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Fiscal Adjustment and Fund-Supported Programs, 1971-80

Author(s):
International Monetary Fund. Research Dept.
Published Date:
January 1982
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Arecent paper by Donovan (1982) examined quantitative evidence regarding the macroeconomic performance of developing countries that in the 1970s undertook adjustment programs supported by use of Fund resources under upper credit tranche stand-by arrangements. That paper compared the balance of payments, growth, and inflation performance of these countries with that exhibited by all non-oil developing countries during the period of these programs and also examined the accompanying effects on real growth and consumption. The paper concluded that, in broad terms, countries that undertook Fund programs achieved significant absolute and relative (that is, compared with non-oil developing countries) reductions in their external deficits, as well as a relative reduction in average domestic inflation rates. Moreover, this adjustment generally was not achieved at a cost of lower real rates of growth of gross domestic product (GDP) and consumption, as changes in these variables for program countries on average were found to be not significantly different from those experienced by all non-oil developing countries.

The primary purpose of this paper is to investigate the extent to which the above-mentioned reduction in external deficits in program countries resulted from adjustments in the government financial position, as opposed to the adjustments in the rest of the economy.1 The analysis is based on a simple framework that uses national income accounts and monetary survey identities to specify the relationship between fiscal and balance of payments variables. The paper also examines actual data on government savings (investment), total savings (investment), and growth in program countries in an attempt to assess the implications, if any, for growth and medium-term balance of payments objectives of different strategies (that is, increases in government savings and reductions in government investment) used in reducing government deficits.

In principle, there is no a priori view as to how much balance of payments adjustment (a primary objective of Fund programs) should be achieved through adjustments in the government sector. In practice, however, large external imbalances tend to have been associated with large fiscal imbalances. Consequently, reductions in external imbalances are likely to require reductions in fiscal imbalances. Also, the size of the fiscal deficit can be controlled more directly by policy instruments than can the private sector surplus or deficit. Thus, programed reductions in external deficits based on programed reductions in fiscal deficits often address a major immediate cause of the external disequilibrium and additionally have a greater likelihood of being achieved, provided that policies to reduce fiscal imbalances are actually implemented. Implicitly, such reasoning underlies the inclusion in most Fund programs of fiscal targets and subceilings on credit to the government sector.

By examining actual experience with programs, this paper provides some evidence by which to test the validity of the foregoing implicit assumptions. Thus, the focus of the paper differs somewhat from previous empirical examinations of fiscal aspects of stabilization programs in that it examines the relationship between external imbalances and fiscal imbalances directly, whereas previous studies—Beveridge and Kelly (1980) and Beveridge (1981)—were concerned more with examining the relationship between observance (nonobservance) of fiscal performance clauses and the observance (nonobservance) of performance clauses on total domestic credit and with identifying the specific fiscal policy instruments responsible for fiscal performance.

For the most part, the methodological approach of this paper is similar to that of the Donovan paper and thus subject to the same caveats. It focuses on actual changes in the government’s financial position during the program period without assigning the cause of these changes to fiscal or other policies or to exogenous factors.2 Likewise, changes during the program period are measured in relation to the preprogram period and not in relation to the hypothetical outcome that would have resulted in the absence of a program supported by Fund assistance. The relationship between fiscal policy and the balance of payments can also be examined using for each program country an econometric model that incorporates the effects of fiscal variables on the balance of payments. Such an analysis, which is beyond the scope of this paper, could in principle enable a quantification to be made of the contribution of fiscal policy to changes in the balance of payments.3 Alternatively, a partial-equilibrium approach, such as that contained in Milne (1977), could be used to examine the effects of fiscal policy on the balance of payments and to test the validity of assumptions underlying the use of fiscal targets and subceilings in Fund programs.4 Some results using this latter methodology are presented in Section III.

To anticipate the main findings of the paper, the results reported in Section III show that (i) external imbalances in years prior to program years tended to be associated with large fiscal imbalances, and (ii) that reductions and increases (relative to gross national product (GNP)) in the current account/overall balance of payments deficit in the year of Fund programs tended to be associated with reductions and increases (relative to GNP) in the overall government deficit/domestically financed government deficit. Insofar as such reductions in external deficits in program years are considered necessary for effective external adjustment, the results of this paper reinforce the importance attached to fiscal targets and fiscal performance clauses in Fund programs.5 The results also indicate that (iii) large absolute reductions in the deficit of both the government sector and the rest of the economy were achieved in many programs. Proportionately (that is, relative to the size of each sector’s deficit in the year prior to the program), however, somewhat larger changes on average were observed in the rest of the economy than in the government sector. The latter may have reflected program design and have been consistent with effective external adjustment. Alternatively, it may have reflected policies considered inconsistent with effective adjustment that were necessitated by worse than projected exogenous developments or fiscal outturns. Further research would be needed (most probably on an individual country basis) to access the causes and implications of this result.

The plan of this paper is as follows. Section I sets out the basic accounting relationships between fiscal and balance of payments variables and discusses fiscal policy options available to countries faced with the need to undertake adjustments in the balance of payments. Section II describes the statistical data and methodology used in the subsequent empirical analysis. Section III presents and discusses the empirical findings, and Section IV summarizes the conclusions and discusses areas for future research.

I. Fundamental Relationships Between Fiscal and Balance of Payments Variables

FUNDAMENTAL RELATIONSHIPS

From the well-known national income accounts identity, the current account of the balance of payments is equal to the gap between national savings and investment (or the gap between domestic income and expenditure), that is,

where

I = investment

S = national savings

X = exports of goods and nonfactor services and factor incomes from abroad6

Z = imports of goods and nonfactor services and factor incomes paid abroad6

By splitting investment and savings into their private and government sector components, the current account balance can also be decomposed into its private and government components, as follows:

where subscripts p and g refer to private and government sectors, respectively. The first term on the right-hand side of equation (2) is the private sector resource gap (surplus or deficit). The second term is the government resource gap or, more specifically, the overall government surplus or deficit (ODg).7 In considering policies that influence the current account of the balance of payments, equation (2) shows that the overall government deficit is the appropriate macroeconomic fiscal target on which to focus.8 Similarly, for the private sector, the income surplus or deficit is the relevant macroeconomic target.

This framework can also be utilized to show the relationship between fiscal variables and the overall balance of payments. Subtracting net inflow of official capital (including grants) and private capital from both sides of equation (2) gives

where

K p = net private capital inflow

and

Kg = net official capital inflow

The left-hand side of equation (3) is the overall balance of payments outcome and is equivalent to the change in net foreign assets.9 This expression shows that the overall balance of payments outcome is equal to net domestic financing of the government and private sectors.10 It highlights the fact that the domestically financed government deficit is the appropriate macroeconomic fiscal target in considering policies that influence the overall balance of payments position.11

POLICY ASPECTS

Equations (l)-(5) are ex ante conditions for equilibrium and ex post accounting identities. They enable comparisons to be made between two points without specifying how the economy moves from one point to the next. From the point of view of financial programing, these identities are useful for two purposes: first, in checking the internal consistency of programs and in making explicit the overall direction of fiscal policy that may be required in countries faced with the need to undertake balance of payments adjustments, and, second, in enabling a quantification to be made of the relative contribution of changes in the government deficit and the private sector deficit or surplus to changes in the balance of payments. Of course, to determine the size of policy adjustments required to bring about a specified change in the balance of payments, knowledge is required of the functional relationships between various economic variables for each particular country.

Equation (2) indicates that the deficit on the current account of the balance of payments can be changed by two broad sets of policies: (i) policies that change the overall deficit or gap between investment and savings of the government; and (ii) policies that change the private sector deficit (surplus). However, identification of the two domestic sector financial balances that correspond to the current account deficit does not imply that the two balances are independent of each other in a policy sense. In fact, this is generally not the case. Changes in policy instruments (for example, tax rates, government expenditure, subsidies) that change the fiscal deficit may change the private sector deficit or surplus. Similarly, policies that change the private sector balance (for example, interest rates, credit policy, exchange rate and tax incentives for investment and savings) may also change the fiscal deficit.12 In addition, both balances are affected by purely exogenous factors, such as changes in the terms of trade and in foreign demand. Thus, the ex post measure of the change in the fiscal deficit is not a measure of the impact of fiscal policy on the balance of payments but rather a measure of the effect of all policies (including fiscal policy), as well as endogenous and exogenous factors via the fiscal balance, on the balance of payments.13 Nevertheless, it is useful to focus on these balances separately. Inasmuch as it is necessary to effect changes in these domestic balances if programed changes in the balance of payments are to be achieved, variations in their outcomes from programed levels need to be examined. Supposing that all policy measures assumed in the program projections are implemented, such variations will reflect one or a combination of three factors: first, an incorrect specification of relationships between fiscal and other variables; second, an incorrect specification of direct effects of fiscal (non-fiscal) measures on the government (private) sector; and third, incorrect forecasts of exogenous variables.

Equation (3) shows that policies that reduce the domestically financed overall government deficit (for example, policies that increase foreign capital inflows without increasing government expenditure) will, ceteris paribus, have beneficial effects on the overall balance of payments but not necessarily on the current account. Similarly, policies that increase private capital inflows and add to the private sector surplus (or reduce the private sector deficit) will also, ceteris paribus, have beneficial effects on the overall balance of payments.14 As with the current account balance, the two domestic sector financial balances that correspond to the overall balance of payments position are not independent of each other in a policy sense. Hence, when the impact of various policy options on the overall balance of payments is assessed, the effects of such policies on all sectors of the economy should be taken into account. The inclusion of domestic nonbank as well as bank financing in equation (3) emphasizes the fact that nonbank financing is not identical in its effects to tax increases and that the effects on the balance of payments of increases in this type of financing of the budget depend crucially on the accompanying monetary policies.

