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MACROECONOMIC DEVELOPMENTS AND SELECTED ISSUES IN SMALL DEVELOPING STATES
May 2015
IMF staff regularly produces papers proposing new IMF policies, exploring options for reform, or reviewing existing IMF policies and operations. The following documents have been released and are included in this package:
The Staff Report on Macroeconomic Developments and Selected Issues in Small Developing States, prepared by IMF staff and completed on March 9, 2015 to brief the Executive Board on March 20, 2015. The Executive Directors met in an informal session, and no decisions were taken at this meeting.
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Front Matter Page
MACROECONOMIC DEVELOPMENTS AND SELECTED ISSUES IN SMALL DEVELOPING STATES
March 9, 2015
Executive Summary
This report builds on the work in the 2013 Board paper on Fund Engagement with Small States, the 2013 background papers on Asian and Pacific small states and Caribbean small states, and the 2014 staff guidance note. It provides a deeper analysis and policy recommendations in respect of three challenges identified in these papers. Looking ahead, the paper also analyses the impact and possible policy responses to two global economic trends—lower oil prices and diverse movements in major currencies.
Macroeconomic trends and outlook. Vulnerabilities for many small states remain high. The outlook for small states is for generally sluggish growth, higher fiscal deficits after a temporary narrowing in 2013, and an upward drift in already relatively high public debt ratios, even after taking account of lower oil prices which represent an economic windfall for the majority of small states.
Fiscal management. Expenditure rigidity and revenue volatility in the face of limited fiscal buffers often results in procyclical fiscal policy, requiring efforts to streamline and prioritize recurrent spending to create fiscal space for capital spending. The quality of expenditure could be improved through fiscal anchors and public financial management reforms.
Exchange rate devaluation. Several analytical approaches find that the effects of devaluation are not significantly different between small and large states—including its impact on growth—although the transmission channels are different. Devaluation results in lower consumption and higher investment in small states and its effectiveness can be strengthened by complementary wage and anti-inflation policies.
Financial inclusion. Access to financial services is a challenge in many small states, as the banking sector is typically small and highly concentrated and the lack of competition constrains the delivery of financial services. For lower-income small states in particular, weak financial inclusion limits access to credit, with consequences for investment and growth. Where possible, small states should foster competition as a way to develop financial inclusion.
Approved By Peter Allum, Hoe Ee Khor, Adrienne Cheasty, and Anne-Marie Gulde-Wolf
Project coordinated by Wendell Samuel (WHD). Prepared by Xavier Maret, Mai Farid, Sarwat Jahan, and Calixte Ahokpossi, (all SPR under the guidance of Peter Allum); Patrizia Tumbarello, Ezequiel Cabezon, Antoinette Kanyabutembo, and Yiqun Wu (all APD); Sebastian Acevedo, Aliona Cebotari, Kevin Greenidge and Geoffrey Keim (WHD); and Marshall Mills, Valeria Fichera, Albert Touna-Mama, Pietro Dallari, Naly Carvalho and Graham Campbell (all AFR) with statistical support from Zhe Liu (SPR) and editorial support from Eneshi Kapijimpanga and Edward Moreno (WHD).
Contents
ABBREVIATIONS AND ACRONYMS
INTRODUCTION
BOX
1. Definition of Analytical Groupings of Small States
TABLES
1. Selected Macroeconomic Indicators, Small States and the Rest of the World, 2013
2. Profile of Developing Small States
MACROECONOMIC TRENDS
A. Recent Macroeconomic Performance and Near Term Outlook
B. Vulnerabilities and Structural Issues
BOXES
1. Effects of Commodity Price Decline
2. Diversification in Small States
FIGURES
1. Impact on 2015 Projections of Lower Oil Prices and Other Factors
2. Vulnerability Profile for Small States
APPENDIX FIGURES
STRENGTHENING FISCAL FRAMEWORKS AND IMPROVING THE SPENDING MIX IN SMALL STATES
A. Introduction
B. Improving the Mix of Public Spending
C. Coping with Revenue Volatility
D. Policy Reform Options
BOXES
1. Pacific Islands: Quantifying the Opportunity Cost of Building Fiscal Buffers
2. From Best Practice to Best Fit: Lessons from Small States
FIGURES
1. Small States: Spending Mix and Infrastructure Gap
2. Measures of Efficiency of Public Spending and Population Dispersion
3. Health, Education Expenditure, and Selected Human Development Indicators
4. Small States: Sources of Revenue Volatility
5. Small States: Revenue Volatility Across Different Groups
6. Small States: Procyclical Bias in Fiscal Policy
APPENDIX
I. Econometric Analysis
ANNEX
I. Fiscal Anchors in Small Developing States
EXTERNAL DEVALUATIONS: ARE SMALL STATES DIFFERENT?
A. Introduction
B. Results
C. Conclusion and Policy Implications
BOXES
1. Exchange Rate Regimes in Small States
2. Two Cases of Devaluations in Small States
FIGURE
1. Event Study: Growth Outcomes in Large Devaluation Episodes
ANNEX
I. Literature Overview and Methodological Notes
FINANCIAL INCLUSION IN SMALL STATES
A. Introduction
B. Access to and Use of Financial Services
C. The Banking Sector and Financial Inclusion
D. Other Barriers to Financial Access
E. Conclusions and Policy Recommendations
BOXES
1. Determinants of Interest Rate Spreads in Pacific Island Countries
2. Promoting Financial Access by SMEs: The cases of Mauritius and Seychelles
FIGURES
1. Individual/Household Use of Financial Services
2. Households Use of Financial Services
3. Physical Access to Financial Services, 2013
4. Households Use of Nonbank Financial Institutions
5. Firms Access to Financial Services by Income Level
6. Firms Access to Financial Services by Country Grouping
7. Bank Competition, Concentration and Financial Access
8. Other Barriers to Financial Access
TABLE
1. Determinants of Financial Access
APPENDICES
I. Empirical Specification of the Panzar-Rosse Model
II. Panel Regressioin Specification and Estimation
ISSUES FOR DISCUSSION
REFERENCES
STATISTICAL APPENDIX
Abbreviations and Acronyms
AFR |
African Department |
APD |
Asia and Pacific Department |
CPIA |
Country Policy and Institutional Assessment |
DSA |
Debt Sustainability Analysis |
ECCU |
Eastern Caribbean Currency Union |
EMDCs |
Emerging Market and Developing Countries |
EUR |
European Department |
HIPC |
Heavily-Indebted Poor Countries |
LICs |
Low-Income Countries |
MIC |
Middle Income Country |
MFI |
Microfinance Institution |
M-LML |
Micro Lower-Middle and Low Income |
M-UMH |
Micro Upper-Middle and High Income |
PICs |
Pacific Island Countries |
PRGT |
Poverty Reduction and Growth Trust |
OFC |
Offshore Financial Centers |
S-LML |
Small Lower-Middle and Low Income |
S-UMH |
Small Upper-Middle and High Income |
SPR |
Strategy, Policy and Review Department |
WEO |
World Economic Outlook |
WHD |
Western Hemisphere Department |