Fiscal Content of Financial Programs Supported by Stand-By Arrangements in the Upper Credit Tranches, 1969–78

In the ten-year period, 1969-78, 105 stand-by arrangements in the upper credit tranches were approved by the Executive Board of the Fund. A prime purpose of this paper is to analyze the types of fiscal performance clauses incorporated in the 105 arrangements, bearing in mind the policy and practice (reinforced since 1968) to avoid performance clauses relating to specific fiscal measures, such as changes in particular forms of taxation and changes in specific elements of government expenditure. 1 Also, the paper examines the types of fiscal policies used in stabilization programs and assesses the extent to which fiscal intentions, projections, and targets were met. This examination sheds some light on the view that most unsuccessful financial programs fail because of fiscal problems. 2 However, the paper does not draw conclusions regarding the role of fiscal policy in balance of payments adjustment, nor does it attempt to ascertain whether an association has existed between the observance of fiscal performance clauses and the achievement of growth, abatement of inflation, and other objectives of financial programs. To reach such conclusions, an immense amount of data and analysis would have been needed for each of the 105 programs surveyed. Rather, the scope of the paper is somewhat narrower—it attempts to identify factors responsible for the observance or nonobservance of fiscal performance clauses and to assess whether close monitoring of the fiscal performance clauses provided an early-warning system relating to overall credit developments. Also, while the paper does not attempt to take into account the effects on fiscal performance of political and social circumstances, or to take account systematically of exogenous influences, the impressions gained in reviewing the data indicate that a fiscal program, no matter how carefully and intelligently constructed, will not have its intended effects if it does not receive adequate political support. The difficulties in meeting fiscal targets suggest that implementing and sustaining policy in this area may be politically more difficult, in some circumstances, than action in other financial policy areas.

Abstract

In the ten-year period, 1969-78, 105 stand-by arrangements in the upper credit tranches were approved by the Executive Board of the Fund. A prime purpose of this paper is to analyze the types of fiscal performance clauses incorporated in the 105 arrangements, bearing in mind the policy and practice (reinforced since 1968) to avoid performance clauses relating to specific fiscal measures, such as changes in particular forms of taxation and changes in specific elements of government expenditure. 1 Also, the paper examines the types of fiscal policies used in stabilization programs and assesses the extent to which fiscal intentions, projections, and targets were met. This examination sheds some light on the view that most unsuccessful financial programs fail because of fiscal problems. 2 However, the paper does not draw conclusions regarding the role of fiscal policy in balance of payments adjustment, nor does it attempt to ascertain whether an association has existed between the observance of fiscal performance clauses and the achievement of growth, abatement of inflation, and other objectives of financial programs. To reach such conclusions, an immense amount of data and analysis would have been needed for each of the 105 programs surveyed. Rather, the scope of the paper is somewhat narrower—it attempts to identify factors responsible for the observance or nonobservance of fiscal performance clauses and to assess whether close monitoring of the fiscal performance clauses provided an early-warning system relating to overall credit developments. Also, while the paper does not attempt to take into account the effects on fiscal performance of political and social circumstances, or to take account systematically of exogenous influences, the impressions gained in reviewing the data indicate that a fiscal program, no matter how carefully and intelligently constructed, will not have its intended effects if it does not receive adequate political support. The difficulties in meeting fiscal targets suggest that implementing and sustaining policy in this area may be politically more difficult, in some circumstances, than action in other financial policy areas.

In the ten-year period, 1969-78, 105 stand-by arrangements in the upper credit tranches were approved by the Executive Board of the Fund. A prime purpose of this paper is to analyze the types of fiscal performance clauses incorporated in the 105 arrangements, bearing in mind the policy and practice (reinforced since 1968) to avoid performance clauses relating to specific fiscal measures, such as changes in particular forms of taxation and changes in specific elements of government expenditure. 1 Also, the paper examines the types of fiscal policies used in stabilization programs and assesses the extent to which fiscal intentions, projections, and targets were met. This examination sheds some light on the view that most unsuccessful financial programs fail because of fiscal problems. 2 However, the paper does not draw conclusions regarding the role of fiscal policy in balance of payments adjustment, nor does it attempt to ascertain whether an association has existed between the observance of fiscal performance clauses and the achievement of growth, abatement of inflation, and other objectives of financial programs. To reach such conclusions, an immense amount of data and analysis would have been needed for each of the 105 programs surveyed. Rather, the scope of the paper is somewhat narrower—it attempts to identify factors responsible for the observance or nonobservance of fiscal performance clauses and to assess whether close monitoring of the fiscal performance clauses provided an early-warning system relating to overall credit developments. Also, while the paper does not attempt to take into account the effects on fiscal performance of political and social circumstances, or to take account systematically of exogenous influences, the impressions gained in reviewing the data indicate that a fiscal program, no matter how carefully and intelligently constructed, will not have its intended effects if it does not receive adequate political support. The difficulties in meeting fiscal targets suggest that implementing and sustaining policy in this area may be politically more difficult, in some circumstances, than action in other financial policy areas.

I. Summary of Results

Fiscal Performance Clauses

Not all financial programs in the upper credit tranches in the ten years to 1978 contained a fiscal performance clause. Traditionally, the attitude has been that the inclusion of such a clause is unnecessary when past fiscal performance has been good and when there is confidence that adequate fiscal adjustment has been made or is in prospect for the program period. Also, for programs with members whose economic structures are such that the nongovernment sector has little or no access to bank credit, developments in the financial accounts of the public sector usually can be monitored adequately through a single performance clause on overall bank credit. Over the 1969-78 period, there was an increasing tendency to incorporate a fiscal performance clause, and between 1973 and 1978 there were only 6 programs in the upper credit tranches that did not include such a clause. This indicates that, with the exceptionally difficult problems of adjustment in recent years, associated mainly with increased energy costs, greater reliance has been placed on fiscal policy. Since adjustment problems will remain crucial in the near future, it seems likely that almost all financial programs in the upper credit tranches will continue to include a fiscal performance clause.

Bank credit to government

The most usual fiscal performance clause in the ten years to 1978 continued to be a subceiling on domestic bank credit to the government (along with a ceiling on total bank credit). It could be argued that a single ceiling on overall bank credit would allow a member the highest degree of flexibility in solving its financial problems. In many cases, however, the government sector has been the one most subject to excessive expansion, and appropriate adaptations of fiscal policy have played a major role in securing the needed restraint on overall credit developments. A ceiling on credit expansion to this sector has proved to be a helpful technique for national authorities in obtaining political support for adequate fiscal policy actions and in retaining such support over time. The evidence suggests a close association between observance of the subceiling on bank credit to the government and of the overall bank credit ceiling. Similarly, a significant relationship was evident between failure to observe the fiscal’ criterion and a breakage of the overall bank credit ceiling. Monitoring the fiscal subceiling also frequently provided warning signals when unexpectedly large expansions in credit to the government, or the public sector, jeopardized the maintenance of overall credit ceilings. Fundamentally, a fiscal subceiling can help to ensure adequate restraint on the expansionary influence of the government or public sector, while allowing the Fund to remain neutral with respect to the alternatives provided by increased taxation or reduced expenditure and among forms of taxation and forms of expenditure. 3

