Abstract

PRGF-supported programs in the 15 mature stabilizers during 2000–03 have generally sought to consolidate macroeconomic stability and foster growth. By and large, growth outcomes have been in line with program targets. Reflecting favorable initial conditions, there has been limited emphasis on further disinflation. On the fiscal front, programs have sought to increase capital spending, but have not been generally successful. Developments in the external accounts have been less favorable; while external reserves have increased, current account deficits have remained too large to ensure external viability even after debt relief from the enhanced HIPC Initiative. The rest of this section discusses these stylized facts in more detail.

PRGF-supported programs in the 15 mature stabilizers during 2000–03 have generally sought to consolidate macroeconomic stability and foster growth. By and large, growth outcomes have been in line with program targets. Reflecting favorable initial conditions, there has been limited emphasis on further disinflation. On the fiscal front, programs have sought to increase capital spending, but have not been generally successful. Developments in the external accounts have been less favorable; while external reserves have increased, current account deficits have remained too large to ensure external viability even after debt relief from the enhanced HIPC Initiative. The rest of this section discusses these stylized facts in more detail.

Growth and Inflation

After recovering in the late 1990s, economic growth in the mature stabilizers has been sustained at relatively high levels (see Table 1.1 and Figure 2.1). Growth outcomes in the 15 countries have generally been close to program projections. At inception, PRGF-supported programs in the countries typically envisaged an increase in growth from about 4½ percent in the year preceding the program to 6 percent in the third program year. But growth outcomes tended to be lower, and expectations of growth increases shifted to later years in subsequent program documents (Figure 2.2 and Box 2.1). These revised program projections (often established in the year immediately preceding the program year) are the ones with the most direct bearing on the calibration of monetary and fiscal policies. The median projection in the sampled countries one year out is for real GDP growth of 5½ percent a year—some 3 percent in per capita terms.1 Outcomes were only marginally (less than ½ percentage point) lower, and this difference between projections and outcome was not statistically significant.

Figure 2.1.
Figure 2.1.

Real GDP Growth: 1980–20031

(Median values in percent)

Source: IMF, World Economic Outlook.1 Dotted line excludes the three transition countries in the sample: Albania, Azerbaijan, and the Kyrgyz Republic.
Figure 2.2.
Figure 2.2.

Projected Real GDP Growth1

Source: IMF staff reports.1 The starting point of a projection line shows actual growth in the previous year.

Targets and Projections in IMF-Supported Programs

The projections for the original program may not be the most relevant ones for the entire program period. Program projections are updated regularly—in principle at each half-yearly program review.

Macroeconomic policies and outcomes are likely affected by the IMF-supported policy programs presented in both staff reports issued during the year concerned (year t), as well as by the last one presented in the previous year (t – 1). The projections contained in the latter report may be the most relevant ones for shaping the budget and affecting year-end policy outcomes regarding broad money and inflation, given the time lags in the transmission of monetary policy, often estimated at about 6 to 12 months. However, the current-year projections underpin the program’s quantitative conditionality regarding fiscal balances and the central bank’s balance sheet, which should have an impact on policy-making during the year.

Projection horizon differs across countries and variables. Program documents generally include projections for inflation and GDP for the next two or three years, but the projection period for broad money is often shorter, and reserve money and central bank NDA and NFA projections often do not extend beyond one year (that is, t + 1).

These growth targets and outcomes are high by historic standards, but for most countries, they fall short of the levels considered necessary to achieve the MDGs. Until the second half of the 1990s, real growth in the mature stabilizer sample was anemic, averaging 3 percent or lower. Although real GDP growth has picked up since the mid-1990s, the countries in the sample have not attained the approximately 7 percent growth rates that are considered necessary to meet the MDG target of halving poverty by 2015. Why, then, don’t the authorities generally target higher growth rates? Some clearly do—for example, one-fifth (10) of the PRGF-supported program episodes under consideration target growth rates of 7 percent or more. Elsewhere, the modest growth objectives likely reflect estimates of potential growth, and the caution exhibited in program growth targets does not seem to be out of order.2

On the inflation front, the overall focus of PRGF-supported programs has been gradual further disinflation:

  • At the inception of a new PRGF-supported program, inflation was generally projected to decline to less than 4 percent over the three-year program period from more than 6 percent in the year before the start of the program, as shown in Table 2.1.3 The final-year projections across the programs ranged from 2 to 6 percent. Average and median projected inflation were close, reflecting the scarcity of large outliers in this sample limited to countries that already had largely disinflated. However, as with growth projections, the inflation targets that matter most for program design purposes, and around which monetary and fiscal policies are calibrated, are the ones set shortly before and during program episodes under consideration. During the arrangement period, these inflation targets tend to be adjusted upward by about 1 percentage point—to around 6 percent—to take into account somewhat higher inflation outturns (Table 2.2).4 The magnitude of this revision is related to inflation overruns in the previous year.

