Chapter

III Macroeconomic and Fiscal Setting in Postconflict Countries

Author(s):
Rina Bhattacharya, Benedict Clements, Sanjeev Gupta, Shamsuddin Tareq, Alex Segura-Ubiergo, and Todd Mattina
Published Date:
December 2005
Share
  • ShareShare
Show Summary Details

The challenges facing postconflict countries can be gauged by the economic conditions confronting them in the aftermath of a conflict.1Figures 3.1 to 3.6 present information, to the extent that data are available, on macroeconomic and fiscal conditions in 14 countries and territories with conflict episodes from 1990–2003: the Islamic Republic of Afghanistan, Albania, Bosnia and Herzegovina, Cambodia, Democratic Republic of the Congo, Croatia, Lebanon, Liberia, Mozambique, Rwanda, Serbia and Montenegro, Sierra Leone, Tajikistan, and the Republic of Yemen.2

Figure 3.1.Real GDP Growth in Selected Postconflict Countries

(Annual percent change)

Sources: IMF, World Economic Outlook database, 2004; and World Bank, World Development Indicators database.

Notes: Based on a sample of 13 countries: Albania, Bosnia and Herzegovina, Cambodia, Democratic Republic of the Congo, Croatia, Lebanon, Liberia, Mozambique, Rwanda, Serbia and Montenegro, Sierra Leone, Tajikistan, and Yemen. “Preconflict” refers to the year before the conflict, except for Albania and Croatia, for which it refers to two years prior to the conflict. “Postconflict” refers to the year before the first technical assistance mission by the IMF’s Fiscal Affairs Department, either during or immediately following the conflict. “Latest year” refers to the most recent year for which data are available.

Figure 3.6.Financing of the Budget in Selected Postconflict Countries

(In percent of GDP)

Sources: National authorities and IMF staff estimates.

Notes: Based on a sample of nine countries: Albania, Cambodia, Democratic Republic of the Congo, Lebanon, Mozambique, Rwanda, Sierra Leone, Tajikistan, and Yemen. See notes to Figure 3.1 for definitions of “preconflict,” “postconflict,” and “latest” years.

Of course, a host of factors besides the conflict influenced the evolution of the macroeconomic variables over this period, so the analysis in this chapter should be interpreted with caution. In addition, the sample size for some of the macroeconomic and fiscal variables differs. Given those caveats, it can nevertheless be stated that macroeconomic imbalances in the postconflict episodes analyzed here—already severe at the onset of the conflict—were generally exacerbated by the hostilities. On average, real gross domestic product (GDP) fell significantly in these countries during the conflict (Figures 3.1 and 3.2), which is consistent with earlier studies on the economic consequences of conflict.3 Both real GDP and real per capita GDP were below their preconflict levels when the IMF carried out its first postconflict technical assistance mission.4 Inflation, already at high levels before the onset of hostilities, increased further during the conflict episode (Figure 3.3).

Figure 3.2.Real GDP and GDP per Capita in Selected Postconflict Countries

(Index, preconflict = 100)

Sources: IMF, World Economic Outlook database, 2004; and World Bank, World Development Indicators database.

Notes: Based on a sample of 13 countries: Albania, Bosnia and Herzegovina, Cambodia, Democratic Republic of the Congo, Croatia, Lebanon, Liberia, Mozambique, Rwanda, Serbia and Montenegro, Sierra Leone, Tajikistan, and Yemen. See notes to Figure 3.1 for definitions of “postconflict” and “latest” years.

Figure 3.3.Consumer Price Inflation in Selected Postconflict Countries

(Annual percent change)

Sources: IMF, World Economic Outlook database, 2004; and World Bank, World Development Indicators database.

Notes: Based on a sample of 11 countries: Afghanistan, Albania, Cambodia, Democratic Republic of the Congo, Croatia, Lebanon, Mozambique, Rwanda, Sierra Leone, Tajikistan, and Yemen. See notes to Figure 3.1 for definitions of “preconflict,” “postconflict,” and “latest” years.

Macroeconomic challenges were particularly severe in the fiscal area. The overall fiscal deficit (including grants) increased only slightly during the conflict (Figure 3.4), but underlying fiscal developments were much more adverse than suggested by changes in the deficit.5 Total revenues, including grants, fell by 2 percentage points of GDP, reflecting primarily a substantial slippage in revenue effort. In response, government spending was cut back, but not by enough to offset the fall in revenues.6 Reduction in outlays on wages and salaries were especially sharp, while military spending increased (Figure 3.5). Equally worrisome were developments in the financing of the deficit. Net foreign financing fell sharply during the conflict period (Figure 3.6), forcing countries to rely much more on domestic sources to finance the deficit. Consequently, the domestic financing requirement increased to more than 7 percent of GDP, with adverse consequences for macroeconomic stability, including inflation.

Figure 3.4.Fiscal Aggregates in Selected Postconflict Countries

(In percent of GDP)

Sources: National authorities and IMF staff estimates.

Notes: Based on a sample of 10 countries: Albania, Cambodia, Democratic Republic of the Congo, Croatia, Lebanon, Mozambique, Rwanda, Sierra Leone, Tajikistan, and Yemen. See notes to Figure 3.1 for definitions of “preconflict,” “postconflict” and “latest” years.

Figure 3.5.Government Spending in Selected Postconflict Countries

(In percent of GDP)

Sources: National authorities and IMF staff estimates.

Notes: Based on a sample of seven countries: Albania, Cambodia, Democratic Republic of the Congo, Mozambique, Rwanda, Sierra Leone, and Yemen. See notes to Figure 3.1 for definitions of “preconflict,” “postconflict,” and “latest” years. For defense spending, the latest year for Albania, Lebanon, and Mozambique is 2002.

Macroeconomic conditions in these countries have improved significantly in recent years. The latest available data, as shown in the figures, indicates that annual real GDP growth averaged about 5 percent, with all countries in the sample registering positive growth rates. Real GDP was about 64 percent higher than its preconflict level, with real per capita GDP more than 30 percent higher. There has also been a dramatic reduction in inflation.

The fiscal position has also improved somewhat in recent years. Deficits (including grants) have fallen by almost 1½ percent of GDP.7 More importantly, domestic financing of the deficit has been cut sharply, contributing to greater macroeconomic stability. Revenues rebounded and rose as a share of GDP, surpassing their preconflict levels. Total government spending rose sharply but military spending declined to about half its preconflict level. As such, it appears that the peace dividend has been used by countries both to address fiscal imbalances, as well as to attend to pressing social needs by further increasing government spending.8

In a more comprehensive study of the relationship between conflict episodes and economic performance, Staines (2004) documents how recent conflicts have become shorter but have resulted in more severe contractions in economic activity, followed by a stronger recovery of growth.

The 14 are a subset of the 27 postconflict countries or territories identified in Chapter II.

In the figures, “preconflict” refers to the year before the start of the conflict, and “postconflict” refers to the year before the first postconflict technical assistance mission by the International Monetary Fund. In most cases, the IMF mission coincides with the final year of the conflict, but in four countries—Croatia, Liberia, Sierra Leone, and Tajikistan—the first mission actually took place during the conflict. The “latest year” refers to the most recent year for which data are available.

Excluding grants, the overall fiscal deficit worsened by about 2 percent of GDP.

In a postconflict setting, there are often a large number of unpaid civil servants and the government is unable to provide even a rudimentary level of public services.

The overall fiscal deficit excluding grants also fell slightly.

For an examination of the impact of conflict on social indicators, see Gupta and others (2004).

    Other Resources Citing This Publication