Budget balance

There were 7 programs that incorporated a performance clause relating to the size of the budget balance of the government or of the public sector. This type of approach, which also maintains the Fund’s neutrality with respect to revenue and expenditure policies, can be regarded as useful and appropriate, mainly in industrialized countries, where (1) financial capital markets are well developed, (2) the markets are integrated with those in other countries, (3) the authorities are able to obtain increased government financing by open market operations, and (4) accurate statistical information is available in a timely fashion. In such circumstances, it is usually not possible to isolate sales of bonds to resident nonbankholders from sales to nonresidents. Financing obtained from the latter could not be regarded as an offset to the expansionary effects on the domestic economy of budgetary operations. In these cases, a performance clause on the overall budget balance can be a useful monitoring technique. 4

Government payments arrears

A number of cases were noted where arrears in government payments were built up during the program period, sometimes in an effort to observe, technically, the relevant credit ceilings. It could be argued that such a practice, while not in the spirit of the agreement, forces a diversion of financial resources away from the private sector to the government. To the extent that private outlays are crowded out, accumulation of government arrears may not weaken the necessary overall credit restraint. However, resort to accumulation of payments arrears will add to the cost of goods and services provided to the government and disrupt orderly budgetary processes. In recognition of these factors, some financial programs incorporated performance clauses on changes in government payments arrears. It could be worthwhile to experiment further in this area, but the difficulties would have to be recognized. In many cases, incomplete records of arrears of payments or “floating debt” are maintained, and in these circumstances a performance clause would not be an appropriate safeguard. When institutional and other arrangements ensure adequate records, a performance clause on changes in floating debt may be a useful ancillary instrument to the ceiling on bank credit to the government. When data are not sufficient to establish a performance criterion, general statements on policies regarding arrears in government payments could be incorporated in the letter of intent sent to the Fund by the national authorities.

Nonfinancial public enterprises

In the early years (1969-71) of the period covered by the survey, there were 6 programs that involved a performance clause on the use of bank credit by one or more nonfinancial public enterprises. It appears that in these cases the use of bank credit by these enterprises was a special problem that had to be dealt with apart from central government budgetary issues. In fact, 2 of these programs did not involve a performance clause on bank credit to government. In recent years, only one program used a separate performance clause on bank credit to nonfinancial public enterprises, and there was a significant trend over the ten years to 1978 toward bringing bank financing to them under the main fiscal provision of net bank credit to the public sector (or, in some cases, the public sector’s borrowing requirement). The subceiling relating to bank credit to government included one or more of these enterprises in nearly 50 per cent of the programs. It has to be recognized that in some cases these enterprises were established because national authorities judged it appropriate for them to have a degree of autonomy. Nevertheless, the tendency to include them within the subceiling recognizes the fact that they frequently serve as instruments of fiscal policy. Such an approach also permits the national authorities a wider range of options in the financial management of the public sector. For stabilization purposes, increases in prices or tariffs charged by nonfinancial public enterprises may have effects similar to an increase in certain taxes. In inflationary circumstances, it is necessary to increase prices charged by nonfinancial public enterprises in a flexible fashion in the same way as it is necessary to raise specific tax rates periodically or change to an ad valorem tax basis. Equally, action taken on the expenditure side of the budget for stabilization purposes (including reductions in numbers of public employees, policy regarding pay, and a spreading out of investment outlays) may apply, in principle, to all levels of government and to public enterprises. A broad definition of the government’s use of bank credit also avoids difficulties observed in some programs in which financial resources were switched between the central government and the nonfinancial public enterprises in an apparent attempt to technically observe a credit ceiling for the central government. Nevertheless, when one or more of these enterprises pose particular financial problems, a separate ceiling on their use of bank credit could be warranted.

Revenue and expenditure measures

There has been a reduction in the use made of performance clauses relating to specific revenue or expenditure measures since 1968. In 1966-67, 5 programs contained specific revenue or expenditure provisions; by contrast, there were only 7 in the ten years 1969-78, of which 4 related to specific revenue measures and 3 to specific expenditure measures. It is apparent that other, more general, performance clauses were preferred for two reasons: (1) credit ceilings or limitations on the size of the budget deficit are less likely to convey the impression that the Fund is making a judgment on the social and economic priorities of the member as reflected in governmental operations; and (2) information on credit ceilings is available more promptly and can be interpreted with greater precision. It is frequently difficult, if not impossible, to obtain information in a timely fashion on whether particular revenue or expenditure measures have been implemented in the expected form.

Fiscal Policy Statements

Practically all programs surveyed contained revenue and expenditure forecasts, and in most cases these were included in the letters of intent, sometimes as policy targets. Considering the 105 programs as a group, more reliance was placed on revenue increases than on expenditure cutbacks. Indeed, a sizable number of programs planned increases in the ratios of both revenue and expenditure to gross national product (GNP) and less than one half of the programs aimed at a reduction of 1 percentage point or more in the ratio of the overall budget deficit to GNP. This might suggest that in some cases the size of the planned fiscal effort was not large, but it should be noted that since 1974, when adjustment problems become more widespread, national authorities have indicated more frequently their intentions to cut back significantly the growth of government expenditures.

As to actual fiscal results during financial programs, of particular concern was the increasing tendency over the ten years to 1978 for expenditures to be understated. Revenues, on average, were also understated, but there was no increasing trend during the decade to understate them. As a consequence, projections for the overall budget deficit incorporated in financial programs were achieved in a declining proportion of cases over the ten years reviewed.

As to the size of changes achieved in fiscal aggregates during the usual 12-month period of a financial program, the survey showed that it was possible to raise the ratio of revenue to GNP by 1 or 2 percentage points in a number of cases, but few programs achieved larger increases. Significant expenditure reductions were achieved in fewer cases than were revenue increases, but reductions in the ratio of expenditure to GNP well in excess of 2 percentage points were obtained in some instances. The survey did not reveal whether cuts of this magnitude were sustained beyond the period of the financial arrangement. Nevertheless, when a sizable adjustment is needed, the technical possibilities for expenditure reductions should be examined carefully as part of a well-balanced approach involving use of all instruments of financial policy.

Revenues

Unforeseen inflation, and perhaps a conservative bias in forecasting, accounted to some extent for revenue exceeding projections in a majority of cases. The survey illustrated the difficulties of achieving a large increase in the ratio of revenue to GNP; such increases, when programmed, need to be critically examined, and meaningful descriptions of revenue policies could usefully continue to be included in letters of intent. This procedure could also be used to accommodate understandings regarding the introduction of specific revenue measures. The gain from such measures could be counted in the total revenue yield and thus be reflected in the use of bank credit by government, which could normally be designated as a performance clause.

Taxation

Substantial numbers of programs over the ten years to 1978 incorporated tax policy statements, and toward the end of the survey period these statements appeared in almost all of the programs. Tax measures introduced shortly before the start of programs were particularly helpful in boosting revenue in the context of one-year programs, partly reflecting the fact that such measures were effective for the full period of the program. Measures such as these were likely to provide a more certain basis for projecting an adequate revenue performance than were tax measures introduced in the course of the program. While Fund members are to be encouraged to modernize and improve their tax systems, experience indicates that the additional revenues generated from the latter measures within a one-year stand-by period are frequently overstated. Preparation of the necessary legislation and parliamentary approval are often protracted processes. Also, new forms of taxation sometimes cannot be productively handled in the short run by a tax administration that is already overburdened. Even if new forms of taxation succeed in generating additional revenues in the short run, there is the risk of shortfalls in other forms of revenue because of overextension of administrative capacity. New forms of taxation can be expected to have a more positive effect on the revenue yield in medium-term programs, such as those under the extended Fund facility.

