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?
2
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
3
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
4
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
5
Why is it an eligibility criterion?
Macroeconomic
stability:
Precondition for
Macroeconomic
instability
sustained
economic
growth
stable
government
budget
budget outcomes
diverge from plan
income growth
of poor people
sustained
funding of
poverty
reduction
policies
financial
programming
becomes ineffective
6
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).
7
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)
8
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
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
10
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.
12
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?
15
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….)
16
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
17
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.
18
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.
19
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
20
a) Content of the Introduction of the macroeconomic 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.
21
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.
22
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.
23
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).
25
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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