The Web edition of the IMF Survey is updated several times a week, and contains a wealth of articles about topical policy and economic issues in the news. Access the latest IMF research, read interviews, and listen to podcasts given by top IMF economists on important issues in the global economy.


The Web edition of the IMF Survey is updated several times a week, and contains a wealth of articles about topical policy and economic issues in the news. Access the latest IMF research, read interviews, and listen to podcasts given by top IMF economists on important issues in the global economy.

Camdessus Supports EFF Credit for Russia

On February 22, IMF Managing Director Michel Camdessus, after discussions with Russian President Boris Yeltsin and Prime Minister Viktor Chernomyrdin, announced agreement in principle on a three-year extended Fund facility (EFF) credit of about $10 billion in support of Russia’s comprehensive medium-term economic adjustment program. The program is aimed at consolidating macroeconomic stabilization while accelerating the transformation of the Russian economy to a fully market-based system. The agreement must be approved by the IMF’s Executive Board, which could take up the matter possibly by the end of March or by the middle of April.

“I am confident that with this arrangement, we are supporting an extremely solid strategy for the next three years for Russia,” Camdessus said at his February 22 press conference.

The key features of the proposed EFF include:

• Continuation of a restrained macroeconomic policy stance as a precondition for sustained growth. The program’s objectives are a further reduction of inflation to about 1 percent a month by the end of 1996 and further declines in 1997 and 1998, and a narrowing of the budget deficit to 4 percent of GDP in 1996. Strong measures will be taken to raise budgetary revenues to permit adequate spending, including on an appropriate safety net, consistent with reducing inflation. The program envisages a recovery of annual GDP growth to 2-4 percent in 1996-97 and to more than 5 percent thereafter; the achievement of a sustainable balance of payments position over the medium term; and maintenance of broad stability of the exchange rate along with adequate competitiveness in foreign trade.

• Redoubled efforts to strengthen Russia’s capacity to implement macroeconomic policy through the introduction and improvement of the requisite policy instruments and institutions.

• A major initiative toward the expeditious implementation of key structural reforms to enhance prospects for sustained growth and to make truly irreversible the move toward a market economy. This entails a broadening of the tax base and improved tax administration and compliance; a comprehensive approach to strengthening the banking system; continuing progress with privatization; further trade liberalization, including the elimination of remaining export duties; and the initiation of a bolder agricultural reform strategy.

“The program will be monitored very carefully—on a monthly basis, as under the stand-by arrangement during 1995,” according to Camdessus. He added that the IMF’s financial support, together with the measures it will trigger on the part of the Paris Club of official creditors and on the part of potential bilateral contributors, “will provide Russia with all the necessary financial means to finance its imports and the necessary investments that will be key to achieving the sustainable and high rate of growth” the Russian authorities desire.

A seminar on the SDR is to convene March 18 at IMF headquarters (see page 87).

Pension Plans Need to Adapt to Changing Demographics

Over the next several decades, the post-World War II “baby boom” generation will again alter the demographic profile of the major industrial countries. As an aged segment of the population, this generation’s sheer numbers will force policymakers to confront the serious fiscal, economic, and social implications of this shift—especially its impact on pension schemes. The pension plans were designed when workforces were proportionately larger and more youthful and have enjoyed remarkable success in alleviating poverty among the elderly. The plans are now increasingly at risk of creating escalating and unsustainable financial burdens as the proportion of the elderly in the population grows. While the particulars vary with individual country population profiles and specific pension approaches, no major industrial country will be immune from the difficult choices that lie ahead.

To assess the fiscal implications of the looming imbalances between benefits and contributions of existing public pension schemes, an internal IMF study by the Fiscal Affairs Department surveys the characteristics of populations and pension plans in the major industrial countries and in Sweden (as a representative of a smaller industrial country with an aging population) and explores the options open to policymakers.

Selected IMF Rates

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The SDR interest rate, and the rate of remuneration, are equal to a weighted average of Interest rates on specified short-term domestic obligations in the money markets of the five countries whose currencies constitute the SDR valuation basket (the U.S. dollar, weighted 39 percent; deutsche mark, 21 percent; Japanese yen, 18 percent; French franc, 11 percent; arid U.K. pound. 11 percent). The rate of remuneration is the rate of return on members’ remunerated reserve tranche positions. The rate of charge, a proportion (currently 102.5 percent) of the SDR interest rate, is the cost of using the IMF’s financial resources. All three rates are computed each Friday for the following week. The basic rates of remuneration and charge are further adjusted to redact burden-sharing arrangements. For the latest rates, call (202) 623-7171.

Data: IMF Treasurer’s Department

Plan Characteristics Vary Widely

Most industrial countries currently operate public pension programs whose coverage is typically comprehensive, though generally supplemented by private sector plans. These mandatory public pension programs have traditionally been rooted in a “defined benefit” concept. The benefits have been specified in advance, with the individual’s earnings history and years in the work force determining their level. The benefits are adjusted during retirement by indexing, typically either to wages or prices. The alternative—a “defined contribution” plan—is more commonly used in developing countries. The pension programs of Chile and Singapore are notable examples. Defined contribution plans specify an annual contribution level—usually as a percent of gross salary—and tie benefits directly to accumulated contributions and realized rates of return on investments.

With regard to financing, public pension plans typically rely on one of three forms: fully funded, partially funded, and pay as you go. In a fully funded scheme, the contribution rate is selected to accumulate a stock of capital that should equal, at any given point in time, the present discounted value of future benefits minus future contributions. A pay-as-you-go plan provides current benefits to retirees from current contributions of workers and/or from budget transfers. A partially funded plan combines elements of both fully funded and pay-as-you-go plans but characteristically lacks sufficient reserves to meet the fully funded requirement. Defined contribution plans are, by definition, fully funded, while defined benefit plans can operate on either a partially funded or a pay-as-you-go basis. Japan, Sweden, and the United States maintain partially funded plans; Canada, France, Germany, Italy, and the United Kingdom rely on pay-as- you-go approaches. Pay-as-you-go systems, the IMF study notes, are particularly susceptible to problems associated with aging populations.

Contributions are derived from gross wage earnings and provide the revenue for public pension plans, with employers shouldering at least half the burden of these taxes. All the major industrial countries, except Italy, place a ceiling on the earnings subject to social security taxes. A legally set retirement age and minimum contribution period determine eligibility; several countries have flexible retirement criteria that permit individuals to retire early, with a reduction in benefits, if they meet a minimum pensionable age and the basic requirement for paid contributions.