A particularly careful assessment needs to be made if financial programs rely on improvements in tax administration to aid the revenue performance. Nearly 60 per cent of the programs contained general statements to this effect, but only about one half of these provided much substance as to measures to be taken. Identifiable benefits to the revenue yield were apparent in only a handful of cases. In general, it is to be expected that continuous efforts would be made by most Fund members to strengthen their tax administration practices and procedures, but caution must be exercised in taking credit for such efforts in terms of additional revenue in the context of short-term financial programs. It is likely that revenue gains would be more discernible over a longer period of adjustment than is involved in a one-year financial program.

Particular problems were posed where members were experiencing rapid inflation. In many of these cases the member took steps, and so indicated in policy statements, to adapt taxation to the inflationary circumstances. In particular, specific rates of tax on sales of goods and on imports were replaced by ad valorem rates. The collection lags were shortened and penalties for taxpayer arrears were adjusted so that the rate of interest implicit in the penalty exceeded the rate of inflation. It was recognized that, unless comprehensive action in these areas was taken, revenue, while rising in nominal terms, would decline in real terms.

Expenditures

There was a marked tendency for projections made at the beginning of financial programs to understate expenditures, and there was a disturbing trend over the ten-year period toward a progressive increase in the proportion of the programs in which expenditures exceeded projections. By 1977 and 1978, expenditures were contained as planned in less than 20 per cent of the programs, compared with over 50 per cent in 1969 and 1970. Unexpectedly rapid inflation is likely to have contributed to this result, since many elements of government spending are linked formally or informally to the price index. In addition, it appeared that projections were sometimes optimistic as to the ability of the budget control administration to keep the growth of government spending in line with the objectives of the program. In a few cases, it almost seemed as if expenditure projections represented the residual element needed to limit government use of bank credit after taking full account of all other resources, both domestic and foreign, that the government could garner. Experience has indicated the need for program projections to be totally realistic about the technical capacity to control expenditures and the likely rate of inflation. If projections are realistic, more meaningful sets of fiscal aggregates can be projected and more appropriate sets of policies can be established.

Of the 105 programs surveyed, 30 aimed for a reduction in the ratio of expenditures to GNP of 1 percentage point or more, compared with 55 programs that sought an increase in the revenue ratio of 1 percentage point or more. There was, however, an increasing trend from the mid-1970s for programs to encompass cutbacks in the expenditure ratio. The survey indicated that policies to reduce the expenditure ratio, if well designed and implemented, were capable of achieving somewhat larger quantitative results than were revenue measures.

The survey drew attention to the aspiration frequently incorporated in the programs whereby capital outlays were to be expanded while current outlays were to be constrained. The results indicated that efforts at expenditure control along these lines had a limited practical chance of success. In over 70 per cent of the programs using this approach, current expenditure in nominal terms exceeded the target or projection. In about one half of these programs, capital outlays in nominal terms were lower than projected. While the distinction between current and capital outlays and the concept of the current balance is common in the budget presentation of many developing countries, it should be noted that for short-run stabilization there is no difference between capital and current outlays. Both represent a claim on domestic resources or imports. It should also be noted that definitions of current and capital outlays of the government vary widely among member countries, and undue emphasis on control of current expenditure during a stabilization program may induce reclassification of expenditure items in ways consistent with achieving the target for current expenditures but at the expense of control of total expenditures. Moreover, even if all government capital expenditures were to eventually increase productive potential, they also lead to a continuing drain on government resources in the form of increased recurrent outlays for personnel, maintenance, and servicing costs. Of fundamental importance is the notion that the economy benefits in terms of growth from balanced, well-planned, and appropriately implemented government expenditure projects and programs, which encompass both current and capital outlays, but suffers from wasteful expenditures, regardless of whether they are current or capital. Management of all outlays, private and public as well as current and capital, is of particular importance in the context of stabilization programs. 5

Official policies with respect to particular projects, programs, and expenditure policies proved to be more valuable than reliance on broad statements regarding current expenditure or the current balance of the budget. Since the total wage and salary bill is a major element in government spending, national authorities need to establish policies regarding wage and salary payments for public sector workers and any needed further increase in the size of the public sector work force. A growing proportion of programs included official policy statements on wages and salaries of government workers. These policies, if based on a realistic approach and effectively implemented, were of assistance in achieving the member’s objective of controlling government outlays. Similarly, a number of member countries adopted stricter attitudes toward adding to the number of government workers in an effort to stabilize public expenditures. Many programs focused on other elements of expenditure that had proved to be a cause of instability. In some cases, consumer subsidies had grown to the extent that they absorbed a sizable proportion of available resources and contributed in other ways to an allocation of resources that was inappropriate for needed balance of payments adjustment and development of the economy. In a growing number of programs, members have indicated policies to contain the continued growth of subsidies or to reduce their value during the program period.

Nonfinancial public enterprises

In support of the trend toward incorporating bank credit needs of nonfinancial public enterprises into the subceiling on credit for government, an increasing number of programs over the ten years to 1978 included specific statements on price policies of these enterprises. Beyond these statements, programs have made limited reference to financial policies regarding nonfinancial public enterprises, and further work is necessary in many member countries and in the Fund before other substantive policy positions can be established. As a first step, it would be advisable if systems for reporting adequate financial data by these enterprises to the central authorities could be established and used as a basis for the suitable monitoring of their activities.

Nonbank budget financing

In nonbank budget financing, foreign grants and loans proved to be the most significant flows in terms of size. Projections of these flows proved particularly difficult and were realized or exceeded in less than 40 per cent of the programs surveyed. Furthermore, 21 programs had a shortfall in foreign grants and loans that contributed to nonobservance of the fiscal subceiling. Of these, at least 6 were identified in which the shortfall was sufficient to lead to a break in the subceiling, notwithstanding the fact that the overall budget deficit was reduced by more than had been programmed. This suggests that foreign financing should be programmed on a reasonably conservative basis and mainly take into account only those flows that are already committed.

Were Inadequate Fiscal Policies Responsible for Financial Program Failure?

The survey tends to confirm the view that most unsuccessful financial programs failed because of fiscal problems. 6 Success or failure in limiting overall credit expansion was related to success or failure in maintaining fiscal performance clauses on bank credit to government. However, the survey also illustrated that programs in which the fiscal performance clause was not observed were more ambitious than programs in which the clause was observed, in that a higher proportion of the former planned an increase of at least 1 percentage point in the revenue ratio, a decrease of at least 1 percentage point in the expenditure ratio, and a reduction in the overall deficit ratio of at least 1 percentage point. In addition, the size of planned reductions in the overall deficit ratio tended to be greater for programs in which the fiscal performance clause was not observed; also, a significant increase in foreign borrowing was planned more frequently under these programs. The inclusion of more ambitious projections and targets presumably reflected the fact that they were designed in the context of severe adjustment problems, and the chances of their success were accordingly reduced. The tendency for these programs to incorporate more frequently specific statements on policies related to consumer subsidies, wage policy for government employees, and pricing policies of nonfinancial public enterprises also tends to support this view.

