role of fiscal policy in resilience building: experiences of small island states in the pacific...

ROLE OF FISCAL POLICY IN ROLE OF FISCAL POLICY IN RESILIENCE BUILDING: RESILIENCE BUILDING: EXPERIENCES OF SMALL EXPERIENCES OF SMALL

ISLAND STATES ISLAND STATES IN THE PACIFIC REGIONIN THE PACIFIC REGION

T.K. JayaramanT.K. Jayaraman

University of the South PacificUniversity of the South PacificFIJI ISLANDS FIJI ISLANDS

INTRODUCTIONINTRODUCTION • PACIFIC ISLAND COUNTRIES (PICs): PRONENESS TO NATURAL PACIFIC ISLAND COUNTRIES (PICs): PRONENESS TO NATURAL DISASTERS: GEOGRAPHIC LOCATION DISASTERS: GEOGRAPHIC LOCATION

• HIGH DEGREE OF ECONOMIC OPENNESSHIGH DEGREE OF ECONOMIC OPENNESS

• DEPENDENCY ON STRATEGIC IMPORTS & NARROW RANGE OF DEPENDENCY ON STRATEGIC IMPORTS & NARROW RANGE OF EXPORTSEXPORTS

• VOLATILITY IN EXPORT EARNINGS VOLATILITY IN EXPORT EARNINGS

• CHALLENGES OF INCREASED GLOBALISATION CHALLENGES OF INCREASED GLOBALISATION

• WEAK CAPACITY TO WITHSTAND THE RISKS WEAK CAPACITY TO WITHSTAND THE RISKS

• EXAMPLES OF SUCCESSFUL SMALL STATES: NURTURING EXAMPLES OF SUCCESSFUL SMALL STATES: NURTURING ECONOMIC ECONOMIC RESILIENCE THRU SOUND MACROECONOMIC RESILIENCE THRU SOUND MACROECONOMIC MANAGEMENTMANAGEMENT

• FISCAL POLICY’S ROLE IN ENSURING MACROECONOMIC FISCAL POLICY’S ROLE IN ENSURING MACROECONOMIC STABILITYSTABILITY

CURRENT STATUS CURRENT STATUS • PICs: UNCERTAIN MACROECONOMIC PICs: UNCERTAIN MACROECONOMIC CONDITIONSCONDITIONS

• HURTING GROWTH & HALTING PROGRESS HURTING GROWTH & HALTING PROGRESS TOWARDS ACHIEVING MILLENNIUM TOWARDS ACHIEVING MILLENNIUM DEVELOPMENT GOALS DEVELOPMENT GOALS

• AVERAGE ANNUAL GROWTH RATES IN PER AVERAGE ANNUAL GROWTH RATES IN PER CAPITA REAL INCOME DURING 1995-2004 LESS CAPITA REAL INCOME DURING 1995-2004 LESS THAN 2%: REQUIRED GROWTH RATE FOR THAN 2%: REQUIRED GROWTH RATE FOR HALVING INCIDENCE OF POVERTY BY 2015 HALVING INCIDENCE OF POVERTY BY 2015

• EXTERNAL SHOCKS & DECLINE IN TERMS OF EXTERNAL SHOCKS & DECLINE IN TERMS OF TRADE TRADE

• VOLATILITY IN AID & NATURAL RESOURCE RENT VOLATILITY IN AID & NATURAL RESOURCE RENT INCOMES: REVENUE FROM FISHING LICENSESINCOMES: REVENUE FROM FISHING LICENSES

CURRENT CONDITIONSCURRENT CONDITIONS Contd…Contd…

•DISCONTINUANCE BY END OF 2007 OF DISCONTINUANCE BY END OF 2007 OF PREFERENTIAL TREATMENT BY EU FOR SUGAR & PREFERENTIAL TREATMENT BY EU FOR SUGAR & PRIMARY EXPORTSPRIMARY EXPORTS

• SLOW PACE IN RESTRUCTURING :IMPROVING SLOW PACE IN RESTRUCTURING :IMPROVING FARM PRODUCTIVITY & RAISING FACTORY FARM PRODUCTIVITY & RAISING FACTORY EFFICIENCYEFFICIENCY

• DELAYS HAVE PROVED COSTLYDELAYS HAVE PROVED COSTLY

• FALLING EXPORT EARNINGS & HIGH IMPORT FALLING EXPORT EARNINGS & HIGH IMPORT PENETRATION SHARES WITH LITTLE PENETRATION SHARES WITH LITTLE DIVERSIFICATION INTO ANY MANUFACTURING DIVERSIFICATION INTO ANY MANUFACTURING POSSIBILITIESPOSSIBILITIES

•WIDENING TRADE GAPSWIDENING TRADE GAPS

POLICYPOLICY TOOLSTOOLS • NURTURING RESILIENCE THRU MACROECONOMIC STABILITYNURTURING RESILIENCE THRU MACROECONOMIC STABILITY

• POLICY TOOLS: EXCHANGE RATE (ER), FISCAL & MONETARY POLICY TOOLS: EXCHANGE RATE (ER), FISCAL & MONETARY POLICIESPOLICIES

•FIXED ER REGIMES: MONETARY POLICY LESS EFFECTIVE: FIXED ER REGIMES: MONETARY POLICY LESS EFFECTIVE: NASCENT MONEY & CAPITAL MARKETS: WEAK TRANSMISSION NASCENT MONEY & CAPITAL MARKETS: WEAK TRANSMISSION MECHANISMSMECHANISMS

•PICs USING CURRENCIES OF US/AUS/NZ AS LEGAL TENDER: LESS PICs USING CURRENCIES OF US/AUS/NZ AS LEGAL TENDER: LESS MANOEUVERABILITY:NO CONTROL OVER EXCHANGE RATESMANOEUVERABILITY:NO CONTROL OVER EXCHANGE RATES

• DOLLARISATION: GAIN OF FISCAL DISCIPLINE DID NOT DOLLARISATION: GAIN OF FISCAL DISCIPLINE DID NOT MATERIALISEMATERIALISE

• DOLLARISED RMI, FSM & PALAU: COMPACT FUNDS: BUDGET DOLLARISED RMI, FSM & PALAU: COMPACT FUNDS: BUDGET SUPPORTSUPPORT

• ALL PICs: STAGNANT REVENUES, VOLATILITY IN AID & NATURAL ALL PICs: STAGNANT REVENUES, VOLATILITY IN AID & NATURAL RESOURCE RENT INCOMESRESOURCE RENT INCOMES

• WIDENING BUDGET & CURRENT ACCOUNT DEFICITSWIDENING BUDGET & CURRENT ACCOUNT DEFICITS

Table 3 : PICs: Government Revenue, Expenditure and Overall Balance

(Averages and Variability)

Govt Rev Gov Rev Govt Exp Govt Exp Overall Bal Overall Bal

(% of GDP) Standard (% of GDP) Standard (% of GDP) Standard

Average Deviation Average Deviation Average Deviation

1988-2005

Fiji 26.4 2.4 30.5 2.2 -4.1 1.8

FSM 71.6 10.2 73.9 10.7 -2.3 53.0

Kiribati 111.6 20.1 122.7 23.4 -11.1 19.9

PNG 24.7 3.9 30.2 2.5 -5.5 1.9

RMI 68.8 9.2 64.2 11.1 4.6 11.2

Samoa 38.5 6.7 41.9 14.9 -3.4 7.2

Sol. Is 24.5 3.2 36.3 2.8 -11.8 3.5

Tonga 29.8 2.6 30.4 3.1 -0.6 3.7

Vanuatu 22.3 2.3 28.2 6.5 -5.9 3.2

Source: Author’s CalculationsAsian Development Bank (2006)






1988-

1999

Fiji 26.8 2.7 30.4 2.6 -3.6 2.0

FSM 77.2 4.3 80.4 5.9 -3.2 4.1

Kiribati 103.7 20.7 107.7 9.8 -4.0 16.9

PNG 23.9 1.7 30.1 2.6 -6.2 2.0

RMI 74.2 4.6 67.6 18.6 6.6 15.9

Samoa 31.8 7.4 47.2 17.8 -15.4 9.2

Sol. Is 20.9 4.3 35.7 5.3 -14.8 8.6

Tonga 28.2 1.1 29.3 1.5 -1.1 1.6

Vanuatu 20.3 0.9 23.9 2.9 -3.6 2.4







2000-

2005

Fiji 25.3 0.9 30.3 1.1 -5.0 1.1

FSM 63.5 9.1 65.0 8.1 -1.5 7.1

Kiribati 120.7 16.5 140.2 22.9 -19.5 16.5

PNG 26.4 6.4 30.4 2.5 -4.0 1.9

RMI 64.3 9.9 61.2 5.4 3.1 6.5

Samoa 33.0 1.1 34.7 5.7 -1.9 0.8

Sol. Is 28.2 4.4 30.6 2.9 -2.4 4.5

Tonga 30.5 2.7 32.3 3.2 -1.8 4.4

Vanuatu 23.4 2.1 30.4 6.8 -7.0 2.9


STRUCTURAL RIGIDITIES IN STRUCTURAL RIGIDITIES IN BUDGETS BUDGETS

• PERSISTENT FISCAL DEFICITS: ATTRIBUTED TO PERSISTENT FISCAL DEFICITS: ATTRIBUTED TO STRUCTURAL RIGIDITIES IN THEIR BUDGETSSTRUCTURAL RIGIDITIES IN THEIR BUDGETS

