A Stress Test for a Stylized RRC
Citation: IMF How To Notes 2021, 001; 10.5089/9781513568799.061.A001Source: IMF staff.Note: In this scenario, commodity prices are assumed to decline to $45, $30 and $45/barrel in years 1, 2 and 3 of the shock period respectively. The charts show the impact on liquid assets, debt and spending for three different policy responses: i) ‘no adjustment’ where spending remains unchanged and the revenue shortfall is met through running down liquid assets and new borrowing (in that order), ii) full adjustment, where spending reduction fully offsets the revenue shortfall, and iii) partial adjustment, where reductions in spending a subject to a maximum of 10 percent of the pre-shock path. The scenario shows that a no adjustment strategy would leave liquid buffers exhausted and the already-elevated gross debt ratio to increase by a further 4 percent of GDP to almost 65 percent of GDP; a partial adjustment strategy would lead to an almost 2 percent of GDP reduction in expenditure and leave liquid buffers exhausted (although there would only be a small increase in debt), while a full adjustment strategy would lead to a very large 8 percent reduction in spending. These results suggest that a partial adjustment may be the only feasible course of action or the near-term fiscal path should be revised to accumulate additional fiscal buffers.