Despite the more ambitious aspirations embodied in these programs, projections and targets were realized less frequently for a number of reasons. In the case of revenue, programs in which the fiscal performance clause was not observed relied more on improvements in tax administration and less on changes in tax policy for revenue gains than programs in which the clause was observed. Improvements in tax administration did not yield significant increases in revenue in the short run. Moreover, while inflation was a problem more often in countries where programs failed, few of these countries took measures to “inflation proof” the tax system. It should also be mentioned that, to the extent it was possible to identify the effects of exogenous factors, export shortfalls and unexpected slowdowns in the domestic economy appeared to have been partly responsible for inadequate revenue performance in those programs that failed.

In the case of expenditure, programs in which the fiscal performance clause was not observed relied excessively on current budget balance projections and targets and on other expenditure policies, some of which were politically difficult to implement. With regard to foreign financing, the survey indicated that planned increases were based on known commitments in fewer instances for programs in which the fiscal performance clause was not observed than for programs in which the clause was observed.

II. Method for Conducting Survey

The survey covered all of the 105 financial programs in the upper credit tranches for the period 1969-78. 7 It covered those programs where no net purchases were made under the standby arrangement as well as those where purchases were made. Nonobservance of one or all of the performance criteria accounted for some of the cases in the former category.

Data and qualitative assessments of targets and performance were obtained for each program from member country reports and from the Fund’s International Financial Statistics. Data were summarized separately for each program as follows: nominal gross national product (GNP) or nominal gross domestic product (GDP); major items in the monetary survey, including net foreign assets, net domestic assets, and bank credit to government; and major items in the government budget, including total revenue, total government expenditure (disaggregated, where needed, into current and capital expenditure), the overall deficit, foreign financing, domestic nonbank financing, and bank financing. 8 Statistics were also collected on the rate of inflation and on exports at current prices. Data were assembled for the program year—both planned and actual—and, if available, for three years prior to the introduction of the program. 9

While the projection for GNP or GDP for the program year was normally contained either explicitly or implicitly in country reports, it was necessary to infer GNP or GDP from other information in a few cases. Efforts were made to ensure that these estimates did not bias the results. In a few countries, GNP or GDP was not available either for the program year or for years prior to the program year. In these cases, comparisons of variables for the program year with those of previous years were based on percentage changes in nominal variables rather than changes in their ratio to GNP or GDP. 10 For some programs, actual monetary survey data for the program year or the preceding year were not readily available on a basis consistent with definitions used in the letter of intent for ceilings on net domestic assets and bank credit to government. However, qualitative information relating to performance was normally available. In a few cases, data on revenue, expenditure, and other budget aggregates were not available for the program year; these were included under “not available” in the tables in this paper.

The survey was not constructed in a way that would permit conclusions regarding the contribution of fiscal policy to balance of payments adjustments. Rather, attention was focused on whether or not fiscal policy performance criteria, targets, and projections contained in financial programs implied significant changes compared with the past. For this purpose, a target or projection for a particular variable was considered to represent a significant break with past behavior if it implied a change in its ratio to GNP or GDP of at least 1 percentage point. While this benchmark had to be chosen arbitrarily, it was felt that a change of 1 percentage point represented a reasonable and perceptible change, compared with past performance. For revenue, only increases in the ratio were considered, while for expenditure and the overall deficit only decreases in the ratio of 1 percentage point or more were categorized as breaks with past performance. For other variables, either positive or negative movements were considered. Program targets were compared with the actual data of the previous year, since it appeared that member countries generally used this comparison in drawing up their financial programs. Data on three-year averages were used mainly to indicate whether peculiarities in data for the previous year might yield invalid comparisons. Although it might have been appropriate to compare program targets and actual performance with forecasts that assumed no policy changes for the program year, such comparisons were not possible since they would have required the collection of more data than was reasonably available. It was considered that a performance criterion had been observed if the actual nominal value was equal to or less (greater) than the ceiling (floor), while a target or projection was considered to be achieved if the actual value expressed as a per cent of GNP fell within 1 per cent of the projected value. 11 Actual values of targets or projections were also categorized according to whether these nominal values were equal to, less than, or greater than their projected values. When such performance criteria were observed and targets and projections achieved, attempts were made to isolate the factors responsible for their achievement (as well as those responsible for lack of achievement in other programs).

In addition to cross-section analysis of the 105 financial programs, the survey data were also analyzed to ascertain whether any significant trends emerged over the period with regard to either targets or achievement. For this purpose, the relevant variables were regressed against time using the ordinary least-squares regression technique. Only trends that were statistically significant at the 95 per cent confidence limit are reported in this paper.

In addition to quantitative data, some qualitative information was also summarized for each program. The impressions reported in this paper are based on this qualitative information.

III. General Characteristics of Fiscal Performance Clauses

Table 1 shows the number and types of fiscal performance clauses incorporated in financial programs supported by standby arrangements in the upper credit tranches over the ten years to 1978. Nearly 80 per cent of the 105 programs incorporated one or more fiscal performance clauses. In most cases, only one fiscal performance clause was used; only 13 programs had two such clauses, and only 2 programs had three. In virtually all of these programs there was also a ceiling on overall domestic bank credit.

Table 1.

Financial Programs in Upper Credit Tranches, 1969-78

(In number of programs)

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The number of programs incorporating a fiscal performance clause on domestic bank credit or the size of the budget balance is 76 rather than 77 because one program included a ceiling on both use of bank credit by the government and the size of the budget balance.

Programs not Incorporating Fiscal Performance Clause

Of the 105 programs surveyed, 24 did not incorporate a fiscal performance clause. In most of these cases, it was not considered necessary because of past and prospective policies to incorporate a binding commitment relating to fiscal matters. Many of these programs included statements by the authorities regarding fiscal policy intentions that were not regarded as performance criteria (see Section IV), but a number of these statements were of a broad, nonoperational nature. Most of the programs not using a fiscal performance clause were in the 1969-73 period, and, as indicated in Chart 1A, there was an increased tendency in the ten years to 1978 to use a performance clause relating to either the use of bank credit by government or the budget balance. 12

Chart 1.
Chart 1.

Fiscal Content of Financial Programs in Upper Credit Tranches, 1969-78

Citation: IMF Staff Papers 1980, 002; 10.5089/9781451946864.024.A001

Programs Incorporating Performance Clause on Bank Credit to Government

The most usual form of a fiscal performance clause during the 1969-78 period related to the use of domestic bank credit by the government. This clause was included in 70 programs, or 86 per cent of those with a fiscal performance clause. The frequent use of a fiscal performance clause relating to bank credit to government was also a feature of the provisions of stand-by arrangements approved by the Executive Board in 1966 and 1967.

In the period 1969-78, definitions of bank credit to government varied widely. Depending on the circumstances, they ranged from the narrow concept of the use of central bank credit by the central government to a broad concept encompassing total net use of domestic bank credit by the “public sector” (frequently defined to include some or all nonfinancial public enterprises). In some cases, the definition also included foreign commercial borrowing. During the period there was a trend toward a broader coverage of the nonfinancial public sector in the fiscal performance clause. This may reflect the availability of statistics on a more timely basis, as well as an apparent need to include in the fiscal credit ceiling some or all public enterprises if they were being used as instruments of fiscal policy.

Programs Incorporating Performance Clause on Budget Balance

A few programs (7 per cent of those surveyed) incorporated ceilings on the size of the government’s or the public sector’s budget deficit or borrowing requirement. One of these programs had two separate budget balances relating to different aspects of government. Another had a fiscal provision relating to the budget balance, in addition to a binding commitment on the use of bank credit by government.