The treatment of balance of payments financing loans (for example, Eurocurrency borrowing) in equation (3) deserves special attention. In some countries such borrowing is undertaken by the monetary authorities and is treated as a below-the-line item in the balance of payments. In other countries, the government undertakes all commercial foreign borrowing, partly because it can do so on better terms than the private sector or nonfinancial enterprises. In the latter case, such financing is included as an above-the-line item with official borrowing. To avoid drawing what could be meaningless distinctions (in terms of both movements in the overall balance of payments and movements in the domestically financed budget deficit) between these countries, and further between countries that substitute for Eurocurrency borrowing (by the government) the use of Fund credit, it would be desirable from an analytical point of view to treat all loans for balance of payments purposes as below the line in the balance of payments. To the extent that such loans are used to finance the government deficit, such treatment is equivalent analytically to including these loans with domestic bank financing of the government.15

GOVERNMENT DEFICIT, SAVINGS, AND INVESTMENT

Although the government deficit can be reduced by policies that increase revenue or reduce expenditure, the particular choice of policies will depend on a number of factors, such as the economic growth, social and distributional objectives of the authorities (both in the short term and the medium term), and the effects of particular policy actions on the achievement of these objectives. Also of relevance is the administrative, technical, and political feasibility of various policy actions, the speed with which such measures can be implemented, and the permanency of particular stabilization measures.16 In this subsection, those aspects that are of relevance to the stabilization role of government and its role in promoting growth are discussed briefly, and potential conflicts between a government’s short-term stabilization and growth objectives are also examined.17

The choice between policies that reduce the overall government deficit is often viewed as a choice between policies that increase the government current account surplus or that reduce government investment. Put in this context, it is often argued that a reduction in the deficit achieved by an increase in the government current account surplus, which allows government capital expenditure to remain unchanged or perhaps to increase, is preferable to an adjustment based on a reduction in government capital expenditure. This argument is based on the premise that capital expenditure is more growth-promoting than is current expenditure18 and that an increase in the government current account balance will not be offset by a reduction in savings in the rest of the economy. As already indicated, the assumption regarding the relationship between government savings and total savings is likely to be incorrect in that most policies that affect the government current account (changes in tax rates, subsidies, transfers, etc.) also affect private sector savings.19 With regard to the other part of the argument, other things being equal, a reduction in the government deficit achieved through a reduction in nonproductive expenditure is preferable to one based on a reduction in productive (growth-promoting) expenditure. However, the distinction between productive and nonproductive expenditure does not necessarily coincide with national accounts distinctions between consumption and investment or with what in government budgets is classified as current and capital expenditure (or developmental and nondevelopmental expenditure). Apart from the fact that such classifications differ between countries, many public sector outlays on capital goods are relatively unproductive20 in the sense of adding to medium-term growth potential, while much expenditure, which is customarily classified as current outlays, enhances the productive capacity of workers and hence complements physical capital formation in the growth process by increasing the productivity of the existing capital stock.21 In part, the bias in favor of capital rather than current expenditure reflects the fact that foreign development assistance normally is available for capital but not for current expenditure. While it might be argued that such expenditure should not be discouraged in that it does not affect the overall balance of payments in the short term, most capital expenditure entails future commitments for recurrent expenditure. Along with other factors, these recurrent costs should be weighed against the benefits of projects financed by concessional loans in determining the appropriate level and composition of government expenditure.22

The foregoing discussion is not meant to imply that the structure of government revenue and expenditure does not have important implications for growth and hence for the viability of a particular balance of payments current account deficit in the medium term. Rather, it suggests that in designing fiscal policies appropriate to a country’s macroeconomic circumstances, disaggregated approaches are likely to be required to evaluate the profile of total expenditure, the efficiency of government investment, and the effects of the tax system on work incentives and private sector savings. In the context of Fund stabilization and structural adjustment programs, such approaches in turn suggest the desirability of designing policies in consultation with project specialists in major development agencies and specialists in the fields of tax policy and administration.

II. Empirical Analysis—Methodology

In Section III the primary aim is to measure the fiscal contribution to changes in the balance of payments current account and in the overall balance of payments position for each program period covered in Donovan (1982).23 The fiscal contribution to changes in the current account is measured by calculating the one-year change in the ratio of the government deficit to GNP for all program periods.24 In line with relationships set out in Section I, the overall government deficit is defined so as to treat foreign grants as a financing item. For each year, the average change in the fiscal deficit is compared with the average change in the current account of the balance of payments.25 The difference between these is the implicit change in the surplus or deficit of the rest of the economy. The fiscal contribution to changes in the overall balance of payments position is measured by the one-year change in the ratio of the domestically financed government deficit to GNP.26 It is not possible to compute the proportion of the change in the overall balance of payments as reported in Donovan (1982) that was reflected in a change in the domestically financed fiscal deficit, because Donovan calculated changes in the overall balance of payments as a percentage of exports with all data expressed in U.S. dollars. Exports are used by Donovan as the scaling factor to avoid complications associated with choosing the appropriate exchange rate to use for conversion. Nevertheless, the results do indicate whether changes in the domestically financed overall government deficit made a positive or negative contribution to the changes in the overall balance of payments.

The government sector, as defined in this paper, includes only central and local governments and departmental enterprises. Thus, the rest of the economy includes nonfinancial public enterprises as well as the private sector. In principle, it would be desirable to treat nonfinancial enterprises as a separate sector in the analysis, particularly since programs supported by Fund stand-by arrangements during the 1970s increasingly included commitments to improve the performance of these enterprises. (See Beveridge and Kelly (1980).) This is not possible, owing to the lack of appropriate data.

Fiscal data are obtained from the Fund’s Government Finance Statistics Yearbook; where such data are not available, the Fund’s International Financial Statistics (IFS) and, in a few cases, unpublished and national data sources are used. Balance of payments data are obtained from IFS. To the extent that balance of payments data are reported on an accrual basis and fiscal data are reported on a cash basis (as recommended in the Draft Manual on Government Finance Statistics), balance of payments and fiscal data are not strictly comparable. This inconsistency is likely to distort measurement of the fiscal contribution to changes in the balance of payments, however, only if “float” (unpresented government checks) varies considerably from year to year or if large changes occur in the arrears of domestic or external government payments.27 Given the availability of data, it has not been possible to adjust for these factors in this paper. However, as shown in Table 10 (in the Appendix), external arrears were a factor in only 22 per cent of program periods covered.28 Domestic government arrears, which are often a problem in countries that are members of regional currency boards, also present the same problem in measuring the fiscal gap. Data on domestic arrears, however, are even less readily available than those for external government arrears.

The definition of “program period” used in the paper may also tend to distort measurement of the actual change in fiscal (as well as balance of payments) variables that occurred during the period of the stand-by arrangement.29 An indication of the degree of underestimation of changes in fiscal variables can be obtained by comparing the results obtained in this paper with results based on unpublished data for actual program periods. See the subsection comparison of results with previous studies in Section III.30 Section III also presents some empirical results comparing the government current account balance and government investment with total savings and total investment, respectively, and government investment with the rate of economic growth. Comparisons between government savings (investment) and total savings (investment) are based on one-year changes in the ratios of these variables to GNP. One-year changes in the ratio of government investment to GNP are also related to changes in the rate of growth. The change in the rate of growth is defined as the increase (decrease) in the average rate of growth for the three years beginning with the program year, compared with the average of the three years prior to the program year.31 This longer period is used to allow for medium-term effects of increases (decreases) in government investment.

III. Empirical Results

FISCAL CONTRIBUTION TO CHANGES IN CURRENT ACCOUNT OF BALANCE OF PAYMENTS

Chart 1 presents data showing the size and direction of changes in the fiscal balance and current account deficit for programs over the period 1971-80. Of the 77 program periods covered in the analysis, there were 48 programs (62 per cent) in which the fiscal deficit and current account moved in the same direction. Of these programs, 28 (36 per cent) registered a reduction in the current account and the fiscal deficit, and 20 (26 per cent) registered an increase in both the fiscal deficit and current account deficit. The remaining 29 programs, in which the fiscal deficit and current account moved in opposite directions, were split almost equally between programs in which there was an increase in the current account deficit—despite a decrease in overall fiscal deficit—and programs in which the current account deficit declined, notwithstanding an increase in the overall government deficit.

Chart 1.Upper Credit Tranche Stand-By Arrangements, 1971-80: Changes in Fiscal Balance and Current Account Deficit in Program Years

(As percentage of GNP)

Source: Table 10 (in the Appendix).

1 Togo, for 1979.

2 Zaire, for 1977.

The results in Chart 1 suggest that to the extent that financial programs provided for a reduction in the deficit on the current account of the balance of payments, changes in the fiscal deficit were required for the achievement of this target. These results are broadly consistent with previous studies (Reichmann and Stillson (1978), Beveridge and Kelly (1980), and Beveridge (1981)) that found that most unsuccessful financial programs failed because of fiscal problems32 and that overall credit ceilings were more likely to be observed if subceilings on credit to government were observed. The observed close correlation between changes in the fiscal deficit and the changes in the current account may partly reflect the effects of policy-induced changes in the fiscal deficit on the current account or the effects of exogenous variables on both sides of equation (2). A comparison of results in this paper with those for all non-oil developing countries would provide some indication of the importance of policy-induced effects: a closer positive correlation between these variables for countries undertaking Fund programs than for all non-oil developing countries would suggest that policy-induced changes in the fiscal deficit played an important role in Fund programs in reducing disequilibrium.33 With regard to exogenous factors, since the variables in equation (2) are in nominal terms, any change in terms of trade, in most cases, would initially cause all three elements of the equation (i.e., current account, government deficit, and savings investment gap of the rest of the economy) to move in the same direction. Likewise, changes in foreign demand would initially have similar effects on all elements of the equation.

