- Sanjeev Gupta, Claire Liuksila, Henri Lorie, Walter Mahler, and Karim Nashashibi
- Published Date:
- June 1992
© 1992 International Monetary Fund
Library of Congress Cataloging-in-Publication Data
The Fiscal dimensions of adjustment in low-income countries / Karim
Nashashibi … [et al.].
p. cm. — (Occasional paper / International Monetary Fund,
ISSN 0251-6365; no. 95)
1. Fiscal policy—Developing countries. 2. Economic stabilization—Developing countries. I. Nashashibi, Karim A. II. Series: Occasional paper (International Monetary Fund); no. 95.
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The following symbols have been used throughout this paper:
… to indicate that data are not available;
— to indicate that the figure is zero or less than half the final digit shown, or that the item does not exist;
– between years or months (e.g., 1991–92 or January–June) to indicate the years or months covered, including the beginning and ending years or months;
/ between years (e.g., 1991/92) to indicate a crop or fiscal (financial) year.
“Billion” means a thousand million.
Minor discrepancies between constituent figures and totals are due to rounding.
It has been increasingly recognized that low-income countries face particularly difficult problems in carrying out economic adjustment. Such countries are often burdened with economic structures and institutions that hinder rather than foster the achievement of economic growth. With inadequate institutional foundations and insufficient resources, low-income countries can become trapped in a downward spiral of declining demand caused by adverse external factors and austerity measures aimed at remedying the effects of past and present expansionary policies.
Economic adjustment programs are intended to improve economic management and to raise the living standards of the population in the medium term. IMF programs and technical assistance over several years have resulted in substantial institutional reforms in the low-income countries, which will contribute during the coming years to creating an enabling environment for productive investment and greater integration into the global economy. However, adjustment may have shortrun costs that can be especially onerous for the poorest segments of the population. Encouraging adjustment while minimizing its costs for these groups is a special challenge for the policymakers, especially when such countries do not have the financial resources and the institutions to protect these groups.
These issues have been of special concern to the IMF for some time. The establishment of the structural adjustment facility (SAF) and the extended structural adjustment facility (ESAF), which provide highly concessional lending to the poorest countries undergoing adjustment programs, was a response to these problems. Because they have a longer time frame than most IMF loan arrangements and because of their concessional terms and their emphasis on tackling structural problems, SAF/ESAF programs give countries the “breathing space” needed to break out of the cycle of declining living standards that can sometimes accompany repeated short-term austerity programs.
For various reasons, the special problems that affect low-income countries are of particular concern to the Fiscal Affairs Department. First, in most of these countries the need for adjustment generally arises from imbalances in the public sector, both structural and short-term. Therefore, reducing these imbalances has required much more than conventional deficit reduction solutions. The Fiscal Affairs Department has provided specialist advice on structural measures in the areas of tax reform, taxation of the informal sector, tax administration, budgetary reform, and restructuring government expenditure.
A second important concern is the need to provide for measures to cushion the initial shock of adjustment on the living standards of the poorest groups. This has generated an internal debate within the IMF, supported by a number of research papers, to narrow down the various alternatives. The Fiscal Affairs Department has played an important role in advising countries in designing such measures—loosely termed “social safety nets”—through specialist advice provided during the process of program design and through discussion within and outside the IMF in a series of seminars.
This Occasional Paper attempts to bring together the key fiscal issues that have arisen in countries undertaking SAF/ESAF programs. We hope that, in examining the experience of these countries in the fiscal area, lessons can be drawn that will enrich future programs and facilitate the transition to sustained high-quality growth.
The authors received valuable comments from a number of colleagues in the Fiscal Affairs Department and in other departments of the Fund. They would like to thank, in particular, Vito Tanzi and Teresa Ter-Minassian for their helpful advice, and Tarja Papavassiliou and Chris Wu for their help in compiling data as well as for computational assistance. The paper was edited by Elin Knotter of the External Relations Department. The authors bear sole responsibility for any factual errors. The opinions expressed in the paper are those of the authors and should not be construed as representing the views of the International Monetary Fund.