Programs Incorporating Other Fiscal Performance Clauses

As indicated in Table 2, 5 programs incorporated a single fiscal performance clause other than one relating to the use of bank credit by the government or the budget balance. In 13 other programs, two fiscal performance clauses were used, one relating to the use of bank credit by the government and the other to a different aspect of fiscal policy. Two programs incorporated three fiscal performance clauses and involved two separate subceilings on public enterprise borrowing from the banks, as well as a commitment on central government bank borrowing.

Table 2.

Fiscal Content of Financial Programs in Upper Credit Tranches, 1969-78: Actual Performance of Overall Credit Ceilings Compared with Results of Fiscal Performance Clauses

(In number of programs)

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Of these 5 programs, 3 incorporated binding commitments regarding specific revenue measures and 2 incorporated commitments with respect to the use of bank credit by a commodity fund.

Ten of these programs included a performance clause relating to the use of bank credit by government or to the budget balance and another clause concerning a different aspect of fiscal policy. Three related to specific expenditure matters, one to a specific revenue matter, four to government expenditure arrears, one to two different budget balances, and one to the budget balance as well as to the use of bank credit by government. The other 2 programs included under this heading incorporated separate ceilings on the use of bank credit by government and by public enterprises (with no performance clause relating to overall bank credit expansion), and one of these programs incorporated a separate ceiling on nonfinancial public enterprises.

These 2 programs incorporated two separate subceilings on public enterprise borrowing from the banks, in addition to a binding commitment on central government bank borrowing.

Specific revenue or expenditure measures were subject to performance criteria in only 7 of the 105 programs in the ten years from 1968, compared with 5 of the 32 programs surveyed in 1966 and 1967. Four programs incorporated a performance clause on government expenditure arrears and 7 used separate ceilings, or subceilings, on the use of bank credit by public enterprises.

Results of use of Fiscal Performance Clauses

An important test of the value of fiscal performance clauses is whether they provide an underpinning for limiting the overall bank credit expansion to the agreed limits. First of all, the information in Table 2 confirms that the overall bank credit ceiling was observed in a high proportion of programs in which it was not judged necessary to incorporate a fiscal performance clause. This was the case in 15 out of 24 programs (a ratio of over 60 per cent). 13 When major fiscal adjustment was not necessary, financial programs were reasonably successful in keeping overall bank credit within needed limits.

At the other end of the spectrum, there were 20 programs that incorporated more than one fiscal performance clause or a particular type of binding fiscal commitment relating to specific revenue or expenditure measures. Experience suggested that fiscal adjustment in those programs represented an unusually difficult problem. In many cases, the programs recognized that past fiscal policies had been inadequate and doubts existed as to the efficacy of ongoing policies. Accordingly, it was not surprising that, of these 20 programs, 14 policies as implemented were sufficient in only 8 (a ratio of 40 per cent) to keep overall bank credit within the agreed ceilings.

The bulk of the financial programs were in the middle of the spectrum, where, for the most part, important fiscal adjustment was needed and where a single performance clause, relating to either the use of bank credit by the government or to the size of the budget balance, was incorporated in the program. 15 Such a clause was used in 61 programs (58 per cent of the total surveyed). The overall bank credit ceiling was observed in 31 of these programs, just over half of the number in this category.

It is also relevant to note from the data in Table 2 that success or failure in limiting overall credit expansion was related to success or failure in maintaining a fiscal performance clause relating to either the use of bank credit by the government or the budget balance. Of the 61 programs incorporating a single fiscal performance clause, there were 27 in which both this clause and the ceiling on overall bank credit were observed; in 17 programs, neither of these ceilings was observed. In only 9 programs was such a fiscal performance clause observed, but other developments led to a break in the overall bank credit ceiling; in only 4 programs was the main ceiling observed, notwithstanding a break in the fiscal subceiling.

To help to assess whether close monitoring of the fiscal ceiling provided an early-warning system relating to overall credit developments, efforts were made during the survey to identify cases in which a fiscal performance clause was broken before a break occurred in the total bank credit ceiling. These efforts were not fully successful because of difficulties in pinpointing the precise timing from the data available. Nevertheless, 17 cases were identified (compared with a total of 34) 16 in which the fiscal performance clause was broken in advance of a break in the total bank credit ceiling. About 10 cases were identified in which the total bank credit ceiling was broken at a date earlier than the break in the fiscal performance clause.

IV. General Characteristics of Fiscal Policy Statements

In addition to fiscal performance clauses, financial programs include fiscal policy statements by national authorities. The importance of these statements should be emphasized. The effectiveness of fiscal policy cannot be adequately assessed by counting the number of statements on particular aspects of fiscal policy or by attempting to assess their firmness. However, they form a vital background to the adaptations of fiscal policy that are considered necessary to achieve the objectives of financial programs. Policy statements constitute an essential framework within which to judge the viability of fiscal performance clauses, and, for programs that do not contain such a clause, they provide an important basis on which to assess the adequacy of the fiscal posture. In addition, the policy understandings reached in order for the authorities to make statements of intent on fiscal matters provide a further basis for constructive dialogue between the authorities and the Fund staff during the period of the financial program.

This section, which reviews the policy statements with respect to revenue, expenditure, nonfinancial public enterprises, overall budget balance, and budget financing, permits some general observations. From Table 3 it is apparent that revenues reached or exceeded projections more often than expenditures were kept to or below projections. 17 Also, although nonbank domestic financing was generally at least equal to the projection, foreign financing provided a less certain basis for fiscal adjustment. Chart 2 illustrates the reliance placed on gains in revenue for fiscal adjustment. Many programs resulted in an increase in the ratio of revenue to GNP of at least 1 percentage point (i.e., those shown in the upper half of Chart 2); few programs resulted in a decrease in this ratio (those in the lower half of Chart 2). On the other hand, many programs resulted in an increase in the ratio of expenditure to GNP (left-hand side of Chart 2), and relatively few led to a decrease in this ratio (right-hand side of Chart 2). The available evidence suggests that, for the most part, successful programs—in the sense that the fiscal performance clause was observed—relied on achieving, or bettering, the nominal revenue forecasts or targets. In some of these cases, the revenue performance was adequate to offset overruns of expenditures and shortfalls in foreign assistance. As indicated below, however, there is limited scope for raising revenues in the short run, and there has been an increased tendency in the past decade toward policies designed to constrain the growth of expenditures for stabilization purposes.

Chart 2.
Chart 2.

Fiscal Content of Financial Programs in Upper Credit Tranches, 1969-78: Revenue and Expenditure Adjustment1

(In per cent of GNP)

Citation: IMF Staff Papers 1980, 002; 10.5089/9781451946864.024.A001

1 Data were not available on the actual outturn for revenue and expenditure for two programs in which the fiscal performance clause was observed and for one program in which it was not observed.
Table 3.

Fiscal Content of Financial Programs in Upper Credit Tranches, 1969-78: Actual Fiscal Results During Program Period Compared with Program Projections

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Government Revenue

Forecasts, targets, and estimates

Table 4 indicates that most financial programs in the upper credit tranches contained substantive statements on revenue matters. Some two thirds of the programs incorporated explicit revenue forecasts for the program period (generally 12 months) in the letter of intent (Table 4, line a). In about 20 per cent of the programs the estimates assumed greater significance because they were indicated as policy targets (Table 4, line b). In more than one half of the programs surveyed, the revenue forecasts suggested an increase of 1 percentage point or more during the program period in the ratio between revenue and GNP, compared with the ratio in the year before the program (Table 4, line c).

