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Back Matter

Back Matter

Paolo Dudine, Sibabrata Das, Pritha Mitra, Yongzheng Yang, Eteri Kvintradze, and Nkunde Mwase
Published Date:
March 2010
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    Annex 1 Analysis of Macroeconomic Policy Design Using WEO Data

    The purpose of this analysis is to show whether the findings obtained for continuous PRGF programs in the main text broadly apply to all programs in LICs. The WEO dataset used covers all 37 program LICs as of end-July 2009 (see Annex 2 for the country list).26 These countries are divided into two groups—those that initiated their programs before 2008 and those during 2008–09.27 This distinction helps gauge the extent to which the difference in the nature of programs and the timing of their initiation could influence their objectives. Pre-2008 programs consist of PRGFs and PSIs which are aimed at resolving protracted balance of payments problems. Post-2008 programs include—in addition to PRGFs and PSIs—SBAs and ESFs that are designed to address short-term balance of payments problems. Post-2008 programs were designed in the midst of the twin global crises and were more likely than pre-2008 programs to have taken into account the need to address the impact of the crises. Pre-2008 programs, on the other hand, will more likely need to be modified in subsequent reviews to address the consequence of the crises.

    As the impact of the food, fuel and global financial crises was increasingly being felt, programs began to factor in a significant growth slowdown. The October 2007 WEO projected steady growth in 2008–10 for both pre-and post-2008 program countries (Figure A1). As the global economic outlook deteriorated with the onset of the global financial crisis, the October 2008 WEO revised growth projections downward, more so for post-2008 program countries than for pre-2008 program countries. By the time of the April 2009 WEO revision, projected growth was revised down by about 3 percentage points for 2009 and 2 percentage points for 2010, for both groups of countries.

    Figure A1.Real GDP Growth, Inflation, and Change in Broad Money

    (In percent)

    Sources: WEO database; and IMF staff estimates.

    Inflation objectives and monetary policy have been adjusted to accommodate the first-round effect of increasing world food and fuel prices. As food and fuel prices rose, monetary policy was eased and inflation projections for both groups of countries were revised significantly upwards in October 2008 (Figure A1). As food and fuel prices began to fall in mid-2008 and money demand weakened with slowing economic activity in the wake of the global financial crisis, money supply was adjusted downward for 2009 to prevent the second-round effects of the price increases. Despite the adjustment, however, inflation in both groups of countries is expected to come down only gradually to allow monetary policy to support short-term economic activity in the face of an economic downturn.

    Fiscal policy was loosened in response to a deteriorating economic outlook. In pre-2008 program countries, 2007 and 2008 projections envisaged a large increase in the primary deficit in 2008 but a consolidation in 2009. As the impact of the global financial crisis became more evident in 2009, projections envisaged a continued deterioration of the fiscal balance in 2009, with a projected improvement only in 2010. In post-2008 program countries, the October 2007 WEO projected a sharp deterioration in the primary balance for 2007 (partly reflecting the one-off effect of debt relief under the Multilateral Debt Relief Initiative in 2006), followed by a stable outlook. Subsequent WEO revisions projected some further increase in the deficit in 2008 and similar levels of deficits in 2009. This outlook reflected a policy to allow automatic stabilizers to work on the revenue side and to increase expenditures at the same time. A similar policy appears to have been at work in pre-2008 countries (Figure A2).

    Figure A2.Primary Balance, Revenues, and Expenditures

    (In percent of GDP)

    Sources: WEO database; and IMF staff estimates.

    In relaxing fiscal stances debt vulnerabilities have been taken into account.28 Primary fiscal balances in pre-2008 program countries with low and moderate risks of debt distress were projected to deteriorate during the period 2006–10. In contrast, primary fiscal balances in countries with high debt distress risk were projected to remain stable throughout the period. The pattern is similar for post-2008 program countries, except that countries with low debt distress risks started with a stronger fiscal position and were projected to loosen their fiscal stance even more than their pre-2008 counterparts. Debt dynamics also reflect a more accommodating fiscal stance in countries with low and moderate debt distress risks. The debt-to-GDP ratio was projected to increase for countries with low and moderate debt distress risks, while remaining stable for countries with high debt distress risks (Figure A3).