  • Based on this revised metric—inflation as targeted in the year before—the approximately 50 program episodes under consideration projected inflation of 5 percent, and outturns have been relatively close.5 There are few significant deviations between targets and outcomes. In those instances when inflation was above 10 percent in the year before the program, a gradual reduction of inflation was envisaged. In the 11 such cases, the median inflation was targeted to decelerate from 14½ percent in the year preceding the program episode to 9 percent in the first program year.

  • Overall, then, inflation did recede during these PRGF-supported programs, albeit somewhat less than projected. On average, consumer price index (CPI) inflation moderated from more than 9 percent in the year before the start of the program to less than 5 percent three years later—about 1 percentage point above the original program target.6

Table 2.1.

Inflation Targets in Original PRGF-Supported Programs1

(In percent)

article image
Sources: IMF staff reports and World Economic Outlook database.

Originating programs are those reported in the staff report requesting a new arrangement under the PRGF, and for Azerbaijan, also the 2001 program augmentation.

Table 2.2.

Inflation Targets in Consecutive Program Updates1

(In percent)

article image
Source: IMF staff reports and World Economic Outlook database.

The projections are for year t. The projections as of year t – 1 and t – 2 are those from the last staff report in the previous year and the year before that, respectively. The projection as of t(SR1) is from the first staff report in year t, and the one at t(SR2) is from the final staff report in that year. If only one staff report was issued in year t, the last two observations coincide.

Fiscal Developments

PRGF-supported programs in the sampled countries have sought to keep the overall budget deficit broadly unchanged (at 4½ percent of GDP), with modest increases in spending targeted to be offset by an increase in revenues (Table 2.3).

Table 2.3.

Fiscal Targets and Performance

(Unweighted averages in percent of GDP)

article image
Sources: National authorities and IMF staff estimates.

Total expenditure and net lending includes spending items that are not classified as current or capital.

Data on foreign-financed capital spending are not available for Bangladesh, Honduras, and Guyana.

Other fiscal transactions include repayment of arrears and float.

Data on project loans are not available for Bangladesh and Honduras.

Specifically:

  • On average, public expenditure was targeted to increase by some ¾ percentage point of GDP a year, with most of the increase targeted for higher capital outlays consistent with the growth orientation of PRGF-supported programs. In general, countries with higher initial spending (in relation to GDP) targeted smaller increases (or larger declines) in expenditure (Figure 2.3).7 Current spending and the wage bill, in contrast, were targeted to remain broadly unchanged.

  • This increase in expenditures was expected to be offset by an improvement in tax revenues and grants of the same order of magnitude (Figure 2.4).

  • Deficits (relative to GDP) were programmed on average to be unchanged. Relatively few programs targeted a significant increase in domestic financing—even when the level of domestic debt was low—with an average increase in domestic financing 0.2 percent of GDP.

  • Finally, the broad stability in the targeted fiscal balance contrasts with the lower fiscal deficit and domestic financing typically envisaged in other PRGF programs where internal macroeconomic stability remained a concern. For example, in a sample of 18 countries with PRGF-supported programs for such countries over the same period, the overall deficit was targeted to decline by about 1½ percent of GDP.

Figure 2.3.
Figure 2.3.

Expenditure Targets in PRGF Programs, 2000–03

(In percent of GDP)

Sources: IMF staff reports and staff estimates.
Figure 2.4.
Figure 2.4.

Revenue Targets in PRGF Programs, 2000–03

(In percent of GDP)

Sources: IMF staff reports and staff estimates.

Fiscal deficits in PRGF-supported programs have, however, been smaller than envisaged because of shortfalls in capital spending. The mature stabilizers did not raise capital outlays as a share of GDP, mainly because of shortfalls in foreign project implementation. These shortfalls were partially offset by current spending that was higher than programmed, including for wages. The composition of spending has also shifted toward social and poverty-reducing spending as sought under the Poverty Reduction Strategy Paper (PRSP) approach (see Box 2.2). Revenue collection as a share of GDP was broadly in line with program projections. As a result, the fiscal deficit was about ½ percent of GDP smaller than envisaged. These averages mask a great deal of variation in targets. For instance, several PRGF-supported programs have accommodated large increases in the fiscal deficit to accommodate higher external financing—for example, Guyana (2000), Mozambique (2000), Rwanda (2000), and Tanzania (2002).

