Upper-case expressions are nominal values, and lower-case expressions are ratios to GDP. Begin with the first expression presented in the main text:
Note that in expression (3) PB, is expressed as expenditure minus revenue, and so to express it in the usual way of revenue minus expenditure, everything is multiplied by-I:
Expressing all elements in terms of ratios to GDP, we get the following:
The key behavioral equations that govern the evolution of the ratio of debt to GDP are the following:ddt-1= (1 +β) ddt and dct-1= (1 + β) dct-1,. Consequently, setting t = 1 gives:
Including the real exchange rate changes into the expression amounts to augmenting the interest on domestic and concessional debt with the change in the real exchange rate. Then, expression (8) becomes the following:
where Δrert is the change in the real exchange rate at time t
Prepared by Ashok Bhundia.
The interest rate, exchange rate, and macroeconomic assumptions are detailed in Tables 8 and 9 of the completion point document.
Sebastian Edwards, “Debt Relief and Fiscal Sustainability,”NEBR Working Paper 8939 (Cambridge, Massachusetts: National Revenue of Economic Research, 2002).
In subsection C, the benchmark model is extended to include valuation effects from changes in the real exchange rate.
Since both the domestic and foreign debt is converted into U.S. dollars, the nominal growth in U.S. dollar GDP is equal to the sum of the real growth in U.S. dollar GDP plus U.S. dollar inflation.
The initial ratios are those prevailing after full enhanced HIPC Initiative relief as at June 2001 Negotiations continue between Tanzania and its non-Paris Club creditors, which complicates the treatment of this debt as at June 2001. To simplify the analysis, and without knowledge of the outcome of these discussions, all debt is assumed to have been provided relief in line with the enhanced HTPC Initiative.
The link between this model and the DSA framework is clear if we assume the exports-to-GDP ratio remains constant at is initial level because then the evolution of the debt-to-GDP ratio over the simulation horizon pins down the evolution of the debt-to-exports ratio, which is an important indicator of external debt sustainability under the DSA framework of the HIPC Initiative.
The primary balances implied by the simulations are conditional on the macroeconomic assumptions being satisfied. Therefore, using this framework, it is not possible to provide insights into what fiscal adjustment would be required, and the form it should take, if, for example, there is a negative shock to GDP (or if there is a shock to 9 or P) in one year during the simulation period. In this sense, the simulations are deterministic.
Fiscal effort here is defined as the balance between noninteresl expenditure and revenue, and not the revenue-GDP ratio. A greater fiscal effort means a smaller primary deficit/larger primary surplus.
These are IMF staff projections as of October, 2002.
This gap would increase for a larger overvaluation of the real exchange rate.
The precise details of the simulation would depend on the nature and speed of the withdrawal of foreign concessional financing. However, the argument here is that a gradual withdrawal, as captured in the net repayment of 5 percent of outstanding obligations at each period, represents a fairly well-managed and phased exit, thus limiting the damage.