• NARROW REVENUE RESOURCE NARROW REVENUE RESOURCE

• REVENUE: TAXES ON TRADE SUBJECT TO VOLATILITYREVENUE: TAXES ON TRADE SUBJECT TO VOLATILITY

• TAX REVENUES OF PICs AVERAGE 17% TO 25% OF TAX REVENUES OF PICs AVERAGE 17% TO 25% OF GDPGDP

• VANUATU: NO DIRECT TAXATION: PURE TAX HAVEN: VANUATU: NO DIRECT TAXATION: PURE TAX HAVEN: REVENUE DOMINATED BY INDIRECT TAXES ON REVENUE DOMINATED BY INDIRECT TAXES ON CONSUMPTION OF GOODS & SERVICES, EXCISE & VAT CONSUMPTION OF GOODS & SERVICES, EXCISE & VAT

• OTHERS: DIRECT TAXES, EXCEPT FOR PNG: 10% OF OTHERS: DIRECT TAXES, EXCEPT FOR PNG: 10% OF GDPGDP

STRUCTURAL RIGIDITIES IN STRUCTURAL RIGIDITIES IN BUDGETS Contd…BUDGETS Contd…

• SHARES OF NONTAX REVENUES IN GDP: LARGER IN SHARES OF NONTAX REVENUES IN GDP: LARGER IN KIRIBATI AND TUVALU. THEY RANGED FROM 50% TO 54 %. KIRIBATI AND TUVALU. THEY RANGED FROM 50% TO 54 %.

• 2006: FISHING LICENSE FEES ACCOUNTED FOR 87% OF 2006: FISHING LICENSE FEES ACCOUNTED FOR 87% OF KIRIBATI’S NONTAX REVENUES & 43% OF TOTAL KIRIBATI’S NONTAX REVENUES & 43% OF TOTAL GOVERNMENT REVENUES. GOVERNMENT REVENUES.

• RESOURCE RENT INCOME RECEIPTS VARIED FROM YEAR TO RESOURCE RENT INCOME RECEIPTS VARIED FROM YEAR TO YEAR YEAR

• HIGH VOLATILITY IN TOTAL GOVERNMENT REVENUES OF HIGH VOLATILITY IN TOTAL GOVERNMENT REVENUES OF KIRIBATI KIRIBATI

• RMI, FSM & PALAU: RECEIVING COMPACT FUNDS FROM USA RMI, FSM & PALAU: RECEIVING COMPACT FUNDS FROM USA

• GOVERNMENT REVENUES: 69 % of GDP IN RMI & 72 % IN GOVERNMENT REVENUES: 69 % of GDP IN RMI & 72 % IN PALAUPALAU

RIGIDITIES IN GOVT RIGIDITIES IN GOVT EXPENDITUREEXPENDITURE

• EXP RATIOS: KIR 123% OF GDP; FSM 74% & RMI: 84% EXP RATIOS: KIR 123% OF GDP; FSM 74% & RMI: 84%

• PICs WITH SMALL POPULATION: UNABLE TO REALISE PICs WITH SMALL POPULATION: UNABLE TO REALISE SCALE ECONOMIES IN PROVISION OF PUBLIC GOODS AND SCALE ECONOMIES IN PROVISION OF PUBLIC GOODS AND SERVICES. SERVICES.

• US GENERAL ACCOUNTING OFFICE: COMPACT FUNDS: RMI US GENERAL ACCOUNTING OFFICE: COMPACT FUNDS: RMI & FSM FINANCED WAGES & GOVT CONSUMPTION & FSM FINANCED WAGES & GOVT CONSUMPTION

• FAILED TO REALISE COMPACT OBJECTIVES: SELF-FAILED TO REALISE COMPACT OBJECTIVES: SELF-RELIANCE RELIANCE

• FIJI: GOVT WAGE BILL: 45 % OF TOTAL EXPENDITURE. FIJI: GOVT WAGE BILL: 45 % OF TOTAL EXPENDITURE.

• OPERATING EXP INCLUSIVE OF WAGES: 80% OF BUDGETOPERATING EXP INCLUSIVE OF WAGES: 80% OF BUDGET

•HIGH PROPORTION OF RECURRENT EXPENDITURS: HIGH PROPORTION OF RECURRENT EXPENDITURS: DENYING ALLOCATION TO GROWTH ENHANCING CAPITAL DENYING ALLOCATION TO GROWTH ENHANCING CAPITAL PROJECTS PROJECTS

TABLE 4: FISCAL VULNERABILITY INDICATORS OF TABLE 4: FISCAL VULNERABILITY INDICATORS OF SELECTED COUNTRIES (2001-2005)SELECTED COUNTRIES (2001-2005)

(in percent of GDP, unless otherwise indicated)(in percent of GDP, unless otherwise indicated)

2001 2002 2003 2004 2005

Fiji

Revenue & Grants 22.1 24.6 25.1 25.8 25.8

Expenditure & Net Lending 28.6 31.6 31.1 29.1 29.6

Overall Balance -6.5 -7.0 -6.0 -3.3 -3.8

Government Debt 44.0 48.0 49.0 53.0 52.0

External Debt 13.6 13.7 12.2 10.9 11.1

Current Account Balance -3.5 -1.7 -2.0 -5.0 -4.5

Intl.Reserves (months of imports) 4.3 3.5 3.1 3.3 3.5

Exch Rate (Dom.currency/US$) 2.3 2.2 1.9 1.7 1.7



Kiribati 20012001 20022002 20032003 20042004 20052005

Revenue & Grants 118.4 138.7 139.2 106.2 123.2


Overall Balance 17.0 0.6 -31.9 42.8 -22.6

External Debt 20.0 16.4 16.0 17.5 19.0

Current Account Balance 2.0 -1.8 -19.3 -16.3 -9.4

Intl.Reserves (months of imports) NA NA NA NA NA


Current Account Balance 2.0 -1.8 -19.3 -16.3 -9.4





Marshall Islands 20012001 20022002 20032003 20042004 20052005

Revenue & Grants 70.1 64.2 65.0 56.2 58.1


Overall Balance 8.2 -4.0 11.0 -0.4 -2.1

External Debt 77.0 70.6 71.2 76.4 70.6

Current Account Balance 8.8 8.6 16.3 4.4 0.5





Micronesia 20012001 20022002 20032003 20042004 20052005

Revenue & Grants 64.2 71.8 71.8 53.7 51.0


Overall Balance -8.9 6.8 7.9 -4.8 -3.2

External Debt 26.3 25.6 25.2 25.8 24.8

Current Account Balance -5.4 7.3 0.9 -10.6 -12.1





Palau 20012001 20022002 20032003 20042004 20052005

Revenue & Grants 43.1 42.4 54.0 54.3 53.6


Overall Balance -20.3 -28.3 -2.4 -6.9 -3.9

External Debt 16.2 16.6 15.9 14.0 13.2

Current Account Balance -9.4 -11.0 9.6 12.6 15.1





PNG 20012001 20022002 20032003 20042004 20052005

Revenue & Grants 29.7 27.8 28.2 31.1 28.1


Overall Balance -3.9 -5.3 -1.6 1.1 1.9

Government Debt 62.0 73.0 70.0 57.0 51.0

External Debt 48.7 51.5 43.8 34.3 27.7

Current Account Balance 6.5 -1.0 4.4 2.1 4.0





Samoa 20012001 20022002 20032003 20042004 20052005

Revenue & Grants 31.9 33.8 32.8 32.5 40.0


Overall Balance -2.3 -2.1 -0.6 -0.9 -0.6

Domestic Debt 61.0 59.0 53.0 50.0 48.0

External Debt 61.4 62.0 59.6 51.5 48.1

Current Account Balance 0.1 -0.6 2.9 4.4 2.2





Solomon Islands 20012001 20022002 20032003 20042004 20052005

Revenue & Grants 23.5 18.8 37.6 48.9 48.5


Overall Balance -12.7 -11.0 -1.9 8.3 -0.5

Government Debt 82.0 97.0 99.0 87.0 78.0

External Debt 49.0 67.0 70.6 62.0 61.4

Current Account Balance -12.8 -7.2 1.3 12.5 -10.8





Tonga 20012001 20022002 20032003 20042004 20052005

Revenue & Grants 27.5 29.9 27.3 27.5 26

Expenditure & Net Lending 29 31.3 30.4 26.2 25.8

Overall Balance -1.5 -1.5 -3.1 1.3 0.1

Domestic Debt 68 72 68 62 53

External Debt 40.4 46.3 43.9 40.9 35.6

Current Account Balance -9.2 4.9 -3 4 -2.2

Intl.Reserves (months of imports) 1.8 2.8 2 4.8 4




Vanuatu 20012001 20022002 20032003 20042004 20052005

Revenue & Grants 20.9 21 20.1 21.9 22.3

Expenditure & Net Lending 24.6 25 21.8 21 21.2

Overall Balance -3.7 -4.1 -1.7 0.9 1

Public Sector Debt

Domestic Debt 38 41 41 38 37

External Debt 29.7 28.2 26.1 24.6 23.4

Current Account Balance 2 -9 -10.2 -9.5 -7.1



FISCAL VULN. INDICATORS (Contd) FISCAL VULN. INDICATORS (Contd) • OVERALL FISCAL BALANCES: NEGATIVE EXCEPT IN RMI: OVERALL FISCAL BALANCES: NEGATIVE EXCEPT IN RMI: RECEIVING SUPPORT UNDER COMPACT I & II. RECEIVING SUPPORT UNDER COMPACT I & II.

