Fiscal Aspects of IMF-Supported Programs in Low-Income Countries

Sanjeev GuptaFiscal Affairs Department

January 28, 2003

2

IMF-Supported Programs in Low-Income Countries

ESAF transformed into PRGF in November 1999 A change in the content of programs

More pro-poor and pro-growth Increased emphasis on country

ownership of programs Better definition of IMF’s role

Laid out in the Key Features of the PRGF

3

IMF-Supported Programs in Low-Income Countries

Of the seven key features of PRGF-supported programs, four are related to fiscal policy: Budgets that are more pro-poor and pro-

growth Ensuring appropriate flexibility in fiscal targets Measures to improve public resource

management/accountability Poverty and social impact analysis (PSIA) of

major macro adjustments/structural reforms

4

IMF-Supported Programs in Low-Income Countries

The other three key features are:

Broad participation and greater ownership

Embedding of the PRGF in the overall strategy for growth and poverty reduction

More selective structural conditionality

5

Sample and Methodology 35 countries were reviewed based on

programs approved or reviewed by the Executive Board between July 1, 2000 and September 30, 2001

The sample includes 19 countries with new, three-year PRGF-

supported arrangements 16 countries with transformed PRGF-

supported arrangements

6

Sample and Methodology The analysis focuses on the extent to which

program design in PRGF-supported programs has been consistent with the key features The process of transformation from the ESAF

to the PRGF is ongoing and still at an early stage.

An attempt has been made to evaluate outcomes relative to objectives wherever data were available. Some presentation on outcomes goes beyond what was presented to the IMF Board.

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First Key Feature: Budgets That Are More Pro-Poor and Pro-Growth

More Pro-Poor Budgets Broad-brush changes in

expenditure composition Both actual and projected spending in

education and health care are to rise as a share of GDP and total spending

Real spending per capita on education and health care is projected to rise

8

Education Spending in PRGF-Supported Programs: 1999 - 2001/2002(In percent of GDP; number of countries in parentheses)

3.7 3.84.03.9

4.3 4.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

All PRGFs (26) All PRGFs (29) New PRGFs (15)

1999 (Pre-PRGF) 1/ 2000 2/ 2001-02 3/

Sources: National authorities; and IMF staff estimates.1/ In most cases, the pre-PRGF year is for 1999.2/ 2000 refers to actual expenditure level for that year.3/ 2001-02 refers to the average projected spending level for 2001-02.

9

Health Spending in PRGF-Supported Programs: 1999 - 2001/2002(In percent of GDP; number of countries in parentheses)

1.71.8 1.81.8

2.1 2.2

0.0

0.5

1.0

1.5

2.0

2.5

All PRGFs (26) All PRGFs (29) New PRGFs (15)

1999 (Pre-PRGF) 1/ 2000 2/ 2001-02 3/

Sources: National authorities; and IMF staff estimates.1/ In most cases, the pre-PRGF year is for 1999.2/ 2000 refers to actual expenditure level for that year.3/ 2001-02 refers to the average projected spending level for 2001-02.

10

Education Spending in PRGF-Supported Programs: 1999 - 2001/2002(In percent of total government spending; number of countries in parentheses)

14.8 15.2 15.015.616.7 16.4

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

All PRGFs (26) All PRGFs (29) New PRGFs (15)

1999 (Pre-PRGF) 1/ 2000 2/ 2001-02 3/

Sources: National authorities; and IMF staff estimates.1/ In most cases, the pre-PRGF year is 1999.2/ 2000 refers to actual expenditure level for that year.3/ 2001-02 refers to the average projected spending level for 2001-02.

11

Health Spending in PRGF-Supported Programs: 1999 - 2001/2002(In percent of total government spending; number of countries in parentheses)

7.1 7.46.6

7.3

8.27.9

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

All PRGFs (26) All PRGFs (29) New PRGFs (15)

1999 (Pre-PRGF) 1/ 2000 2/ 2001-02 3/

Sources: National authorities; and IMF staff estimates.1/ In most cases, the pre-PRGF year is 1999.2/ 2000 refers to actual expenditure level for that year.3/ 2001-02 refers to the average projected spending level for 2001-02.

