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Business and Economics > Public Finance

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Cover Departmental Papers
Long-Term Spending Pressures in Europe
Stephanie Eble
,
Alexander Pitt
,
Irina Bunda
,
Oyun Erdene Adilbish
,
Nina Budina
,
Gee Hee Hong
,
Moheb T Malak
,
Sabiha Mohona
,
Alla Myrvoda
, and
Keyra Primus
European countries face high, rising, and long-lasting spending pressures, calling for a renewed focus on fiscal policy and comprehensive structural reforms to prepare their economies for the future. On top of existing fiscal consolidation needs, spending pressures in five key areas are imminent and growing in Europe: pensions and healthcare/long-term care driven by population aging; climate transition; increased defense spending; and higher borrowing costs. Some pressures are immediate, others will build up over time. Projections indicate that additional expenditures could reach 5¾ percent of GDP annually by 2050 in Advanced Europe and 8 percent in Central, Eastern, and Southeastern Europe (CESEE). Addressing these challenges will require extensive efforts, including enhancing institutional capacity and implementing deep structural reforms to manage spending, ensure adequate revenue, and meet environmental, social, and security objectives. Policymakers must also consider the distributional impacts of reforms, particularly on vulnerable households. A broad reform agenda tailored to country circumstances is essential, with urgent actions needed in many countries to ensure the sustainability of pension systems and to combat climate change through fiscal instruments like carbon pricing. Increased revenue mobilization, particularly in CESEE, and the reduction of inefficient spending are critical for creating fiscal space for priority expenditures. Strengthening the EU's fiscal capacity to provide common public goods such as climate, defense, energy security, and R&D and implementing structural reforms to enhance growth potential are also vital. However, raising awareness of these issues and implementing the necessary reforms will be challenging. A well-designed fiscal framework that incorporates long-term spending pressures, supported by comprehensive analysis and data, is crucial for informing public debate and guiding national decision-making to ensure that spending pressures are adequately addressed. Ultimately, inaction is not an option, as it risks fiscal sustainability and the fulfillment of priority spending needs.
Keywords:
Fiscal policy; structural reforms; climate; defense; demographics; aging; health; public debt; fiscal institutions; spending pressure; member states; EU climate goal; increase EU resilience; emissions trading system; EU financing; EU rule; carbon border adjustment mechanism; EU budget; EU country; climate goal; spending needs; Pension spending; Defense spending; Pensions; Europe; priority spending needs; data from European Union; inefficient spending; long-term spending pressure
Cover IMF Working Papers
Evaluating Historical Episodes using Shock Decompositions in the DSGE Model
Zamid Aligishiev
,
Michael Ben-Gad
, and
Joseph Pearlman
We present alternative methods for calculating and interpreting the influence of exogenous shocks on historical episodes within the context of DSGE models. We show analytically why different methods for calculating shock decompositions can generate conflicting interpretations of the same historical episodes. We illustrate this point using an extended version of Drautzburg and Uhlig’s (2015) model of the U.S. economy, focusing on the periods 1964–1966, 1979–1987, 2006–2009, 2016–2020 and 2020–2023. We argue that the best method for analyzing particular episodes is one which isolates the influence of the shocks during the period under consideration and where the initial conditions represent the system’s distance from balanced growth path at the beginning of the episode.
Keywords:
DSGE model; Shock Decomposition; Financial Frictions; Fiscal Policy; copyright page; influence of the shock; monetary policy shock; differencing method; decomposition method; Sovereign bonds; Central bank policy rate; Private investment; Public investment spending; Global
Cover Selected Issues Papers
Financial Conditions and Their Growth Implications for Qatar
Dorothy Nampewo
This paper develops a Financial Conditions Index (FCI) for Qatar and uses the Growth-at-Risk (GaR) framework to examine the impact of financial conditions on Qatar’s non-hydrocarbon growth. The analysis shows that the FCI is an important leading indicator of Qatar’s non-hydrocarbon growth, highlighting its predictive potential for future economic performance. The GaR framework suggests that overall, the current downside risks to Qatar’s baseline non-hydrocarbon growth projections are relatively mild.
