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Business and Economics > Public Finance

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Cover IMF Working Papers
Government Debt and Growth: The Role of R&D
Can Sever
Economic growth in the advanced economies (AEs) has been slowing down since the early 2000s, while government debt ratios have been rising. The recent surge in debt at the onset of the Covid-19 pandemic has further intensified concerns about these phenomena. This paper aims to offer insight into the high-debt low-growth environment in AEs by exploring a causal link from government debt to future growth, specifically through the impact of debt on R&D activities. Using data from manufacturing industries since the 1980s, it shows that (i) government debt leads to a decline in growth, particularly in R&D-intensive industries; (ii) the differential effect of government debt on these industries is persistent; and (iii) more developed or open financial systems tend to mitigate this negative impact. These findings contribute to our understanding of the relationship between government debt and growth in AEs, given the role of technological progress and innovation in economic growth.
Keywords:
Government debt; fiscal policy; economic growth; R&D; innovation; financial development; economic growth in the advanced economies; R&D activity; impact of debt; debt level; affect tax dynamics; Financial sector development; Manufacturing; Productivity; Aging; Global
Cover IMF Staff Country Reports
Cyprus: 2024 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Cyprus
International Monetary Fund. European Dept.
The 2024 Article IV Consultation discusses that Cyprus recovered swiftly from the pandemic and has proven resilient to multiple adverse shocks. Growth moderated in 2023 with slowing consumption growth, lower services exports to Russia, and fading post-pandemic base effects. However, growth has remained above the euro area average, supported by a continued recovery in tourism, expanding financial services and information and communication technology activity, and strong investments. The labor markets are tight, with unemployment at a near two-decade low. Headline inflation dipped below 2 percent, but core inflation has been more persistent. Growth is expected to stabilize in 2024 and rise to 3 percent in the medium term. Driven by robust revenue growth, the primary surplus increased further in 2023, contributing to a large decline in public debt. The authorities’ planned neutral fiscal stance in 2024 is appropriate. Further, primary surpluses should be maintained until debt falls comfortably below 60 percent of gross domestic product. Further judicial and labor market reforms are necessary to streamline the business environment and reduce skill mismatches, both of which will support the ongoing diversification of Cyprus’ growth model.
Keywords:
EFF arrangement; EFF credit; property price statistics; credit sector restructuring; growth model; Anti-money laundering and combating the financing of terrorism (AML/CFT); Nonperforming loans; Labor markets; Middle East; Global
Cover Policy Papers
Operational Guidance Note On Program Design and Conditionality
International Monetary Fund. Strategy, Policy, & Review Department
This note aims to provide guidance on the key principles and considerations underlying the design of Fund-supported programs. The note expands on the previous operational guidance notes on conditionality published over 2003-2014, incorporating lessons from the 2018-19 Review of Conditionality, and other recent key policy developments including the recommendation of the Management’s Implementation Plan in response to Independent Evaluation Office (IEO)’s report on growth and adjustment in IMF-supported programs. The note in particular highlights operational advice to (i) improve the realism of macroeconomic forecast in programs and fostering a more systematic analysis of contingency plans and risks; (ii) improve the focus, depth, implementation, and tailoring of structural conditions (SCs), with due consideration of growth effects; and (iii) help strengthen the ownership of country authorities. Designed as a comprehensive reference and primer on program design and conditionality in an accessible and transparent manner, the note refers in summary to a broad range of economic and policy considerations over the lifecycle of Fund-supported programs. As with all guidance notes, the relevant IMF Executive Board Decisions remain the primary legal authority on matters covered in this note.
Keywords:
Conditionality; Conditionality guidelines; Use of Fund resources; Fund-supported adjustment programs; Debt sustainability analysis; Structural reform; Fragile and conflict-affected states; transparency policy; guidance note; Fund-supported program; financing gap; climate change policy assessment; policy note; existing IMF policy; financial support; Balance of payments need; Debt sustainability; Structural reforms; Global
Cover IMF Staff Country Reports
Cyprus: Technical Assistance Report–Strengthening the Governance and Oversight of State-Owned Enterprises
International Monetary Fund. Fiscal Affairs Dept.