• AVERAGE NEGATIVE OVERALL BALANCE: (2000-2005)AVERAGE NEGATIVE OVERALL BALANCE: (2000-2005) KIRIBATI: 20% OF GDP; VANUATU : 7% & FIJI: 5% OF GDP KIRIBATI: 20% OF GDP; VANUATU : 7% & FIJI: 5% OF GDP

• KIRIBATI: DEFICITS FINANCED BY SUBSTANTIAL KIRIBATI: DEFICITS FINANCED BY SUBSTANTIAL DRAWDOWN FROM REVENUE EQUALISATION RESERVES DRAWDOWN FROM REVENUE EQUALISATION RESERVES FUND (RERF) FUND (RERF)

• IN TUVALU BY SIMILAR RECOURSE TO TUVALU TRUST IN TUVALU BY SIMILAR RECOURSE TO TUVALU TRUST FUND (TTF)FUND (TTF)

• FIJI’S FISCAL DEFICITS: ENTIRELY FINANCED BY DOMESTIC FIJI’S FISCAL DEFICITS: ENTIRELY FINANCED BY DOMESTIC BORROWING UNTIL 2005 BORROWING UNTIL 2005

• 2006: FIJI RESORTED TO INTERNATIONAL BOND MKT 2006: FIJI RESORTED TO INTERNATIONAL BOND MKT

MONETISATIONMONETISATION• CENTRAL BANK MONETISATION: NOT CENTRAL BANK MONETISATION: NOT UNCOMMON UNCOMMON

• DEFICITS IN PNG, SOLOMONS & VANUATU: DEFICITS IN PNG, SOLOMONS & VANUATU: DEFICITS FINANCED THROUGH CENTRAL BANK DEFICITS FINANCED THROUGH CENTRAL BANK BORROWING BORROWING

• PNG’S BUDGET DEFICITS MID 1990S: DUE TO PNG’S BUDGET DEFICITS MID 1990S: DUE TO DEFENCE SPENDING ON BOUGAINVILLE, TAX DEFENCE SPENDING ON BOUGAINVILLE, TAX REDUCTIONS, AGRICULTURAL SUBSIDIES, & REDUCTIONS, AGRICULTURAL SUBSIDIES, & PERSISTENT EXPENDITURE OVERRUNS: PERSISTENT EXPENDITURE OVERRUNS: MONETISED BY ITS CENTRAL BANK MONETISED BY ITS CENTRAL BANK

• VANUATU’S UN-SUBSCRIBED BONDS FOR VANUATU’S UN-SUBSCRIBED BONDS FOR BUYING AIRCRAFT FOR BUYING AIRCRAFT FOR AIR VANUATU AIR VANUATU WERE WERE PICKED UP BY RESERVE BANK OF VANUATUPICKED UP BY RESERVE BANK OF VANUATU

FINANCING FISCAL DEFICITSFINANCING FISCAL DEFICITS• DOMESTIC BORROWING & LOANS FROM ADB & DOMESTIC BORROWING & LOANS FROM ADB & WB WB

• FIJI: NOT ELIGIBLE FOR BORROWING ON FIJI: NOT ELIGIBLE FOR BORROWING ON CONCESSIONAL TERMSCONCESSIONAL TERMS

• OTHER PICS: TOOK LOANS FROM ADB & WB OTHER PICS: TOOK LOANS FROM ADB & WB

• GOVERNMENT DEBT IN MOST PICs IS EXTERNALGOVERNMENT DEBT IN MOST PICs IS EXTERNAL

• SAMOA’S GOVERNMENT HIGH AT 50% OF GDP SAMOA’S GOVERNMENT HIGH AT 50% OF GDP IN 2005, DEBT-SERVICING COSTS: LESS THAN 8% IN 2005, DEBT-SERVICING COSTS: LESS THAN 8% OF XGS OF XGS

• FIJI’S FISCAL DEFICITS: 2001-06: DOM FIJI’S FISCAL DEFICITS: 2001-06: DOM BORROWINGBORROWING

FINANCING FISCAL DEFICITS FINANCING FISCAL DEFICITS Contd…Contd…

• FIJI’S TOTAL GOVERNMENT DEBT IN 2006 FIJI’S TOTAL GOVERNMENT DEBT IN 2006 WAS 53% OF GDPWAS 53% OF GDP

• WITH CONTINGENT LIABILITIES PUBLIC WITH CONTINGENT LIABILITIES PUBLIC DEBT: CLOSE TO 60% OF GDPDEBT: CLOSE TO 60% OF GDP

• FIJI’S EXTERNAL DEBT: LOW AT AROUND FIJI’S EXTERNAL DEBT: LOW AT AROUND 11% OF GDP UNTIL 200611% OF GDP UNTIL 2006

•MINIMAL OVERSEAS BORROWING MINIMAL OVERSEAS BORROWING

• SEPT 2006: FIJI’S FIRST BOND ISSUE IN SEPT 2006: FIJI’S FIRST BOND ISSUE IN INTL BOND MARKET FOR US$ 150 INTL BOND MARKET FOR US$ 150 MILLION: LOAN PROCEEDS FOR MEETING MILLION: LOAN PROCEEDS FOR MEETING 2007 BUDGET DEFICIT REQUIREMENTS 2007 BUDGET DEFICIT REQUIREMENTS

TWIN DEFICITSTWIN DEFICITS• FISCAL DEFICITS: LEAD TO RISE IN AGGREGATE DEMANDFISCAL DEFICITS: LEAD TO RISE IN AGGREGATE DEMAND

• SPILLS OVER INTO DEMAND FOR FOREIGN GOODS AND SPILLS OVER INTO DEMAND FOR FOREIGN GOODS AND SERVICESSERVICES

• BUT FOR SUBSTANTIAL AID INFLOWS AND REMITTANCES, BUT FOR SUBSTANTIAL AID INFLOWS AND REMITTANCES, CURRENT ACCOUNT BALANCES IN PICS WOULD HAVE BECOME CURRENT ACCOUNT BALANCES IN PICS WOULD HAVE BECOME NEGATIVE & LARGE NEGATIVE & LARGE

• TABLE 5 PRESENTS BUDGET, TRADE & CA DEFICITS TABLE 5 PRESENTS BUDGET, TRADE & CA DEFICITS

• PNG:COMMODITY PRICE BOOMS & HIGH EXPORT EARNINGS IN PNG:COMMODITY PRICE BOOMS & HIGH EXPORT EARNINGS IN RECENT YEARS WITH TRADE SURPLUSRECENT YEARS WITH TRADE SURPLUS

• SOLOMONS: ANOTHER EXCEPTION: PLENTIFUL AID DURING SOLOMONS: ANOTHER EXCEPTION: PLENTIFUL AID DURING 2001-20042001-2004

• OTHER 4 MAJOR PICs : SIZEABLE CURRENT ACCOUNT DEFICITSOTHER 4 MAJOR PICs : SIZEABLE CURRENT ACCOUNT DEFICITS

Table 5: Budget, Trade and Current Account Deficits of Selected Countries:1990-2004

(% of GDP)

PICs Budget Deficit

Averages Trade Deficits

Averages Current Account Deficit

Averages

1990-

941995-99

2000-04

1990-94

1995-99

2000-04 1990-94 1995-99 2000-04

Fiji 3.2 3.2 5.1 14.4 11.6 17.0 2.1 0.2 7.0

PNG 3.7 0.8 1.5 -14.7 -21.0 -26.5 -3.8 -4.6 -4.3

Samoa 10.5 0.2 1.3 68.3 38.7 41.4 13.2 -5.0 0.2

Solomon Is 6.1 0.9 5.8 0.9 -2.1 1.1 6.6 -1.1 -1.4

Tonga 0.0 1.1 1.1 30.0 -2.1 35.1 -1.5 6.7 2.2

Vanuatu 4.6 3.2 2.7 30.3 20.2 23.8 7.2 8.8 4.6

Source: ADB 2006; Author’s calculations

TWIN DEFICITS (contd)TWIN DEFICITS (contd)• CA DEFICITS: FINANCED UNDER FIXED CA DEFICITS: FINANCED UNDER FIXED EXCHANGE RATE REGIMES BY A STEADY EXCHANGE RATE REGIMES BY A STEADY DRAWDOWN OF THE INTERNATIONAL RESERVES. DRAWDOWN OF THE INTERNATIONAL RESERVES.