Keywords:
Financial conditions; non-hydrocarbon growth; Qatar; GaR framework; growth projection; Qatar's baseline; copyright page; financial conditions indicator; Financial conditions index; Oil prices; Central bank policy rate; Deposit rates; Post-clearance customs audit; Global
Cover Technical Assistance Reports
The Gambia: Technical Assistance Report-Public Investment Management Assessment Update with the Climate Module
International Monetary Fund. Fiscal Affairs Dept.
The IMF’s Fiscal Affairs Department (FAD) conducted a Public Investment Management Assessment (PIMA) and Climate Module (C-PIMA) for The Gambia to assess public investment management (PIM) and its climate sensitivity. The assessment found improvements since the 2019 PIMA, including the 2020 Cabinet Memorandum for strategic project reviews, the 2023 SOE Act for centralized oversight, and enhanced procurement regulations. However, despite these institutional improvements, effectiveness has yet to catch up and, in some cases, has weakened. Climate resilience is also insufficiently addressed, with weak integration of climate risks into project planning and outdated regulatory frameworks. Key recommendations include establishing a public investment management information system, strengthening PIM oversight within the Ministry of Finance, formalizing project selection pipelines, and embedding climate-related criteria in investment decisions.
Keywords:
The Gambia; investment; PIM; PIMA; Climate; Climate Module; C-PIMA.; management institution; procurement authority; IMF climate policy diagnostic; capital cash outlay; D. investment allocation; climate PIMA; Public investment spending; Climate change; Budget planning and preparation; Infrastructure; West Africa; Sub-Saharan Africa; Global
Cover Global Financial Stability Notes
Pension Funds and Financial Stability
This Global Financial Stability Note examines the growth of the pension fund sector and the potential financial stability implications. Historically, pension funds have been seen as a contributor to financial stability because of their long-term and well-diversified liabilities. However, the sector has undergone significant structural shifts accelerated by a prolonged period of low interest rates, increasing its exposure to traditional risks while introducing emerging risks; this is reflected in growing intra-financial sector interconnectedness and exposure to long-term sovereign bonds. The recent transition to higher interest rates should be positive for the pension sector, albeit its pace and abruptness has been associated with liquidity stress and contagion risks in some countries.
Keywords:
Pension Funds; Financial Stability; Assets; Risks; Pension Plans; major pension fund sector; IMF Library; major pension savings market; structural liquidity; asset-liability duration mismatch; risk analysis; Pension spending; Pensions; Financial sector stability; Liquidity risk; Global
Cover IMF Staff Country Reports
Angola: 2024 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Angola
International Monetary Fund. African Dept.
The economy recovered in 2024 as oil sector rebounded from its slump. However, fiscal consolidation efforts somewhat waned, auguring the start of a political cycle. Buffers built during the 2018–21 EFF—supported program are being eroded by fiscal slippages from higher capital expenditures and a slower fuel subsidy reform. Nevertheless, public debt relative to GDP declined in 2024, benefiting from high nominal GDP growth and debt repayments. High external debt service constrains development spending, while oil dependence represents a drag on sustainable growth. Inflation remains elevated, fueled by exchange rate depreciation, and import substitution measures that have restricted food supply. The National Development Plan 2023–27 remains the main element for the authorities’ diversification strategy.
Keywords:
AFRITAC South; debt management effort; production capacity; inflation expectation; policy transmission; Credit; Inflation; Global; Africa
Cover IMF Staff Country Reports
Malaysia: 2025 Article IV Consultation-Press Release; and Staff Report
International Monetary Fund. Asia and Pacific Dept
Malaysia’s economic performance has significantly improved in 2024, supported by strong domestic and external demand. Disinflation is taking hold and external pressures have eased. The favorable economic conditions provide a window of opportunity to build macroeconomic policy buffers and accelerate structural reforms, especially as risks to growth are tilted to the downside amid an uncertain global outlook. Risks to the inflation outlook are tilted to the upside, including from global commodity price shocks and potential wage pressures.