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Annual Change in Real Per Capita Education Spending in PRGF-Supported Programs

(Number of countries in parentheses)

5.45.0

9.2

5.7

0

1

2

3

4

5

6

7

8

9

10

All PRGFs (28) New PRGFs (15)

Pre-PRGF 2001-02

13

Annual Change in Real Per Capita Health Spending in PRGF-Supported Programs

(Number of countries in parentheses)

8.0

6.3

10.410.9

0

2

4

6

8

10

12

All PRGFs (25) New PRGFs (12)

Pre-PRGF 2001-02

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First Key Feature: Budgets That Are More Pro-Poor and Pro-Growth

More Pro-Poor Budgets Poverty-reducing spending identified

in PRSPs Both actual and projected spending

are increasing

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Poverty-Reducing Spending in PRGFs(In percent of GDP; refers to actual data; number of countries in parentheses)

7.5

6.2

8.8

7.1

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

All PRGFs (19) New PRGF (6)

Pre-PRGF Year Latest Year

Source: National authorities; and IMF staff estimates.1/ In most cases, the pre-PRGF year is 1999. 2/ Latest year refers to actual data for 2000, in most cases.

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Poverty-Reducing Spending in PRGFs(In percent of total government spending; refers to actual data;

number of countries in parentheses)

26.4

18.1

29.9

19.9

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

All PRGFs (19) New PRGF (6)

Pre-PRGF Year Latest Year

Source: National authorities; and IMF staff estimates.1/ In most cases, the pre-PRGF year is 1999. 2/ Latest year refers to actual data for 2000, in most cases.

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First Key Feature: Budgets That Are More Pro-Poor and Pro-Growth

More Pro-Growth Budgets Higher spending on human capital

formation; shifts in public spending from current to capital outlays; and efficiency-promoting tax reforms

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First Key Feature: Budgets That Are More Pro-Poor and Pro-Growth Results should be seen as tentative, given

constraints in tracking pro-poor spending: Existing budget classification systems do not

allow for precise matching of expenditure allocations with poverty-reducing programs identified in PRSPs

Additionally, there are other weaknesses in public expenditure management (PEM) systems that prevent tracking

Data on social outcomes not yet available

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First Key Feature: Budgets That Are More Pro-Poor and Pro-Growth

Spending increases must be accompanied by improvements in efficiency and targeting

Three-fourths of PRGF-supported programs contain such measures

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First Key Feature: Budgets That Are More Pro-Poor and Pro-Growth Over half target improvements in the

efficiency of spending by reducing waste or allocating a higher share of spending to critical inputs (e.g., textbooks and medicines)

About one-third seek to reallocate spending to more productive activities (e.g., primary education)

About one-third aim to improve the targeting of spending so that the poor receive a higher share of benefits

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First Key Feature: Budgets That Are More Pro-Poor and Pro-Growth There is substantial scope to improve

the quality and specificity of expenditure advice in PRGF-supported programs As more countries move to full PRSPs, there

will be opportunity to fully articulate specific measures

Full PRSPs will provide occasion to more fully integrate the policy advice from development partners, such as the World Bank’s Public Expenditure Reviews (PERs)

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Second Key Feature: Appropriate Flexibility in Fiscal Targets

Flexibility can be assessed in three ways: (Aspect 1) Does the fiscal framework permit

higher public spending to accommodate the government’s poverty reduction strategy?

(Aspect 2) Are targets for the budget deficit allowed to bend when foreign financing or revenues are different than anticipated?

(Aspect 3) Were alternative fiscal adjustment paths discussed with country authorities?

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Fiscal Frameworks (Aspect 1) PRGF-supported programs accommodate

higher public expenditures PRGF-supported programs have deficit

targets that are similar to those under the preceding ESAF-supported programs; however, the deficit targets excluding grants are higher

Due to higher external financing, revenues, and grants, PRGF-supported programs were targeted to rely no more on domestic financing than ESAFs

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Fiscal Targets in PRGF- and ESAF-Supported Programs(Unweighted averages; in percent of GDP)

Under the PRGF Under the ESAF3-Year 3-Year

Pre-Program Program Pre-Program ProgramYear Average Year Average

Total revenue and grants 20.3 21.4 19.4 20.3Revenue 17.1 17.9 16.3 17.3Grants 3.2 3.5 3.1 3.0

Total expenditure and net lending 23.6 24.4 22.8 23.2Primary expenditure 21.6 22.5 20.0 20.6

