Preparing for the Next Shock Thomas Baunsgaard Deputy Division - - PowerPoint PPT Presentation

Preparing for the Next Shock

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African Fiscal Forum November 9-10, 2011 Cape Town

Thomas Baunsgaard

Deputy Division Chief Fiscal Affairs Department

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

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External and domestic volatility is high

Commodity and fuel prices are volatile

Domestic growth is volatile

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50 100 150 200 250 1990Jan 1992Jan 1994Jan 1996Jan 1998Jan 2000Jan 2002Jan 2004Jan 2006Jan 2008Jan 2010Jan 2011Jul food price index

• il price index

metal price index

Real GDP growth rate (%)

• Commodity price indices (2005=100)
• 4
• 2

2 4 6 8 10 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Sub-Sahara Africa emerging & developing

Economic volatility spills over on the budget

Revenue volatility tends to be higher in countries where the terms of trade is volatile…

…and where the domestic growth rate is volatile

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Revenue volatility vs. terms of trade volatility (1990-2010) Revenue volatility vs. growth volatility (1990-2010)

AGO CMR TCD COG GNQ GAB NGA BWA CPV GHA LSO MUS NAM SEN SYC ZAF SWZ ZMB BEN BFA ETH GMB KEN MDG MWI MLI MOZ NER RWA SLE TZA UGA CAF COM ZAR CIV ERI GIN GNB TGO

0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 5 10 15

Revenue-to-GDP (std-dev) Terms of Trade (std/mean)

AGO CMR TCD COG GAB NGA BWA CPV GHA LSO MUS NAM SEN SYC ZAF SWZ ZMB BEN BFA ETH GMB KEN MDG MWI MLI MOZ NER RWA SLE TZA UGA CAF COM ZAR CIV ERI GIN GNB TGO

2 4 6 8 10 12 14 5 10 15

Growth (std-dev) Revenue-to-GDP (std-dev)

We assessed the impact of two kinds of shocks on LICs

Another spike in global commodity prices

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50 100 150 200 250 300 350 400 50 100 150 200 250 300 350 400

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) Baseline Simulated 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.

Based on market expectations, embedded in commodity future options, commodity prices would continue to increase in 2011–12.

Commodity prices, (Index, 2005 = 100)

And a downturn in global growth

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2005 2006 2007 2008 2009 2010 2011 2012

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1 2 3 4 5 6

Global growth

Baseline Downside

Sources: WEO, and IMF staff estimates. 2006 2007 2008 2009 2010 2011 (proj.) 2012 (proj.) 1 2 3 4 5 6 7

LICs' growth

Baseline Downside scenario

A 1½ percentage point decline in global growth in 2011–12 would shave off an estimated 1 percent from LIC growth.

(Median, percentage change)

A recap from yesterday: the recovery of fiscal space is still lagging

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Fiscal space of all African LICs (% of GDP)

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• 2
• 1

1 2 3 4 5 6 2007 2008 2009 2010 2011 2012

median 75th percentile 25th percentile

African LICs are less prepared to respond to further shocks compared to 2009

• Fiscal balances would

deteriorate in LICs eroding fiscal space if the shocks materialize

• The fiscal impact of the

growth shock is higher

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Fiscal space (% of GDP, African LICs, non-oil exporters, median)

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• 0.8
• 0.6
• 0.4
• 0.2

0.2 0.4 0.6 0.8 2009 2010 2011 2012 baseline 2012 commodity shock 2012 growth downturn

Oil exporting LICs in Africa have greater fiscal buffers, but more volatile

• While oil exporting LICs

have more room to accommodate the shocks…

• …and would benefit

from higher fuel prices…

• …the fiscal space can

quickly be eroded if oil prices drop

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Fiscal space (% of GDP, African LICs, oil exporters, median)

• 3
• 2
• 1

1 2 3 4 5 6 7 8 2009 2010 2011 2012 baseline 2012 commodity shock 2012 growth downturn

Poverty would increase if the shocks were to materialize

Higher food and fuel prices would leave an additional 31 million people in poverty in 2012, more than half in Sub-Saharan Africa.

35.9 2.5 9.6 52.0 2.7 2.2 2.2 2.2 0.0 0.5 1.0 1.5 2.0 2.5 3.0 10 20 30 40 50 60 ASI LAC MEU SSA Share of total increase in poverty (percent; left axis) Impact on poverty rate (percentage points; right axis) Sources: WEO, and IMF staff

A double dip growth shock would leave an additional 23 million people in poverty by 2012, more than half in Sub-Saharan Africa.

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44.4 2.3 2.9 50.4 2.5 1.5 0.5 1.6 0.0 0.5 1.0 1.5 2.0 2.5 3.0 10 20 30 40 50 60 ASI LAC MEU SSA Share of total increase in poverty (percent; left axis) Impact on poverty rate (percentage points; right axis) Sources: WEO, and IMF staff

Households are especially sensitive to fuel and food price shocks

Food and fuel make up half of the consumer basket in LICs

Higher food and fuel prices affect the poorest most, but middle- income households also impacted

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• ther,

49% food, 45% fuel, 6%

Composition of CPI basket (LICs, median)

2 4 6 8 10 12 14 1 2 3 4 5 6 7 8 9 10

Household Consumption Decile

Reduction in real household consumption (in percent)

Asia Latin America and Caribbean Middle East and Europe Sub-Saharan Africa

Sources: WEO, and IMF staff estimates.

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

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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

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• 5

5 10 15 20

Fiscal response in 2009

(Median)

Anticipating future shocks: balance the rebuilding of buffers against spending needs

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Real government expenditure growth Change in fiscal balance in percent of GDP Ample fiscal space and reserve coverage Mixed buffers Low fiscal space and reserve coverage

 Policy buffers are key for

building resilience against shocks

 But building buffers has an

• pportunity cost

trade-off

How can countries become more resilient by increasing fiscal space?

• Strengthen the fiscal balance…
• …by revenue increases…
• …and public expenditure reforms
• Other reforms that strengthen growth and

economic diversification

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Link Link

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

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Thank you !