Given that exogenous shocks—in particular, the sharp increase in oil prices—were a major factor in the deterioration in external positions of non-oil developing countries during the decade of the 1970s, it is perhaps surprising that there was such a large number of programs in which the budget balance and current account moved in opposite directions. For those programs in which the current account deficit declined, notwithstanding an increase in the budget deficit, it would be of interest to investigate whether these outcomes were in line with original program designs, in that they depended entirely on the rest of the economy for adjustment, or whether they reflected a resort to trade and payments restrictions (possibly associated with higher rates of inflation than programed) necessitated by shortages of foreign exchange, worse than programed fiscal outturns, and unexpected exogenous developments.34 Although such an investigation is beyond the scope of this paper, it is interesting that the increase in inflation for this group of countries did not differ significantly from that for all countries.35 The results in some cases could have reflected more favorable external developments than projected; at least some of the countries within this group experienced export booms and, in this context, more expansionary fiscal policies than programed.

Tables 1 and 2 contain data on actual changes in fiscal balances relative to GNP and compare these with data contained in Donovan (1982) on changes in the current account. For all 77 programs over the period, the current account deficit on average declined by 1.5 percentage points of GNP (Table 1). About 40 per cent of this reduction (0.6 percentage point of GNP) resulted from a reduction in fiscal deficits (Table 1). By implication, the surplus (deficit) of the rest of the economy increased (decreased) on average by almost 1 percentage point of GNP. The results are more revealing, however, when disaggregated along the same lines as in Chart 1. (See Tables 1 and 2.) Thus, for the 28 programs that registered a reduction in both the current account and fiscal deficits, the current account deficit declined on average by 5.8 percentage points of GNP; of this reduction, 64 per cent (3.7 percentage points of GNP) reflected, on average, a reduction in the fiscal deficit and 36 per cent reflected adjustment in the rest of the economy. For the 20 programs that registered an increase in both the current account and fiscal deficit, the current account balance on average increased by 2.6 percentage points of GNP, of which 69 per cent (1.8 percentage points of GNP on average) reflected an increase in the fiscal deficit and 31 per cent (0.8 percentage point) reflected a decrease (increase) in the surplus (deficit) of the rest of the economy. For programs in which the current account increased (on average, the increase amounted to 2.8 percentage points of GNP) while the fiscal deficit declined, the implied reduction (increase) in the surplus (deficit) of the rest of the economy is equivalent to 4.1 percentage points of GNP. For the 14 programs that registered a reduction in the deficit on the current account of the balance of payments, despite an increase in the overall fiscal deficit, the implied contribution of the rest of the economy to the reduced current account deficit amounted on average to 6.3 percentage points of GNP.

Table 1.Upper Credit Tranche Stand-By Arrangements, 1971-80: Current Account of Balance of Payments and Fiscal Balance1 in Program Period Compared with Preprogram Year

(Average change in current account deficit of balance of payments and fiscal balance as a per cent of GNP)2

Average for
19711972197319741975197619771978197919801971-803
All programs4
Change in current account of balance of payments0.34.352.0-2.6-4.18.91.42.62.6-0.41.5
Change in fiscal balance0.1-0.30.41.7-0.12.72.70.4-1.40.70.6
Programs with improvement in both current account of balance of payments and fiscal balance
Change in current account of balance of payments1.73.23.22.08.95.98.04.84.75.8
Change in fiscal balance0.11.41.32.12.74.44.73.63.63.7
Programs with deterioration in both current account of balance of payments and fiscal balance
Change in current account of balance of payments-1.0-0.8-1.1-4.1-4.8-4.0-5.4-2.9-2.6
Change in fiscal balance-0.6-1.5-1.1-0.1-0.2-3.3-5.2-1.3-1.8
Programs with deterioration in current account of balance of payments and improvement in fiscal balance
Change in current account of balance of payments-1.0-2.3-3.7-3.0-6.2-3.1-0.7-2.8
Change in fiscal balance0.92.21.61.31.91.71.3
Programs with improvement in current account of balance of payments and deterioration in fiscal balance
Change in current account of balance of payments2.96.82.21.810.24.7
Change in fiscal balance-0.6-1.1-1.6-1.4-1.6-2.9-1.6
Sources: International Monetary Fund, International Financial Statistics (various issues) and Government Finance Statistics Yearbook, 1980; Donovan (1982), p. 178, Table 1.

Where foreign grants could be identified separately, they are excluded from revenue and grants and are included “below the line” with foreign financing.

Number of program periods is less than in Donovan (1982), as fiscal data were not available for Uruguay for 1972. Minus sign (—) indicates increase.

Equals unweighted arithmetic average of all individual program country data for 1971-80 and therefore does not equal simple average of yearly columns.

Improvement and deterioration are measured in relation to GNP except for a few cases in which GDP is used instead. An improvement is measured as a reduction (increase) in the current account (budget) deficit (surplus); a deterioration is measured as an increase (reduction) in the current account (budget) deficit (surplus).

Differs from Table 1 in Donovan (1982), owing to exclusion of one program period.

Sources: International Monetary Fund, International Financial Statistics (various issues) and Government Finance Statistics Yearbook, 1980; Donovan (1982), p. 178, Table 1.

Where foreign grants could be identified separately, they are excluded from revenue and grants and are included “below the line” with foreign financing.

Number of program periods is less than in Donovan (1982), as fiscal data were not available for Uruguay for 1972. Minus sign (—) indicates increase.

Equals unweighted arithmetic average of all individual program country data for 1971-80 and therefore does not equal simple average of yearly columns.

Improvement and deterioration are measured in relation to GNP except for a few cases in which GDP is used instead. An improvement is measured as a reduction (increase) in the current account (budget) deficit (surplus); a deterioration is measured as an increase (reduction) in the current account (budget) deficit (surplus).

Differs from Table 1 in Donovan (1982), owing to exclusion of one program period.

Table 2.Upper Credit Tranche Stand-By Arrangements, 1971-80: Fiscal Contribution to Change in Balance of Payments

(Proportion of change in current account resulting from change in fiscal balance)1

Average for
19711972197319741975197619771978197919801971-802
Programs in which
Current account and fiscal balance improved0.060.440.411.050.300.750.590.750.770.64
Current account and fiscal balance deteriorated0.601.881.000.020.040.830.960.450.69
Current account deteriorated and fiscal balance improved3-0.90-0.96-0.43-0.43-0.31__-2.43-0.46
Current account improved and fiscal balance deteriorated4-0.21-0.16-0.72-0.89-0.28-0.34
Source: Table 1.

The proportions in each row are obtained from Table 1 as the ratio of the change in the fiscal balance to the change in the current account, both measured in relation to gnp. A minus sign (—) indicates that the variables moved in opposite directions.

Equals unweighted arithmetic averages of proportions for all years and therefore does not equal simple average of yearly columns.

Shows improvement in fiscal balance as proportion of deterioration in current account balance.

Shows deterioration in fiscal balance as proportion of improvement in current account balance.

Source: Table 1.

The proportions in each row are obtained from Table 1 as the ratio of the change in the fiscal balance to the change in the current account, both measured in relation to gnp. A minus sign (—) indicates that the variables moved in opposite directions.

Equals unweighted arithmetic averages of proportions for all years and therefore does not equal simple average of yearly columns.

Shows improvement in fiscal balance as proportion of deterioration in current account balance.

Shows deterioration in fiscal balance as proportion of improvement in current account balance.

REGRESSION ANALYSIS

The relationship between the fiscal balance and current account balance is also examined, using an approach similar to that of Milne (1977).36 For this purpose, the change in the current account balance is regressed on the change in the fiscal balance for all programs, and separately for programs where the current account and fiscal balance moved in the same direction; the results are summarized in Table 3. In all equations, the coefficient β on the change in the fiscal balance is significantly different from zero at the 99 per cent level.37 For all programs (equation (1) in Table 3), an increase or decrease of 1 percentage point of GNP in the fiscal deficit is reflected in an increase or decrease in the current account deficit of 0.80 percentage point of GNP. However, the overall explanatory power of the equations including all programs is extremely low. Excluding programs in which the current account and fiscal balance moved in opposite directions (equation (2) in Table 3), the results show that on average an increase or decrease of 1 percentage point of GNP in the fiscal deficit is reflected in an equivalent change in the current account of the balance of payments.38 As indicated in Milne (1977), the existence of an empirical relationship between the government deficit and the current account does not necessarily imply causality. These results suggest, however, that at least for some countries the ceteris paribus condition holds (that is, changes in the fiscal deficit have little effect on the rest of the economy and are fully reflected in changes in the current account).

Table 3.Upper Credit Tranche Stand-By Arrangements, 1971-80: Statistical Relationship Between Change in Current Account and Change in Fiscal Balance1
Number
Coefficientsoft-ratios2
αβ2D-WObservationsβ = 0β = l
Equation(1)(2)(3)(4)(5)(6)(7)
(1)0.800.231.59774.26**-1.10
(1ˊ)1.140.750.171.64774.04**-1.34
(2)1.140.541.74486.84**0.85
(2ˊ)1.021.100.471.81486.52**0.57

Estimated forΔ(ZX)=α+βΔ(ODg)

Double asterisks (**) indicate statistical significance at the 99 per cent level. The null hypothesis in col. (6) is that β = 0, in col. (7) that β = 1.