Overall balance (commitment basis) -3.3 -3.0 -3.5 -2.9Arrears -0.1 -0.5 -0.3 -0.4Overall balance (cash basis) -3.5 -3.6 -3.8 -3.4Overall balance (cash basis) excluding grants -6.7 -7.0 -6.6 -6.2Deficit financing 3.5 3.6 3.8 3.4

Domestic 0.9 -0.2 1.0 -0.2Bank 0.1 -0.6 0.3 -0.7Non-Bank 0.2 -0.1 0.3 -0.1Privatization 0.4 0.6 0.2 0.3

External 2.6 3.7 2.8 3.6

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Fiscal Frameworks (Aspect 1) Countries that have achieved some

degree of fiscal stabilization (“post-stabilization countries”) incorporate larger increases in public expenditure and the deficit

This group includes those that (1) achieved a cash deficit of less than 2 percent of GDP (after grants) in 1999; (2) had inflation of less than 10 percent in 1999, and projected inflation below 10 percent in 2000-02; and had positive economic growth in 1999. It comprises Azerbaijan, Benin, Cambodia, Cameroon, Macedonia, Mauritania, Mozambique, Senegal, Tanzania, and Uganda.

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Fiscal Frameworks (Aspect 1)

Targeted revenue increases under PRGF tend to be less ambitious in post-stabilization countries

This may reflect healthier revenue generation prior to the start of the PRGF program

27

Fiscal Frameworks (Aspect 1) Total revenues are expected to rise

by about ¾ percentage point of GDP Domestic revenue mobilization less

prominent than under the ESAF HIPCs target only half the increase that

was present under last ESAF Most tax measures focus on

consumption and trade taxes rather than income and property taxation

28

Fiscal Frameworks (Aspect 1) A wide array of measures to

strengthen tax administration, majority of these focus on domestic tax system

Less conditionaility on tax measures than under ESAF (2 to 3 against 3 under ESAF)

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Fiscal Frameworks (Aspect 1) Fiscal Outcomes

For 28 countries, compared to the program targets, overall deficit was broadly on track in the first program year, although there was a shortfall in capital spending and revenues

The average numbers mask differences across countries in achieving the program targets

Up to 18 countries experienced a shortfall in both total expenditures and in revenues

12 countries had higher than programmed deficit

30

Fiscal Frameworks (Aspect 1) Fiscal Outcomes (cont’d)

In the second program year, the overall deficit was higher than programmed

Traceable to higher primary current expenditure

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Fiscal Targets in PRGF-Supported Programs(Unweighted averages; in percent of GDP)

Pre-PRGF First YearYear Program Actual

All countriesTotal revenue and grants 20.2 21.3 21.0

Revenue 16.3 17.0 16.5 Grants 3.4 3.9 4.0

Total expenditure and net lending 23.7 24.3 24.1 Primary expenditure 21.8 22.5 22.2

Overall balance (commitment basis) -3.5 -3.0 -3.2 Arrears -0.1 -1.0 -0.6 Overall balance (cash basis) -3.6 -4.2 -3.8 Overall balance (cash basis) excluding grants -6.9 -8.0 -7.6 Deficit financing 3.6 4.3 3.8

Domestic 1.0 -0.1 0.8 External 2.6 4.3 3.0

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Fiscal Targets in PRGF-Supported Programs(Unweighted averages; in percent of GDP)

Pre-PRGF Second YearYear Program Actual

All countriesTotal revenue and grants 21.2 21.6 21.6

Revenue 16.5 17.0 16.8 Grants 4.7 4.6 4.9

Total expenditure and net lending 24.5 25.5 26.6 Primary expenditure 23.3 24.4 25.5

Overall balance (commitment basis) -3.4 -3.9 -5.0 Arrears -0.1 -0.3 -0.3 Overall balance (cash basis) -3.4 -4.2 -5.3 Overall balance (cash basis) excluding grants -8.1 -8.7 -10.1 Deficit financing 3.4 4.2 5.3

Domestic 1.2 -0.1 1.8 External 2.2 4.3 3.4

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Flexibility in accommodating changes in financing or revenues (Aspect 2)

PRGF-supported programs show greater flexibility than ESAFs in accommodating unanticipated changes in foreign financing One-third of new PRGFs contain adjustors

that allow higher spending if foreign financing higher than anticipated (Adjustors are also there to cover shortfalls in foreign financing)

Relatively few, however, indicate “contingent expenditures” to be increased in case additional foreign financing is secured

