budget support training module 3 stability of macro-economic framework (second eligibility...

Budget support training

Module 3

Stability of macro-economic framework(second eligibility criterion)

Version October 2013

Buzzing exercise

Why is macro-economic stability important for budget support?

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Outline

1. What is a stable macroeconomic framework?

2. Why is macroeconomic stability an eligibility criterion

for BS?2a A precondition for sustainable growh

2b Macroeconomic stability and Domestic Revenue Mobilisation (fiscal

apsects of DRM)

3. How to assess the stability of the macroeconomic

framework?

4. Supplementary document to the action fiche and the

payment dossier

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A stable macroeconomic framework. What does it mean?

Macroeconomic instability rupture of the macrofinancial balances

and major risk that budget support cannot achieve its goals :

unsustainable external and internal deficits, swings in economic activity, high and/or volatile inflation, and excessive volatility in exchange rates and financial markets.

Macroeconomic stability prerequisite for sustainable growth

and poverty reduction

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Outline





apsects of DRM)


framework?


payment dossier

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Why is it an eligibility criterion?

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Macroeconomic stability:

Precondition for

Macroeconomic

instability

income growth of poor people

sustained economic

growth

sustained funding of poverty

reduction policies

stable government

budget

financial programming

becomes ineffective

budget outcomes diverge from plan

Domestic Revenue mobilisation DRM: direct taxes, indirect taxes, non-tax revenues. DRM has macro-economic policy and PFM aspects

DRM is part of 2 eligibility criteria: macro-economic stability and quality of PFM.

Improving DRM should be core component of fiscal policy, PFM

reform strategy and policy dialogue. Tax income in LIC is 10-20% of GDP; in OECD 36% on average. See EC Communication “Tax and development: cooperating

with developing countries on promoting good governance in

tax matters” (2010).

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Increasing DRM: + and -

+-

• Lower deficit (increased financial sustainability)

• Reduced aid dependency• More scope for

development and poverty reduction expenditures

• Higher tax burden-> risk of disincentive for economic operators

Key issues: equity and incentives:

• How to spread the tax burden (including informal sector)• Using tax and non tax to protect natural resources and the

environment (specific case of extractive industries)

Outline





apsects of DRM)


framework?


payment dossier

9

3.1 Demonstration of eligibility

Eligibility has to be demonstrated at programme approval

and for the disbursement of each tranche

Same methodology is applied for all eligibility criteria and for

all types of contracts: eligibility assessment is based on the

relevance and the credibility of the policies in place and

announced, at formulation stage and during implementation

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3.2 Importance of the relation of the country with the IMF

Satisfactory implementation of an IMF programme

(programme on track): good assurance of stability

orientation, but still need to understand underlying

economics of the operation Unsatisfactory implementation of IMF programme: country

may still be eligible if the objectives of the BS support

programme are not at risk. No IMF program: not automatically a sign of absence of a

stability oriented macroeconomic policy. Commission takes

final decision 11

3.3. Scope of the macro-economic analysis

1° Analyse the main macroeconomic aggregates and identify the

(potential) sources of instability (imbalances);

2° : Assess macroeconomic policies and their contribution to

macroeconomic stabilisation and to social balance; Pay a particular

attention to the consistency of fiscal policy with macroeconomic/debt

stability (i.e. efforts to strengthen domestic revenue mobilisation,

increasing the efficiency of expenditures);

3° : Assess the vulnerability of the economy to external shocks and

efforts to strengthen macro-economic resilience.

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1° Identification of macro-economic imbalances

Real and monetary developments Low or decreasing GDP growth, High and/or increasing inflation

Public sector High and/or increasing deficit of Government budget High and/or increasing Public Debt (central government, public

enterprises) Debt service and debt burden.

External sector Increasing deficit current account of Balance of Payments and/or

decreasing foreign exchange reserves Unattractive and/or deteriorating business climate

Existence and evolution of arrears of payments 13

1° Identification of macro-economic imbalances : assessing the causes of the imbalances

External or internal shocks Policy mistakes Political instability Insufficient capacity to react to changing

circumstances Institutional weaknesses in public sector Rigid economic structures and absence of economic

transformation processes Weak adaptive capacity in economic sectors Etc. 14

2° Assessing the macroeconomic policy

Is the policy mix conducive to the correction of macro

imbalances?