Table 4.

Fiscal Content of Financial Programs in Upper Credit Tranches, 1969-78: Government Revenue

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Revenue forecasts or targets were supported by a variety of statements on tax policy and tax administration. Over 70 per cent contained specific statements relating to increases in existing tax rates or the introduction of new forms of taxation (Table 4, line g). As illustrated in Chart 3A, there was an increasing trend toward inclusion of such statements, and by 1977-78 they were included in almost all programs. This reflected largely a tendency (Chart 3B) for the authorities to indicate the introduction of new or additional taxes prior to the start of the financial program. As shown in Table 4 (line h), a large number of programs also made reference to measures to be introduced during the program period. 18 A recurrent theme in the majority of programs was a general and rather vague statement relating to improvements in tax administration (Table 4, line 1). These statements were supported by descriptions of specific measures (Table 4, line m) in relatively few programs.

Chart 3.
Chart 3.

Fiscal Content of Financial Programs in Upper Credit Tranches, 1969-78

Citation: IMF Staff Papers 1980, 002; 10.5089/9781451946864.024.A001

It would not be surprising if programs without fiscal performance clauses, mainly cases where fiscal issues were not of crucial importance, focused less on revenue matters than did programs with fiscal performance clauses. Nevertheless, more than half of the former did contain explicit revenue forecasts 19 in the letter of intent, and about half indicated an increase in the ratio of revenue to GNP of at least 1 percentage point during the program period. The majority referred to specific revenue measures, mainly those which were to be taken during the program period rather than before the program started. Somewhat surprisingly, these programs contained general observations on the need to improve tax administration as frequently as did programs with a fiscal performance clause.

Programs in which the fiscal performance clause was not observed were probably the most ambitious in terms of projections, targets, and policy statements. This presumably reflected the recognition that fiscal problems were unusually serious and called for extensive action. Nearly 90 per cent of these programs contained a revenue projection in the letter of intent, with over one third indicating this projection as a policy target. As many as two thirds of these programs planned an increase in the ratio of revenue to GNP of at least 1 percentage point. Indeed, several programs envisaged an increase in this ratio in excess of 3 percentage points (Table 5).

Table 5.

Fiscal Content of Financial Programs in Upper Credit Tranches, 1969-78: Government Revenue, Expenditure, and Overall Deficit1

(In number of programs)

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Figures in parentheses indicate actual results.

Programs in which the fiscal performance clause was observed were generally less ambitious than those in which the clause was not observed. Although most contained revenue projections, these projections were indicated as policy targets in less than 20 per cent of the programs. Less than half of these programs called for an increase in the ratio of revenue to GNP of at least 1 percentage point, compared with the previous year, and the great majority planned an increase of less than 3 percentage points.

Revenue results

In the majority of the programs surveyed, revenue goals were achieved. In 60 per cent of the cases, actual revenue in nominal terms for the period equaled or exceeded the projection or target (see Table 3). No significant trend was apparent over the ten-year period as to the degree of success in meeting these projections or targets. It is possible that a generally conservative bias might have existed in the estimates drawn at the start of the programs. It is also possible that inflation during the program periods was underestimated. To the extent that this led to faster rates of increase in money incomes and expenditures, revenues in nominal terms would also have exceeded expectations. There were, however, a number of programs in which rapid inflation (defined for purposes of the survey as 25 per cent or more a year) had adverse effects on revenue growth (Table 4, line p). Special efforts were made in some programs to adapt the tax system to rapid inflation. These included action to shorten the revenue collection lags, increased penalties for late payment of tax, and adaptation of specific duties and excise rates to an ad valorem basis. 20

It should also be noted that export shortfalls and unexpectedly slow growth in the domestic economy (sometimes both factors operating together) were also important factors behind undesired revenue results and nonobservance of fiscal performance clauses (Table 4, lines e and f). Given the nature of the survey and its concentration on fiscal variables, it was not possible to generate adequate statistical information on the effects of unexpected domestic or external events on the revenue yield. It was the impression, however, that these factors were significant in determining the fiscal results in several programs.

The survey also suggested that tax policy measures taken before the start of the program were more likely to have their intended effect than measures that were to be introduced during the program period (Table 4, lines j and k). As to the effects on revenue of efforts to strengthen tax administration, the evidence was not precise. However, there appeared to be few programs where the revenue yield benefited during the program period from such efforts; in some of these, Fund technical assistance was being provided concurrently.

As noted above, more than half of the programs surveyed planned an increase in the ratio of revenue to GNP of at least 1 percentage point during the program year, compared with the preceding year. Such an increase, however, was achieved in less than half of the programs incorporating such a plan. While many programs were successful in raising revenues in relation to GNP by 1 or even 2 percentage points, the survey indicated the difficulties of raising revenues by larger amounts. 21

The least successful programs, naturally, were those in which the fiscal performance clause was not observed. In half of these programs, nominal revenue fell short of the projection or target. The ratio of revenue to GNP rose significantly, as planned, in only 4 cases out of 22, and in no case was the increase above 1 percentage point.

In some ways, programs with fiscal performance clauses that were observed were more successful with respect to raising revenue than those without such a clause. Nominal revenue fell short of the target or projection in a smaller proportion of programs in which the clause was observed than in programs with no performance clause. Also, an increase in the ratio of revenue to GNP of at least 1 percentage point was achieved in a slightly higher proportion of programs in which the fiscal performance clause was observed than in programs without such a clause.

Government Expenditure

Forecasts, targets, and estimates

As indicated in Table 6, financial programs in the upper credit tranches contained substantive statements on government expenditure projections and targets to about the same extent as in the case of revenue. However, fewer programs (less than 30 per cent) planned a reduction in the expenditure ratio than planned an increase in the revenue ratio (over 50 per cent). While this suggests that programs were more ambitious with respect to revenue than to expenditure, two points should be noted. First, over the ten years to 1978 there was a significant increase in the proportion of programs planning a reduction in the expenditure ratio of at least 1 percentage point. As shown in Chart 3C, by 1978 over 50 per cent of the programs planned such a reduction. This trend perhaps reflected the growing realization of the limited extent to which financial programs could count on gains in revenue in the short run, as well as the realization that certain expenditure programs were out of control. Second, the size of planned reductions in the expenditure ratio was generally more ambitious than the size of planned increases in the revenue ratio. 22

Table 6.

Fiscal Content of Financial Programs in Upper Credit Tranches, 1969-78: Government Expenditure

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In terms of substantive statements on expenditure policy, about one third of the programs surveyed indicated the wage policy to be followed with respect to government or public sector employees (see Table 6, line j) during the program period. Chart 4A shows a significantly increasing trend over the ten years to 1978 for programs to include statements along these lines; in the latter part of the period about one half of the programs explicitly included this important area of policy. There was also a sharp increase over time in the trend to include policy statements on consumer subsidies (Chart 4B). Few programs, however, carried policy indications on the proposed treatment of arrears in government payments.

Chart 4.
Chart 4.

Fiscal Content of Financial Programs in Upper Credit Tranches, 1969-78

Citation: IMF Staff Papers 1980, 002; 10.5089/9781451946864.024.A001

A remarkably large number of programs incorporated policy statements on desired movements in government current and capital expenditure and on the government’s balance on current account (Table 6, line e). However, in only a relatively small proportion of the programs were these statements supported by a reference to specific action to curb current outlays.