34

Flexibility in accommodating changes in financing or revenues (Aspect 2)

Fiscal Outcomes Domestic financing was higher in light of

shortfalls in foreign financing in both years For the first year, adjustors were included in

almost all programs Only in 2 cases were adjustors relevant for

completing the first review 9 countries met their program targets 4 programs went off-track even though 12 countries

had higher than programmed deficit 10 countries were granted waivers in fiscal related

areas (net credit to government) even after adjustors came into play

35

Alternative Fiscal Paths (Aspect 3) PRGF documents do not always report

on discussions with the authorities on fiscal policy choices and their impact on the poor—pointing to need for more PSIA (see below)

36

Third Key Feature: Improving Public Resource Management/Accountability Almost all PRGF-programs place

strong emphasis on improving PEM Average 4-5 measures per program or

review, over half subject to conditionality

Major area of concentration budget execution, but also a large number of measures in budget formulation and reporting

37

PEM Measures in PRGF-supported Programs(Number of measures per country)

0.0 0.5 1.0 1.5 2.0

Budget coverage and classification (13)

Tracking poverty-reducing expenditure (10)

Budgeting procedures (17)

Expenditure procedures (30)

Treasury system (22)

Arrears and debt management (21)

Expenditure Reporting (12)

Auditing (19)

Other governance (15)

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For

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atio

nB

udge

tE

xecu

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R

epor

ting

and

Rev

iew

38

Third Key Feature: Improving Public Resource Management/Accountability But a substantial agenda of reform remains

Fiscal data are often not comprehensive In a third of countries, there are considerable

differences between budget coverage and the GFS definition of the general government

Budgets rarely provide information on contingent liabilities, tax expenditures, or quasi-fiscal activities

Only about half fully capture donor funds in the budget in a timely manner

39

Third Key Feature: Improving Public Resource Management/Accountability

Dissemination of fiscal information is at times incomplete and subject to considerable delays

Most countries do not publish budget outturn data on at least a quarterly basis

final audited accounts are provided to legislatures with a substantial lag

A vigorous program of technical assistance remains necessary

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Fourth Key Feature: Poverty and Social Impact Analysis (PSIA)

PSIA consists of the analysis—ex-ante, during implementation, and ex-post—of the positive and negative impact of country policies on the well-being of the poor and other groups.

May be defined broadly as instances where program documents describe the potential effects of one or more economic policies on the poor

May be defined strictly to include instances where a study was undertaken to assess the effects of specific policies

41

Fourth Key Feature: Poverty and Social Impact Analysis (PSIA)

Defined broadly: about 60 percent of PRGF programs include some form of PSIA, more so than under ESAF

Defined strictly: only a third of PRGF-supported programs included formal PSIA

PSIA has been widely absent in most PRSPs in the sample, with the exception of Mauritania and Uganda

42

Fourth Key Feature: Poverty and Social Impact Analysis (PSIA)

Coverage of PSIA varies by reform. For some reforms (e.g. taxation), a very small percentage of measures are accompanied by PSIA

Data limitations and weak national capacity are important obstacles to more widespread PSIA

43

Poverty and Social Impact Analysis (PSIA) in PRGF-supported Programs and Countervailing Measures

(Percent of reforms covered by PSIA and Countervailing Measures)

0 10 20 30 40 50 60 70 80 90

Contractionary expenditure (13)

Revenue (22)

Trade and exchange rate (16)

Domestic prices (23)

Civil service (27)

Privatization (29)

Social (25)

Other (26)

Exogenous shocks (10)

PSIA Countervailing Measures

44

Summary and Conclusion A good start has been made

The composition of public spending is shifting toward pro-poor activities

Higher public spending is accommodated under the PRGF

Measures to improve the efficiency and targeting of public expenditure

45

Summary and Conclusion Progress has been uneven in other

areas Reporting of poverty-reducing spending Identification of contingent expenditures Systematic poverty and social impact

analysis Bolstering the revenue efforts in HIPCs

46

Summary and Conclusion There is scope for deeper implementation

More extensive and effective communication with government officials, development partners, and civil society in countries with PRGF-supported programs

Documents for PRGF programs should routinely provide a description of the PSIA being carried out

Further capacity building to develop and assess macroeconomic frameworks, analyze the profile of poverty, and conduct poverty and social impact analyses