Estimated forΔ(ZX)=α+βΔ(ODg)

Double asterisks (**) indicate statistical significance at the 99 per cent level. The null hypothesis in col. (6) is that β = 0, in col. (7) that β = 1.

PROPORTIONATE CHANGES IN DEFICIT OF GOVERNMENT AND NONGOVERNMENT SECTORS

When the contribution of changes in financial balances of the government and the rest of the economy to changes in the current account of the balance of payments is assessed, it is also relevant to examine the size of these balances relative to the current account deficit in the year prior to the program. Such an examination is useful for at least two purposes. First, it provides an empirical basis for testing the proposition that external imbalances tend to be associated with fiscal imbalances and that these imbalances have increased in recent years, and thus that achievement of reductions in external imbalances is likely to require reductions in fiscal imbalances. Second, data on the size of the deficit (surplus) in each sector in the year prior to the program combined with data in Table 1 enable the proportionate adjustment in the year of the program to be calculated for each sector; this is of some relevance in assessing whether the adjustment relied too heavily on one sector by “crowding out” efficient investment or consumption in order to finance less efficient expenditures in other sectors. The proportionate adjustment in the ratio of each sector’s expenditure to gross national expenditure would provide a better basis for this assessment.

Table 11 (in the Appendix) contains data on the size of the fiscal deficit both relative to GNP and as a proportion of the current account deficit in preprogram years. The implied deficit or surplus in the rest of the economy is also shown. The relationship between the fiscal deficit and current account in the preprogram year is depicted in Chart 2. Table 4 shows the proportionate adjustment in each sector over the period.

Table 4.Upper Credit Tranche Stand-By Arrangements, 1971-80: Proportionate Change in Program Year in Fiscal Balance1 and Balance of Rest of the Economy

(As proportion of deficit or surplus in preprogram year)2

Average for
19711972197319741975197619771978197919801971-803
All programs
Change in fiscal balance0.04-0.160.150.29-0.010.210.210.06-0.280.100.09
Change in balance of rest of economy0.040.871.23-1.23-1.111.55-0.523.670.78-0 920.47
Programs that showed improvement in both current account and fiscal balance
Change in fiscal balance0.030.370.650.300.210.270.550.470.280.39
Change in balance of rest of economy3.000.421.06-0.031.550.351.276.000.372.33
Programs that showed deterioration in both current account and fiscal balance
Change in fiscal balance-0.17-3.75-0.26-0.12-0.01-0.87-0.51-0.45-0.31
Change in balance of rest of economy-0.180.70-0.98-0.34-0.35-0.15-0.36-0 67
Programs that showed deterioration in current account and improvement in fiscal balance
Change in fiscal balance0.360.810.280.360.210.220.23
Change in balance of rest of economy-0.46-11.25-1.56-1.95-2.79-0.56-2.27-5 13
Programs that showed improvement in current account and deterioration in fiscal balance
Change in fiscal balance-0.86-0.92-0.47-1.27-0.19-0.90-0.37
Change in balance of rest of economy0.321.072.920.222.131.131.02
Sources: Tables 1 and 11.

Where foreign grants could be identified separately, they are excluded from revenue and grants and are included “below the line” with foreign financing.

A plus sign (+) indicates a decrease (increase) in the fiscal/current account deficit (surplus); a minus sign (-) indicates an increase (decrease) in the fiscal/current account deficit (surplus).

Equals unweighted arithmetic average for all individual country program data for 1971-80 and therefore does not equal simple average of yearly columns.

Sources: Tables 1 and 11.

Where foreign grants could be identified separately, they are excluded from revenue and grants and are included “below the line” with foreign financing.

A plus sign (+) indicates a decrease (increase) in the fiscal/current account deficit (surplus); a minus sign (-) indicates an increase (decrease) in the fiscal/current account deficit (surplus).

Equals unweighted arithmetic average for all individual country program data for 1971-80 and therefore does not equal simple average of yearly columns.

At the risk of overgeneralization, the data in Chart 2, Table 4, and Table 11 might be summarized as follows. As the decade of the 1970s progressed, the size of fiscal imbalances in the year prior to programs tended to increase in countries undertaking adjustment programs supported by use of Fund resources. Fiscal deficits also became a higher proportion of current account deficits in more recent periods.39 This finding, together with the high proportion of programs in which the government deficit and the current account deficit moved in the same direction (62 per cent), lends support to the proposition that reductions in external current account imbalances have depended to a large extent on reductions in fiscal imbalances. However, large absolute reductions in deficits of the rest of the economy, although fewer in number, were also observed during the period 1971-80. In general, where the current account deficit was reduced in the program year, the sector that accounted for the largest proportion of the imbalance in the preprogram year also accounted for the major part of the adjustment in the program year. Proportionately, however, reductions in the deficit of the rest of the economy exceeded those in the government sector.40 Whether or not this result should give cause for concern depends on whether the larger proportionate adjustments in the rest of the economy reflected policies that were consistent with effective external adjustment (increases in domestic petroleum prices to world market prices, elimination of price controls, etc.) or policies that were not consistent with effective external adjustment (for example, trade and payments restrictions, credit policies) and which effectively crowded out the private sector. Finally, when deficits in either sector increased during program periods they tended to be proportionately somewhat larger in the rest of the economy than in the government sector. This result may have reflected program design and may have been consistent with effective external adjustment. Equally, these out-comes may have reflected inappropriate policies or a greater uncertainty in specifying the impact of policy instruments on the rest of the economy than on the government sector.

Chart 2.Upper Credit Tranche Stand-By Arrangements, 1971-80: Relationship Between Fiscal Balance and Current Account Balance in Preprogram Years

(As percentage of GNP)

Source: Table 11 (in the Appendix).

COMPARISON OF RESULTS WITH PREVIOUS STUDIES

Table 5 contains data on changes in fiscal balances derived from unpublished data sources and for program periods that coincide with actual periods of stand-by arrangements.41 The results in Table 5 are broadly comparable to those in Table 1 and Table 10 (in the Appendix). Table 10 indicates that for 77 program periods, the fiscal deficit declined in 56 per cent of the programs and increased in 44 per cent. Comparable percentages for Table 5 are 59 per cent and 41 per cent, respectively. For all programs, the average decrease in the fiscal deficit for the period was 0.6 per cent of GNP in both Table 1 and Table 5. For programs in which the fiscal deficit declined, the average improvement was 2.9 percentage points of GNP (Table l)42 and 2.7 percentage points of GNP (Table 5). Finally, for programs in which the fiscal deficit increased, the average deterioration was 1.2 percentage points of GNP (Table l)43 and 2.6 percentage points of GNP (Table 5). The closeness of the results in Tables 1 and 5 would indicate that the choice of definition of “program period” used in this paper has not seriously distorted the fiscal results, at least in the aggregate.44

Table 5.Upper Credit Tranche Stand-By Arrangements, 1971-80: Fiscal Balance in Program Period Compared with Preprogram Year
19711972197319741975197619771978197919801971-80
Number of programs
Number of stand-by arrangements101076851181517971
Programs excluded211213351228
Programs included99555588105693
Of which,4
Improvement or no change372322659241
Deterioration623233231328
Change relative to GNP5
All programs-0.5-1.4-0.80.90.51.22.82.0-0.90.66
Improvement0.20.90.21.24.15.12.88.72.50.52.76
Deterioration-0.8-3.0-2.5-3.9-1.3-2.5-3.4-7.0-2.6-1.8-2.66
Sources: Questionnaires completed for studies by Beveridge and Kelly (1980), Beveridge (1981), and unpublished data.

Total number of upper credit tranche stand-by arrangements approved by the Fund’s Executive Board during the period.

Programs were excluded from analysis to achieve comparability with Tables 1-3 or owing to lack of data.

Number of programs is less than in Table 1, owing to different definition of program period.

Improvement and deterioration in the fiscal balance are measured in relation to GNP except where GDP is used instead.

A plus sign (+) indicates an increase (decrease) in surplus (deficit) relative to GNP; a minus sign (-) indicates a decrease (increase) in surplus (deficit) relative to GNP.

Equals unweighted average of all programs in each category and therefore is not equal to simple average of columns.

Sources: Questionnaires completed for studies by Beveridge and Kelly (1980), Beveridge (1981), and unpublished data.

Total number of upper credit tranche stand-by arrangements approved by the Fund’s Executive Board during the period.

Programs were excluded from analysis to achieve comparability with Tables 1-3 or owing to lack of data.

Number of programs is less than in Table 1, owing to different definition of program period.

Improvement and deterioration in the fiscal balance are measured in relation to GNP except where GDP is used instead.

A plus sign (+) indicates an increase (decrease) in surplus (deficit) relative to GNP; a minus sign (-) indicates a decrease (increase) in surplus (deficit) relative to GNP.

Equals unweighted average of all programs in each category and therefore is not equal to simple average of columns.

CHANGES IN DOMESTICALLY FINANCED BUDGET DEFICIT AND OVERALL BALANCE OF PAYMENTS

Table 6 presents data showing the direction of change in the overall balance of payments and in the domestically financed budget deficit over the period 1971-80.45 Of the 73 programs covered in the analysis, the overall balance of payments and domestically financed deficit moved in the same direction in 68 per cent of programs and in the opposite directions in 32 per cent. Donovan (1982) found that 61 per cent of all programs (one-year comparison) covered in his analysis registered an improvement in the overall balance of payments. The results in this paper suggest that at least part of this improvement reflected policies that affected the balance of payments via their effects on the government budget.