Programs that did not contain a fiscal performance clause were the least ambitious in describing expenditure policies and in setting goals or targets. While almost 60 per cent included expenditure projections, 23 relatively few called for a reduction of 1 percentage point in the expenditure ratio or contained qualitative statements regarding policies to curb expenditure growth. Of some surprise was the inclusion of broad and largely unsupported statements regarding the current balance of the budget in nearly three fourths of the programs without fiscal performance clauses. This fact, along with the tendency for these programs to include general and rather vague statements on methods to improve tax administration, suggests that most of them were not designed to combat serious fiscal problems.

More ambitious were those programs in which the fiscal performance clause was observed. In addition to inclusion of specific forecasts and statements on expenditure policies, about one third suggested a decline in the ratio of expenditure to GNP of at least 1 percentage point. The most ambitious programs regarding expenditure policies (as was also the case for revenue) were those in which the fiscal performance clause was not observed. A relatively large proportion of these programs incorporated expenditure projections (85 per cent), expenditure targets (38 per cent), statements on wage policy (47 per cent), and statements on policies regarding consumer subsidies (26 per cent), and a reduction in the ratio of expenditure to GNP of at least 1 percentage point (38 per cent). It is probably no coincidence that programs in which the fiscal performance clause was not observed were the most ambitious in detailing policy statements on expenditure and in setting goals for expenditure constraint. As these were the programs requiring major fiscal adjustment, they tended to contain a detailed documentation of expenditure policies to be followed.

Expenditure results

Total government expenditures exceeded projections, in nominal terms, in 57 per cent of the programs. By comparison, revenue projections were not achieved in 40 per cent of the programs surveyed. More disturbing was the unmistakable trend for expenditures to exceed the program targets in a growing proportion of programs over the ten years to 1978. As shown in Chart 3D, by the latter part of the 1970s expenditure projections, in nominal terms, were being observed in less than 20 per cent of the programs, compared with over 50 per cent in 1969-70. As in the case of revenue, more rapid (and unexpectedly rapid) rates of inflation were likely to have contributed to this result. Large portions of government expenditures comprise wages and salaries of government workers, with rates of growth of such expenditures in many cases being linked to the inflation rate. Also, consumer subsidies and current transfers to public enterprises are likely, in the absence of policy changes, to rise as a percentage of GNP during periods of inflation. 24

The reliance on policies to cut back current expenditure and to raise both the current surplus and capital outlays generally proved unsuccessful. In over 70 per cent of the programs using such an approach, current outlays exceeded program projections or targets (Table 6, line g). As a consequence, it frequently became necessary, for stabilization purposes, to cut back capital outlays. In about one half of these programs capital outlays fell short of aspirations. 25

Regarding efforts to cut back the growth of total government outlays, the ratio of expenditure to GNP declined by 1 percentage point or more in 15 of the 30 programs seeking such a reduction. 26 This was a higher rate of success than for programs planning an increase in the revenue ratio of 1 percentage point or more (42 per cent). Moreover, unlike revenue, the degree of success in effecting a change in the expenditure ratio did not depend on the size of the intended reduction, and several programs achieved reductions well in excess of 3 percentage points. 27

The least successful expenditure results were for programs in which the fiscal performance clause was not observed (as was also true for revenue results). Nominal expenditure exceeded the projection in two thirds of these programs, and the expenditure ratio was reduced in only a few cases. 28 Results of efforts to constrain current expenditure were as unsuccessful for this group of programs as for those without a fiscal performance clause or those in which the performance clause was observed.

As indicated above, the results for raising revenue were marginally better for programs with a fiscal performance clause that was observed than for programs without a performance clause. In the case of expenditures, the results were unsatisfactory for both of these groups of programs, and the estimates, projections, or targets were realized in fewer cases than on the revenue side. Nominal expenditure exceeded the program estimates in nearly one out of two cases for both groups of programs, and current outlays exceeded projections in a large proportion of programs in both of these groups. Reductions in the expenditure ratio were more apt to be achieved in programs without a fiscal performance clause than in programs in which the fiscal performance clause was not observed, and the success rate was not related to the size of the planned reduction.

Nonfinancial Public Enterprises

In more than one half of the programs surveyed it was stated in the letter of intent that improvements in the operations of the nonfinancial public enterprises were expected to contribute to the stabilization effort (Table 7). Almost one third of the programs with a fiscal performance clause on bank credit or the budget balance included all nonfinancial public enterprises within the subceiling, while one half of these programs included some of these enterprises. Time-series data revealed an increasing trend over the period under review for nonfinancial public enterprises to be encompassed within subceilings (Chart 4C). Nonbinding fiscal undertakings on pricing policies of these enterprises were incorporated in about one third of the programs surveyed, and, as indicated in Chart 4D, there was an increasing trend to include specific statements on these policies over the period reviewed.

Table 7.

Fiscal Content of Financial Programs in Upper Credit Tranches, 1969-78: Nonfinancial Public Enterprises

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The data also suggest that, when the subceiling was broken, the performance of nonfinancial public enterprises was at least partly responsible, reflecting difficulties encountered in estimating their credit requirements, a lack of specific policies designed to bring about the desired improvement in their performance, or inadequate financial control of the enterprises by the government. In this context, it is noteworthy that programs in which the fiscal performance clause was not observed included specific statements on pricing policy more frequently than programs in which the fiscal performance clause was observed. Nonobservance of fiscal performance clause criteria in these cases would thus appear to be partly linked to nonfulfillment of measures related to pricing policy. While inadequate performance in this area may reflect a lack of control by the central government over pricing policies, it also suggests that political difficulties encountered in increasing prices of commodities and services proved to be greater than anticipated at the time the program was established.

Overall Budget Balance

A higher proportion of programs contained explicit forecasts and policy targets relating to the overall budget deficit in the letter of intent than was the case for either revenue or expenditure. This suggests that national authorities were more inclined to make firm projections or statements with respect to a neutral concept, such as the overall budget balance, than to its components. Forty per cent of all programs surveyed planned a decrease in the ratio of the overall deficit to GNP of at least 1 percentage point (Table 8, line c) during the program. Chart 5A indicates an increasing tendency to plan such a reduction over the ten-year period surveyed.

Chart 5.
Chart 5.

Fiscal Content of Financial Programs in Upper Credit Tranches, 1969-78

Citation: IMF Staff Papers 1980, 002; 10.5089/9781451946864.024.A001

Table 8.

Fiscal Content of Financial Programs in Upper Credit Tranches, 1969-78: Government Overall Budget Balance

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The overall deficit both in nominal terms and as a proportion of GNP was held within the projected level in about 50 per cent of the programs, but the success in achieving these goals declined during the ten years to 1978 (Chart 5B and C). This declining success reflected mainly the disappointing trend for expenditure to exceed estimates over the period under review.

Budget Financing

Foreign financing

Of the 105 financial programs surveyed, over 40 per cent projected an increase or a decrease in foreign financing equivalent to 1 percentage point or more of GNP, compared with the preceding year (Table 9, line a). Of these, one third programmed a decrease in foreign financing as a percentage of GNP, presumably because of the need to limit foreign borrowing. 29 In approximately 60 per cent of those programs in which a break was programmed, there were indications that the projections were based on known commitments.

Table 9.

Fiscal Content of Financial Programs in Upper Credit Tranches, 1969-78: Budget Financing1

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It should be noted that these programs include those in which unplanned breaks in foreign financing and nonbank domestic financing were achieved. Figures in parentheses indicate actual results.

