Preparing for the Next Shock Thomas Baunsgaard Deputy Division Chief Fiscal Affairs Department African Fiscal Forum November 9-10, 2011 Cape Town 1
Where could the next fiscal shocks come from? • External shocks – Commodity price shocks – Spillover of growth shocks (global growth slowdown) • Domestic shocks – Policy shocks – Weather related shocks 2
External and domestic volatility is high Commodity and fuel prices are Domestic growth is volatile volatile 10 250 8 200 6 4 150 2 100 0 50 -2 -4 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 1990Jan 1992Jan 1994Jan 1996Jan 1998Jan 2000Jan 2002Jan 2004Jan 2006Jan 2008Jan 2010Jan 2011Jul Sub-Sahara Africa emerging & developing food price index oil price index metal price index Real GDP growth rate (%) • Commodity price indices (2005=100) 3
Economic volatility spills over on the budget Revenue volatility tends to be higher in …and where the domestic growth rate is countries where the terms of trade is volatile volatile… 14 0.9 RWA 0.8 12 GNQ SLE GNB Terms of Trade (std/mean) 0.7 AGO Growth (std-dev) 10 0.6 GIN BEN 8 TCD 0.5 ERI MWI GNB ETH ZAR 0.4 COG 6 MWI TGO ETH ZMB NGA ERI NER TZA MDG MDG SYC ZMB 0.3 TGO RWA BFA MOZ AGO 4 NGA CAF GHA BWA CIV UGA CAF COG GMB TCD GAB COM CMR MLI 0.2 COM GMB NAM NAM SLE BFA GAB LSO NER SWZ CPV MUS UGA MUS MLI ZAF TZA KEN CIV CPV BWA SEN KEN ZAR CMR 2 SWZ LSO 0.1 BEN GIN GHA MOZ ZAF SEN SYC 0 0 0 5 10 15 0 5 10 15 Revenue-to-GDP (std-dev) Revenue-to-GDP (std-dev) Revenue volatility vs. terms of trade volatility Revenue volatility vs. growth volatility (1990-2010) (1990-2010) 4
We assessed the impact of two kinds of shocks on LICs Another spike in global commodity prices Based on market expectations, embedded in commodity future options, commodity prices would continue to increase in 2011–12. 400 400 Commodity prices, (Index, 2005 = 100) 350 350 Baseline Simulated 300 300 250 250 200 200 150 150 100 100 50 50 0 0 2007 2008 2009 2010 2011 2012 2007 2008 2009 2010 2011 2012 2007 2008 2009 2010 2011 2012 Global Food Prices Global Oil Price Global Metals Prices (Index) Sources: WEO, and IMF staff estimates. Note: Global food prices are assumed to increase by 28% in 2011, 47% in 2012, relative to the baseline; global oil prices by 23% in 2011 and 47% in 2012; and metal prices by 23% in 2011 and 46% in 2012. 5
And a downturn in global growth A 1½ percentage point decline in global growth in 2011–12 would shave off an estimated 1 percent from LIC growth. (Median, percentage change) LICs' growth Global growth 7 6 Baseline Baseline 6 5 5 4 4 3 Downside 3 2 Downside scenario 2 1 1 0 0 2006 2007 2008 2009 2010 2011 2012 -1 (proj.) (proj.) 2005 2006 2007 2008 2009 2010 2011 2012 Sources: WEO, and IMF staff estimates. 6
A recap from yesterday: the recovery of fiscal space is still lagging Fiscal space of all African LICs (% of GDP) 6 5 4 3 2 1 0 -1 -2 -3 2007 2008 2009 2010 2011 2012 median 75th percentile 25th percentile 7
African LICs are less prepared to respond to further shocks compared to 2009 • Fiscal balances would 0.8 deteriorate in LICs 0.6 0.4 eroding fiscal space if 0.2 the shocks materialize 0 -0.2 • The fiscal impact of the -0.4 growth shock is higher -0.6 -0.8 -1 2009 2010 2011 2012 2012 2012 baseline commodity growth shock downturn Fiscal space (% of GDP, African LICs, non-oil exporters, median) 8
Oil exporting LICs in Africa have greater fiscal buffers, but more volatile • While oil exporting LICs 8 have more room to 7 accommodate the 6 5 shocks… 4 3 • …and would benefit 2 from higher fuel 1 0 prices… -1 -2 • …the fiscal space can -3 quickly be eroded if oil 2009 2010 2011 2012 2012 2012 baseline commodity growth shock downturn prices drop Fiscal space (% of GDP, African LICs, oil exporters, median) 9
