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Back Matter

Martin Sommer, Allan Auclair, Armand Fouejieu, Inutu Lukonga, Saad Quayyum, Amir Sadeghi, Gazi Shbaikat, Andrew Tiffin, and Bruno Versailles
Published Date:
June 2016
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    Annex I. Recently Announced Fiscal Measures in MENA and CCA Oil-Exporting Countries (as of March 2016)
    AlgeriaA public sector hiring freeze instituted in 2015 and still in place. The 2016 budget laws call for a 9 percent cut in spending (mainly capital expenditures), while a subsidy reform was initiated by raising prices on fuel, electricity, and natural gas.
    BahrainIn 2015, fees and charges for government services increased, while a meat subsidy was cancelled. Natural gas prices are being gradually increased over 2015–21. In 2016, the price of diesel, kerosene, and gasoline products (January); tobacco and alcohol taxes; and electricity and water tariffs (March) all increased. Current expenditure streamlined.
    KuwaitFuel subsidy reform in 2015: diesel and kerosene prices were increased (saving 0.3 percent of GDP), while non-essential current spending was curtailed. In March 2016, the cabinet announced a wide-ranging set of economic and financial reforms. In addition to initiatives aimed at enhancing the role of the private sector through financial, labor market, and other reforms that will help reshape the government’s role, reforms include the following fiscal measures: (1) introduction of value added and corporate profit taxes, (2) re-pricing of some commodities and public services, (3) reforms of the civil service (including wages), and (4) privatization of state-owned assets and a greater role for public private partnerships.
    OmanMeasures announced in January 2016: (1) increase in fuel prices, (2) reduction in defense spending, (3) reduction in capital spending (related to development projects and hydrocarbon production), (4) increase in corporate income tax, (5) higher fees for government services, and (6) reduction in government workers’ allowances, other remunerations and operating expenses (including transportation allowances, business travel, hospitality spending).
    QatarThe 2016 budget suggests government spending will continue being restrained this year. Authorities have recently increased some utility and energy prices (water and electricity charges in September 2015, and gasoline prices in January 2016).
    Saudi ArabiaIn 2015, authorities increased transfers of investment income from the Public Investment Fund and the Human Resource Development Fund. In addition, they introduced spending controls for both current and capital spending, and the announced fiscal packages were under-executed (saving 0.5 percent of GDP). In 2016, the government raised prices of energy products (saving about 1¼ percent of GDP), while planning to further curtail spending.
    UAETariffs for water and electricity were raised in January 2015, saving ½ percent of GDP. Policymakers have also cut grants and transfers to government-related enterprises.
    AzerbaijanIn 2016, authorities have increased mineral royalty tax rates, raised the threshold on the simplified tax, upgraded checks on tax evasion and increased administrative measures (expected savings are 0.5 percent of GDP). The authorities have significantly cut public infrastructure spending, while increasing transfers to vulnerable populations to partially compensate for the adverse impact of devaluation on real incomes.
    KazakhstanIn 2014, authorities embarked on a three–to–five–year stimulus plan to modernize critical infrastructure and promote lending to small and medium-sized enterprises, $12 billion (5¾ percent of GDP) of which is financed through buffers and $7 billion (3 percent of GDP) in international development bank loans. No new measures have recently been announced.
    TurkmenistanAuthorities have raised import duties, placed limits on car and food imports, and cut investment spending (by over 20 percent in 2015) and utility subsidies—more capital spending cuts are envisaged in 2016. Public salaries have been increased, while social spending was reduced.
    UzbekistanThe authorities recently announced a new public investment program, amounting to $41 billion during 2015–19 (11 percent of GDP).
    Sources: National authorities; and IMF staff estimates.
    Annex II. Policy Trade-Offs in Devising Budget Deficit-Financing Strategies
    OptionsCost and Risk CharacteristicsBenefitsPolicy Issues
    1. Drawdown of Own Resources
    Sovereign wealth funds• If large deficits persist, buffers could diminish, investor sentiment could shift, and borrowing costs could increase.