With regard to actual performance, Table 3 indicates that the projection for foreign financing, in nominal terms, was realized or exceeded in only 39 per cent of the programs surveyed, but, as shown in Chart 5D, a marked reduction occurred in the proportion of shortfalls over the ten-year period. This improvement may be partly related to expenditure developments, discussed above, and it may also reflect an increased rate of utilization of foreign grants and loans. Nevertheless, it would appear from Table 9 that shortfalls in foreign financing contributed importantly to the nonobservance of the fiscal subceiling in a number of programs.

Domestic financing

Nonbank domestic financing was less important than other sources of financing in most of the programs surveyed. Policies in this area were also less ambitious; few programs (about 40 per cent) incorporated changes equivalent to 1 percentage point of GNP, compared with the previous year (Table 9, line e). Domestic nonbank financing, in nominal terms, was equal to or higher than the program projection in 70 per cent of all programs surveyed. A shortfall in domestic nonbank financing was not identified as a major factor contributing to the nonobservance of the subceiling on the use of bank credit by the government sector in any of the programs surveyed.

*

Mr. Beveridge, Deputy Director of the Fiscal Affairs Department and formerly Assistant Director, British Commonwealth Division, European Department, graduated from the University of Sydney.

Ms. Kelly, senior economist in the Fiscal Review Division of the Fiscal Affairs Department, is a graduate of the University of New England (Australia) and the Australian National University. Before joining the Fund she was an economist in the Research Department of the Reserve Bank of Australia.

1

If performance clauses are not observed, the member’s right to resources under the stand-by arrangement is interrupted until the deviation is corrected or until new understandings are reached.

2

See, for example, Thomas M. Reichmann and Richard T. Stillson, “Experience with Programs of Balance of Payments Adjustment: Stand-By Arrangements in the Higher Tranches, 1963-72,” Staff Papers, Vol. 25 (June 1978), pp. 293-309.

3

This approach is in keeping with the guidelines on conditionality for the use of Fund resources and for stand-by arrangements. For further details, see the text of the guidelines set forth in International Monetary Fund, Annual Report of the Executive Board for the Financial Year Ended April 30, 1979, pp. 136-39.

4

In this connection, some programs were observed in which fiscal aggregates were greatly affected by transactions with the foreign sector. In such cases, consideration could be given to a performance criterion relating to the so-called domestic budget balance, that is, the budget balance after abstracting both government foreign expenditures and government revenues received from foreigners. Timely and accurate data on the domestic budget balance are available in only a few member countries, and there has been no use of this concept as a performance clause.

5

See “The Concept of the Current Balance in Government Accounts” (unpublished, International Monetary Fund, June 11, 1976).

6

See Reichmann and Stillson (cited in footnote 2).

7

Most programs covered a period of 12 months. Programs which covered a longer period but which became inoperative after the first year, for reasons other than those related to nonobservance of performance criteria, were also treated as 12-month programs.

8

Data were collected for the level of government applicable in the fiscal performance clause and in the fiscal policy statements.

9

Financial-year data were adjusted to a program-year basis in those cases where the two did not coincide.

10

Most of the analysis of fiscal targets and projections was carried out in terms of their ratios to GNP. However, since fiscal performance criteria were specified in nominal terms, budget aggregates were also categorized according to whether their actual nominal values exceeded, equaled, or fell short of projections or targets.

11

No account was taken of targets or projections that were achieved after the program period.

12

The proportion of programs in which such a performance clause was observed is shown in Chart 1B.

13

In classifying results, fiscal performance clauses observed after modification were not distinguished from those observed without modification.

14

Seven of these programs involved binding commitments relating to specific revenue or expenditure measures. Available evidence indicated that the specific measure was implemented in only three cases. The evidence of compliance with binding commitments relating to government expenditure arrears and to credits to public enterprises is also mixed.

15

Results regarding maintenance of performance clauses relating to the size of the budget deficit indicate that the clause was observed in 4 of the 7 programs in which it was used.

16

This total represents the number of programs incorporating a fiscal provision relating to the use of credit by the government or to the budget balance when the overall credit ceiling was not observed.

17

Note that the results in Table 3 are given in nominal terms, while Chart 2 is based on ratios to GNP.

18

Many of these statements were couched in rather broad terms, possibly reflecting the tradition in some member countries of secrecy regarding tax measures before they are presented to Parliament.

19

In no case was the projection indicated as a policy target.

20

For further details on methods of adjusting the tax system for inflation, see Teruo Hirao and Carlos A. Aguirre, “Maintaining the Level of Income Tax Collections Under Inflationary Conditions,” Staff Papers, Vol. 17 (July 1970), pp. 277-325; Vito Tanzi, “Inflation, Lags in Collection, and the Real Value of Tax Revenue,” Staff Papers, Vol. 24 (March 1977), pp. 154-67.

21

Of the programs examined, there were 28 in which an increase of 1 percentage point in the revenue ratio was planned; in 15 of these (54 per cent), the planned increase was obtained. Of the 9 programs in which a 2 percentage point increase was planned, it was achieved in 5 (56 per cent). However, of the 16 programs in which an increase in the revenue ratio in excess of 2 percentage points was planned, in only 2 (13 per cent) was it achieved.

In 8 programs in which an increase in the revenue ratio in excess of 2 percentage points was not planned, such an increase was obtained. Thus, of the 105 programs surveyed, in only 10 was an increase in the revenue ratio in excess of 2 percentage points achieved.

22

Of the 30 programs in which a fall in the expenditure ratio was suggested, a decline of 3 percentage points or more was envisaged in 12 (40 per cent). As to planned increases in the revenue ratio, in only 16 of 55 programs (29 per cent) was an increase of 3 percentage points or more suggested.

23

In only one program was the expenditure projection indicated as a policy target.

24

This occurs when consumer prices for subsidized goods and services are not automatically adjusted to the increase in market prices.

25

In some programs, shortfalls in capital expenditures were also related to overambitious plans and to shortfalls in foreign financing.

26

It should be noted that in 50 programs (48 per cent of the total surveyed) there was an increase in the ratio of expenditure to GNP during the period. Also, in 14 programs there was an unplanned reduction in the expenditure ratio.

27

Of the 30 programs in which a reduction in this ratio was indicated, a cutback of 1 percentage point was involved in 14. In 6 of these (43 per cent), the planned decline was achieved. Of the 6 programs in which a cutback of 2 or 3 percentage points was planned, it was achieved in 3 (50 per cent). In addition, of the 10 programs in which a reduction in the ratio in excess of 3 percentage points was involved, it was achieved in 6 (60 per cent).

28

Some sizable reductions (in excess of 3 percentage points) were, however, achieved.

29

Performance clauses relating to the contracting of external debt were not covered in the survey.

IMF Staff papers: Volume 27 No. 2
Author: International Monetary Fund. Research Dept.
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    Fiscal Content of Financial Programs in Upper Credit Tranches, 1969-78

  • View in gallery

    Fiscal Content of Financial Programs in Upper Credit Tranches, 1969-78: Revenue and Expenditure Adjustment1

    (In per cent of GNP)

  • View in gallery

    Fiscal Content of Financial Programs in Upper Credit Tranches, 1969-78

  • View in gallery

    Fiscal Content of Financial Programs in Upper Credit Tranches, 1969-78

  • View in gallery

    Fiscal Content of Financial Programs in Upper Credit Tranches, 1969-78