Poverty would increase if the shocks were to materialize A double dip growth shock would leave an additional Higher food and fuel prices would leave an 23 million people in poverty by 2012, more than half additional 31 million people in poverty in 2012, more in Sub-Saharan Africa. than half in Sub-Saharan Africa. 60 3.0 60 3.0 Impact on poverty rate 2.7 Impact on poverty rate 52.0 50.4 (percentage points; right 2.5 (percentage points; right axis) 50 2.5 axis) 2.5 50 44.4 2.2 2.2 2.2 40 2.0 40 2.0 35.9 1.6 1.5 30 1.5 30 1.5 Share of total increase in Share of total poverty (percent; 20 1.0 20 1.0 increase in left axis) poverty (percent; 9.6 0.5 left axis) 10 0.5 10 0.5 2.9 2.3 2.5 0 0.0 0 0.0 ASI LAC MEU SSA ASI LAC MEU SSA Sources: WEO, and IMF staff Sources: WEO, and IMF staff 10
Households are especially sensitive to fuel and food price shocks Food and fuel make up half of Higher food and fuel prices affect the poorest most, but middle- the consumer basket in LICs income households also impacted fuel, Reduction in real household consumption 6% (in percent) 14 12 other, 10 49% food, 45% 8 Asia 6 Latin America and Caribbean 4 Middle East and Europe 2 Sub-Saharan Africa 0 Composition of CPI basket (LICs, median) 1 2 3 4 5 6 7 8 9 10 Household Consumption Decile Sources: WEO, and IMF staff estimates. 11
How should countries respond to a commodity price surge? • LICs face inflation and social pressures tough choices for fiscal and monetary policies • Fiscal policy: need a pragmatic response, but avoid generalized tax decreases or subsidies – First best: full pass-through of international prices while relying on an effective, well-targeted social safety net – Second best: • Well-targeted price subsidies on specific commodities mostly consumed by the poor • Import tariff reductions on selected food items • Social support schemes: school based feeding, food voucher programs and proxy-targeting • If well-designed and targeted, agricultural input subsidies can help stimulate small-holder agricultural production 12
How should countries respond to a double dip growth shock? • Countries with fiscal space and financing can maintain, or even scaling up, expenditure to soften the economic and social impact – Investment spending for growth and employment – Social spending soften the impact on the poor • Countries with inadequate fiscal space should limit revenue decline and prioritize spending • Where there is no comprehensive social safety net, ad hoc social programs can help • Avoid poorly targeted measures such as public wage increases 13
Anticipating future shocks: balance the rebuilding of buffers against spending needs Fiscal response in 2009 (Median) 20 Policy buffers are key for Change in fiscal balance 15 building resilience against in percent of GDP shocks Real government 10 expenditure growth 5 But building buffers has an 0 opportunity cost -5 Ample fiscal Mixed Low fiscal buffers space and space and trade-off reserve reserve -10 coverage coverage 14
How can countries become more resilient by increasing fiscal space? • Strengthen the fiscal balance… • …by revenue increases… Link • …and public expenditure reforms Link • Other reforms that strengthen growth and economic diversification 15
Scaling up capital expenditure has benefits but also risks • Increasing capital expenditure is important for growth • But requires better public investment management…appraisal, project selection, implementation, and evaluation • Non-concessional borrowing needs to be handled prudently – Debt sustainability – Fiscal risks including from off-budget liabilities 16
Thank you ! 20
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