• WEAKENING FIJI’S RESERVES: FROM 6.3 WEAKENING FIJI’S RESERVES: FROM 6.3 MONTHS OF IMPORT COVER IN 2002 TO 3.2 MONTHS OF IMPORT COVER IN 2002 TO 3.2 MONTHS OF IMPORTS COVER IN 2006.MONTHS OF IMPORTS COVER IN 2006.

• PRESSURES ON FIJI DOLLAR: DEVALUATION PRESSURES ON FIJI DOLLAR: DEVALUATION RUMOURS RUMOURS

• RESERVE BANK OF FIJI IMPOSED IN DECEMBER RESERVE BANK OF FIJI IMPOSED IN DECEMBER 2006 EXCHANGE CONTROLS2006 EXCHANGE CONTROLS

• CREDIT CEILINGS & INCREASES IN INTEREST CREDIT CEILINGS & INCREASES IN INTEREST RATES. RATES.

SIGNS OF MACROECONOMIC SIGNS OF MACROECONOMIC INSTABILITYINSTABILITY

• FIJI’S 2006 SITUATION: SIMILAR TO PNG FIJI’S 2006 SITUATION: SIMILAR TO PNG CONDITIONS IN 1990sCONDITIONS IN 1990s

• PNG’S EXPANSIONARY FISCAL POLICIES FOR 4 PNG’S EXPANSIONARY FISCAL POLICIES FOR 4 YEARS PRECEDING 1997 ELECTIONS: TAX YEARS PRECEDING 1997 ELECTIONS: TAX REDUCTIONS, AGRICULTURAL EXPORT SUBSIDIES, REDUCTIONS, AGRICULTURAL EXPORT SUBSIDIES, PERSISTENT EXPENDITURE EXCESSES AND HEAVY PERSISTENT EXPENDITURE EXCESSES AND HEAVY TRANSFERS TO UNVIABLE SOEsTRANSFERS TO UNVIABLE SOEs

• MASSIVE ANNUAL BUDGET DEFICITS IN A ROW MASSIVE ANNUAL BUDGET DEFICITS IN A ROW

• PNG GOVT DEBT: ROSE TO 60% OF GDP IN 1996 PNG GOVT DEBT: ROSE TO 60% OF GDP IN 1996 FROM 45% IN 1990 FROM 45% IN 1990

• BALANCE OF PAYMENT CRISES ENSUEDBALANCE OF PAYMENT CRISES ENSUED

MACROEC INSTABILITYMACROEC INSTABILITY::PNG (contd) PNG (contd) • 1996: INTL RESERVES FELL TO HALF-MONTH OF IMPORTS 1996: INTL RESERVES FELL TO HALF-MONTH OF IMPORTS

• SWITCHED ON TO FLOATING EXCHANGE RATES REGIMESWITCHED ON TO FLOATING EXCHANGE RATES REGIME

• EXTERNAL STABILITY: ONLY FOR A SHORT PERIOD EXTERNAL STABILITY: ONLY FOR A SHORT PERIOD

• CONTRACTION IN EXPORTS: DROUGHT IN 1997 & ASIAN FIN. CRISIS CONTRACTION IN EXPORTS: DROUGHT IN 1997 & ASIAN FIN. CRISIS • ANOTHER CURRENT ACCOUNT CRISIS ANOTHER CURRENT ACCOUNT CRISIS

• 1999: BUDGETARY REFORMS BEGAN FOR RESTORING STABILITY 1999: BUDGETARY REFORMS BEGAN FOR RESTORING STABILITY

• MONTHS LEADING UP TO 2002 ELECTIONS: FISCAL EXCESSES BY MONTHS LEADING UP TO 2002 ELECTIONS: FISCAL EXCESSES BY GOVERNMENT GOVERNMENT

• 2002-2004: DETERIORATION OF BUDGET & CURRENT ACCOUNT 2002-2004: DETERIORATION OF BUDGET & CURRENT ACCOUNT BALANCES BALANCES

• 3 YEARS OF NEGATIVE GROWTH3 YEARS OF NEGATIVE GROWTH

• 2005: SENSIBLE POLICIES & MINERAL EXPORT BOOM2005: SENSIBLE POLICIES & MINERAL EXPORT BOOM

• 2006: INTL. RESERVES: 5 MONTHS IMPORT COVER: RECORD LEVEL2006: INTL. RESERVES: 5 MONTHS IMPORT COVER: RECORD LEVEL

SOLOMON ISLANDS CASESOLOMON ISLANDS CASE

• SOLOMON IS: 3 DECADES OF FISCAL DEFICITS SINCE 1978 SOLOMON IS: 3 DECADES OF FISCAL DEFICITS SINCE 1978

• STAGNANT REVENUES: TAX & CUSTOMS EXEMPTIONSSTAGNANT REVENUES: TAX & CUSTOMS EXEMPTIONS

•RISE IN RECURRENT EXPENDITURES: WAGES & SALARIES: RISE IN RECURRENT EXPENDITURES: WAGES & SALARIES: TRANSFERS TO LOCAL GOVTS & WEAK EXPENDITURE TRANSFERS TO LOCAL GOVTS & WEAK EXPENDITURE CONTROLS. CONTROLS.

• SHORT LIVED RECOVERY ON CURRENT ACCOUNT: 1990-95SHORT LIVED RECOVERY ON CURRENT ACCOUNT: 1990-95

• LOGGING & LOG EXPORTS: DID NOT LAST LONGLOGGING & LOG EXPORTS: DID NOT LAST LONG

•1998: ASIAN FINANCIAL CRISIS 1998: ASIAN FINANCIAL CRISIS

• 1999: ETHNIC CONFLICT: NEGATIVE GROWTH FOR 3 1999: ETHNIC CONFLICT: NEGATIVE GROWTH FOR 3 YEARSYEARS

•FALL IN REVENUES & DECLINE IN EXPORTSFALL IN REVENUES & DECLINE IN EXPORTS

•2001: FISCAL DEFICIT: 12% OF GDP2001: FISCAL DEFICIT: 12% OF GDP

SOLOMON ISLANDS CASE (Contd)SOLOMON ISLANDS CASE (Contd)• RESERVES LEVEL IN 2001: 2 MONTHS OF IMPORT COVER RESERVES LEVEL IN 2001: 2 MONTHS OF IMPORT COVER

• 2002: REGIONAL ASSISTANCE MISSION TO SOLOMON ISLANDS 2002: REGIONAL ASSISTANCE MISSION TO SOLOMON ISLANDS

• DONORS SETTLED DEBT SERVICING OBLIGATIONS TO INTL DONORS SETTLED DEBT SERVICING OBLIGATIONS TO INTL AGENCIES. AGENCIES.

• IMPROVEMENTS IN FISCAL MANAGEMENT SINCE 2003 IMPROVEMENTS IN FISCAL MANAGEMENT SINCE 2003 STABILISED THE ECONOMY & FISCAL POSITION STABILISED THE ECONOMY & FISCAL POSITION

• CONDITIONS : NOT VERY DISSIMILAR TO THE ONES OBSERVED CONDITIONS : NOT VERY DISSIMILAR TO THE ONES OBSERVED IN CARIBBEAN CONTEXT IN MID 1990S (HILAIRE 2000): IN CARIBBEAN CONTEXT IN MID 1990S (HILAIRE 2000):

• EXTERNAL CURRENT ACCOUNTS SLIPPING INTO DEFICITS; EXTERNAL CURRENT ACCOUNTS SLIPPING INTO DEFICITS;

• FOLLOWED BY THE PLUMMETING OF FOREIGN RESERVES; FOLLOWED BY THE PLUMMETING OF FOREIGN RESERVES;

• WITH SPECTRE OF DEFAULT ON FOREIGN LOANS LOOMING; AND WITH SPECTRE OF DEFAULT ON FOREIGN LOANS LOOMING; AND • EXCHANGE RATES BEING UNDER THREAT.EXCHANGE RATES BEING UNDER THREAT.