    • Losses could be incurred if assets are liquidated in unfavorable market conditions.
    • Could ease pressures on domestic liquidity.

    • Funds are readily available, contingent on market conditions.
    • Need a decision-making structure to determine how much, when, and what assets to sell.

    • Fiscal rules governing sovereign wealth funds.
    Bank deposits• Could tighten liquidity in the banking system and exert pressures on interest rates.

    • Contingent on the surplus liquidity in the banking system, the government could crowd out the private sector.

    • Net costs could be very high if government deposits are small in relation to financing need.
    • Financing costs for the government are low, particularly since the deposits likely yield low interest.

    • Funding is readily available because it is not constrained by investor appetite for risky assets.
    • Coherence in monetary and fiscal operations is needed to minimize liquidity shocks.
    2. External Borrowing
    Issuance of sovereign bonds• Cost of borrowing can be high if market sentiment shifts due to uncertainties about the trajectory of oil prices and if the sovereigns are downgraded.

    • Access is contingent on market sentiment and liquidity conditions in the global market.

    • Increases currency exposure and exchange rate vulnerability for countries with flexible exchange rates.

    • Large financing needs could lead to re-emergence of debt vulnerabilities.
    • Eases pressure on domestic liquidity conditions.

    • Debt is marketable and can be traded in a secondary market so investor appetite might be higher than for domestic bonds.

    • Can attract investors seeking to diversify their portfolios, given that the countries have not been in the markets regularly.

    • Pre-financing when market conditions are favorable could reduce borrowing costs.
    • Need to develop debt management strategy.

    • Need legal and financial advisory services necessary to achieve a successful issuance.

    • Need to monitor issuance by sovereigns with similar credit ratings and establish effective investor-relations programs.
    Sovereign bond issuance for on-lending to government-related entities• Central government assumes the counterparty risks of government-related entities.• Could reduce borrowing costs for the government-related entities.• Legal framework is needed to govern the transaction.
    Sukuk• Usage for budgetary purposes could be constrained or would require complex structuring.

    • Issuance costs could be higher than for conventional bonds.
    • Investor demand could be high because it offers diversification opportunities.• Legal framework to issue Sukuk is needed, as is identification of permissible assets.
    Commercial bank loans, including syndicated loans• Market for loans not as developed as that of international bonds.• Eases pressure on domestic liquidity conditions.

    • Greater flexibility to influence terms depending on negotiating power.
    Bilateral loans, including project loans• Project loans tied to specific project use, thus less fungible.

    • Disbursement highly dependent on progress of project.
    • Could finance public investment programs.• Institutional framework for monitoring projects is needed.
    3. Domestic Borrowing
    Treasury bills• Exposes government to rollover risks given the short duration.• Instruments are denominated in domestic currency, so there is no currency risk.

    • Could attract capital inflows from foreign investors wishing to participate.

    • Provides banks with short-term liquid assets and facilitates their liquidity management.
    • Ensure infrastructure for issuance and calendar.
    Treasury bonds• If domestic liquidity conditions tighten, the domestic cost of borrowing could be higher than in international capital markets.

    • In tight liquidity conditions, could crowd out private sector.

    • Islamic banks, which account for a significant market share of banking systems in the GCC, cannot participate.
    • Medium- to long-term instruments issued in domestic currency, so reduces rollover and currency risk.

    • Can facilitate domestic debt market development and provides a reference benchmark for private sector issuance.

    • Provides alternative investment opportunities for financial institutions, and for banks the zero-risk weight can improve the capital-adequacy ratio.

    • Could attract capital inflows from foreign investors wishing to participate.
    • Ensure infrastructure for issuance and calendar.

    • Develop medium-term debt management strategy.
    Sukuk• Could require complex structuring if it is to be used for budgetary purposes since an underlying asset is required.• Provides investment opportunities for Islamic banks and facilitates liquidity management in the Islamic banking segment.• Need a legal framework to issue Sukuk and to identify permissible assets.
    Retail instruments• Administrative or market rates.