The domestically financed budget balance and overall balance of payments outcome might be expected to move together in a downward direction more frequently than the overall budget balance and current account balance.46 For some programs, particularly those involving a relaxation of quantitative import restrictions, the current account deficit could initially (that is, in the year of the program and perhaps for a few subsequent years) be expected to increase. In many of these programs, however, both the overall balance of payments deficit and the domestically financed budget deficit are expected to decline.47 The data in Tables 1 and 6 are consistent with this expectation. Of the 77 program periods covered in Table 1, the overall budget deficit and the current account balance declined in 36 per cent, whereas in 47 per cent of the 73 program periods covered in Table 6 the domestically financed budget deficit declined and the overall balance of payments deficit (surplus) declined (increased).

Table 6.Upper Credit Tranche Stand-By Arrangements, 1971-80: Overall Balance of Payments and Domestically Financed Fiscal Balance in Program Period Compared with Preprogram Year
19711972197319741975197619771978197919801971-80
Number of programs
758576810107731
Improvement2 in overall balance of payments and domestically financed fiscal balance143125663334
Deterioration2 in overall balance of payments and domestically financed fiscal balance321224216
Deterioration in overall balance of payments; improvement in domestically financed fiscal balance223221113
Improvement in overall balance of payments; deterioration in domestically financed fiscal balance1111113110
Sources: International Monetary Fund, Intenational Financial Statistics (various issues) and Government Finance Statistics Yearbook, 1981

Number of program periods here is less than in Donovan (1982), as fiscal data were not available for 11 program periods

Improvement and deterioration in the domestically financed fiscal deficit are measured in relation to GNP, except for a few instances where GNP is used instead. For the overall balance of payments, exports are used as the scaling factor.

Sources: International Monetary Fund, Intenational Financial Statistics (various issues) and Government Finance Statistics Yearbook, 1981

Number of program periods here is less than in Donovan (1982), as fiscal data were not available for 11 program periods

Improvement and deterioration in the domestically financed fiscal deficit are measured in relation to GNP, except for a few instances where GNP is used instead. For the overall balance of payments, exports are used as the scaling factor.

SAVINGS, INVESTMENT, AND GROWTH

In Section I it was noted that the two domestic balances that correspond to the current account deficit are not independent in a policy sense. For similar reasons, policies that affect government savings and investment are also likely to affect private savings and investment. Thus, an increase in government savings or investment will not necessarily result in an equal (or perhaps any) increase in total savings and investment in the economy. Table 7 summarizes available actual data on government savings and investment and total savings and investment for program countries for the period 1971-80.48 Of the 57 program periods for which data are available, government savings increased relative to GNP in 29; of these 29 programs, total savings increased relative to GNP in 22 and declined in 7. Of the 28 programs in which the government savings ratio declined, the total savings ratio declined in 13 and increased in 15. Government investment increased relative to GNP in 27 of the 57 programs; of these 27 programs, the total investment ratio increased in 11 and declined in 16. Of 30 programs in which government investment declined relative to GNP, the total investment ratio also declined in 18 but increased in 12. Although these data indicate that in many cases total savings and investment move in the same direction as government savings and investment, these variables move in opposite directions in almost half the programs. The latter finding emphasizes the importance of assessing the effects on total savings and investment of all policies that are designed primarily to influence government savings and investment. More particularly, these results suggest that policies to increase government savings and investment are not substitutes for policies to increase total savings and investment.

Table 7.Upper Credit Tranche Stand-By Arrangements, 1971-80: Government Savings and Investment Compared with Total Savings and Investment1(In number of programs)
Government SavingsGovernment Investment
IncreaseDecreaseIncreaseDecrease
Total savings2928
Increase2215
Decrease713
Total investment2730
Increase1112
Decrease1618
Sources: International Monetary Fund, International Financial Statistics (various issues) and Government Finance Statistics Yearbook, 1981; Donovan (1982).

Increases and decreases are measured in relation to GNP, except for a few instances in which GDP is used instead.

Sources: International Monetary Fund, International Financial Statistics (various issues) and Government Finance Statistics Yearbook, 1981; Donovan (1982).

Increases and decreases are measured in relation to GNP, except for a few instances in which GDP is used instead.

It is argued in Section I that a disaggregated analysis of government expenditure is required to assess the efficiency of government investment and the effects of various types of government expenditure in enhancing growth. This argument is based on the proposition that neither current and capital expenditure distinctions in government budgets nor consumption and investment classifications of expenditure in national accounts coincide with distinctions between productive (growth-promoting) and nonproductive expenditure. Nevertheless, it is possible that budget or national accounts expenditure classifications may provide a reasonably good proxy for this “ideal” expenditure classification. Such a finding would considerably simplify the task of policymakers in that an analysis of expenditure along the line suggested in Section I is both complex and time consuming. Presuming that capital and current disaggregations of government expenditure are reasonable proxies for productive and nonproductive expenditure, and that increases in government capital expenditure are not systematically offset by a reduction in investment in the rest of the economy, one might expect to find a positive relationship between government capital expenditure and the rate of growth. To adequately test this proposition, it would be necessary to specify and to estimate functional relationships between government capital expenditure and the rate of economic growth that allow for the effects of lags, capacity utilization, and other relevant variables. Although this analysis is not made in this paper, Table 8 provides actual data on government investment and economic growth for program countries for the period 1971-79 in an attempt to determine whether such an analysis would show any direct simple relationship between these variables. For this purpose, changes in government investment in the year of the program are compared with changes in the rate of growth.49 The data do not indicate any simple systematic relationship between government investment and the rate of growth. This result could mean (i) that increases in government capital expenditure take longer than three years to affect the rate of growth; or (ii) that increases in government capital expenditure are offset by reductions in investment expenditure in the rest of the economy (Table 7 suggests that this occurred in some countries); or (iii) that capital expenditure is not a good proxy for productive expenditure in the government sector; or (iv) that other factors (changes in capacity utilization, changes in the capital/output ratios,50 etc.) affected growth more during this period than did changes in the level of investment.

Table 8.Upper Credit Tranche Stand-By Arrangements, 1971-79: Comparison of Government Investment and Growth(In number of programs)
Change in Rate of Growth1
PositiveNegativeTotal
Increases in government investment2111223
Decreases in government investment2121325
Total232548
Sources: International Monetary Fund, International Financial Statistics (various issues) and Government Finance Statistics Yearbook, 1981.

Rates of growth are the average of three years beginning with the program year, compared with the average of the three years prior to that year.

Increases and decreases in government investment are measured in relation to GNP.

Sources: International Monetary Fund, International Financial Statistics (various issues) and Government Finance Statistics Yearbook, 1981.

Rates of growth are the average of three years beginning with the program year, compared with the average of the three years prior to that year.

Increases and decreases in government investment are measured in relation to GNP.

IV. Conclusions and Suggestions for Further Research

The main purpose of this paper has been to examine the contribution of changes in the fiscal balance and in the financial position of the rest of the economy to reductions in external deficits in countries that undertook Fund-supported adjustment programs during the period 1971-80. Such an investigation provides some evidence by which to test the implicit hypothesis underlying the practice of including fiscal targets and subceilings in Fund programs. In addition, the study provides some evidence on the relative adjustment in different sectors of the economy in the context of Fund programs.

In terms of changes in the current account of the balance of payments, the paper shows that the appropriate macroeconomic targets on which to focus are the overall government deficit and the private sector surplus or deficit. From the point of view of changes in the overall balance of payments, the relevant macroeconomic targets are the domestically financed budget deficit and the private sector surplus or deficit, offset by private capital inflows or outflows. Emphasized, however, is the fact that the domestic financial balances corresponding to the external deficits are not independent in a policy sense and that the effects of all policies on both sectors of the economy must be taken into account in assessing their effects on the balance of payments. In this context, however, the results in Table 3 demonstrate that at least in a number of programs, policies (and exogenous developments) had their major impact on the balance of payments via their effect on the government budget. Further research could examine whether the correlation between changes in the current account and changes in the fiscal deficit were greater for countries undertaking Fund programs than for all non-oil developing countries.

The observed increase in fiscal deficits as a proportion of external current account deficits in preprogram years, and the large number of programs (62 per cent) in which the overall government deficit and the deficit on the current account of the balance of payments were observed to move in the same direction, combined with data that show that in the latter a large proportion of the change in the current account (about two thirds) reflected a change in overall government deficits reinforce the importance attached to fiscal targets and fiscal performance clauses in Fund programs.

However, for programs in which the rest of the economy was the major source of imbalance in the preprogram year, this sector also accounted for the major part of the reduction in external deficits (in those cases where such a reduction occurred) in the program year both in an absolute and a relative sense. This finding emphasizes the importance of policies that primarily affect the rest of the economy in programs where the government is not the major source of domestic and external imbalances. In this respect, further research could usefully focus on the role of non-financial public enterprises (which are included in the rest of the economy in this paper), particularly since these enterprises are often a major source of imbalance in countries that undertake Fund programs.

For all programs, however, on average proportionate (that is, in relation to each sector’s deficit in the year prior to the program) reductions in deficits of the rest of the economy exceeded those in the government sector. Further research (most probably on an individual country basis) could usefully examine whether the adjustment in the rest of the economy was excessive in the sense that efficient private sector investment or necessary (productive) private sector consumption was crowded out in order to finance the government sector. It would also be useful to investigate the extent to which these results reflected “program design” as opposed to the implementation of less than ideal policies necessitated by exogenous developments and fiscal outturns that were less favorable than envisaged in programs.

Relationships between the fiscal sector and the overall balance of payments have not been investigated to the same extent in this paper as the relationship between the fiscal sector and the current account deficit. This mainly reflects data constraints, although it might also be justified by the greater emphasis given to current account targets in recent Fund programs. The results presented in Table 6 show that movements in the overall balance of payments tend to be in the same direction as movements in the domestically financed budget deficit and that at least part of the improvement in the overall balance of payments of countries undertaking Fund programs reflected policies (and exogenous developments) that affected the balance of payments via their effect on the government budget.