Fiscal policies : overall revenue and expenditure level, financing

of the deficit, debt sustainability, etc Monetary policies: control of inflation, money growth, regulation

of the banking sector, credit requirements, regulation of the

financial market, etc. Is the policy mix conducive to stability? Are fiscal, monetary

exchange rate policy concurring into balancing the economy?

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2° Assessing the macroeconomic policy: DRM policy

Analyse: Tax ratios: tax & non tax/GDP (trends and comparisons- Tax effort (taxes collected/potential) Composition of taxes Tax incentives (exemptions, reductions, tax holidays, free

zones, etc.) Commitment to strengthening DRM (MTFF projections,

measures taken to increade DRM, policies regarding natural

resources….)

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2° Assessing the macroeconomic policy

What if the policy is not stability oriented?

In this case it is important to try to understand the reasons of that

situation:

• Socio-political constraints

• Trade offs between conflicting policy objectives

Conclusions for the provision of BS need to take these factors into

consideration

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3° Vulnerability to external shocks

decline of external demand. deteriorating terms of trade (import prices up and/or

export prices down). decline of foreign aid and FDI. adverse climatic circumstances. political instability in neighbouring countries and/or trading

partners. etc.

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Strengthening macro-economic resilience

Build up fiscal reserves in good years (= decreasing public

debt as % of GDP). Build up forex buffers in good years (> 3 months import). Set up a well targeted and efficient social safety net (to be

used in case of food price surges and/or bad harvests). Diversify production structure. Diversify exports.

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Outline





apsects of DRM)


framework?


payment dossier

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a) Content of the Introduction of the macro-economic assessment paper

Brief overview of the performance and structure of the

economy. Indicators of inclusiveness of economic growth: distribution of

income and wealth, access to public services, pattern of

economic growth and productivity gains, etc. Most pressing economic challenges and risks. Environmental risks and sustainability of economic growth. Relationship of the country with the IMF and the latter’s

opinion on macro-economic performance and policies.

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b) Data collection

Collect data for tables 1-4 of annex 4 of the BS Guidelines, for

the last 3 years, present year and 2 next years. Focus analysis on trends and imbalances which need to be

addressed by the Government.

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Major sources of information

Medium term economic policy documents of the Government. Annual Budget Framework Papers of the Government. Letter of Intent of the Government supporting a credit

arrangement with IMF. MTFF and MTEF. Budget execution reports. Letter of Development Policy of the Government, which

support funding requests submitted to the WB. Other economic policy documents of the Government. Economic research papers of universities and other institutes.

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Result of the assessment (formulation BS)

Decision on eligibility based on Findings of the four assessments mentioned before Opinions of other specialised institutions (notably the IMF).

Format: Authorities pursue a credible and relevant stability oriented

macro-economic policy aiming at ….., or; There is as yet no sufficient evidence that the authorities

pursue a credible and relevant stability oriented macro-economic

policy, but they have embarked on negotiations with the IMF ….

It is expected that …, or; The Delegation considers that the macro-economic criterion is

not fulfilled, because …..

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Key messages (1) Keep in mind that :

Effective macro-economic policies and trends of the

indicators are more important than the actual values of the

indicators; Sound analyses are more important than long lists of

statistics; Special attention should be paid to fiscal policies and

targets, including domestic revenue mobilisation, and the

consistency with macro-economic stability (see EC

Communication on BS).

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Key messages (2) Focus the assessment on:

Links between identified imbalances and policy responses. Fiscal policies : overall revenue and expenditure level,

financing of the deficit, debt sustainability, sector allocation

of resources, etc. Monetary policies: control of inflation, increase supply of

money, supervision of banks. Balance of payments: exchange rate policies, external debts,

foreign exchange reserves. Policies to promote economic growth and restructuring the

economy. Employment generation.

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budget support training module 3 stability of macro-economic framework (second eligibility...

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