This paper presents Cyprus’ technical assistance report on strengthening the governance and oversight of state-owned enterprises (SOE). Cyprus' government has implemented measures to enhance financial oversight and strengthen the governance of SOEs over several years. The ongoing reforms have already yielded positive results. Additional measures are needed to strengthen SOEs corporate governance and accountability practices. Establishing and regularly updating a consolidated inventory of public entities is essential to ensure SOE accountability. Good SOE governance requires a coordinated and sequential approach to reforms. Coordination among various stakeholders and decision makers is paramount and calls for developing and publishing a reform strategy with benchmarks to track progress. A SOE ownership policy should also be developed. This policy could outline the state's ownership rationale and define the roles and responsibilities of the institutions involved in SOE oversight and governance to provide clarity on the objectives and guidelines for effective ownership and management of SOEs. The policy should set clear accountability lines of respective agencies involved in the SOE ownership, governance, and oversight process. Their responsibilities would depend on the chosen ownership model the government will decide.
Keywords:
Cyprus SOE Governance; request of the Ministry of Finance; IMF's Fiscal Affairs Department; oversight of state-owned enterprises; Cyprus asset management company Ltd; Public enterprises; Fiscal risks; Public sector; Budget planning and preparation; Corporate governance; Europe
Cover IMF Working Papers
The Economics of Sovereign Debt, Bailouts, and the Eurozone Crisis
Pierre-Olivier Gourinchas
,
Philippe Martin
, and
Todd Messer
Despite a formal ‘no-bailout clause,’ we estimate significant net present value transfers from the European Union to Cyprus, Greece, Ireland, Portugal, and Spain, ranging from roughly 0.5% (Ireland) to a whopping 43% (Greece) of 2010 output during the Eurozone crisis. We propose a model to analyze and understand bailouts in a monetary union, and the large observed differences across countries. We characterize bailout size and likelihood as a function of the economic fundamentals (economic activity, debt-to-gdp ratio, default costs). Our model embeds a ‘Southern view’ of the crisis (transfers did not help) and a ‘Northern view’ (transfers weaken fiscal discipline). While a stronger no-bailout commitment reduces risk-shifting, it may not be optimal from the perspective of the creditor country, even ex-ante, if it increases the risk of immediate insolvency for high debt countries. Hence, the model provides a potential justification for the often decried policy of ‘kicking the can down the road.’ Mapping the model to the estimated transfers, we find that the main purpose of the outsized Greek bailout was to prevent an exit from the eurozone and possible contagion. Bailouts to avoid sovereign default were comparatively modest.
Keywords:
Euro area; Monetary Union; Sovereign debt; bailouts; Eurozone crisis; bailout size; no-bailout clause; debt country; debtor country; Monetary unions; Loans; Collateral; Debt default; Global
Cover IMF Staff Country Reports
Euro Area Policies: 2023 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Euro Area; IMF Country Report No. 23/264
International Monetary Fund. European Dept.
The 2023 Article IV Consultation discusses that the euro area economy has shown remarkable resilience in the aftermath of Russia’s invasion of Ukraine and the largest terms of trade shock in several decades, thanks to a swift policy response and a strong rebound in contact-intensive services. Looking ahead, growth is expected to pick up gradually throughout 2023 and 2024, supported by a recovery in real incomes in the context of continued tight labor market conditions, a further easing of supply constraints, and firmer external demand, even as financial conditions continue to tighten. While headline inflation has fallen sharply recently after reaching record high levels, core inflation is proving more persistent. As tight financial conditions restrain demand and supply shocks dissipate further, inflation is set to decline further but is expected to remain elevated for an extended period. Renewed supply shocks, which could result from an escalation of the war in Ukraine and a related increase of commodity prices, or a further intensification of geoeconomic fragmentation, would also push up inflation and hurt growth. On the upside, the economy could again prove more resilient than expected, especially amid a still large stock of excess savings.
