© 2006 International Monetary Fund
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Designing monetary and fiscal policy in low-income countries / Aemro Selassie … [et al.] — Washington, D.C. : International Monetary Fund, 2006.
p. cm. — (Occasional paper ; 250)
Includes bibliographical references.
ISBN 1-58906-496-8
1. Monetary policy — Developing countries. 2. Fiscal policy — Developing countries. 3. Poverty Reduction and Growth Facility (International Monetary Fund) 4. Inflation — Developing countries. I. Abebe Aemro Selassie. II. Series : Occasional paper (International Monetary Fund) ; no. 250
HG1496.D37 2006
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Contents
Preface
Abbreviations
I Introduction
II Stylized Facts of PRGF-Supported Programs in Mature Stabilizers
Growth and Inflation
Fiscal Developments
External Viability
III Monetary Policy Issues in PRGF-Supported Programs
Inflation and Economic Growth
Financial Programming
Is Private Sector Credit Being Crowded Out?
IV Fiscal Policy Issues in PRGF-Supported Programs
Fiscal Stance and Economic Growth
Public Expenditure
Tax Policy
V Conclusions
Appendixes
I. The Accuracy of Consecutive Updates of Monetary Projections
II. The Efficiency of Monetary Projections
III. Measuring the Fiscal Stance and Accounting Issues
IV. NPV of Debt-Stabilizing Primary Balances
References
Boxes
1.1. The PRGF
1.2. Why the “Mature Stabilizer” Moniker?
2.1. Targets and Projections in IMF-Supported Programs
2.2. Social and Poverty-Reducing Spending
3.1. Seigniorage Income
3.2. Monetary Programming in IMF Program Design
4.1. Treatment of Concessional Loans in Fiscal Accounts
4.2. Public Debt Sustainability: The Case of Ethiopia
4.3. Absorptive Capacity Constraints and Policies to Ameliorate Them
Tables
1.1. Economic and Social Indicators in PRGF-Eligible and Other Developing Countries
2.1. Inflation Targets in Original PRGF-Supported Programs
2.2. Inflation Targets in Consecutive Program Updates
2.3. Fiscal Targets and Performance
2.4. External Targets versus Outcomes in the Mature Stabilizer Sample
3.1. Empirical Studies on Kinks in the Relationship between Inflation and Growth
3.2. De Facto Exchange Regimes, 2001
3.3. Monetary Projections and Projection Deviations
3.4. Credit to the Private Sector
4.1. NPV of Public Sector Debt for Selected Poststabilization Countries
4.2. Evolution of the Revenue Structure of Poststabilization Countries in the 1990s
4.3. Selected VAT and Corporate Income Tax (CIT) Indicators
A1.1. Accuracy of Program Updates
A1.2. Test of the Accuracy of Program Projections (Theil’s U-Statistic)
A2.1. Test of the Weak Efficiency of Program Projections
A4.1. Average Augmented Primary Balance, 2000–03
Figures
2.1. Real GDP Growth: 1980–2003
2.2. Projected Real GDP Growth
2.3. Expenditure Targets in PRGF Programs, 2000–03
2.4. Revenue Targets in PRGF Programs, 2000–03
2.5. External Development Indicators in the Mature Stabilizers
2.6. Actual and Debt-Stabilizing Current Account Balances
2.7. Ratio of Private Investment to GDP
3.1. Inflation: One-Year-Ahead Projections and Outcomes
3.2. Dispersion of Monthly Exchange Rate Changes to the U.S. Dollar—Kernel Density Diagram
3.3. Deviations from Previous-Year Projections for CPI and Broad Money Growth
3.4. Projected and Actual Percentage Change in Velocity
3.5. Projected and Actual Percentage Change in the Reserve Money Multiplier
3.6. Deviations from the Programmed Levels of NDA and NFA
3.7. Exchange Rate Variability and Deviations from Previous-Year Broad Money Projection
3.8. Cumulated Growth in Credit and GDP, 1995–2002
3.9. Domestic Debt and Private Sector Credit in Low-Income Countries
The following conventions are used in this publication:
In tables, a blank cell indicates “not applicable,” ellipsis points (…) indicate “not available,” and 0 or 0.0 indicates “zero” or “negligible.” Minor discrepancies between sums of constituent figures and totals are due to rounding.
An en dash (–) between years or months (for example, 2005–06 or January–June) indicates the years or months covered, including the beginning and ending years or months; a slash or virgule (/) between years or months (for example, 2005/06) indicates a fiscal or financial year, as does the abbreviation FY (for example, FY2006).
“Billion” means a thousand million; “trillion” means a thousand billion.
“Basis points” refer to hundredths of 1 percentage point (for example, 25 basis points are equivalent to ¼ of 1 percentage point).
As used in this publication, the term “country” does not in all cases refer to a territorial entity that is a state as understood by international law and practice. As used here, the term also covers some territorial entities that are not states but for which statistical data are maintained on a separate and independent basis.
Preface
In 1999, the IMF established the Poverty Reduction and Growth Facility (PRGF) to make the objectives of poverty reduction and growth more central to lending operations in its poorest member countries. Against this backdrop, in this study, the IMF staff takes a close look at the IMF’s monetary and fiscal policy advice, as well as program design in the context of PRGF-supported programs. In view of the marked improvement in macroeconomic outcomes in many low-income countries in recent years, the analysis focuses, in particular, on those countries that have established a certain level of macroeconomic stability—the so-called mature stabilizers.
Designing Monetary and Fiscal Policy in Low-Income Countries was prepared by a team comprising staff members from the Policy Development and Review (PDR) and Fiscal Affairs (FAD) departments. In PDR, the team included Abebe Aemro Selassie, Jan Kees Martijn, Gabriel Di Bella, and Zaijin Zhan. In FAD, the team consisted of Michael Keen, Benedict Clements, Shamsuddin M. Tareq, Kevin Fletcher, Mario Mansour, Todd Mattina, and Alejandro Simone. Qiang Cui of FAD and Luzmaria Monasi of PDR provided valuable research assistance. Overall supervision was exercised by Mark Plant and Peter S. Heller.
This paper was originally prepared as background for the IMF Executive Board discussion of the 2005 review of PRGF program design. The views expressed are those of the authors, however, and do not necessarily reflect the views of national authorities, the IMF, or IMF Executive Directors.
Abbreviations
| CPI | Consumer price index |
| CIT | Corporate income tax |
| DSA | Debt sustainability assessment |
| EU | European Union |
| FAD | Fiscal Affairs department |
| FDI | Foreign direct investment |
| HIPC | Heavily Indebted Poor Countries |
| IEO | Independent Evaluation Office |
| IFS | International Financial Statistics |
| MDG | Millennium Development Goal |
| NDA | Net domestic assets |
| NFA | Net foreign assets |
| NIR | Net international reserves |
| NPV | Net present value |
| PDR | Policy Development and Review Department |
| PRGF | Poverty Reduction and Growth Facility |
| PRSP | Poverty Reduction Strategy Paper |
| PSCG | Private sector credit growth |
| PEM | Public expenditure management |
| RMSE | Root mean squared error |
| VAT | Value-added tax |
| WEO | World Economic Outlook |