Under a defined benefit scheme, benefits can be tied to earnings, provided on a flat rate, or means tested. Earnings-related benefits are computed by determining assessed income (normally a percentage of the average wage over a period of years) and applying it to an accrual rate (a rate multiplied by the number of eligible years). A ceiling is often imposed in the form of a maximum replacement rate—that is, a maximum ratio of the pension to the assessed income. A flat rate system bases its benefits on characteristics of the recipient; Japan, Sweden, and the United Kingdom combine elements of the earnings-related and flat rate approaches.

Another important element is the indexation mechanism. In many of the major industrial countries, indexation of benefits is tied to the consumer price index (CPI). Germany and Japan, however, link pension indexation to the growth rate of net wages, and France, to the growth rate of gross wages.

Since at least the early 1980s, policymakers and legislatures have debated how best to address the growing pressures on public pension plans. Some industrial countries have already moved to increase gradually the statutory retirement age and to tighten eligibility criteria and the penalty for early retirement. Some countries are also exploring a greater reliance on private plans. The United Kingdom has exempted participants in occupational pension schemes from the national public pension program. And the United States has encouraged the creation of individual retirement accounts.

Fiscal Consequences Of Existing Schemes

The IMF study finds that under current pension arrangements and using standard interest rate, inflation, and growth assumptions, all of the countries included in the report will face some shortfall in pension finances owing to the worsening demographic profile. The magnitude of the problem is measured in several ways; the two most useful constructs are “unfunded liabilities” (the present discounted value of anticipated deficits) and the “contribution gap” (the additional contribution that will on average equate future pension benefits and contributions). Unfunded liabilities average 65 percent of 1995 GDP for the major industrial countries—ranging from 5 percent in the United Kingdom and 26 percent in the United States to more than 100 percent in Japan, Germany, and France. Similarly, the contribution gap is on average 1.8 percent of GDP—ranging from less than 1 percent for the United Kingdom and the United States to more than 3 percent in Japan, Germany, and France. These significant shortfalls in public pension systems make inevitable the need for reform.

Reform Options

The IMF staff finds that most countries will need to focus their energies on choosing between adjustments to the existing pay-as-you-go system or a more systemic approach to reform.

Adjustments to Existing System. In the past, when policymakers sought to shore up their existing systems, they almost invariably turned to increased contribution rates or larger direct budgetary transfers. Now, for reasons of both equity and efficiency, scope for further use of these means may be limited. In many industrial countries where the link between contributions and benefits is weak, high social security contribution rates—often levied at flat rates up to a specified limit—have worked to undercut the progressivity of the tax system. Higher payroll taxes are also widely believed to affect employment negatively, particularly for low-wage labor.

Characteristics of Public Pension Schemes In Selected Industrial Countries

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Data: Van den Noord and Herd. 1993; and IMF staff estimates

Benefit accrual factor increases as assessed earnings decline.

Benefit accrual factor declines as number of contribution years Increases.

PAYG = pay as you go. PF = partially funded.

Statutory retirement ages as of 1995.

Benefit accrual factor per year of contributions. In percent of assessed earnings.

The basic scheme is indexed to prices, while the earnings-related schemes are indexed to gross wages.

For earnings-related scheme only.

The obvious alternative—reduced benefits—has encountered stiff resistance by well-organized and increasing numbers of pensioners. From a practical standpoint, attention has been shifting from measures that address existing benefits to proposals that affect future retirees. The study assesses several reform options that address the sustainable contribution gaps. These include:

• Reducing average replacement rates. Benefits could be lowered as a proportion of average wages by a number of means, including reducing accrual factors, increasing the length of time used to determine average income, or some combination of the two. Reducing the replacement rate by 5 percent, for example, would fully eliminate the sustainable contribution gap for Sweden, the United Kingdom, and the United States and reduce the gap for the other major industrial countries by one fourth to one half. If the adjustment were made solely for new pensions, a substantial reduction in the contribution gap would still result.

• Modifying indexation provisions. France, Germany, and Japan—which index their pensions to wages—stand to gain from a switch to full CPI indexation. This is based on the fact that productivity gains recorded during retirement are reflected in higher real wages, so that indexing to consumer prices will lead to a gradual erosion of the effective replacement rate. The study demonstrates that even larger savings result by indexing to 80 percent of the CPI; this proposal can be justified by the upward bias in recorded CPI inflation.

All major industrial countries will face a shortfall in pension finances.

• Extending retirement ages. Several countries, most notably the United States, have already announced a gradual move toward a higher retirement age. Examining the potential impact of an immediate increase in the retirement age to 67 for both men and women, the IMF staff finds the sustainable contribution gap for Italy, Sweden, and the United Kingdom would be more than wiped out, and two thirds of the gap would be eliminated for the other major industrial countries. The effect of an immediate change is substantial, but it would likely have to be phased in to eliminate the perception of unfairness to those near retirement. Also, women who now retire at ages 55 and 57 in Japan and Italy, respectively, and at 60 in France and the United Kingdom would bear a disproportionate share of the burden of this transition.

• Mix of reforms. Each of the above reforms may be effective in addressing sustainable contribution gaps, although a number of additional elements—particularly the severity of the demographic factors and the political feasibility of these reforms—would necessarily shape the steps that could be taken. Relatively small increases in the current average contribution rates might suffice in Sweden, the United Kingdom, and the United States, as long as these were sustained. A moderate reduction in the replacement ratio might also aid the United States, but would be of less assistance to Sweden and the United Kingdom because their replacement rates are already projected to decline sharply over the period.

For the others, particularly those with already high contribution rates, some combination of reduced replacement rates and extension of the retirement age may offer the greatest scope for adjustment.

Systemic Reforms. The above reforms to existing public pension schemes appear to be a viable option in addressing contribution gaps. But they also raise concerns about further increases in the contribution rates or excessive cutbacks in benefits, as well as an erosion of the perceived implicit return if higher contributions yield lower benefits.

Growing attention has been given to the possibility of shifting to fully funded schemes as a more radical solution to current pension problems. Such reform would help build up financial reserves as a cushion against adverse demographic developments and is also seen as a means to increase national savings. An increase in national savings, however, is not an inevitable outcome. For example, the mandatory savings generated by such a scheme might simply replace private sector savings that would otherwise have been made. Apart from this possibility, the increase in private sector saving will be offset to a greater or lesser extent by an increase in the public sector deficit. Moreover, difficult transition issues in the shift from current pension systems to fully funded schemes would need to be addressed.