Keywords:
Euro area headline inflation; inflation expectation; EU climate investment fund; EU AML authority; EU institution; EU bank; core inflation; EU economy; Inflation; Energy prices; Fiscal stance; Monetary tightening; Global; Europe
Cover Selected Issues Papers
Causes and Implications of Elevated Inflation in Cyprus
Robert C. M. Beyer
Inflation has risen sharply in Cyprus, initially driven by imported prices, but increasingly broadening to domestic prices. A Phillips Curve estimate attributes the high inflation largely to energy prices, external price pressures, and inflation expectations at the end of 2022. Historically high pass-through of inflation shocks to wages—amplified by a tight labor market—may make inflation persistent. This calls for policies to stem inflationary pressures while protecting vulnerable households.
Keywords:
Cyprus; Inflation; Import Prices; Energy Prices; Phillips Curve; Wages; inflation expectation; C. inflation driver; inflation shock; E. inflation outlook; Phillips Curve estimate; Energy pricing; Oil prices; Income; Europe
Cover IMF Staff Country Reports
Cyprus: Selected Issues
International Monetary Fund. European Dept.
This Selected Issues paper discusses the causes and implications of elevated inflation in Cyprus and describes recent inflation trends. The paper also analyses drivers of inflation in with an augmented Phillips Curve and investigates how wages adjust to inflation. Estimating a pass-through from inflation shocks to wages can further help assess domestic price pressures. Fiscal policies should help containing price pressures. While external developments drove inflation dynamics in 2022, domestic developments will increasingly determine inflation going forward. Given the historical pass-through, wage pressures are expected to intensify this year, aggravated by labor market tightness. Fiscal policy should hence support the battle against inflation, while protecting vulnerable households, which have been impacted disproportionally by the cost-of-living crisis. Spending plans in the 2023 budget are sufficiently tight to help contain inflation pressures from aggregate demand. Any upwards, revisions to the automatic cost-of-living allowance would risk sustaining high inflation and weakening the economy structurally.
Keywords:
C. inflation driver; inflation expectation; inflation trend; E. inflation outlook; wage pass-through; Inflation; Housing prices; Housing; Mortgages; Energy pricing; Europe; Global
Cover IMF Staff Country Reports
Cyprus: 2023 Article IV Consultation-Press Release; and Staff Report
International Monetary Fund. European Dept.
This 2023 Article IV Consultation discusses that Cyprus’s economy has been resilient to the fallout from Russia’s invasion of Ukraine. The outlook is uncertain with risks from an escalation of the war and a possible recession in Europe. Should inflation expectations rise further and the pass-through to wages intensify, inflation could be stickier than expected. Adverse macroeconomic developments could amplify financial risks given high private debt. The recent shocks have demonstrated that fiscal policy can be a powerful tool to foster resilience, and buffers should be rebuilt over the medium term. Fiscal policy should aim at sustaining primary surpluses to reduce public debt over time, supported by a risk-based fiscal framework. As buffers are rebuilt, available fiscal space should be directed to productive investments for the green and digital transitions. A greener growth model is an important element of reforms. Cyprus aims to become emissions neutral by 2050. Integration into the regional electric grid and the expansion of renewables—together with a liberalization of the domestic electricity market—are key elements of this strategy and will also improve energy security, but require large public and private investments.
Keywords:
inflation expectation; inflation pressure; land price indices; IMF's transparency policy; SDR million; Inflation; Fiscal stance; Nonperforming loans; Europe
Cover IMF Working Papers
Restructuring Domestic Sovereign Debt: An Analytical Illustration
Mr. David A. Grigorian
Sovereign domestic debt restructurings have become more common in recent years and touched upon a growing share of total public debt. This paper offers a simple framework for policymakers to think about the decision whether to restructure domestic sovereign debt as part of an effort to reduce overall public indebtedness. It also highlights a rather wide range of technical, legal, and operational issues a sovereign may face while restructuring domestic debt. As expected, factors such as debt reduction required to achieve sustainability, fiscal savings from a restructuring, and economic costs of a restructuring are key inputs into the decision making regarding a restructuring, but so are factors such as the composition of debt, financial stability costs, and crisis preparedness, all of which are discussed in the paper.
Keywords:
Domestic debt restructuring; sovereign debt; net debt relief; restructuring Laffer Curve; debt relief calculation; debt relief target; DDR Laffer Curve; Debt relief; Debt restructuring; Sovereign debt restructuring; Domestic debt; Europe