WAY OUT: FISCAL ADJUSTMENT WAY OUT: FISCAL ADJUSTMENT PROGRAMPROGRAM

• BROADER DEFINITION: FISCAL ADJUSTMENT WOULD BROADER DEFINITION: FISCAL ADJUSTMENT WOULD MEAN CHANGE IN FISCAL STANCEMEAN CHANGE IN FISCAL STANCE

• EITHER TIGHTENING OR LOOSENING EITHER TIGHTENING OR LOOSENING

• TERM FISCAL CONSOLIDATION HAS A DIRECT TERM FISCAL CONSOLIDATION HAS A DIRECT CONNOTATIONCONNOTATION

• REDUCING GOVT.DEFICIT & DEBT ACCUMULATION REDUCING GOVT.DEFICIT & DEBT ACCUMULATION

• FISCAL ADJUSTMENT FACILITATES EXTL ADJUSTMENTFISCAL ADJUSTMENT FACILITATES EXTL ADJUSTMENT

EXPERIENCES IN INDUSTRIAL EXPERIENCES IN INDUSTRIAL COUNTRIESCOUNTRIES

• GENUINE FEARS : IMPACT OF FISCAL ADJUSTMENT GENUINE FEARS : IMPACT OF FISCAL ADJUSTMENT IN SHORT-RUN: POTENTIAL TO TRIGGER A RECESSIONIN SHORT-RUN: POTENTIAL TO TRIGGER A RECESSION

• INVESTIGATIONS OF SUSTAINED CONSOLIDATION INVESTIGATIONS OF SUSTAINED CONSOLIDATION EXPERIENCES IN INDUSTRIAL COUNTRIES EXPERIENCES IN INDUSTRIAL COUNTRIES (McDERMOTT AND WESTCOTTT 1996A): LOSS FROM (McDERMOTT AND WESTCOTTT 1996A): LOSS FROM SLOWDOWN IN THE SHORT-RUN IS OFFSET BY GAINS SLOWDOWN IN THE SHORT-RUN IS OFFSET BY GAINS IN THE LONG RUN. IN THE LONG RUN.

• NON-KEYNESIAN EC. LITERATURE: SUSTAINED NON-KEYNESIAN EC. LITERATURE: SUSTAINED FISCAL ADJUSTMENT IN TERMS OF BUDGET & DEBT FISCAL ADJUSTMENT IN TERMS OF BUDGET & DEBT REDUCTION WOULD RESULT IN LOWER INTEREST REDUCTION WOULD RESULT IN LOWER INTEREST RATESRATES

• EXCHANGE RATE DEPRECIATION EXCHANGE RATE DEPRECIATION

GIVE RISE TO “POSITIVE EXPECTATIONAL EFFECTS” GIVE RISE TO “POSITIVE EXPECTATIONAL EFFECTS” THAT WOULD SWAMP UNDESIRABLE EFFECTS OF THAT WOULD SWAMP UNDESIRABLE EFFECTS OF FISCAL CONTRACTIONFISCAL CONTRACTION

ARGUMENT IN FAVOUR OF REDUCED ARGUMENT IN FAVOUR OF REDUCED SPENDINGSPENDING

• SMALLER BUDGET REDUCES THE PERCEIVED SMALLER BUDGET REDUCES THE PERCEIVED RISK THAT A GOVERNMENT MIGHT RISK THAT A GOVERNMENT MIGHT DEPRECIATE ITS DEBT THRU HIGH INFLATION DEPRECIATE ITS DEBT THRU HIGH INFLATION IN THE FUTURE (PAYING OFF DEBT WITH IN THE FUTURE (PAYING OFF DEBT WITH CHEAPER MONEY) CHEAPER MONEY)

• REDUCTION IN THE PERCEIVED RISK LEADS REDUCTION IN THE PERCEIVED RISK LEADS TO FALL IN INTEREST RATES TO FALL IN INTEREST RATES

• REDUCTION IN DEFAULT RISK PREMIUM REDUCTION IN DEFAULT RISK PREMIUM INTEREST RATES INTEREST RATES

• BUDGET REDUCTION IMPROVES IMAGE OF BUDGET REDUCTION IMPROVES IMAGE OF GOVERNMENT SOLVENCYGOVERNMENT SOLVENCY

REDUCED SPENDINGREDUCED SPENDING (c (contd)ontd)• COMPRESSION OF EXPENDITURE BY REDUCING COMPRESSION OF EXPENDITURE BY REDUCING SALARIES & WAGES WILL HAVE AN IMPACT ON SALARIES & WAGES WILL HAVE AN IMPACT ON PRIVATE SALARIES PRIVATE SALARIES

• WOULD RAISE PROFITABILITY & WOULD RAISE PROFITABILITY & COMPETITIVENESS, THUS STIMULATING COMPETITIVENESS, THUS STIMULATING INVESTMENT & EXPORTS INVESTMENT & EXPORTS

• BUDGET REDUCTION: SIGNALS TO HOUSEHOLD BUDGET REDUCTION: SIGNALS TO HOUSEHOLD & BUSINESSES: FUTURE TAX BURDENS WOULD BE & BUSINESSES: FUTURE TAX BURDENS WOULD BE LOWERED, AS DEBT FINANCING BY GOVERNMENT LOWERED, AS DEBT FINANCING BY GOVERNMENT WOULD DECLINE WOULD DECLINE

• HOUSEHOLDS WOULD THEN INCREASE HOUSEHOLDS WOULD THEN INCREASE CONSUMPTION & BUSINESS WOULD INCREASE CONSUMPTION & BUSINESS WOULD INCREASE INVESTMENT SPENDING INVESTMENT SPENDING

• EVENTUAL OUTCOME: AN INCREASE IN OUTPUTEVENTUAL OUTCOME: AN INCREASE IN OUTPUT

FISCAL CONSOLIDATION FISCAL CONSOLIDATION MEASURES INCLUDEMEASURES INCLUDE

• EFFECTIVE EXPENDITURE CONTROL & MONITORING EFFECTIVE EXPENDITURE CONTROL & MONITORING

• EFFICIENT REVENUE SYSTEM EFFICIENT REVENUE SYSTEM

• MEASURES FOR RESPONDING TO CHANGING NON-TAX MEASURES FOR RESPONDING TO CHANGING NON-TAX REVENUE RECEIPTS & VOLATILE AID INFLOWSREVENUE RECEIPTS & VOLATILE AID INFLOWS

• RE-DIRECTING SAVINGS INTO CAPITAL PROJECTS BY RE-DIRECTING SAVINGS INTO CAPITAL PROJECTS BY REDUCING RECURRENT EXPENDITURESREDUCING RECURRENT EXPENDITURES

• CAREFUL DEBT-MANAGEMENT CAREFUL DEBT-MANAGEMENT

• MAINTAINING COMPETITIVE REAL EXCHANGE RATE : MAINTAINING COMPETITIVE REAL EXCHANGE RATE : EXTERNAL DEBT SERVICING DOES NOT POSE PROBLEMS IN EXTERNAL DEBT SERVICING DOES NOT POSE PROBLEMS IN THE LONG RUN.THE LONG RUN.

EFFECTIVE EXPENDITURE EFFECTIVE EXPENDITURE CONTROLCONTROL

• SINCE REVENUE MOBILIZATION IS CONSTRAINED BY SINCE REVENUE MOBILIZATION IS CONSTRAINED BY RIGIDITIES, FOCUS ON EFFECTIVE EXPENDITURE RIGIDITIES, FOCUS ON EFFECTIVE EXPENDITURE ADJUSTMENTSADJUSTMENTS

•REDUCE THE WAGE BILL REDUCE THE WAGE BILL

•OVERCOME RELUCTANCE TO DOWNSIZE CIVIL SERVICE, OVERCOME RELUCTANCE TO DOWNSIZE CIVIL SERVICE, WITH GHOST-EMPLOYEES ON ITS ROLL & HIGH RATE OF WITH GHOST-EMPLOYEES ON ITS ROLL & HIGH RATE OF ABSENTEEISM.ABSENTEEISM.

• BUDGETARY EXERCISES: UNREALISTIC FORWARD BUDGETARY EXERCISES: UNREALISTIC FORWARD ESTIMATES: EITHER UNDER ESTIMATES FOR O & M OF ESTIMATES: EITHER UNDER ESTIMATES FOR O & M OF EXISTING ASSETS OR OVER ESTIMATES FOR NEW CAPITAL EXISTING ASSETS OR OVER ESTIMATES FOR NEW CAPITAL PROJECTSPROJECTS

• PICs ARE “LITTERED LITERALLY WITH BUDGET PICs ARE “LITTERED LITERALLY WITH BUDGET PREPARATION MANUALS” (HUGHES 2003) PREPARATION MANUALS” (HUGHES 2003)

• LACK OF SUSTAINED CAPACITY BUILDING EFFORTS, LACK OF SUSTAINED CAPACITY BUILDING EFFORTS, OFTEN ADVERSELY AFFECTED BY LARGE TURN OVER OF KEY OFTEN ADVERSELY AFFECTED BY LARGE TURN OVER OF KEY PERSONNELPERSONNEL

EFFECTIVE EXPENDITURE EFFECTIVE EXPENDITURE CONTROL Contd…CONTROL Contd…

• 2001-04: PNG’S FISCAL CONSOLIDATION: CONTINUOUS FOR 4 2001-04: PNG’S FISCAL CONSOLIDATION: CONTINUOUS FOR 4 YEARS YEARS

• RESULTS : 3 YEARS IN A ROW: POSITIVE FISCAL BALANCE, RESULTS : 3 YEARS IN A ROW: POSITIVE FISCAL BALANCE, MEETING ALL DOMESTIC & EXTERNAL INTEREST PAYMENT MEETING ALL DOMESTIC & EXTERNAL INTEREST PAYMENT OBLIGATIONS. OBLIGATIONS.