The IMF study considers these issues in assessing the alternatives of a gradual transition and an immediate shift to a fully funded scheme. While the details differ, both approaches share some common themes. In shifting suddenly to a fully funded scheme a government would have to continue, during the transition, to meet its responsibilities to the currently retired and to those retiring in the next several decades who will still have a (shrinking) stake in the current pension scheme. Since new contributions will be allocated to the new fully funded scheme, however, a stream of social security contributions will no longer be available to meet that responsibility. How would this responsibility be met? To illustrate the difficult choices that need to be made, one benchmark would be that the path of the government deficit is unchanged during the shift; this would imply a need for significant fiscal consolidation to allow the government to make up for the decline in social security contributions. Such fiscal measures could be achieved by some combination of tax increases, expenditure reductions, or tighter benefit entitlements. This benchmark also illustrates that there is no easy way to increase national savings during the transition. Any increase in national savings during the transition—which is by no means inevitable—would likely reflect the impact of fiscal consolidation. This benchmark also illustrates that the resolution of the difficulties facing public pension schemes will involve a delicate balancing of many interests, both within and across generations.

The IMF staff also looks at case studies of alternative pension regimes. One that has attracted considerable attention is Chile, which has been shifting to a fully funded scheme, with individual participants making their own decisions with accumulated assets. This case illustrates many of the issues raised by the transition. In particular, the Chilean authorities implemented significant fiscal consolidation in preparation for the shift. At the same time, the management costs of the new investment funds have proven to be very high. Moreover, the adequacy of the benefits have yet to be tested since the scheme has yet to mature.


Ultimately, while individual circumstances vary, collectively the major industrial countries face daunting deficits and heavy debt accumulations if they do not take adequate remedial measures. A window of opportunity exists, but the lead times needed to make adjustments are long and the cost of delay is high. Given the natural clash of intergenerational interests, reaching an effective consensus may not be easy. A clear understanding and analysis of the economic, distributional, and administrative implications of the reform options is a necessary, but not sufficient, basis for seeking solutions. Considerable political acumen and a willingness to compromise will also be needed.

Tunisia Concludes Association Agreement with EU

As part of an ambitious agenda for integration into the world economy, Tunisia concluded an Association Agreement with the European Union (EU) in July 1995. The Agreement involves the establishment of a free trade area over 12 years, as well as enhanced financial and technical cooperation in such areas as education, training, and social welfare. The following article, based on an internal review by the IMF’s Middle Eastern Department, outlines the impact that the Association Agreement will have on the Tunisian economy.

Tunisia and the other countries of the Maghreb have long-standing ties with the countries of Europe. The EU is Tunisia’s most important economic and financial partner, accounting for about 80 percent of Tunisia’s exports and 70 percent of its imports; it is also the primary source of tourism receipts and foreign direct investment. At the end of 1994, loans from the European Investment Bank and bilateral loans from EU member countries made up about 37 percent of Tunisia’s total external debt outstanding.

For the EU, the Association Agreement with Tunisia is part of its general approach to deepening and widening its relations with its southern neighbors and, eventually, of building a Euro-Mediterranean Economic Area. The Agreement supersedes an earlier trade and cooperation agreement that Tunisia and other Maghreb countries signed with the EU (then the European Community) in 1976. Under the 1976 agreement, Tunisia obtained virtually free access for industrial exports and some limited preferential access for agricultural exports. For Tunisia, the new Association Agreement poses both challenges and opportunities.

The Agreement’s Provisions

The Agreement consolidates key elements of the 1976 trade and cooperation agreement and adds several new features, including a far-reaching liberalization of trade relations and enhanced cooperation in a number of areas. Safeguard clauses permit limited exemptions from these commitments in the event of balance of payments difficulties or social problems, and to protect infant industries. In addition, a declaration attached to the Agreement states that if application of the Agreement results in serious balance of payments difficulties for Tunisia, consultations between the two parties on appropriate measures will be conducted in collaboration with the IMF.

Under trade and related policies, the Agreement provides for:

• the immediate abolition of all quantitative import restrictions;

• the phasing out of all tariffs on imports on industrial goods from the EU over 12 years; and

• extended preferential access for Tunisia’s agricultural exports to the EU.

The Agreement does not provide for a general liberalization of trade in agriculture, but it commits the EU and Tunisia to work toward greater liberalization. To that end, trade in agricultural products will be reviewed after the year 2000.

Under movement of capital, both parties will ensure convertibility for current transactions and for capital transactions related to foreign direct investment, subject to a safeguard clause in case of balance of payments difficulties. They also commit themselves to working toward full convertibility between them.

Photo Credits: Associated Press, page 73; Michele and Tom Grimm for Tony Stone Images, page 88.

The Agreement emphasizes three major areas of economic and financial cooperation:

• support for sectors that experience difficulty adjusting to the trade liberalization;

• support for intra-Maghreb regional integration; and

• environmental issues, especially with a view to protecting soil and water, preventing maritime pollution, and rationalizing waste disposal. In addition, the EU—in collaboration with other contributors, including international financial institutions—will provide financial assistance to support structural reforms in Tunisia.

Under labor and cooperation on social issues, the Agreement provides for:

• national treatment for expatriate workers regarding working conditions, salary and firing rules, and social security; and

• active cooperation in reducing immigration through regionally targeted development support, promotion of the role of women in development, and strengthening of basic social services, especially for women and children.

The Agreement’s Impact

The Agreement will affect the Tunisian economy on several fronts. Growth will be strengthened over the long term, but transitional short-term costs could hurt certain sectors and increase unemployment. The magnitude of these effects will depend on how quickly the structural reforms aimed at facilitating the required reallocation of capital and labor can be implemented. Also, fiscal and external balances could be affected by the phasing out of trade tax revenues and the response of exports, imports, and capital flows to the liberalization of trade.

Growth and Employment. The liberalization of trade should result in efficiency gains over the long run as capital and labor are reallocated toward sectors where Tunisia has a comparative advantage. The gains from this reallocation are difficult to quantify, however, and will depend on the extent of trade creation versus trade diversion and the pace at which labor and capital can be redeployed.

The Agreement is likely to enhance Tunisia’s existing investment incentives.

Increased competitive pressures will also reduce monopolistic rents and strengthen incentives for increased efficiency. The greater openness of the economy could raise the rate at which best practices and technologies from abroad are absorbed into the economy, thereby raising the long-run growth rate.

Tunisia’s existing investment incentives—such as its relatively low labor costs and proximity to European markets—are likely to be enhanced by the Agreement. Both domestic and foreign investment are expected to increase, spurred by the credibility implied by the adoption of EU standards and regulations; the perceived “locking in” of reforms through the Agreement; and the acceleration—likely to be supported by the Agreement—of the move to a fully market-based and open economy. Although the experience of other countries in similar circumstances suggests the likelihood of large inflows of foreign direct investment, some factors could attenuate these inflows. In particular, the economy may reallocate its resources toward relatively labor-intensive activities, thereby reducing the need for capital. Also, the Agreement might tilt investment incentives toward Europe rather than Tunisia, as European producers gain additional export access to the Tunisian market.