Although the overall government deficit is the appropriate fiscal target on which to focus when considering changes in the current account of the balance of payments, it is recognized that the particular policy instruments used to achieve changes in the government deficit have importance in terms of their effects both on other sectors of the economy and on medium-term growth and balance of payments objectives. With regard to growth and balance of payments objectives, it is argued that policies based on disaggregated analysis of government revenue and expenditure are likely to be more useful than those based on aggregative analysis. Given the necessity for less developed countries to achieve high rates of growth and the greater emphasis placed on the growth objective in programs supported by extended Fund facility arrangements, the relationship of government expenditure components to growth needs to be examined in greater detail. Meanwhile, the results in Section III would suggest that policy recommendations on the structure of government expenditure, on the one hand, and revenue, on the other hand, be developed in consultation with project specialists in major development agencies and specialists in the area of tax policy and administration, respectively.

APPENDIX: CHOICE OF PROGRAM COUNTRIES AND PERIODS

The programs and countries involved in this analysis were chosen for their comparability with those covered in Donovan (1982). In some cases, it was not possible to obtain either fiscal or GNP data. Thus, the number of program periods for which fiscal data can be related to the current account of the balance of payments is one less than in Donovan (1982); the number of countries for which fiscal data can be related to the overall balance of payments is 11 less than covered in Donovan (1982). Unless otherwise stated, fiscal data are obtained from Government Finance Statistics Yearbook, 1980, and GNP and GDP data are obtained from IFS.

The program periods covered are as follows:51

Current account of balance of payments and overall government deficits

(Chart 1, Tables 1 and 2, and Table 10 (in the Appendix))

Argentina (1976, 1977, 1978); Bolivia (1973); Burma (1974/75, 1977/78, 1978/79); Chile (1974, 1975); Colombia (1971*, 1972); Costa Rica (1980**+); Ecuador (1972*, 1973*); Egypt (1977*+); Gabon (1978**+); Guyana (1978+, 1979+); Haiti (1975*+, 1976*, 1977*); Honduras (1971*, 1972*, 1973); Israel (1975, 1976,1977); Jamaica (1973*, 1977*+); Kenya (1979, 1980); Korea (1971, 1975, 1976, 1980); Liberia (1980); Malawi (1979, 1980); Mauritius (1979); Morocco (1971); Nicaragua (1972); Pakistan (1972/73*, 1973/74, 1974/75, 1977/78); Panama (1971*, 1978, 1979); Peru (1978+, 1979+, 1980); Philippines (1971*, 1972*, 1973, 1980*); Portugal (1978**, 1979**); South Africa (1976/77*); Sri Lanka (1971, 1974, 1978); Sudan (1972/73, 1973/74, 1974/75+); Tanzania (1975, 1976); Togo (1979**+); Uruguay (1973); Yugoslavia (1971,1972); Zaire (1977+, 1979**+, 1980**+); Zambia (1976+, 1977+, 1978+, 1979*+).

Overall balance of payments and domestically financed budget deficit (Table 6)

Argentina (1976,1977,1978); Bolivia (1973); Burma (1974,1977,1978,1979); Chile (1974, 1975); Colombia (1971*, 1972); Ecuador (1972*, 1973*); Egypt (1977); Guyana (1978,1979); Haiti (1975**, 1976**, 1977**); Honduras (1971*, 1972*, 1973); Israel (1975, 1976, 1977); Jamaica (1973*, 1977); Kenya (1979, 1980**); Korea (1971, 1975, 1976, 1980); Malawi (1979, 1980**); Mauritius (1979); Morocco (1971); Nicaragua (1972); Pakistan (1973*, 1974, 1975, 1978); Panama (1971*, 1978, 1979); Peru (1978, 1979); Philippines (1973, 1980**); Portugal (1978**, 1979**); Somalia (1980**); South Africa (1977); Sri Lanka (1971, 1974, 1978); Sudan (1973, 1974, 1975); Tanzania (1975, 1976, 1980**); Turkey (1978,1979,1980**); Uruguay (1973); Yugoslavia (1971, 1972); Zambia (1976, 1977, 1978, 1979*).

The definition of “program period” is identical to that used in Donovan (1982). Thus, a one-year stand-by arrangement that spans more than one calendar year (or fiscal year for countries where IFS data are on a fiscal-year basis) is viewed as corresponding to two distinct program periods. Hence, the number of data points exceeds the number of upper credit tranche stand-by arrangements approved during the period.52

CHOICE OF COUNTRIES IN TABLE 5

The results in Table 5 are based on actual program data contained in questionnaires completed for studies by Beveridge and Kelly (1980), Beveridge (1981), and unpublished data. To ensure comparability with data in Tables 1 and 10, certain upper credit tranche stand-by arrangements have been excluded from the sample. The list of countries and the month and year in which the stand-by arrangement was approved are given in Table 10.

CHOICE OF COUNTRIES IN TABLE 7

Argentina (1976, 1977, 1978); Bolivia (1973); Burma (1974/75, 1977/78, 1978/79); Chile (1974, 1975); Colombia (1971, 1972); Egypt (1977); Guyana (1978,1979); Honduras (1971**, 1972**, 1973); Israel (1975,1976,1977); Jamaica (1973**, 1977); Kenya (1979); Korea (1971, 1975, 1976); Malawi (1979); Mauritius (1979); Morocco (1971); Nicaragua (1972); Pakistan (1972/73**, 1973/74, 1974/75, 1977/78); Panama (1971**, 1978, 1979); Peru (1978, 1979, 1980); Philippines (1973*); Portugal (1978**, 1979**); South Africa (1976/77); Sri Lanka (1971, 1974, 1978); Sudan (1973,1974,1975); Tanzania (1975,1976); Yugoslavia (1971**); Zaire (1977); Zambia (1976, 1977, 1978).

CHOICE OF COUNTRIES IN TABLE 8

Argentina (1976, 1977, 1978); Bolivia (1973); Burma (1974/75, 1977/78, 1978/79); Chile (1975); Colombia (1971, 1972); Egypt (1977); Honduras (1971**, 1972**, 1973); Israel (1975, 1976, 1977); Jamaica (1973**, 1977); Kenya (1979); Korea (1971, 1975, 1976); Malawi (1979); Morocco (1971); Nicaragua (1972); Pakistan (1972/73**, 1973/74,1974/75,1977/78); Panama (1971**, 1978, 1979); Peru (1978, 1979); Portugal (1978**, 1979**); South Africa (1976/77); Sri Lanka (1971, 1974, 1978); Tanzania (1975); Uruguay (1973); Yugoslavia (1971**); Zaire (1977); Zambia (1976, 1977, 1978).

Table 9.Upper Credit Tranche Stand-By Arrangements, 1971-80: Financial Programs
Year and Month

of Approval of

Arrangement
Country
1971
JanuaryKorea
MarchPhilippines
MarchSri Lanka
MarchMorocco
MarchPanama
AprilColombia
JuneHonduras
JulyMali
JulyYugoslavia
1972
JanuaryKorea
FebruaryNicaragua
MarchSudan
MayColombia
MayPhilippines
MayPakistan
JuneHonduras
JuneUruguay
JulyEcuador
1973
JanuaryBolivia
MayPhilippines
JuneJamaica
AugustSudan
AugustPakistan
1974
JanuaryChile
AprilSri Lanka
AugustSudan
NovemberPakistan
NovemberBurma
1975
MarchChile
JulyBangladesh
AugustHaiti
AugustTanzania
OctoberKorea
1976
JulyZambia
JulyHaiti
AugustArgentina
AugustSouth Africa
OctoberIsrael
1977
MarchPakistan
AprilEgypt
AprilZaire
MayBurma
AugustJamaica
SeptemberArgentina
NovemberPeru
DecemberSri Lanka
1978
AprilTurkey
AprilZambia
MayGabon
JunePanama
JunePortugal
AugustGuyana
AugustBurma
SeptemberPeru
1979
MarchPanama
MayNicaragua
JuneTogo
JulyPeru
JulyTurkey
JulyBangladesh
AugustKenya
AugustZaire
OctoberMalawi
OctoberMauritius
1980
FebruaryPhilippines
MarchKorea
MarchCosta Rica
MayMalawi
OctoberKenya
Table 10.Upper Credit Tranche Stand-By Arrangements, 1971-80: Balance of Payments Current Account and Fiscal Balance1 in Program Period Compared with Preprogram Year
19711972197319741975197619771978197919801971-80
Number of programs28638576910108773
(1)(1)(4)(4)(5)(2)(17)
Of which,4
Improvement in current account balance and fiscal balance124106543228
(1)(2)(3)(2)(8)
Deterioration in current account balance and fiscal balance211050133420
(1)(1)(1)(3)
Deterioration in current account; improvement in fiscal balance5301420201215
(1)(2)(3)
Improvement in current account; deterioration in fiscal balance6232000133014
(1)(2)(3)
Sources: International Monetary Fund, International Financial Statistics (various issues); Government Finance Statistics Yearbook, 1981; and Annual Report on Exchange Arrangements and Exchange Restrictions (various issues).

Where foreign grants can be identified separately, they are excluded from revenue and grants and are included “below the line” with foreign financing.

Figures in parentheses indicate number of programs in which external payments arrears existed.

Number of program periods is less than in Donovan (1982), as fiscal data were not available for one program in 1972.