Social and Poverty-Reducing Spending1

Programs in the mature stabilizer sample have achieved significant increases in poverty-reducing spending. The average PRGF-supported program achieved an increase of about 1 percent of GDP (2¼ percent of total spending) in these outlays a year (see the figure). Average annual spending on poverty-reducing programs increased by more than 2 percent of GDP in Ethiopia, Guyana, and Mozambique, and by more than 1 percent of GDP in Tanzania and Uganda. Honduras was the only country in the sample where the ratio decreased; there was practically no increase in Benin and Madagascar. Over the 1999–2002 period, these outlays in the sampled countries rose by more than 3 percent of GDP. Social spending (outlays on education and health care) has also risen. The average social spending to GDP ratio increased in all countries in the sample except Azerbaijan and the Kyrgyz Republic. Thus, the mature stabilizers have achieved a modicum of success in making their budgets more pro-poor, despite difficulties in raising total government spending to the extent programmed. Although it is possible that changes in classification may account for part of these increases, they have nonetheless been accompanied by improvements in social indicators for which data are available (see the table).

uch02fig01

Average Annual Increase in Social and Poverty-Reducing Spending Realized in Mature Stabilizers1

Sources: National authorities; and IMF staff estimates.1 In many countries, budgetary data do not cover all public spending in social and poverty-reducing sectors. Nonpublic spending in these sectors could also be significant in some countries.

Average Annual Improvement in Selected Social Indicators1

(Percent change, positive indicating improvement)

article image
Source: World Bank, World Development Indicators database.

Average annual improvement refers to the annual change between 1999 and the latest available year, usually 2001. Positive growth rates correspond to improved outcomes.

1 The sample comprises 42 programs for social spending and 40 programs for poverty-reducing spending. Social spending is defined as education and health care expenditures.

External Viability

Progress toward external viability among the mature stabilizers has been limited. On the positive front, international reserves have increased significantly in the 15 countries, from less than three months to about five months of import cover since the mid-1990s, increasing the scope for absorbing the impact of shocks (Figure 2.5, top left panel). This improvement in part reflected an increase in aid inflows (including debt relief) as well as a recovery in export growth (Figure 2.5, lower left panel). Current account deficits have been lowered relative to program targets (by about 1¼ percentage points of GDP, Table 2.4). These lower-than-projected current account deficits and close adherence to fiscal deficit targets imply a lower-than-projected investment-savings imbalance by the private sector.8 Nonetheless, these current account deficits (net of foreign direct investment [FDI]) have been too high to stabilize the stock of net present value (NPV) of debt—including after HIPC Initiative debt relief (Figure 2.6). In particular:

  • In eight countries (those below the line at zero), the current account deficits during 2000–03 were too high to stabilize the external debt stock. All of these countries are HIPCs. And while they are accumulating debt from moderate levels reflecting the debt relief that has been provided to them,9 these findings nonetheless suggest that external debt buildup will resume anew unless steps are taken to curb borrowing, move to grant financing, or both.10

  • The other seven countries (including Honduras, which benefited from HIPC debt relief) have sustained current account deficits that would allow them to stabilize or even reduce their external debt stocks—though from a very high level in the case of Mongolia and the Kyrgyz Republic.

Figure 2.5.
Figure 2.5.

External Development Indicators in the Mature Stabilizers

Sources: IMF, World Economic Outlook; and IMF staff estimates.
Table 2.4.

External Targets versus Outcomes in the Mature Stabilizer Sample

article image
Sources: IMF, staff reports and World Economic Outlook database.
Figure 2.6.
Figure 2.6.

Actual and Debt-Stabilizing Current Account Balances1

Source: IMF, World Economic Outlook database.1 Debt figures include actual or expected completion point debt relief for HIPCs. Triangles show the values for non-HIPCs.Note: Country abbreviations used are ISO codes. ALB=Albania; AZE=Azerbaijan; BEN=Benin; BGD=Bangladesh; ETH=Ethiopia; GUY=Guyana; HND=Honduras; KYR=Kyrgyz Rep.; MDG=Madagascar; MNG=Mongolia; MOZ=Mozambique; RWA=Rwanda; SEN=Senegal; TZA=Tanzania; UGA=Uganda.