    Figure A3.Outstanding Debt and Primary Balance by Debt Vulnerabilities

    (In percent of GDP)

    Sources: WEO database; and IMF staff estimates.

    Program countries have been able to smooth external account adjustment by slowing reserve buildup and adjustment patterns have reflected debt vulnerabilities. Both groups of countries were projected to experience a sharp deterioration in their current account balances in 2007–08 as a result of rising world food and fuel prices. The deterioration turned out to be larger than projected for both groups, but more so in post-2008 program countries,

    which were able to use their higher level of initial reserves to finance a larger increase in the current account deficit. Countries with lower and moderate debt distress risks entered the crises with higher reserve coverage and considerably lower current account deficits. As a result, they were able to finance a larger increase in the current account deficit in 2007 and 2008, and undertake slower adjustment in 2009 and 2010 (Figure A4).

    Figure A4.Current Account Deficit in Percent of GDP, and Reserves in Months of Imports

    Sources: WEO database; and IMF staff estimates.

    Annex 2 List of Countries with Program Engagements
    Program start date in

    Program start date in

    Program start date in

    Program start date in 2005–07 and active in

    2 countries:21 countries:6 countries:21 countries:5 countries:12 countries:2 countries:5 countries:13 countries:
    BoliviaAlbaniaCape VerdeAfghanistanArmeniaBurundiKyrgyzCape VerdeAfghanistan
    Burkina FasoNigeriaArmeniaMongoliaRep. ofMalawiSenegalBurkina Faso
    BurundiSenegalBeninPakistanCô;te d’lvoireTanzaniaGambia, The
    Cape VerdeTanzaniaBurkina FasoSri LankaDjiboutiUgandaGrenada
    Rep. ofCentral African