Improvement and deterioration are measured in relation to GNP except for a small number of cases where GDP is used instead. An improvement is measured as a reduction (increase) in the current account deficit (surplus) or budget deficit (surplus); a deterioration is measured as an increase (reduction) in the current account deficit (surplus) or budget deficit (surplus). These terms are not used in a pejorative sense.

Includes one program for 1979 for which fiscal balance registered no change.

Includes one program for 1977 for which current account balance registered no change.

Sources: International Monetary Fund, International Financial Statistics (various issues); Government Finance Statistics Yearbook, 1981; and Annual Report on Exchange Arrangements and Exchange Restrictions (various issues).

Where foreign grants can be identified separately, they are excluded from revenue and grants and are included “below the line” with foreign financing.

Figures in parentheses indicate number of programs in which external payments arrears existed.

Number of program periods is less than in Donovan (1982), as fiscal data were not available for one program in 1972.

Improvement and deterioration are measured in relation to GNP except for a small number of cases where GDP is used instead. An improvement is measured as a reduction (increase) in the current account deficit (surplus) or budget deficit (surplus); a deterioration is measured as an increase (reduction) in the current account deficit (surplus) or budget deficit (surplus). These terms are not used in a pejorative sense.

Includes one program for 1979 for which fiscal balance registered no change.

Includes one program for 1977 for which current account balance registered no change.

Table 11.Upper Credit Tranche Stand-By Arrangements, 1971-80: Comparison of Fiscal Balance, 1 Balance of Rest of the Economy, and Balance of Payments Current Account Deficit in Preprogram Year2
Average for
19711972197319741975197619771978197919801971-803
(1) All programs4
(1.1) Current account balance in year prior to program as per cent of GNP-7.2-7.2-4.0-2.4-10.4-16.7-10.3-6.5-13.0-7.9-8.8
(1.2) Fiscal balance in year prior to program as per cent of GNP-2.4-1.9-2.7-5.9-6.8-12.7-12.8-7.1-8.6-6.7-6.9
(1.3) Deficit or surplus of rest of the economy in year prior to program as per cent of GNP-4.8-5.3-1.33.5-3.6-4.02.50.6-6.4-1.2-1.9
(1.4) Fiscal balance as proportion of current account balance (1.2)÷(1.1)0.330.260.682.460.650.761.241.090.660.850.78
(2) Programs in which both current account and fiscal balance improved in program year
(2.1) Current account balance in year prior to program as per cent of GNP-3.0-8.1-3.8-3.0-16.7-12.0-10.0-7.4-15.9-10.4
(2.2) Fiscal balance in year prior to program as per cent of GNP-3.2-3.8-2.0-6.9-12.7-16.3-8.6-7.6-12.9-9.5
(2.3) Deficit or surplus of rest of the economy in year prior to program as per cent of GNP0.2-4.3-1.83.9-4.04.3-2.60.2-3.0-0.9
(2.4) Fiscal balance as proportion of current account balance (2.2)÷(2.1)1.070.460.532.30.761.360.861.030.810.91
(3) Programs in which both current account and fiscal balance deteriorated in year of program
(3.1) Current account balance in year prior to program as per cent of GNP-5.7-1.4-10.2-12.2-0.7-1.8-8.9-7.3-7.0
(3.2) Fiscal balance in year prior to program as per cent of GNP-3.5-0.4-4.2-8.1-14.4-3.8-10.2-2.9-5.8
(3.3) Deficit or surplus of rest of the economy in year prior to program as per cent of GNP-2.2-1.0-6.0-4.113.72.01.3-4.4-1.2
(3.4) Fiscal balance as proportion of current account balance (3.2)÷(3.1)0.610.290.410.6620.572.111.50.400.83
(4) Programs in which current account deteriorated and fiscal balance improved
(4.1) Current account balance in year prior to program as per cent of GNP-6.6-2.3-2.3-5.8-12.1-16.4-7.0-6.5
(4.2) Fiscal balance in year prior to program as per cent of GNP-2.5-2.7-5.7-3.6-9.2-16.4-7.0-6.5
(4.3) Deficit or surplus of rest of the economy in year prior to program as per cent of GNP-4.10.43.4-2.2-2.9-5.50.9-0.8
(4.4) Fiscal balance as proportion of current account balance (4.2)÷(4.1)0.381.172.480.620.760.661.130.88
(5) Programs in which current account improved and fiscal balance deteriorated in year prior to program as per cent of GNP
(5.1) Current account balance-11.6-8.6-2.1-7.60.661.130.88
(5.2) Fiscal balance in year prior to program as per cent of GNP-0.7-1.2-3.4— -7.6-6.8-21.8-10.5
(5.3) Deficit or surplus of rest of the economy in year prior to program as per cent of GNP-10.9-7.41.3-6.51.6-14.6-6.2
(5.4) Fiscal balance as proportion of current account balance (5-2)÷(5.1)0.060.141.620.141.240.330.41
Source: International Monetary Fund, International financial Statistics (various issues) and Government Finance Statistics Yearbook, 1980; various national sources.

Where foreign grants can be identified, they are excluded from revenue and grants and are included "below the line" with foreign financing.

A minus sign(-) indicates a deficit.

Equals unweighted arithmetic average of all individual program data for 1971-80 and therefore does not equal simple average of yearly columns.

Improvement and deterioration are measured in relation to GNP except for a few cases in which GDP is used instead. An improvement is measured as a reduction (increase) in the current account/budget deficit (surplus); a deterioration is measured as an increase (reduction) in the current account/budget deficit (surplus).

Source: International Monetary Fund, International financial Statistics (various issues) and Government Finance Statistics Yearbook, 1980; various national sources.

Where foreign grants can be identified, they are excluded from revenue and grants and are included "below the line" with foreign financing.

A minus sign(-) indicates a deficit.

Equals unweighted arithmetic average of all individual program data for 1971-80 and therefore does not equal simple average of yearly columns.

Improvement and deterioration are measured in relation to GNP except for a few cases in which GDP is used instead. An improvement is measured as a reduction (increase) in the current account/budget deficit (surplus); a deterioration is measured as an increase (reduction) in the current account/budget deficit (surplus).

REFERENCES

    BeveridgeW.A.Fiscal Adjustment in Financial Programs Supported by Stand-By Arrangements in the Upper Credit Tranches, 1978-79” (unpublishedInternational Monetary FundJuly11981).

    BeveridgeW.A. and Margaret R.KellyFiscal Content of Financial Programs Supported by Stand-By Arrangements in the Upper Credit Tranches, 1969-78Staff Papers Vol. 27 (June1980) pp. 20549.

    DonovanDonal J.Macroeconomic Performance and Adjustment Under Fund-Supported Programs: The Experience of the SeventiesStaff Papers Vol. 29 (June1982) pp. 171203.

    HellerPeter S.The Problem of Recurrent Costs in the Budgeting and Planning Process” (unpublishedInternational Monetary FundJune11982).

    International Monetary Fund (IMF)The Concept of the Current Balance in Government Accounts” (unpublishedJune111976).

    KhanMohsin S. and Malcolm D.KnightSome Theoretical and Empirical Issues Relating to Economic Stabilization in Developing Countries” (unpublishedInternational Monetary FundJune211982).

    MilneElizabethThe Fiscal Approach to the Balance of PaymentsEconomic Notes Monte dei Paschi di Siena Vol. 6 (No. 11977) pp. 89106.

    ReichmannThomas M. and Richard T.StillsonExperience with Programs of Balance of Payments Adjustment: Stand-By Arrangements in the Higher Tranches, 1963-72Staff Papers Vol. 25 (June1978) pp. 293309.

    TanziVito (1976) “Fiscal Policy, Keynesian Economics and the Mobilization of Savings in Developing CountriesWorld Development Vol. 4 (No. 10 and 111976) pp. 90717.

    TanziVito (1981) “Taxation and Price Stabilization” (unpublishedInternational Monetary FundOctober301981).

    TanziVito (1982) “Fiscal Disequilibrium in Developing Countries” (unpublishedInternational Monetary FundJune231982).

Ms. Kelly, Assistant Division Chief in the Stand-By Operations Division of the Exchange and Trade Relations Department, was Assistant Division Chief in the Fiscal Review Division of the Fiscal Affairs Department when this paper was written. She is a graduate of the University of New England (Australia) and the Australian National University and was an economist in the Research Department of the Reserve Bank of Australia before joining the Fund staff.

The concept of the government sector is discussed in Section II.

Donovan (1982) compares macroeconomic variables in the program year with the preprogram year (one-year comparisons) and also the average of three years beginning with the program year with the average of three years prior to the program period (three-year comparisons). Results in this paper are based on one-year comparisons.

This approach would also enable actual outcomes to be compared with hypothetical outcomes associated with alternative policy actions. In this context, however, it should be stressed that the determination of what alternative policies would have been followed in the absence of a Fund program involves major elements of subjective judgment.

This methodology is outlined briefly in Section I.

This does not imply that for programs in which an increase in the current account deficit is planned in the program year fiscal targets and subceilings are not useful.

Including net transfers (except public transfers) and workers’ remittances, as well as net factor incomes.

The overall government deficit as defined in this paper, unlike the definition in the Fund’s Draft Manual on Government Finance Statistics (Washington, June 1974), includes foreign grants “below the line” as a financing item. This is equivalent to treating foreign grants as a use of foreign savings (that is, the same as foreign borrowing) in the balance of payments. If foreign grants are included as a current transaction in the balance of payments, for consistency, they should be included together with revenue in the overall government deficit.

For ease of exposition in the rest of the paper, it is assumed that the author is dealing only with countries with balance of payments current account deficits and overall government deficits.

If external payments arrears exist, the overall balance of payments equals the change in reserves plus the change in outstanding arrears.