    • Could crowd out banks in the funding market.

    • More costly distribution arrangements.
    • Could tap into high-net-worth clients.

    • Widens investor base for the government.
    • Need an institutional framework for issuance.
    Commercial bank loans, including syndicated loans• Could crowd out the private sector.

    • The secondary market for loans is not as developed as that for bonds.
    • Government could negotiate good terms.
    Annex III. Financial Sector Policies to Address Risks from Lower Oil Prices
    Selected Policies Implemented since June 2014 to Mitigate Adverse Impact of Low Oil Prices
    GCC and AlgeriaCCA Oil Exporters
    Financial Sector Policies
    Policies to ease liquidity pressures in banks
    Traditional measures 1/
    Unconventional measures 2/
    Policies to maintain solvency of the banking system
    Recapitalization of banks 3/
    Purchase of NPLs
    Termination of licenses
    Strengthening prudential measures and frameworks
    Microprudential regulations
    Macroprudential measures
    Crisis management
    FX Open position
    Capital requirements 4/
    Provisioning on restructured loans
    Macro Policies with Direct Impact on Banking System Liquidity or Asset Quality
    Exchange rate policies
    Intervention to stem depreciation
    Devaluation and/or allowing depreciations
    Administrative controls on FX transactions
    Other measures5/
    Interest rate policy
    Increases in interest rates 6/
    Declines in interest rates
    Administrative controls
    Fiscal (Deficit Financing Options)
    Drawdown of SWF or other external assets
    External borrowing
    Domestic borrowing
    Drawdown of local bank deposits
    Arrears to domestic government suppliers

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    The value of oil and natural gas exports is projected to fall by almost $450 billion in the GCC countries and Algeria in 2016 compared with 2014; the corresponding estimate for the CCA oil exporters is $65 billion. In contrast, the MENA and CCA oil importers are collectively projected to save only $20 billion on oil and gas imports this year compared with 2014.

    Some countries pursue extensive off-budget quasi-fiscal operations by state-owned enterprises, which could further increase the estimates of current fiscal deficits. However, these transactions are difficult to quantify, given data gaps on activities of the state-owned enterprise sector.

    The October 2015 editions of the Fiscal Monitor (IMF 2015c) and Middle East and Central Asia Regional Outlook (IMF 2015b) discuss how medium-term fiscal frameworks can support consolidation efforts over time. The main recommendations include formulation of clear medium-term fiscal objectives to anchor decisions related to annual budgets, identification of accompanying policy measures including contingency plans, and a strong communication strategy to secure buy-in for the planned policies. Among MENA and CCA oil exporters, preparations are underway to establish or enhance medium-term frameworks in, for example, Algeria, Bahrain, Kazakhstan, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. Increasing fiscal transparency and moving off-budget entities onto the budget would also be highly desirable. Bova, Medas, and Poghosyan (2016) discuss the role of institutional quality in reducing pro-cyclicality of fiscal policy in resource-rich countries.

    See Albino-War and others (2014) for policies to improve efficiency of public investment in MENA and CCA countries. Roudet and others (2016) discuss the relationship between investment and growth. Alreshan and others (2015) and Rodriguez, Pant, and Flores (2015) discuss options for raising budget revenues and energy reforms.

    See Callen and others (2014) and Dauphin and others (2016) for a more detailed analysis of MENA countries. Cherif, Hasanov, and Zhu (2016) discuss how Indonesia, Malaysia, and Mexico fostered diversification. IMF (2015a) discusses macroeconomic performance following structural reforms and summarizes recent IMF work on macro-structural issues. The IMF organized a conference on diversification of oil-exporting countries in 2014 (the conference materials are available at Abiad and others (2014) suggest that public investment can play an important positive role in fostering development, provided such investments are well targeted and fiscally prudent. Warner (2014) cautions about the mixed tracked record of developing countries in boosting long-term growth through public investment booms.

    These calculations assume that the relative share of domestic and expatriate workers follows historical trends.

    See Mitra and others (2016) for further details.

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