    GeorgiaGambia, TheNigerMauritania
    GhanaGrenadaSão Tomé and PríncipeNicaragua
    KenyaHaitiTajikistanSierra Leone
    MaliKyrgyz Rep.TogoCentral African
    UgandaSão Tomé and Príncipe
    Sierra Leone
    Annex 3 Social Issues: Program Measures in 2008–09
    Armenia (SBA)Higher social spending. The IMF-supported program includes an increase in social spending of 1.6 percent of GDP in 2009 compared to 2008.
    Burundi (PRGF)Higher social spending. The impact of higher food and oil prices on the poor is mitigated by enhancing social safety nets (e.g., food security programs and school feeding programs). To boost food production, the government distributed seeds and fertilizers to smallholders, provided microcredits, and rehabilitated irrigation systems. The budgetary costs of these measures (estimated at about 3 percent of GDP) was fully financed by donors.
    Congo, Republic of (PRGF)Higher social spending and focus on pro-poor spending. In collaboration with the World Bank, the program envisages quarterly monitoring of pro-poor spending.
    Côte d’lvoire (PRGF)Higher social spending and focus on improving social indicators. In collaboration with the World Bank, the program envisages quarterly monitoring of pro-poor spending and progress on social indicators. HIPC Completion-Point triggers include safer childbirth, thereby protecting the lives of women and children, and greater access to textbooks to ensure quality education.
    Djibouti (PRGF)Higher social spending and better targeting. In collaboration with the World Bank, the program envisages biannual monitoring of pro-poor spending and progress on social indicators. Social concerns raised by increasing food and oil prices are addressed by developing a system of targeted subsidies to the poorest, with World Bank assistance.
    Georgia (SBA)Higher social spending. Social spending is projected to increase by one percent of GDP in 2009 compared to 2008. Fiscal policy is set to support economic activity while addressing key social and reconstruction needs. Recurrent spending (mainly on defense) is expected to fall sharply while social outlays increase.
    Ghana (PRGF)Better targeting. To mitigate the risks associated with slower growth for low-income and vulnerable groups, social protection and safety nets will be strengthened and expanded. Social protection programs, particularly in health, education and sanitation, will be preserved. New initiatives include the provision of school uniforms to about 1.6 million pupils in public basic schools in deprived communities. Free exercise books will also be provided for every pupil in all public basic schools. In addition, the current capitation grant will be increased by 50 percent.
    The Kyrgyz Republic (ESF-HAC)Higher social spending. Social fund expenditures are programmed to increase by 0.5 percent of GDP in 2009. The surge in food and fuel prices and growing energy supply difficulties prompted a rapid and coordinated response from the donor community. The World Bank, European Union, Asian Development Bank, European Bank for Reconstruction and Development, U.S. Agency for International Development, United Nations Food and Agriculture Organization, and other organizations are providing loans, grants and in-kind assistance to support the agricultural and energy sectors.
    Liberia (PRGF)Higher social spending and focus on improving social indicators. In collaboration with the World Bank, the program envisages quarterly monitoring of pro-poor spending and progress on social indicators.
    Malawi (ESF-HAC)Higher social spending. Higher revenues and aid and lower interest payments on public debt have allowed an increase in outlays for poverty-reducing and social expenditures.
    Mali (PRGF)Higher social spending and better targeting. The program supported the government’s policy response to provide financial support to rice production through fertilizer and machinery subsidies; release food from village food banks; remove import taxes on limited quantities of rice, milk powder and cooking oil imports; and temporarily reduce taxation of petroleum products, particularly diesel. Costs of these measures, estimated at 1.8 percent of GDP in lost revenue, were accommodated in the program-supported budget framework. Looking ahead, in collaboration with the World Bank and the Fund, the government intends to evaluate experience and seek assistance in designing support programs targeted to the vulnerable and groups that are difficult to reach.
    Mongolia (SBA)Higher social spending and improved targeting. The program has a concrete timetable to better target social transfers in order to provide greater support to Mongolia’s poorest citizens. In cooperation with the Asian Development Bank and the World Bank, the government will undertake a study of the existing social benefits system with a view to rationalizing untargeted social spending to direct more resources to the poorest.
    Niger (PRGF)Higher social spending and focus on improving social indicators. In collaboration with the World Bank, the program envisages quarterly monitoring of pro-poor spending and progress on social indicators.
    Pakistan (SBA)Better targeting. Strengthening social safety nets is a key priority under the IMF-supported program. Cash transfers to the poor are projected to increase from 0.4 percent of GDP in 2008—09 to 0.6 percent of GDP in 2009—10. The government is also collaborating with the World Bank to develop specific measures to strengthen social safety nets and improve targeting to the poor.
    São Tomé and Príncipe (PRGF)Focus on improving social indicators. In collaboration with the World Bank, the program envisages quarterly monitoring of pro-poor spending and progress on social indicators. Pro-poor Treasury-funded capital spending covers projects that are deemed to have a direct impact on alleviating poverty in the following sectors: education, health, social safety nets, agriculture and fisheries, rural development, youth and sports, provision of potable water, and electrification. The social sector has benefited from African Development Bank Group financing.
    Sri Lanka (SBA)Higher social spending. To protect the vulnerable, social sector spending is targeted to increase to 7 percent of GDP in 2009 from 6.8 percent in 2008. For the 2010 budget, the authorities are committed to achieving savings in military spending, which will create more space for social and reconstruction spending while allowing a further reduction in the budget deficit.
    Tajikistan (PRGF)Higher social spending. Fiscal policy will accommodate expected increases in demand for social spending. The revenue-to-GDP ratio is expected to decline by close to 2.8 percent of GDP in 2009. At the same time, the authorities intend to raise social spending on transfers to households, health and education by almost 1.5 percent of GDP, and they are working closely with the World Bank in these areas.
    Togo (PRGF)Higher social spending. The government intends to increase the share of priority spending on social and physical capital, in line with its PRS objectives. Priority spending is programmed to increase by 2.4 percent of GDP in 2009 and an additional 3 percent of GDP in 2010.
    Zambia (PRGF)Higher social spending. The fiscal deficit in 2009 is projected to widen in order to accommodate increased expenditure on infrastructure and social services, in line with the authorities’ objectives of encouraging diversification and enhancing competitiveness.
    Annex 4 A New Classification of Structural Conditionality