Higher growth in the long run should also result in faster employment creation, since Tunisia’s comparative advantage is likely to be in relatively labor-intensive sectors. Real wages will therefore probably increase. The reallocation of labor and capital will entail transitional costs, however. The Tunisian authorities have estimated that one third of the enterprises in the manufacturing sector could disappear through liquidation or mergers, while another one third could face serious difficulties in the absence or failure of industrial restructuring.

Fiscal Impact. The Agreement will entail a gradual loss of tax revenue from import duties, estimated to reach a cumulative 3.5 percent of 1995 GDP by the end of the 12-year period. This loss could be higher if tariffs on imports from non-EU countries are also dismantled. These losses may be partially offset by higher revenues from domestic taxes—to the extent that the Agreement results in higher economic growth. But given that import duties and taxes account for about 18 percent of total tax revenue, new revenue or spending measures will be necessary to avoid a deterioration of the fiscal position.

Savings, Investment, and External Balance. Initially, the Agreement is likely to trigger a deterioration in the balance between savings and investment and, thus, a widening of the current account deficit. As mentioned, investment is likely to increase as the country expands production capacity in its areas of comparative advantage. The Agreement should not affect public savings, assuming that lost trade taxes are fully offset by new revenue and spending measures. Private savings, however, may weaken; the removal of quantitative restrictions and tariffs could stimulate private consumption by making a wider range of consumer goods available.

The possible deterioration of the external current account during the initial period of the trade liberalization would thus reflect an acceleration of import growth, although export growth would also eventually accelerate—with a lag. The Agreement gives Tunisia little additional access for its exports; most of the expected growth in exports will therefore result from the reallocation of resources from import-substituting production into export industries as well as higher investment in these industries. The deterioration in the trade balance could be contained by the increased competition and other features of the Agreement that stimulate faster productivity gains. The current account deficits could be financed by the expected higher capital inflows, no-tably in the form of foreign direct investment.

Accompanying Reforms

To maximize the Agreement’s benefits and contain its transitional costs, an extensive agenda of reforms for modernization and structural changes will need to accompany its implementation. In addition to the general reforms and medium-term strategy program under way in Tunisia, a number of structural reforms will be needed to facilitate the reallocation of capital and labor toward sectors of comparative advantage and to mobilize investment in physical and human capital.

Trade Liberalization. Limiting the abolition of trade barriers to EU imports will introduce new distortions and result in welfare losses from trade diversion. Therefore, tariffs and other trade barriers will need to be phased out on all goods simultaneously to establish undistorted price signals. Also, the phasing of tariff reductions for different categories of goods established in the Agreement could initially raise effective protection rates in some sectors. The evolution of effective protection rates in each sector should therefore be monitored closely, and tariff liberalization on finished goods should be accelerated to avoid increases in effective protection.

Industrial Restructuring. The Tunisian authorities, in collaboration with the EU and the World Bank, have put together a program to help viable industrial enterprises adapt to the removal of protection. The program has two components: support for eligible enterprises and improvements in the economic environment in which they operate. The program, estimated to cost about $2.4 billion over the next five years, will be financed through budget resources and contributions from the EU and the World Bank.

Infrastructure and Human Capital. Tunisia’s ability to maximize the economic benefits of the Agreement will depend on the quality of physical infrastructure and the level of development of its human capital. Under the Agreement, the EU will provide financial assistance and cooperate with the Tunisian authorities in upgrading and harmonizing transport and communication facilities. In developing human capital, the focus will be on training the existing work force to help it adapt to the reallocation of production. The government will develop longer-term educational and employment objectives in collaboration with the World Bank.

Lao P.D.R. Embarks on Road To Economic Transition

In 1986, following a decade of centrally planned economic management, the Lao People’s Democratic Republic (Lao P.D.R.) took the first decisive steps toward establishing a market-oriented economy. Since then, the authorities have made impressive progress both in implementing structural reforms and reducing macroeconomic imbalances. Nevertheless, a number of major challenges remain, including the need to strengthen government institutions. Filippo di Mauro of the IMF’s Central Asia Department reviews the Lao P.D.R.’s experience with economic transformation and adjustment during 1979-95 and identifies the challenges facing the country in the coming years.

The introduction of centrally planned economic management in Lao P.D.R. in 1975 coincided with the declaration of the Republic; in contrast to other countries undertaking systemic transformation, central planning in Lao P.D.R. was both shorter lived and less inclusive. Agriculture, the major sector, was never effectively collectivized and continued to be dominated by small private holdings. Although central planning was more rigorously applied to industry, that sector—mostly controlled by state enterprises—accounted for only about 15 percent of national output. In addition, as early as 1979, the government took market-oriented steps to revitalize a stagnant economy; these efforts included partial liberalization of domestic and external trade, realignment of prices and the exchange rate in line with market values, and reduction of government subsidies on several consumer goods.

Introduction of the New Economic Mechanism

These tentative steps were followed by a decisive shift toward a market economy in 1986, with the government’s adoption of a clearly articulated set of policies known as the New Economic Mechanism. This plan encompassed a gradual but wide-ranging structural reform accompanied by rapid macro-economic stabilization. Structural reform efforts in the initial phase (1986-88) of the New Economic Mechanism included:

• liberalization of prices, the exchange rate, and trade and foreign investment;

• reform of public enterprises, the tax system, and the financial sector; and

• virtual discontinuation of the cost-plus-based official price system, in favor of a market-determined price system.

As part of the effort to liberalize the trade and payments system, in late 1987, the authorities unified the seven different official exchange rates prevailing in the mid-1980s into a single official rate. With the consolidation of the state trading companies, trade restrictions were substantially phased out and private companies were given greater autonomy in foreign trade. Moreover, in July 1988, the Lao P.D.R. adopted a liberal foreign investment law—well ahead of other countries in the area.

To achieve financial self-sufficiency, the government granted greater financial autonomy to public enterprises by giving them the authority to set production and financial goals. Compulsory transfers to the budget were abolished and replaced by profit and turnover taxes. In addition, tax collection efforts were strengthened as part of an overhaul of the tax system. To improve financial intermediation and monetary management, the government created a two-tier banking system by separating commercial from central bank activities within the State Bank.


Lao P.D.R.: Output Growth And Inflation

Citation: IMF Survey 0025, 001; 10.5089/9781451937442.023.A005

Note: Output growth is based on real GDP; inflation is based on the consumer price Index.Data: Lao authorities

The macroeconomic response to the first phase of the reform was encouraging. Despite the institutional shocks imposed on the system, output fell only in 1987 and 1988—attributable mainly to protracted droughts rather than to the reform. Inflation initially surged to over 60 percent a year in 1989—owing mainly to price liberalization and exchange rate depreciation, which also involved a large monetization of the budget deficit. However, it declined dramatically to less than 18 percent by the end of 1990 (see chart). In support of the adjustment, fiscal imbalances narrowed with the imposition of hard budget constraints on state enterprises, while monetary policy remained tight.