The treatment of balance of payments financing (for example, Eurocurrency loans) in this context is discussed in the subsection policy aspects in Section I.

Equations (2) and (3) focus on the relationships between the domestic savings and investment (income and expenditure) gap and the balance of payments. Alternatively, the current account balance and overall balance of payments outcomes can be expressed in terms of financial variables (assuming that changes in “other items net” in the monetary survey are zero).ZX=ΔDCpΔMLpg+Kp+ΔNDCg+Kg+Lpg(4)ZXKpKg=ΔDCpΔM+ΔNDCg=ΔR(5)

where

DC =

domestic credit NDC = net domestic credit

Lpg = borrowing by government from the nonbank domestic sector

K = net foreign assets

M = money supply

Δ= a one-period change in the variable

Equation (4) shows that financing for the balance of payments current account deficit equals net domestic credit plus foreign capital inflows (including government borrowing and foreign grants). Equation (5), which is the familiar monetary survey identity, shows that the overall balance of payments outturn is equal to domestic credit creation offset by any increase in the money supply.

See Khan and Knight (1982) for a discussion of these interrelationships. In this context, however, the paper by Milne (1977) is of interest. Milne investigates the validity of the Cambridge New School fiscal approach to the balance of payments by testing the empirical relationship between the government deficit and the current account deficit. This approach assumes that the private sector deficit/surplus is essentially constant and that changes in the balance of payments reflect primarily changes in the government deficit. For this purpose, Milne estimated the equation (Z - X) = α + β (G - T) for 38 countries using annual data for the period 1960-75, where (Z - X) = trade balance, (G - T) = government deficit, α = the private sector surplus and is assumed to be constant for each country. The equation was also estimated allowing for a lagged response of the balance of trade to changes in the deficit for 32 countries. The results lent support to the fiscal approach to the balance of payments in slightly more than half the countries. That is, β was found to be large and statistically significant. (For the lagged version of the equation, this included approximately half the less developed countries included in the sample.) As noted in Milne, the existence of an empirical relationship between the government deficit and balance of trade does not imply causality. Nevertheless, the policy implications of these results are of interest in the present context. For countries where the p coefficient (or sum of the β coefficients for equations using β polynomial distributed lag) is greater than unity (which is true for all countries analyzed by Milne where β is statistically significant), an increase of 1 per cent in the government deficit eventually results in an increase that is greater than 1 per cent in the trade deficit. While this does not imply that policies that affect the private sector deficit have no effect on the balance of trade, it shows that such effects tend to be swamped by the effects of changes in the government deficit. Thus, for such countries, fiscal targets would take on an overriding importance in the context of balance of payments adjustment.

Similarly, the ex post measure of the change in the private sector deficit does not measure solely the impact of nonfiscal policies on the balance of payments.

Looking at the balance of payments from the point of view of financial variables, equation (4) indicates that a reduction (increase) in the fiscal deficit accompanied by a reduction (increase) in domestic bank and foreign borrowing by the government will lead to a reduction (increase) in the current account of the balance of payments, ceteris paribus. An increase in the government deficit financed by nonbank borrowing will have an expansionary impact if the monetary authorities accommodate the resulting increased needs of the private sector. If the monetary authorities do not accommodate these needs, private sector activity is possibly “crowded out.” Of course, the effects of changes in the fiscal deficit on the balance of payments depend not only on accompanying monetary policies but also on other policies, in particular, exchange rate and trade policies, and income and price policies. For example, if a flexible exchange rate policy is employed or the balance of payments is protected by quantitative restrictions, an increase in the government deficit financed by bank borrowing or foreign borrowing will have its major effect on inflation unless the monetary authorities reduce private sector credit.

In fact, in a number of Fund programs foreign commercial borrowing is treated in this manner in specifying ceilings on total credit and subceilings on credit to government.

For a fuller discussion of the “permanency issue” as it relates to the concept of fiscal equilibrium, see Tanzi (1982). The implication of Tanzi’s argument is that a reduction in the government deficit achieved through a reduction in current expenditure is likely to be less permanent than a reduction achieved through cuts in capital expenditure. It might be argued that tax increases (excluding those introduced on a temporary basis) might also have more permanent effects on the budget balance, and hence on the balance of payments.

These issues are discussed more fully in IMF (1976).

See Tanzi (1976) for a different view and a discussion of these issues.

Where the tax level is already high, the inflationary effects of further tax increases also become crucial. Tanzi (1981) in a review of this issue concludes that when the tax level is already high, the cost-increasing effect of tax increases can neutralize the effect on prices of the deflationary impact on demand.

The absence of a market test for the government sector often allows waste on prestige projects and ill-considered projects. To a large extent, the same is true for the private sector (and the nonfinancial public enterprise sector) in many less developed countries where price distortions (owing to interest rate, exchange rate, subsidy, and minimum wage rate policies) may result in a large divergence between private and social rates of return.

See International Bank for Reconstruction and Development, World Development Report, 1980 (Oxford University Press, 1980), p. 8 and pp. 48-64 for estimates of rates of return on education, health, and research and development.

See Heller (1982) for a discussion of recurrent costs in the budgeting and planning process.

The definition of the program period, which is the same as in Donovan (1982), is explained in the Appendix.

As discussed earlier, the term “fiscal contribution” used in this context is not synonymous with “fiscal policy contribution.”

Data on average changes in the current account are identical to those used in Donovan (1982).

Balance of payments financing is included as foreign financing (when utilized for budgetary purposes) in fiscal data.

Even if data were available to adjust the government cash deficit to an accrual basis, it is not clear that this adjustment would necessarily ensure consistency of the fiscal and balance of payments data used in this report, in that balance of payments and national income data actually reported to IFS are a mixture of cash and accrual data.

However, as noted in Section III, the two outlying cases in Chart 1 (where the current account and the budget deficit moved in opposite directions by substantial amounts) were related to an inconsistent treatment of arrears in the budget and the balance of payments.

As noted in Donovan (1982), where a program came into effect within a calendar year, the change in a variable during a one-year arrangement was spread over two calendar-year periods.

Unpublished data for this comparison are obtained from questionnaires completed for Beveridge and Kelly (1980), Beveridge (1981), and other unpublished data.

Data for total savings and investment, changes in the current account of the balance of payments, changes in international reserves, and changes in inflation and the rate of growth are identical to those used in Donovan (1982).

Fiscal problems in this context may have resulted from nonimplementation of fiscal or other policies, incorrect specification of functional relationships, or incorrect forecasts for exogenous variables.

While such a comparison is not made in this paper, it is an area in which future research could usefully be conducted.

For the two outlying observations (Zaire, 1977 and Togo, 1979) in Chart 1 in which the budget deficit and current account moved in opposite directions, it is interesting to note that for Zaire, external payments arrears increased substantially, whereas they had been programed to decline. This was reflected (on an accrual basis) in a larger than programed current account deficit. The recorded improvement in the budget deficit partly reflects the fact that transactions in the fiscal accounts were recorded on a cash basis. For Togo, the government deficit on a commitment basis did not change in relation to GNP. The increase on a cash basis reflects the effect of arrears, which increased more in the preprogram year than in the program year.

For all programs, the average increase in the rate of inflation in the year of the program compared with the preprogram year was 1.8 percentage points; on the basis of a comparison of the three-year period prior to the program with the three-year period after the program, the average increase was 3.2 percentage points (Donovan (1982), p. 184, Table 5). The comparable average increases for programs in which the current account deficit declined and the budget deficit increased were 1.4 and 3.6 percentage points, respectively.

Milne used time-series data to estimate the equation (Z-X)t=α + β (G - T)t. In this paper, the change in the current account is regressed on the change in the government overall deficit using cross-sectional data.

The constant term in equations where it is included is not significantly different from zero at the 95 or 99 per cent levels.

The coefficient p is not significantly different from unity in any of the equations.

This result is not surprising in that exogenous shocks are likely to have increased both the current account deficit and the fiscal deficit.

The proportionate adjustment for each sector is calculated as the ratio of the change in its deficit during the program period to the size of its deficit in the preprogram year, both measured in relation to GNP.

Table 5 is derived from questionnaires used in Beveridge and Kelly (1980), Beveridge (1981), and unpublished data. For comparability with Tables 1 and 2, only 5 of the 17 stand-by arrangements actually approved in 1980 are included.

This is the weighted average of 3.7 (programs in which current account and fiscal balance improved) and 1.3 (programs in which current account deteriorated and fiscal balance improved) in Table 1.

This is the weighted average of -1.8 (programs in which current account and fiscal balance deteriorated) and -1.6 (programs in which current account improved and fiscal balance deteriorated) in Table 1.

This does not imply that data for the current account (and hence implicit data for the rest of the economy) are not affected by the definition of “program period.”

The change in overall balance of payments is measured relative to exports, and the change in the domestically financed budget deficit is measured relative to GNP.

Alternatively, if the overall balance of payments is in small surplus in the preprogram year, it might be expected to show a higher surplus in the program year.

For many of these programs, the overall budget deficit is also expected to decline.

For this purpose, government investment is defined as the sum of government capital expenditure and net lending, and government savings is obtained as the difference between current revenue and current expenditure. Data for total savings and investment are identical to those used in Donovan (1982).

Changes in rates of growth are the average of three years, beginning with the program year, compared with the average of the three years prior to that year.

Changes in capital/output ratios can be of importance for countries in which the structure of production is changing from one that is less capital intensive to one that is more capital intensive.

A plus sign (+) denotes that external payments arrears existed; an asterisk (*) indicates that fiscal data are obtained from IFS; and double asterisks (**) indicate that fiscal data are obtained from unpublished or national sources.

See Donovan (1982), p. 199, for further details.

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