Keywords:
upside inflation risk; Malaysia's obligation; asset forfeiture regime; upside risk; upside growth risk; Inflation; Anti-money laundering and combating the financing of terrorism (AML/CFT); Credit; Global
Cover IMF Staff Country Reports
El Salvador: Request for Extended Arrangement Under the Extended Fund Facility-Press Release; Staff Report; and Statement by the Executive Director for El Salvador
International Monetary Fund. Western Hemisphere Dept.
El Salvador has recovered well from the pandemic, supported by robust remittances and buoyant tourism flows, amid a sharp improvement in the country’s security situation. Inflation has fallen and the external imbalances have narrowed more recently, consistent with a gradual improvement in public finances and favorable terms of trade. In this context, sovereign spreads have come down sharply with recent debt buyback operations helping to ease near-term external financing needs. Despite recent progress, El Salvador’s macroeconomic imbalances remain significant, stemming from high fiscal deficits and debt, as well as low external and financial buffers, in the context of dollarization. Meanwhile, underlying productivity remains low, reflecting in part persistent social and infrastructure gaps, as well as a legacy of weak governance and transparency, which have discouraged investment. The Bukele administration is intent on focusing its second mandate on addressing pending macroeconomic and structural challenges and boosting economic growth, under an IMF-supported program.
Keywords:
audited financial statements; staff appraisal; publication of asset declaration; list of statement; Bitcoin transparency; Public sector; Anti-money laundering and combating the financing of terrorism (AML/CFT); Pension spending; Central America; Caribbean; Global
Cover IMF Working Papers
Pension Reform and Stock Market Development
Shujaat Khan
,
Bo Li
, and
Yunhui Zhao
We highlight the strong connection between developing fully-funded, individually-owned, collectively-managed, mandatory/incentivized (FICMI) pension schemes and the development of domestic stock markets. We do so by building a stylized model and complementing the analysis with cross-country empirical analysis and case studies. We also highlight the challenges of individual impatience, network externalities, and coordination failure in long-term equity investments, which are crucial for stock market development and technological innovation. We find that FICMI pension schemes—when sufficiently wide in coverage and large in size—can serve as coordination devices to support long-term equity investments. Such investments will not only promote domestic stock market development and make it easier for firms to raise long-term equity capital, therefore supporting long-term economic growth, but also enhance financial inclusion and enable more households to benefit from the overall economic development, therefore contributing to inclusive growth. Moreover, we find that the introduction of FICMI pension schemes can impact household savings in two ways: first, FICMI pension can increase household savings through “forced/incentivized” savings channel, where households save too little without FICMI pension (such as in many EMDEs); and second, FICMI pension can decrease household savings and increase household consumption by reducing non-pension savings and decreasing precautionary savings, where households save too much without FICMI pension (such as in China). In both cases, FICMI pension schemes can help move the economy closer to the optimal level of household savings, and may also help improve the structure of such savings. Finally, we discuss the enabling conditions (such as a strong political commitment to the reform and a well-designed fiscal strategy for financing the transition) and policy design for FICMI pension schemes.
Keywords:
Pension Reforms; Stock Market Development; Equity Financing; Innovation' Financial Inclusion; Intertemporal Optimization; Public Pensions; Funded and Private Pensions; FICMI pension schemes; household saving; savings channel; IMF working paper No. 25/49; Pension spending; Pensions; Stock markets; Pension reform; Capital markets; East Asia
Cover IMF Staff Country Reports
Qatar: Selected Issues
International Monetary Fund. Middle East and Central Asia Dept.
2024 Selected Issues
Keywords:
AI readiness; AI adoption; B. Qatar's progress; artificial intelligence in Qatar; innovation policy; Export diversification; Capital spending; Exports; Human capital; Global; Middle East; Eastern Europe; Europe