External viability has not received adequate attention in PRGF program design, although the findings are somewhat more encouraging for this sample group than for the broader sample of PRGF countries (IMF, 2004c). One reason is that conditionality in IMF-supported programs seldom limited either the overall fiscal balance or external borrowing on concessional terms. Of the 38 PRGF arrangements in place at end-March 2003, only 12 arrangements had conditionality to limit either the overall or primary fiscal balance and no arrangement had direct limits on concessional borrowing. Of course, poor use of concessional resources is one reason that low-income countries have built up unsustainable debt burdens in the past.

More recently, the incorporation of debt sustainability assessments (DSAs) in the IMF’s operational work on low-income countries should allow PRGF-supported programs to focus more explicitly on debt sustainability considerations. This will not fully resolve the tension between increasing poverty-reducing expenditures and making progress toward external viability, but it will help clarify the longer-term implications of near-term fiscal decisions (IMF, 2004a, 2004b, 2005d). Importantly, these assessments, which look at the issue of debt sustainability from many angles, will help signal to donors the need for grant financing when there is a higher likelihood of debt distress.

In sum, the mature stabilizers have done relatively well, with markedly higher growth, lower inflation, and higher international reserves, but continuing concerns about external viability. An important question, however, is whether the recent pickup in growth can be sustained or, better still, improved upon. Since 1995, private investment, arguably the most telling predictor of future growth performance, has edged up in the countries in the sample (see Figure 2.7). With the exception of Tanzania and Uganda, where it has been broadly flat, private investment in 2000–03 was marginally higher than in the late 1990s. But this improvement is modest and leaves investment ratios low relative to other regions.

Figure 2.7.
Figure 2.7.

Ratio of Private Investment to GDP1

(Median values in percent)

Source: IMF, World Economic Outlook database.1 Dotted line excludes the three transition countries in the samples: Albania, Azerbaijan, and the Kyrgyz Republic.
1

This growth projection of 5½ percent is surprisingly persistent. Programs in countries where growth in the year before the program was above or below 5 percent envisage growth in the program year to be 5½ percent. The outcomes closely mirror this: when growth is higher than 5 percent in the year preceding the program, actual growth turns out to be around 5¼ percent of GDP; when growth is below 5 percent in the year preceding the program, growth outcomes rise toward 5¼ percent.

2

For the mature stabilizers sample, a unviariate filter was used to extract the trend path for output for each country. In all cases, GDP growth in the sample in recent years has been well above the path suggested by the extracted series.

3

The quantitative analysis in this paragraph is based on annual data for 1999–2003 for 13 of the 15 PRGF countries in the sample of stabilized economies. Benin and Senegal are not included in view of their membership in the CFA franc zone.

4

Because the number of observations is larger closer to the target year, the panel is unbalanced and data are not fully comparable across columns. For the 29 (43) cases in which t – 2 (t – 1) data are available, the ultimate upward revision in the average inflation rate projection was from 4.1 (4.9) to 5.0 (5.3) percent, rather than to 5.9 percent.

5

Depending on data availability, the precise number of episodes varies slightly for the various statistics presented in this section.

6

This moderation in inflation should not be attributed solely to the PRGF-supported programs. There has been a marked drop in inflation across the world. Indeed, the decline in median inflation in the sample is no larger than witnessed in other developing countries.

7

Notable exceptions were Albania (2001, 2002), Guyana (2000), and Honduras (2001). In all three cases, the initial level of spending was much higher than the sample mean (about 26 percent of GDP).

8

Possibly reflecting the pickup in growth since the mid-1990s, private saving has increased steadily in the mature-stabilizers (Table 1.1).

9

Guyana stands out as a country with a rather high post-HIPC debt ratio relative to GDP, and it is set to rapidly accumulate new external debt. Its debt is more modest relative to exports (a measure of debt-servicing capacity) and is substantially below the related HIPC threshold, reflecting the high share of exports in GDP.

10

The vertical line in Figure 2.6, at 40 percent NPV of external debt to GDP, marks the threshold where the risk of debt distress increases for countries with a medium rating for the quality of their policies and institutions by the World Bank’s Country Policy and Institutional Assessment (see IMF, 2005d). All of the countries in the sample have a medium or better rating.

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