• IN 2006: REDUCING NUMBER OF DEPARTMENTS WAS IN 2006: REDUCING NUMBER OF DEPARTMENTS WAS POSTPONED TO A LATER DATE AFTER THE 2007 GENERAL POSTPONED TO A LATER DATE AFTER THE 2007 GENERAL ELECTIONS ELECTIONS

• SHORTLIVED CONSOLIDATION EPISODES IN OTHER PICsSHORTLIVED CONSOLIDATION EPISODES IN OTHER PICs

• FIJI: PERIODICAL TIGHTENING OF PUBLIC EXPENDITURES: FIJI: PERIODICAL TIGHTENING OF PUBLIC EXPENDITURES: EFFECTS OF COUPS: CUTS IN WAGE & SALARY BILL EFFECTS OF COUPS: CUTS IN WAGE & SALARY BILL

• TIGHTENING PROVED UNPOPULAR, REVERSED AFTER SOME TIMETIGHTENING PROVED UNPOPULAR, REVERSED AFTER SOME TIME

• DISRUPTED FISCAL ADJUSTMENT EFFORTS BOUND TO FAIL DISRUPTED FISCAL ADJUSTMENT EFFORTS BOUND TO FAIL WITHOUT ANY LASTING IMPACTS [(GUPTA WITHOUT ANY LASTING IMPACTS [(GUPTA ET ALET AL. (2004)].. (2004)].

EFFICIENCY IN REVENUE EFFICIENCY IN REVENUE MOBILIZATIONMOBILIZATION

• NEED OVERHAULINGNEED OVERHAULING

• SIMPLIFICATION OF THE TAX SYSTEMSIMPLIFICATION OF THE TAX SYSTEM

• REVIEW OF TAX INCENTIVES IN ALREADY REVIEW OF TAX INCENTIVES IN ALREADY FLOURISHING ACTIVITIES, LIKE TOURISM FLOURISHING ACTIVITIES, LIKE TOURISM

• FOREIGN INVESTORS ARE INFLUENCED BY FOREIGN INVESTORS ARE INFLUENCED BY OTHER FACTORSOTHER FACTORS

• TAX FACTORS ARE FAR FROM THE MAIN TAX FACTORS ARE FAR FROM THE MAIN CONCERN IN DECIDING WHERE TO PLACE THEIR CONCERN IN DECIDING WHERE TO PLACE THEIR FUNDS ( DANIEL FUNDS ( DANIEL ET AL.ET AL. 2006) 2006)

EFFICIENCY IN REVENUE EFFICIENCY IN REVENUE MOBILIZATION (contd)MOBILIZATION (contd)

• MINISTERIAL DISCRETIONARY MINISTERIAL DISCRETIONARY AD HOCAD HOC EXEMPTIONS FROM EXEMPTIONS FROM CUSTOM & IMPORT DUTIES, TAX HOLIDAYS BE CUSTOM & IMPORT DUTIES, TAX HOLIDAYS BE DISCONTINUEDDISCONTINUED

• SUSPECTED CASES OF CORRUPTIONSUSPECTED CASES OF CORRUPTION

• THEY UNDERMINE INTEGRITY AND REVENUE POTENTIAL THEY UNDERMINE INTEGRITY AND REVENUE POTENTIAL

• PICs: HEAVILY DEPENDENT ON IMPORT AND EXPORT PICs: HEAVILY DEPENDENT ON IMPORT AND EXPORT DUTIES DUTIES

• REVENUE IMPLICATIONS OF FREE TRADE BY 2010 REVENUE IMPLICATIONS OF FREE TRADE BY 2010

• REFORMS FOR ADDRESSING LIKELY FALL IN TAX REFORMS FOR ADDRESSING LIKELY FALL IN TAX REVENUES. REVENUES.

EFFICIENCY IN REVENUE EFFICIENCY IN REVENUE MOBILIZATION Contd…MOBILIZATION Contd…

• RECOMMENDED: (I) CONVERSION OF SELECTED IMPORT DUTIES RECOMMENDED: (I) CONVERSION OF SELECTED IMPORT DUTIES TO EXCISE TAXES, WHICH ARE WTO INCOMPATIBLE TO EXCISE TAXES, WHICH ARE WTO INCOMPATIBLE

• (II) BROADENING TAX SYSTEM BY INTRODUCING CONSUMPTION (II) BROADENING TAX SYSTEM BY INTRODUCING CONSUMPTION BASED TAXES, SUCH AS VALUE-ADDED TAXES (VAT)BASED TAXES, SUCH AS VALUE-ADDED TAXES (VAT)

• HALF THE COUNTRIES IN THE REGION HAVE INTRODUCED VATHALF THE COUNTRIES IN THE REGION HAVE INTRODUCED VAT

• IMF STUDY: VAT ADMINISTRATION COULD BE IMPROVED BY IMF STUDY: VAT ADMINISTRATION COULD BE IMPROVED BY FASTER PROCESSING OF REBATES, IMPROVED COMPLIANCE AT FASTER PROCESSING OF REBATES, IMPROVED COMPLIANCE AT PORTS (WHERE MOST REVENUE IS COLLECTED) & CAPACITY FOR PORTS (WHERE MOST REVENUE IS COLLECTED) & CAPACITY FOR CONDUCTING AUDITS. CONDUCTING AUDITS.

• VANUATU: NEED FOR DIRECT TAXATION:DECLINING IMP of OFC.VANUATU: NEED FOR DIRECT TAXATION:DECLINING IMP of OFC.

• REDUCE REGRESSIVITY OF INDIRECT TAXESREDUCE REGRESSIVITY OF INDIRECT TAXES

• INCREASE IN REVENUE MOBILISATION CONTRIBUTES TO INCREASE IN REVENUE MOBILISATION CONTRIBUTES TO STRENGTHEN FISCAL CONSOLIDATION EFFORTS (GUPTA 2004)STRENGTHEN FISCAL CONSOLIDATION EFFORTS (GUPTA 2004)

RESPONDING TO VOLATILITY IN NON-RESPONDING TO VOLATILITY IN NON-TAX REVENUE RECEIPTS & AIDTAX REVENUE RECEIPTS & AID

• REVENUES FROM FISHING LICENSES: BE DEPOSITED IN TRUST REVENUES FROM FISHING LICENSES: BE DEPOSITED IN TRUST FUNDS IN KIRIBATI & IN TUVALU FUNDS IN KIRIBATI & IN TUVALU

• PRESENTLY A MULTIYEAR CONTRACT IS NEGOTIATED WITH PRESENTLY A MULTIYEAR CONTRACT IS NEGOTIATED WITH FISHING NATIONS THAT INVOLVE A FIXED YEARLY PAYMENT OVER FISHING NATIONS THAT INVOLVE A FIXED YEARLY PAYMENT OVER THE TERM OF THE CONTRACTTHE TERM OF THE CONTRACT

• THERE IS AN ASYMMETRY OF INFORMATION INVOLVED ABOUT THERE IS AN ASYMMETRY OF INFORMATION INVOLVED ABOUT THE LIKELY CATCH AND THE LIKELY PRICE THE LIKELY CATCH AND THE LIKELY PRICE

• THE COUNTRY OWNER OF OFFSHORE FISHING FIRMS SHOULD BE THE COUNTRY OWNER OF OFFSHORE FISHING FIRMS SHOULD BE ASKED TO BID AGAINST EACH OTHER THROUGH AN AUCTIONASKED TO BID AGAINST EACH OTHER THROUGH AN AUCTION

• FORCE THEM TO BE “TRUTHFUL” ABOUT THEIR LIKELY CATCH. FORCE THEM TO BE “TRUTHFUL” ABOUT THEIR LIKELY CATCH.

• IN EXCHANGE FOR A FIVE YEAR FISHING CONTRACT, FIRMS IN EXCHANGE FOR A FIVE YEAR FISHING CONTRACT, FIRMS SHOULD BE ASKED TO BID A FIVE YEARLY STREAM OF PAYMENTS, SHOULD BE ASKED TO BID A FIVE YEARLY STREAM OF PAYMENTS, WHICH WOULD ENSURE MAXIMUM ACCESS FEES AS THE PRESENT WHICH WOULD ENSURE MAXIMUM ACCESS FEES AS THE PRESENT LICENSE FEES ARE WELL BELOW THE “TRUE RESOURCE RENT” LICENSE FEES ARE WELL BELOW THE “TRUE RESOURCE RENT” (DUNCAN AND TEMU 1997).(DUNCAN AND TEMU 1997).