Medium-Term Strategy Adopted to Boost Reform

Despite the encouraging progress under the New Economic Mechanism, the country’s still-inadequate institutional framework threatened to stall the momentum of reform. To prevent reform from being undermined, the government in mid- 1989 launched a comprehensive medium-term structural adjustment program. The main objective of the program, which was supported by the IMF under its structural adjustment facility and by the World Bank with a structural adjustment credit, was to create an environment conducive to expediting structural reform by establishing domestic and external financial stability. The program’s main macroeconomic targets were:

• 5–6 percent average real growth. Measures included improving production incentives, establishing property rights, increasing investments, and enhancing the physical and social infrastructure. Additional measures aimed at improving domestic resource mobilization by consolidating the two-tier banking system, continuing the tax system and public enterprise reform, and substantially reducing the size of the public sector.

• 5 percent inflation annually by 1992, broadly in line with Lao P.D.R.’s major trading partners. To contain inflationary pressures, the program focused on monetary restraints, effectively curtailing the public sector’s recourse to credit; interest rates were also kept substantially positive in real terms.

• further progress toward balance of payments viability. To strengthen the external position, the program relied on flexible exchange rate management, combined with further liberalization of the trade and payments system and strict limits on new nonconcessional debt.

Program Results. The macroeconomy responded favorably to the reform effort. Growth exceeded the targets throughout the program period, except for 1991 when agricultural output declined substantially. Inflation, reined in by cautious demand management, dropped to single digits by mid-1992 from an annual rate of almost 90 percent in the third quarter of 1989. Mirroring these developments, the kip, which had been sliding, reversed direction and began to appreciate in real terms. Fiscal consolidation continued. The overall budget deficit declined to less than 10 percent of GDP by 1992, down from more than 16 percent at the beginning of the program. The balance of payments also strengthened as the current account deficit shrank to 3.5 percent of GDP from nearly 16 percent in 1989. These positive developments and the country’s favorable prospects triggered a substantial increase in aid commitments and inflows of private capital.

Administrative bottlenecks and political reorganization slowed the pace of structural change. Nevertheless, some progress was made in consolidating the market-determined price system, promoting the private sector’s role in the economy, reforming the financial system, liberalizing the trade system, and privatizing state enterprises. Public administration improvements and commercial bank restructuring, however, lagged.

Second Medium-Term Structural Program Adopted

In 1993, the Lao authorities undertook a second medium-term structural adjustment program, supported by the IMF’s enhanced structural adjustment facility. The authorities retained both the basic strategy of the first program and the objectives of sustaining growth and improving financial stability. But to accelerate the structural reform, they focused more intensively on the institutional weaknesses that had retarded progress during the first program. Key priorities of the 1993-95 program included:

Improving macroeconomic management and eliminating structural bottlenecks remain major challenges.

• reorienting public sector operations;

• completing the establishment of an effective, centralized fiscal management system;

• adopting more comprehensive privatization;

• strengthening the commercial basis of the banking system; and

• putting in place an adequate legal and regulatory framework.

Mixed Performance. Performance during the program period was mixed. On the positive side, real growth remained high, averaging about 7 percent annually over the three years. The external sector also performed well: exports and foreign trade continued to grow strongly and private and official capital inflows surged. As a result, the current account deficit narrowed to 4.1 percent of GDP from 5.6 percent during 1990-92, and the overall balance of payments recorded a small surplus on average. Moreover, despite continuing bottlenecks in administrative capacity and weaknesses in the budget process, fiscal performance improved—the overall deficit declined to 9.8 percent of GDP over the program period and the current fiscal balance shifted into a surplus. On the negative side, unchecked aggregate demand and lax credit policy caused inflation to surge to about 14 percent during the first half of 1995 from just over 6 percent in 1993 and 1994. At the same time, the exchange rate depreciated by about 15 percent after a long period of stability. In the second half of 1995, the authorities tightened the monetary and fiscal stance. These measures, which succeeded in reducing credit expansion and dampening demand, helped restore macro-economic stability.

In contrast to the mixed macroeconomic performance, progress in almost all areas of structural reform was considerable and widespread during the program period. Although the privatization effort showed some weaknesses, several state enterprises were privatized. In the financial sector, new domestic and joint-venture banks were established and nonperforming loans were replaced by fresh capital. Moreover, with the commencement of regular treasury bill auctions and the opening of a discount window, the central bank strengthened its capacity for indirect monetary control. Finally, the remaining interest rate guidelines were removed in July 1995.

After slowing somewhat during 1991-92, civil service reform picked up during 1993-94; an additional 5 percent of the nonmilitary civil service was retrenched, implying that about 26,000 civil servants, out of some 93,000, have been retrenched since 1989. Additionally, public wages were increased to make them more competitive with the private sector. At the same time, job classification and the pay structure were revised, with the aim of rewarding good performance and achieving a leaner and more qualified civil service.

Use of IMF Credit and Loans in January

(million SDRs)

article image
Note: EFF = extended Fund facility.CCFF = compensatory and contingency financing facility.STF = systemic transformation facility.SAF = structural adjustment facility.ESAF = enhanced structural adjustment facility.Figures may not add to totals shown owing to rounding.Data: IMF Treasurer’s Department

The external sector has also undergone considerable reform. With the comprehensive tariff reform adopted in early 1995, the Lao P.D.R.’s tariff system is among the most liberal and transparent in Indochina: only six tariff bands remain; the average tariff rate is less than 14 percent; and all exemptions are well defined and limited in number.

Facing the Future

Despite the progress achieved so far, the recent episode of high inflation and exchange rate pressures has clearly demonstrated deficiencies in macro-economic management. In addition, several structural bottlenecks still hamper realization of the country’s economic potential and the sustainability of economic development. The effectiveness of monetary policy is hamstrung by the paucity of instruments available to the central bank and by institutional limits to its operational autonomy. On the external front, the narrow production/export base—with export earnings depending mainly on electricity, garments, and timber—implies high vulnerability to demand shocks and limits prospects for development. Finally, severe administrative constraints hamper improvement in social and physical infrastructure, while local development policies are unable to reach many areas where poverty is still pervasive.

Tackling these problems will require efforts in four main areas:

• Demand management control will need to be strengthened substantially, both through better management of public expenditures and deepening of financial sector reform, including substantial restructuring of state commercial banks.

• Infrastructure investments will need to target improvements in services and enhance export prospects, allowing the country to share in the gains from increasing regional integration; this, in turn, requires maintaining an open trade system and macroeconomic stability to protect external competitiveness.

• Large investments in human capital would strengthen administrative capacity and ensure that the benefits of economic growth are spread throughout the country.