    In reclassifying structural conditions, a key consideration is the likelihood that a condition is macrocritical and falls within the areas of core Fund expertise. A condition is of critical importance when program goals would not be achieved or program monitoring would not be possible without the implementation of the condition. In economic terms, such a condition is essential to addressing obstacles in correcting maladjustments in the balance of payments and safeguarding Fund resources. Although not all macrocritical conditions fall within the areas of Fund expertise, measures in these areas are more likely to be critical to achieving program goals. The areas of core Fund expertise are typically in the domain of macroeconomic stabilization—specifically, fiscal, monetary and exchange rate policies, including the underlying institutional arrangements and related structural measures, and financial systems issues related to the functioning of both domestic and international financial markets. Structural reforms that are aimed at strengthening public sector resource management and accountability are often central to building the foundation for macroeconomic stabilization. The new classification used in this study therefore highlights the intersection between macrocriticality and Fund expertise:

    • Fiscal policy measures include measures that directly affect revenue by changing tax rates (other than taxes on international trade) or the tax base and measures that directly affect the amount of fiscal expenditures. They include revenue measures (excluding revenue administration and trade policy), combined expenditure and revenue measures, civil service and public employment reforms and wage policy, pension reforms, and other social sector reforms, including social safety net measures. They do not include budget preparation, submission and approval; intergovernmental relations; expenditure auditing; fiscal transparency and financial controls; and public expenditure management. These are included instead in the public sector resource management and accountability category.

    • Public sector resource management and accountability comprises primarily public sector governance, transparency and financial management measures—including PFM measures. These include revenue administration (including customs administration); expenditure auditing, accounting, and financial controls; fiscal transparency (publication of public accounts and parliamentary oversight); budget preparation; and intergovernmental relations. Also included are central bank auditing, transparency and financial controls; PRSP development and implementation; and anticorruption legislation and policy.

    • Monetary policy, exchange rate policy and other central bank operations and reforms cover monetary policy, measures related to the exchange system and exchange restrictions on current and capital account transactions, exchange rate policy, other central bank operations, and central bank reforms, but not central bank auditing, accounting and transparency, which are included in the public sector resource management and accountability category.

    • Public enterprise and pricing includes public enterprise pricing and subsidies, privatization and steps toward privatization (except for the financial sector), and public enterprise reform and restructuring.

    • Financial sector reforms consist of all measures related to the financial sector, apart from central bank operations, central bank auditing, accounting and transparency. The latter three areas are included in the public sector resource management and accountability category.

    • Other measures include all other structural measures not included elsewhere. Specifically, they include policy on international trade (other than customs administration measures), labor market measures (other than those related to public sector employment), economic statistics (excluding reporting related to fiscal or central bank transparency and accountability), private sector legal and regulatory reform, and natural resource and agricultural policies (other than pricing and marketing measures).

    The database includes observations on macrovariables from October 2007, October 2008, and April 2009 WEO revisions covering the period 2006–10. Each WEO vintage includes different actual and projection periods. For example, October 2007 WEO observations include actual observations for 2006 and projections for 2007–10. As actual data become available in subsequent WEO revisions, both actual observations and projections are updated. Thus, the April 2009 WEO revision includes actual observations for 2006–08 and projections for 2009–10 (and beyond).

    Hereafter, the former group is referred to as pre-2008 program countries and the latter group as post-2008 program countries.

    Debt distress ratings reflect the latest DSA assessments as of end-July 2009.

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