RESPONDING TO VOLATILITY IN NON-RESPONDING TO VOLATILITY IN NON-TAX REVENUE RECEIPTS & AID Contd…TAX REVENUE RECEIPTS & AID Contd…

• TO SAFEGUARD TRUST FUNDS: LIMIT ANNUAL TO SAFEGUARD TRUST FUNDS: LIMIT ANNUAL DRAWDOWNS FOR KEEPING PER CAPITA REAL DRAWDOWNS FOR KEEPING PER CAPITA REAL VALUE OF ASSETS VALUE OF ASSETS

• KIRIBATI’S PARLIAMENT HAS LAID DOWN VALUE KIRIBATI’S PARLIAMENT HAS LAID DOWN VALUE OF RERF BE KEPT CONSTANTOF RERF BE KEPT CONSTANT

• THERE WAS NO REQUIREMENT OF PRIOR THERE WAS NO REQUIREMENT OF PRIOR APPROVAL OF THE PARLIAMENT TO EXCESS APPROVAL OF THE PARLIAMENT TO EXCESS DRAWDOWNS. DRAWDOWNS.

• KIRIBATI: CONSIDER APPROPRIATE LEGISLATIVE KIRIBATI: CONSIDER APPROPRIATE LEGISLATIVE AMENDMENTS IN PUBLIC FINANCE MGMT ACT AMENDMENTS IN PUBLIC FINANCE MGMT ACT

RE-DIRECTING MONEYS INTO CAPACITY RE-DIRECTING MONEYS INTO CAPACITY BUILDING INVESTMENTSBUILDING INVESTMENTS

• REDUCTION IN WAGE BILL, SUBSIDIES & REDUCTION IN WAGE BILL, SUBSIDIES & TRANSFERS: SUBSTANTIAL ANNUAL SAVINGSTRANSFERS: SUBSTANTIAL ANNUAL SAVINGS

• REDIRECTING FUNDS SO SAVED FROM REDIRECTING FUNDS SO SAVED FROM RECURRENT EXPENDITURES INTO CAPITAL RECURRENT EXPENDITURES INTO CAPITAL OUTLAYS IS POSITIVELY RELATED TO PERSISTENCE OUTLAYS IS POSITIVELY RELATED TO PERSISTENCE OF FISCAL ADJUSTMENT (GUPTA OF FISCAL ADJUSTMENT (GUPTA ET ALET AL. 2004) . 2004)

• SAMOA’S EXPERIENCES RELEVANT: CIVIL SAMOA’S EXPERIENCES RELEVANT: CIVIL SERVICE REFORMS SERVICE REFORMS

• 2001-2003: N0.OF MINISTRIES REDUCED:28 TO 2001-2003: N0.OF MINISTRIES REDUCED:28 TO 13 13

RE-DIRECTING MONEYS INTO CAPACITY RE-DIRECTING MONEYS INTO CAPACITY BUILDING INVESTMENTS Contd…BUILDING INVESTMENTS Contd…

• REDUCTIONS IN STAFF: NATURAL ATTRITION & FREEZING REDUCTIONS IN STAFF: NATURAL ATTRITION & FREEZING VACANCIES VACANCIES

• WAGE BILL OF SAMOA IS WELL BELOW THAT OF PICsWAGE BILL OF SAMOA IS WELL BELOW THAT OF PICs

• FISCAL CONSOLIDATION ENABLED SAMOA TO REDIRECT FISCAL CONSOLIDATION ENABLED SAMOA TO REDIRECT MORE FUNDS FOR INVESTMENT PROJECTSMORE FUNDS FOR INVESTMENT PROJECTS

•LONGER PERIOD FISCAL CONSOLIDATION HAD LASTING LONGER PERIOD FISCAL CONSOLIDATION HAD LASTING IMPACTSIMPACTS

•COMPOSITION OF PUBLIC EXPENDITURE: DIFFERENT FROM COMPOSITION OF PUBLIC EXPENDITURE: DIFFERENT FROM PICsPICs

•2006: BUDGET DEFICIT OF 0.4% OF GDP2006: BUDGET DEFICIT OF 0.4% OF GDP

DEBT-MANAGEMENTDEBT-MANAGEMENT• DOMESTIC BORROWING FOR FINANCING FISCAL DEFICITS DOMESTIC BORROWING FOR FINANCING FISCAL DEFICITS

• LARGE SCALE IN FIJI & PNG LARGE SCALE IN FIJI & PNG

• FIJI: GOVERNMENT DEBT: INCLUDING CONTINGENT FIJI: GOVERNMENT DEBT: INCLUDING CONTINGENT LIABILITIES CLOSE TO 60% OF GDP DUE TO EXPANSIONARY LIABILITIES CLOSE TO 60% OF GDP DUE TO EXPANSIONARY POLICIES OF 2001-2006 POLICIES OF 2001-2006

• PNG‘S GOVT DEBT LEVEL DECREASED OVER 4-YEAR PNG‘S GOVT DEBT LEVEL DECREASED OVER 4-YEAR PERIOD:73% OF GDP IN 2002 TO 51% IN 2005; & 42% IN 2006. PERIOD:73% OF GDP IN 2002 TO 51% IN 2005; & 42% IN 2006.

• EXTERNAL DEBT LEVEL ALSO DECREASED: 21% OF GDP IN EXTERNAL DEBT LEVEL ALSO DECREASED: 21% OF GDP IN 2006 2006

• REDUCTIONS IN DEBT LEVELS: DUE TO FISCAL REDUCTIONS IN DEBT LEVELS: DUE TO FISCAL CONSOLIDATION EFFORTS SINCE 2001 CONSOLIDATION EFFORTS SINCE 2001

EXTERNAL DEBTEXTERNAL DEBT• PICs OTHER THAN FIJI: ELIGIBLE FOR BORROWING FROM INTERNATIONAL PICs OTHER THAN FIJI: ELIGIBLE FOR BORROWING FROM INTERNATIONAL FUNDING AGENCIES ON CONCESSIONAL TERMSFUNDING AGENCIES ON CONCESSIONAL TERMS

• PICs UTILIZED THE OPPORTUNITY IN THE PAST TO BORROW FROM ADB PICs UTILIZED THE OPPORTUNITY IN THE PAST TO BORROW FROM ADB AND THE WORLD BANK FOR SEVERAL CAPITAL PROJECTS. AND THE WORLD BANK FOR SEVERAL CAPITAL PROJECTS.

• PICs HAVE TO EARMARK BUDGETARY SAVINGS FOR DEBT SERVICING PICs HAVE TO EARMARK BUDGETARY SAVINGS FOR DEBT SERVICING BURDEN. BURDEN.

• EXTERNAL DEBT SERVICING NEEDS TO ENSURE ADEQUATE PROVISION FOR EXTERNAL DEBT SERVICING NEEDS TO ENSURE ADEQUATE PROVISION FOR FOREIGN EXCHANGE. FOREIGN EXCHANGE.

• CASES OF DEFAULTS IN THE 1990S: SOLOMON ISLANDSCASES OF DEFAULTS IN THE 1990S: SOLOMON ISLANDS

• RMI FAILED IN 2006 TO MEET DEBT SERVICE REQIREMENTSRMI FAILED IN 2006 TO MEET DEBT SERVICE REQIREMENTS

• ESTIMATES OF DEBT SUSTAINABILITY IN RMI: NET PRESENT VALUE OF ESTIMATES OF DEBT SUSTAINABILITY IN RMI: NET PRESENT VALUE OF EXTERNAL DEBT TO GDP RATIO IS 80% & DEBT SERVICE AS PROPORTION OF EXTERNAL DEBT TO GDP RATIO IS 80% & DEBT SERVICE AS PROPORTION OF EXPORTS AT 78%. EXPORTS AT 78%.

• AN ADB STUDY ON RMI (2007): EVEN IF NO NEW EXTERNAL DEBT WERE AN ADB STUDY ON RMI (2007): EVEN IF NO NEW EXTERNAL DEBT WERE INCURRED, DEBT SERVICE WOULD INCREASE OVER THE NEXT FIVE YEARS.INCURRED, DEBT SERVICE WOULD INCREASE OVER THE NEXT FIVE YEARS.

EXTERNAL DEBT (contd)EXTERNAL DEBT (contd)• SAMOA’S EXT DEBT WAS IN EXCESS OF 100% OF GDP IN MID SAMOA’S EXT DEBT WAS IN EXCESS OF 100% OF GDP IN MID 1990S1990S

• FISCAL CONSOLIDATION: 1999-2003: REDUCTION IN DEBT FISCAL CONSOLIDATION: 1999-2003: REDUCTION IN DEBT STOCKSTOCK

• 2006: 36% OF GDP 2006: 36% OF GDP

• IMF 2005 DEBT SUSTAINABILITY STUDY: ISOLATED SHOCKS IMF 2005 DEBT SUSTAINABILITY STUDY: ISOLATED SHOCKS WILL NOT SERIOUSLY AFFECT THE DEBT RATIO WILL NOT SERIOUSLY AFFECT THE DEBT RATIO

• COMBINATION OF SHOCKS: VOLATILITY IN AID & COMBINATION OF SHOCKS: VOLATILITY IN AID & REMITTANCES & HIKES IN OIL PRICE MIGHT RAISE DEBT LEVEL REMITTANCES & HIKES IN OIL PRICE MIGHT RAISE DEBT LEVEL (ADB 2007). (ADB 2007).