• Expedited improvement of the legal framework well help sustain development of the country’s market-oriented economy.

If the authorities achieve progress in these areas, the Lao P.D.R. will be able to share in the impressive economic growth of the region while simultaneously enhancing the welfare of its people.

From the Executive Board

Jordan: EFF

The IMF approved a request by the Jordanian authorities for the replacement of Jordan’s current extended arrangement with new credits totaling the equivalent of SDR 200.8 million (about $295 million) under the extended Fund facility (EFF). The credits are being made available over the next three years to support the government’s medium-term economic and structural reform program.

In 1994, Jordan initiated a comprehensive program of macroeconomic adjustment and reform supported by a three-year EFF arrangement (see Press Release No. 94/63, IMF Survey, September 26, 1994). The program aimed at sustaining rapid economic growth with low inflation, improving the external position, and enhancing the supply response of the economy while reducing its vulnerability to adverse exogenous developments. The Jordanian economy responded well to these reforms. In 1994-95, real GDP growth was around 6 percent a year; inflation remained in the 3-3.5 percent range; and the external current account deficit declined by 7 percentage points of GDP. To build on the 1994-95 achievements and to benefit from the opportunities arising from the peace process, the integration with the European Union, and the future changes in the world economy, the Jordanian authorities have formulated an intensified program of macroeconomic adjustment and structural reforms for 1996-98, supported by the new EFF credits.

Medium-Term Strategy And Reforms

The medium-term program for 1996–98 aims at achieving an average annual real GDP growth rate of at least 6 percent in order to sustain improved living standards and expand employment opportunities; maintaining low inflation rates in line with those of industrial countries; narrowing the external current account deficit to below 3 percent of GDP on average, which would lower the debt and debt-service burden over the medium term; and building up gross official reserves to the equivalent of about three months of imports.

To achieve these objectives, fiscal policy aims at further reducing the budget deficit (excluding foreign grants and receipts from sales of assets) to 2.5 percent of GDP in 1998 from 4.8 percent in 1995. The authorities are committed to a tight monetary policy and flexible interest rates geared to maintaining the relative attractiveness of dinar-denominated assets.

The centerpiece of the program is a significant acceleration of broad-ranging structural reforms, including in the areas of taxes, budgetary expenditures, the regulatory framework, the financial system, and the trade system. Over the medium term, measures will also address issues such as food subsidies and reform of the civil service and the pension system. Overall, these measures represent a more determined effort to promote the role of the private sector in the economy through an overhaul of the regulatory framework, a comprehensive reform of public sector enterprises, an intensified action plan for privatization, and, for the first time, an undertaking for the divestment of government holdings in the productive sectors. In their totality, these reforms would enable Jordan to reap significant benefits from developments in the regional and international economies.

The 1996 Program

Within the medium-term macroeconomic framework, the program for 1996 aims at sustaining the growth of real GDP at about 6.5 percent, containing the annual inflation rate to 3.5 percent, reducing the external current account deficit further to below 4 percent of GDP, and building up foreign exchange reserves significantly. To these ends, the overall budget deficit is targeted to decline to 3.8 percent of GDP in 1996 through a sustained reduction in current outlays and increased revenues from domestic taxation. Structural reforms in 1996 focus on liberalizing the trade system further, reforming the subsidy system, formulating a comprehensive privatization plan, and continuing with regulatory and financial sector reforms.

Stand-By, EFF, SAF, and ESAF Arrangements As of January 31

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Note: EFF = ox lorded Fund facility.SAF = structural adjustment facility.ESAF = enhanced structural adjustment facility.Figures may not add to totals owing to rounding.Data: IMF Treasurer’s Department

Jordan: Selected Economic Indicators

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Data: Jordanian authorities and IMF staff estimates

Addressing Social Costs

The program envisages several measures to strengthen the social safety net in order to protect the poor from the temporary hardships of the economic reform process. The authorities have already partially replaced generalized food subsidies by a coupon-based rationing system and provision of direct income support to extremely poor families. Moreover, the coverage and benefits of the National Aid Fund (NAF) are to be extended to include all poor families, and the NAF would administer the direct cash transfers intended to compensate for the reduction of the wheat subsidy. Over the medium term, broad-based sustainable real growth remains the most effective way to raise the living standard of the population and reduce poverty.

The Challenge Ahead

Even with the programmed macroeconomic adjustment and strengthened reform measures, external financing gaps are projected to persist over the medium term. Timely availability of external assistance on appropriate terms will be crucial to support implementation of the government’s program and to achieve a rapid and significant buildup in reserves.

Jordan joined the IMF on August 29, 1952, and its quota is SDR 121.7 million (about $179 million). Its outstanding use of IMF credit currently totals the equivalent of SDR 169 million (about $248 million).

Press Release No. 96/4, February 9

Armenia: ESAF

The IMF approved a three-year loan for the Republic of Armenia in an amount equivalent to SDR 101.2 million (about $148 million) under the enhanced structural adjustment facility (ESAF), to support the government’s medium-term economic and reform program during the period 1996–98. The first annual ESAF loan, in an amount equivalent to SDR 33.7 million (about $49 million), will be disbursed in two equal semiannual installments; the first, in an amount equivalent to SDR 16.9 million (about $25 million), will be available at the end of February; the second will become available in September 1996 after review of program implementation by the IMF’s Executive Board.

The ESAF-supported program builds upon the achievements of Armenia’s previous programs of economic reform: the first supported by a drawing under the systemic transformation facility (STF) in December 1994 (see Press Release No. 94/86, IMF Survey, January 9, 1995); and the second supported by a stand-by arrangement and a second STF drawing, approved by the IMF in June 1995 (see Press Release No. 95/36, IMF Survey, July 3, 1995). Under these programs, the Armenian authorities achieved remarkable exchange rate stability during 1995; kept inflation low; implemented fiscal measures to maintain the general government deficit within the limits set by the revised program for end-1995; and accelerated substantially the pace of privatization. In 1995, the economy is estimated to have grown by 5 percent, primarily thanks to increased industrial activity and a steady improvement in agriculture output. Having achieved a fair degree of economic stability, the Armenian authorities have designed a medium-term program to address critical structural distortions that still pervade the economy.

Medium-Term Strategy and 1996-98 Program

The objectives of the ESAF-supported program are to maintain macroeconomic stability and to nurture growth by building an environment conducive to the development of the private sector while dealing decisively with structural distortions to improve the supply response of the Armenian economy. The main macroeconomic objectives of the program are to raise the economic growth rate from 5 percent in 1995 to 7 percent in 1998, reduce the rate of annual inflation from 32 percent in 1995 to 8 percent by end-1998, and narrow the current account deficit from 26.4 percent of GDP in 1995 to 12.5 percent of GDP in 1998 while raising gross international reserves from the equivalent of 1.5 months of imports in 1995 to 3.5 months in 1998. In support of these objectives, fiscal policy will aim at a fundamental restructuring of the budget, coupled with a continuous reduction in the deficit from 10.9 percent of GDP in 1995 to 3.8 percent of GDP in 1998; monetary policy will be consistent with the envisaged reduction of inflation; and structural reforms will aim at establishing the necessary incentives for state enterprises to produce goods based on commercial principles.

Armenia: Selected Economic Indicators

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Data: Armenian authorities and IMF staff estimates

In this medium-term framework, the program for 1996, supported by the first annual ESAF loan, aims at a real GDP growth rate of 6.5 percent; a reduction in the rate of inflation to 19 percent; and a lowering of the current account deficit to 17 percent of GDP. To these ends, fiscal policy is designed to reduce the budget deficit to 7.6 percent of GDP in 1996 through improved tax administration, including the reduction of the stock of tax arrears, and tight expenditure management and control. Monetary policy will focus on containing inflationary pressures, while exchange rate policy will seek a relatively stable nominal exchange rate for the dram.

Structural Reforms

A series of structural reforms constitute the linchpin of the economic program. Foremost among them will be a fundamental reform of the energy sector and a corresponding restructuring of several enterprises, with electricity tariffs being raised in stages to reach full cost recovery. The program will also impose hard budget constraints on enterprises through decentralization, privatization, and implementation of the bankruptcy and collateral laws upon their approval by the parliament in 1996. The central bank will impose financial discipline on the banking sector by implementing a law on bank insolvency. Also, the 1996 privatization program envisages completion of small-scale privatization and substantial progress in privatizing medium- and large-scale enterprises through public subscriptions payable in cash or vouchers. Other significant structural reforms envisaged in the program will include progress toward a functioning electronic payments system—which is critical to the development of the secondary market for government securities and to the development of indirect instruments of monetary policy—and establishing a debt-management unit to monitor the contracting and guaranteeing of external debt obligations by the government, the central bank, and state enterprises.

Addressing Social Problems

To cope with the social pressures involved in the transition process, the reorientation of social expenditures toward the most vulnerable remains a high-priority task. Although some measures have been taken in this area, much remains to be done. The program lays emphasis on improving the targeting of the social safety net and intensifying efforts in rationalizing social expenditures. Reforms of the education and health care system are expected both to improve the quality and to increase the efficiency of budgetary support in these areas.

The Challenge Ahead

In addition to exercising fiscal restraint and vigilance over banking system developments to prevent a domestic crisis that could jeopardize the program, Armenia will need concessional external financing in the foreseeable future to meet the country’s rehabilitation needs.

The Republic of Armenia joined the IMF on May 28, 1992; its quota is SDR 67.5 million (about $99 million). Armenia’s outstanding use of IMF credit currently totals SDR 47 million (about $69 million).

Press Release No. 96/5, February 14

Mongolia: Article VIII

The government of Mongolia has notified the IMF that it has accepted the obligations of Article VIII, Sections 2, 3, and 4 of the IMF Articles of Agreement, with effect from February 1, 1996. IMF members accepting the obligations of Article VIII undertake to refrain from imposing restrictions on the making of payments and transfers for current international transactions or from engaging in discriminatory currency arrangements or multiple currency practices without IMF approval. A total of 115 countries have now assumed Article VIII status.

Two of the main purposes of the IMF, as stated in its Articles of Agreement, are to facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income; and to assist in the establishment of a multilateral system of payments in respect of current transactions between IMF members. In seeking to achieve these objectives, the IMF exercises firm surveillance over the exchange rate policies of its members and oversees the elimination of exchange restrictions that hamper the growth of world trade.

By accepting the obligations of Article VIII, Mongolia gives confidence to the international community that it will continue to pursue sound economic policies that will obviate the need to use restrictions on the making of payments and transfers for current international transactions, and thereby contribute to a multilateral payments system free of restrictions.

Mongolia joined the IMF on February 14, 1991; its quota is SDR 37.1 million (about $54 million).

Press Release No. 96/6, February 16

Norway: Pensions and Petroleum Pose Long-Term Fiscal Challenges

The following article is based on an internal IMF report prepared by staff of the European I Department in connection with the IMF’s 1995 Article IV consultation with Norway.

Norway’s current fiscal position is comfortable, with net financial assets amounting to over one fourth of GDP and budgetary surpluses expected to persist at least for the remainder of the decade. Over the longer term, however, Norway’s public finances will confront the substantial adverse effects of declining petroleum revenue and an aging population. Against this background, the Norwegian authorities have begun to develop a framework designed to foster long-term fiscal sustainability while not unduly burdening future generations. This framework features fiscal policies geared to expenditure restraint and activation of the State Petroleum Fund (SPF) as the vehicle for investment of anticipated future budgetary surpluses to be drawn on when future needs arise.

Economic Profile

Norway’s economy has performed well in recent years. After a prolonged economic downturn following financial deregulation, overheating, and the mid-1980s oil price collapse, the last three years have seen a strong and broadly based upturn. Inflation remains low, with wage increases and other cost pressures moderate, despite one of the lowest unemployment rates in Europe. The external current account surplus has expanded, driven by buoyant oil and gas exports, which—owing to improvements in extraction technology and new discoveries—are expected to remain strong through the turn of the century.


Old-Age Disability Pensions and Petroleum Reserves

(percent of GDP)

Citation: IMF Survey 0025, 001; 10.5089/9781451937442.023.A005

Data: Norwegian Ministry of Finance

The structure of Norway’s economy has been strongly influenced by the expansion of petroleum production and the use of oil and gas proceeds. The petroleum export boom caused the Norwegian krone to appreciate, thereby eroding the competitiveness of the traditional manufacturing sector, which has declined since the 1970s. At the same time, increased oil and gas revenues were used to expand public sector employment, transfers to households and industry, and infrastructure investment, rather than to lower the relatively high tax burden.

Fiscal policies in Norway are articulated in long-term programs and annual budgets. The current long-term program (1994-97) focuses on keeping the growth of government expenditure below that of mainland (that is, non-oil) GDP while preserving the tax system broadly unchanged following major reform in the early 1990s. Reflecting the cyclical upswing and rising petroleum revenues, the state budget has shifted to a projected surplus of 1 ⅓ percent in 1996 from a deficit of 5 ½ percent GDP in 1993.

Fiscal Challenges

The two long-term fiscal challenges facing Norway are the growing cost of pensions and an eventual drop in projected revenues from the petroleum sector. The combined adverse effects of these developments on the public finances are projected to be close to 15 percent of GDP by 2030.