• VANUATU: PARLIAMENT DEFINED THE “PRUDENT LEVEL” OF VANUATU: PARLIAMENT DEFINED THE “PRUDENT LEVEL” OF EXTERNAL DEBT/GDP RATIO AT 40% & DEBT SERVICE/DOMESTIC EXTERNAL DEBT/GDP RATIO AT 40% & DEBT SERVICE/DOMESTIC REVENUE RATIO AT 8% OF GDP REVENUE RATIO AT 8% OF GDP

• OTHERS CONSIDER ADOPTING SIMILAR RESTRICTIVE OTHERS CONSIDER ADOPTING SIMILAR RESTRICTIVE LEGISLATION?LEGISLATION?

MAINTENANCE OF COMPETITIVE REAL MAINTENANCE OF COMPETITIVE REAL EXCHANGE RATEEXCHANGE RATE

• EXTERNAL DEBT-SERVICING: GROWTH IN EXPORTS IS CRITICAL EXTERNAL DEBT-SERVICING: GROWTH IN EXPORTS IS CRITICAL

• FISCAL DEFICITS RESULT IN INFLATIONARY PRESSURESFISCAL DEFICITS RESULT IN INFLATIONARY PRESSURES

• WILL RAISE REAL EXCHANGE RATESWILL RAISE REAL EXCHANGE RATES

• RENDERING EXPORTS & TOURISM LESS COMPETITIVE RENDERING EXPORTS & TOURISM LESS COMPETITIVE

• AVOID SUBSTANTIAL AMOUNTS OF OFFICIAL TRANSFERS BEING AVOID SUBSTANTIAL AMOUNTS OF OFFICIAL TRANSFERS BEING DIVERTED TO FINANCING HIGHER WAGE BILL & RECURRENT DIVERTED TO FINANCING HIGHER WAGE BILL & RECURRENT EXPENDITURES, EITHER BUDGETED OR UNBUDGETED. EXPENDITURES, EITHER BUDGETED OR UNBUDGETED.

• INSTANCES OF ADDITIONAL, HIGHER ADJUSTMENTS IN SALARIES: INSTANCES OF ADDITIONAL, HIGHER ADJUSTMENTS IN SALARIES: COST OF LIVING ADJUSTMENTS (COLA) & GOVT CONSUMPTION OF COST OF LIVING ADJUSTMENTS (COLA) & GOVT CONSUMPTION OF LOCAL GOODS AND SERVICESLOCAL GOODS AND SERVICES

• SO CALLED “DUTCH DISEASE” EFFECT: PUSHING REAL EXCHANGE SO CALLED “DUTCH DISEASE” EFFECT: PUSHING REAL EXCHANGE RATE: ADVERSE IMPACT ON EXPORTSRATE: ADVERSE IMPACT ON EXPORTS

MAINTENANCE OF COMPETITIVE REAL MAINTENANCE OF COMPETITIVE REAL EXCHANGE RATE Contd…EXCHANGE RATE Contd…

• PICs SHOULD BE AWARE OF POSSIBILITY OF PICs SHOULD BE AWARE OF POSSIBILITY OF DIVERSION OF BORROWED MONEYS FOR MEETING DIVERSION OF BORROWED MONEYS FOR MEETING UNBUDGETED CONSUMPTION EXPENDITURES UNBUDGETED CONSUMPTION EXPENDITURES

• RISKS OF SUCH POSSIBILITIES ARE GREATER IN RISKS OF SUCH POSSIBILITIES ARE GREATER IN TIMES OF POLITICAL INSTABILITY & NATURAL TIMES OF POLITICAL INSTABILITY & NATURAL DISASTERSDISASTERS

• NEED FOR STRONG BUDGETARY CONTROL NEED FOR STRONG BUDGETARY CONTROL MECHANISM IN PLACE MECHANISM IN PLACE

• COMPETITIVE REAL EXCHANGE RATE: CRITICAL NEED COMPETITIVE REAL EXCHANGE RATE: CRITICAL NEED FOR MEETING FUTURE DEBT-SERVICING OBLIGATIONSFOR MEETING FUTURE DEBT-SERVICING OBLIGATIONS

PERSISTENCE OF FISCAL ADJUSTMENT PERSISTENCE OF FISCAL ADJUSTMENT PROGRAMPROGRAM

• GUPTA GUPTA ET ALET AL. (2004): PERSISTENCE OF FISCAL . (2004): PERSISTENCE OF FISCAL ADJUSTMENT IS NEEDED FOR LASTING EFFECTSADJUSTMENT IS NEEDED FOR LASTING EFFECTS

• PERSISTENCE OF FISCAL ADJUSTMENT IS POSITIVELY PERSISTENCE OF FISCAL ADJUSTMENT IS POSITIVELY DETERMINED BY REALLOCATION OF RECURRENT DETERMINED BY REALLOCATION OF RECURRENT EXPENDITURES TO PRODUCTIVE CAPITAL PROJECTS EXPENDITURES TO PRODUCTIVE CAPITAL PROJECTS

• NEGATIVELY INFLUENCED BY LARGE OUTLAYS OF SALARIESNEGATIVELY INFLUENCED BY LARGE OUTLAYS OF SALARIES

• PAST EFFORTS IN PICs OFTEN DISRUPTED BY THE AFTER-PAST EFFORTS IN PICs OFTEN DISRUPTED BY THE AFTER-IMPACT OF UNFORESEEN NATURAL & MAN-MADE DISASTERS IMPACT OF UNFORESEEN NATURAL & MAN-MADE DISASTERS

• KHAMFULA (2005): STUDY ON AFRICAN COUNTRIES: KHAMFULA (2005): STUDY ON AFRICAN COUNTRIES: EXOGENOUS SHOCKS ENDANGER FISCAL REFORM EXOGENOUS SHOCKS ENDANGER FISCAL REFORM PROGRAMMESPROGRAMMES

CONCLUSIONS CONCLUSIONS

• FISCAL DISCIPLINE: INFLUENCED BY POLITICAL FACTORS: FISCAL DISCIPLINE: INFLUENCED BY POLITICAL FACTORS: ELECTORAL SYSTEMS & COALITION ARRANGEMENTS ELECTORAL SYSTEMS & COALITION ARRANGEMENTS

• MORE REPRESENTATIVE ELECTORAL SYSTEM IS LIKELY TO MORE REPRESENTATIVE ELECTORAL SYSTEM IS LIKELY TO ACHIEVE INCLUSIVENESS ONLY AT THE COST OF FISCAL ACHIEVE INCLUSIVENESS ONLY AT THE COST OF FISCAL DISCIPLINE DISCIPLINE

• FABRIZIO AND MODY (2006): MORE FRAGMENTED FABRIZIO AND MODY (2006): MORE FRAGMENTED COALITIONS & GOVERNMENTS TEND TO BE LESS FISCALLY COALITIONS & GOVERNMENTS TEND TO BE LESS FISCALLY CONSERVATIVE CONSERVATIVE

• IN FIJI, GOVT WAS DICTATED BY COALTION INTERESTS & IN FIJI, GOVT WAS DICTATED BY COALTION INTERESTS & ELECTORAL SYSTEMS ELECTORAL SYSTEMS

CONCLUSIONS (contd)CONCLUSIONS (contd)

•ACCOMMODATED CERTAIN INTERESTS RESULTING IN ACCOMMODATED CERTAIN INTERESTS RESULTING IN GREATER COMPETITION OF FOR FISCAL RESOURCESGREATER COMPETITION OF FOR FISCAL RESOURCES

• SPECIAL SCHEMES WERE IMPLEMENTED WITH POOR SPECIAL SCHEMES WERE IMPLEMENTED WITH POOR CONTROL OVER THE EXPENDITURES AND LACK OF CONTROL OVER THE EXPENDITURES AND LACK OF SUPERVISIONSUPERVISION

• MANY OF THEM RESULTED IN SCAMS MANY OF THEM RESULTED IN SCAMS

• QUALITY OF BUDGETARY INSTITUTIONS MATTERS HERE QUALITY OF BUDGETARY INSTITUTIONS MATTERS HERE

• THEY HAVE A MATERIAL BEARING ON FISCAL DISCIPLINETHEY HAVE A MATERIAL BEARING ON FISCAL DISCIPLINE

• A NOTE OF CAUTION: TUSSLE BETWEEN FORCES A NOTE OF CAUTION: TUSSLE BETWEEN FORCES SUPPORTING SOUND INSTITUTIONS & POLITICS OF SUPPORTING SOUND INSTITUTIONS & POLITICS OF PRESSURES ON LIMITED BUDGETARY RESOURCES WILL PRESSURES ON LIMITED BUDGETARY RESOURCES WILL CONTINUECONTINUE

Thank YouThank You

role of fiscal policy in resilience building: experiences of small island states in the pacific...

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