Pensions. As benefits have broadened and become more generous, their cost has correspondingly increased. Central government transfers to households rose to 38 percent of total expenditure in 1993 from 30 percent in 1980. Over this period, pension payments, which account for about two thirds of transfers to households, rose to 23 percent of all central government expenditure from 18 percent.

Along with many other European countries, Norway faces a significant aging of its population in the period after 2010, when the large cohort born after World War II retires. The proportion of retirees is expected to rise from 14.4 percent of the population in 1992 to 17 percent: by 2030. In addition, the average cost of pensions will rise until the present system (introduced in 1967) matures in 2007. Consequently, the cost of state funding of retirement and disability pensions is projected to rise to 14.4 percent of GDP by 2030 from 7.5 percent of GDP at present. Among the important assumptions underlying these estimates are indexation of benefits to the price level and an unchanged effective average retirement age of 61.

Seminar on SDR to Convene March 18

On March 18-19 the IMF will convene a two-day seminar at IMF headquarters on the future of the special drawing right (SDR) in the light of changes in the world financial system. Presenters of papers and discussants at the seminar will consist mainly of invited outside experts, who will reflect the broad perspectives of the IMF’s global membership; IMF staff will be included in the audience. The objective is a substantive discussion of the role the SDR might play in the monetary system, as requested by the IMF’s policy advisory body, the Interim Committee (of the IMF’s Board of Governors on the International Monetary System), at its April 1995 meeting.

The main topics to be explored at the seminar are;

• the rationale for the creation of the SDR and its evolution to date;

• the case for a new SDR allocation under the IMF’s current Articles of Agreement;

• stability in a multi-reserve-asset monetary system;

• the potential for the SDR in the creation of unconditional liquidity;

• the potential for the SDR in the creation of conditional liquidity;

• the SDR’s characteristics and how they might be changed to enhance its role; and

• implications for the SDR of the future evolution of the world monetary system.

A comprehensive summary of the seminar will be featured in the April 1 issue of the IMF Survey.

Oil Production and Revenue. In 1994, net oil exports reached an average of 2.8 million barrels a day, and in late 1995 Norway became the world’s second largest oil exporter. Total petroleum output in 1995 is estimated at nearly 170 million tons of oil equivalent, up from about 60 million in 1980. Petroleum revenue now accounts for about 13 percent of total government receipts; it is expected to climb higher in the next several years before dropping off in the next century, once oil production passes its peak. The net government cash flow from petroleum activities is accordingly projected to decline to 1.3 percent of GDP by 2030 from a peak of 8.6 percent in 2001. It should be understood that considerable uncertainty attaches to these projections; past estimates of future petroleum output have been revised upward every year.

The State Petroleum Fund

The SPF, established in 1990 but yet to accumulate resources, is intended to make transparent the government’s use of petroleum revenues and facilitate the implementation of sustainable fiscal policies. Guidelines for the SPF are to be spelled out in the long-term programs, with resolutions for the amounts of annual transfers into the SPF set in annual budgets.

All future petroleum revenue will first flow through the SPF; any budgetary call on these assets will subsequently constitute a general transfer from the SPF’s account to the budget. The level of assets accumulated in the SPF would represent the difference between these flows. The SPF will not accumulate assets until a budgetary surplus is achieved. Any non-oil fiscal deficit not covered by petroleum revenue will be financed through previously accumulated SPF assets, as long as they are available to tap. Thus, any shift in the SPF’s asset position will signal changes in the central government’s financial wealth.

The size of the budget surplus will determine the amount of money to be transferred to the SPF; the subsequent accumulation of assets within it will thus reflect the actual level of government savings. The annual transfer to the SPF will be made once the fiscal situation is known. The transfer of the 1996 budget surplus (projected to be NKr 12.6 billion, or 1.3 percent of GDP) will be made in early 1997. As regards the long-term picture, the country’s central bank (Norges Bank) has published calculations based on what it terms the “Oslo criteria,” an accumulation rule that requires both additional fiscal consolidation and saving expected from future increases in petroleum revenue. On this rule, the SPF would accumulate assets projected at the equivalent of 150 percent of GDP by 2030 and would reach a level sufficient to address the long-term fiscal challenges on a self-sustaining basis.

Use of Resources. The SPF is structured such that its resources can be used to finance the non-oil budget deficit, invest in foreign financial assets, and underwrite up to half of the net lending of state investment banks. Its resources will not be earmarked for a specific purpose, and accumulation of offsetting liabilities will be avoided. The resources accumulated as a result of the projected 1996 fiscal surplus will be invested in foreign financial assets and managed by Norges Bank on the basis of guidelines provided by the Ministry of Finance. The government’s decision to invest the SPF’s assets abroad is based on its desire to prevent a further loss of competitiveness arising from upward pressure on the Norwegian krone. Taking such a step would also help Norway achieve the twin goals of maximizing its returns and diversifying its wealth—thereby dampening the volatility of government revenue while shielding the economy from future disruptions caused by oil price fluctuations.

The Road Ahead

Norway’s large net financial assets and petroleum resources leave it in a better situation than most industrial countries to undertake the task of setting aside resources on behalf of future generations. Tackling this task at this stage will help ensure that Norway will be able to maintain this advantageous position even as petroleum revenues decline. While revenue accumulation provides one element of a resource response, re-examining benefit levels and social norms, such as the effective age of retirement, provides another. As it looks toward the eventual post-oil era, Norway also faces the broader challenge of addressing certain structural features of its economy—high agricultural and industrial subsidies, large transfers to households, and a substantial degree of public sector involvement in economic activity—that high petroleum revenues have helped to sustain. Early attention to these features should ease Norway’s transition to a competitive, post-oil economy.

David M. Cheney, Editor

Sara Kane • John Starrels

Senior Editors

Sheila Meehan

Assistant Editor

Sharon Metzger • David Juhren

Editorial Assistant Staff Assistant

Philip Torsani • In-OkYoon

Art Editor Graphic Artist

The IMF Survey (ISSN 0047-083X) is published by the International Monetary Fund 23 times a year, in addition to an annual Supplement on the IMF, an annual Index, and other occasional supplements. Editions are also published in French and Spanish. Opinions and materials in the IMF Survey, including any legal aspects, do not necessarily reflect the official views of the IMF. Address editorial correspondence to Current Publications Division, Room IS9-1300, International Monetary Fund, Washington, DC 20431 U.S.A. Telephone: (202) 623-8585. The IMF Survey is mailed by first class mail in Canada, Mexico, and the United States, and by airspeed elsewhere. Private firms and individuals are charged an annual rate of US$79.00. Apply for subscriptions to Publication Services, Box XS600, IMF, Washington, DC 20431 U.S.A. Telephone: (202) 623-7430. Cable: Interfund. Fax: (202) 623-7201. Internet:

IMF Survey: Volume 25 1996
Author: International Monetary Fund. External Relations Dept.