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ROLE OF FISCAL POLICY IN
RESILIENCE BUILDING:
EXPERIENCES OF SMALL ISLAND
STATES
IN THE PACIFIC REGION
T.K. Jayaraman
University of the South Pacific
FIJI ISLANDS
INTRODUCTION
• PACIFIC ISLAND COUNTRIES (PICs): PRONENESS TO NATURAL
DISASTERS: GEOGRAPHIC LOCATION
• HIGH DEGREE OF ECONOMIC OPENNESS
• DEPENDENCY ON STRATEGIC IMPORTS & NARROW RANGE OF
EXPORTS
• VOLATILITY IN EXPORT EARNINGS
• CHALLENGES OF INCREASED GLOBALISATION
• WEAK CAPACITY TO WITHSTAND THE RISKS
• EXAMPLES OF SUCCESSFUL SMALL STATES: NURTURING ECONOMIC
RESILIENCE THRU SOUND MACROECONOMIC MANAGEMENT
• FISCAL POLICY’S ROLE IN ENSURING MACROECONOMIC STABILITY
CURRENT STATUS
• PICs: UNCERTAIN MACROECONOMIC CONDITIONS
• HURTING GROWTH & HALTING PROGRESS TOWARDS
ACHIEVING MILLENNIUM DEVELOPMENT GOALS
• AVERAGE ANNUAL GROWTH RATES IN PER CAPITA
REAL INCOME DURING 1995-2004 LESS THAN 2%:
REQUIRED GROWTH RATE FOR HALVING INCIDENCE
OF POVERTY BY 2015
• EXTERNAL SHOCKS & DECLINE IN TERMS OF TRADE
• VOLATILITY IN AID & NATURAL RESOURCE RENT
INCOMES: REVENUE FROM FISHING LICENSES
CURRENT CONDITIONS Contd…
•DISCONTINUANCE BY END OF 2007 OF PREFERENTIAL
TREATMENT BY EU FOR SUGAR & PRIMARY EXPORTS
• SLOW PACE IN RESTRUCTURING :IMPROVING FARM
PRODUCTIVITY & RAISING FACTORY EFFICIENCY
• DELAYS HAVE PROVED COSTLY
• FALLING EXPORT EARNINGS & HIGH IMPORT
PENETRATION SHARES WITH LITTLE
DIVERSIFICATION INTO ANY MANUFACTURING
POSSIBILITIES
•WIDENING TRADE GAPS
POLICY TOOLS
• NURTURING RESILIENCE THRU MACROECONOMIC STABILITY
• POLICY TOOLS: EXCHANGE RATE (ER), FISCAL & MONETARY POLICIES
•FIXED ER REGIMES: MONETARY POLICY LESS EFFECTIVE: NASCENT
MONEY & CAPITAL MARKETS: WEAK TRANSMISSION MECHANISMS
•PICs USING CURRENCIES OF US/AUS/NZ AS LEGAL TENDER: LESS
MANOEUVERABILITY:NO CONTROL OVER EXCHANGE RATES
• DOLLARISATION: GAIN OF FISCAL DISCIPLINE DID NOT MATERIALISE
• DOLLARISED RMI, FSM & PALAU: COMPACT FUNDS: BUDGET SUPPORT
• ALL PICs: STAGNANT REVENUES, VOLATILITY IN AID & NATURAL
RESOURCE RENT INCOMES
• WIDENING 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
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
1988-2005
Source: Author’s Calculations
Asian Development Bank (2006)
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
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
1988-1999
Source: Author’s Calculations
Asian Development Bank (2006)
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
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
2000-2005
Source: Author’s Calculations
Asian Development Bank (2006)
STRUCTURAL RIGIDITIES IN BUDGETS
• PERSISTENT FISCAL DEFICITS: ATTRIBUTED TO
STRUCTURAL RIGIDITIES IN THEIR BUDGETS
• NARROW REVENUE RESOURCE
• REVENUE: TAXES ON TRADE SUBJECT TO VOLATILITY
• TAX REVENUES OF PICs AVERAGE 17% TO 25% OF GDP
• VANUATU: NO DIRECT TAXATION: PURE TAX HAVEN:
REVENUE DOMINATED BY INDIRECT TAXES ON
CONSUMPTION OF GOODS & SERVICES, EXCISE & VAT
• OTHERS: DIRECT TAXES, EXCEPT FOR PNG: 10% OF GDP
STRUCTURAL RIGIDITIES IN BUDGETS
Contd…
• SHARES OF NONTAX REVENUES IN GDP: LARGER IN KIRIBATI AND
TUVALU. THEY RANGED FROM 50% TO 54 %.
• 2006: FISHING LICENSE FEES ACCOUNTED FOR 87% OF
KIRIBATI’S NONTAX REVENUES & 43% OF TOTAL GOVERNMENT
REVENUES.
• RESOURCE RENT INCOME RECEIPTS VARIED FROM YEAR TO YEAR
• HIGH VOLATILITY IN TOTAL GOVERNMENT REVENUES OF
KIRIBATI
• RMI, FSM & PALAU: RECEIVING COMPACT FUNDS FROM USA
• GOVERNMENT REVENUES: 69 % of GDP IN RMI & 72 % IN PALAU
RIGIDITIES IN GOVT EXPENDITURE
• EXP RATIOS: KIR 123% OF GDP; FSM 74% & RMI: 84%
• PICs WITH SMALL POPULATION: UNABLE TO REALISE SCALE
ECONOMIES IN PROVISION OF PUBLIC GOODS AND SERVICES.
• US GENERAL ACCOUNTING OFFICE: COMPACT FUNDS: RMI &
FSM FINANCED WAGES & GOVT CONSUMPTION
• FAILED TO REALISE COMPACT OBJECTIVES: SELF-RELIANCE
• FIJI: GOVT WAGE BILL: 45 % OF TOTAL EXPENDITURE.
• OPERATING EXP INCLUSIVE OF WAGES: 80% OF BUDGET
•HIGH PROPORTION OF RECURRENT EXPENDITURS: DENYING
ALLOCATION TO GROWTH ENHANCING CAPITAL PROJECTS
TABLE 4: FISCAL VULNERABILITY INDICATORS OF
SELECTED COUNTRIES (2001-2005)
(in percent of GDP, unless otherwise indicated)
2001
2002
2003
2004
2005
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$)
2.3
2.2
1.9
1.7
1.7
Fiji
TABLE 4: FISCAL VULNERABILITY INDICATORS OF
SELECTED COUNTRIES (2001-2005)
(in percent of GDP, unless otherwise indicated)
Kiribati
2001
2002
2003
2004
2005
Revenue & Grants
118.4
138.7
139.2
106.2
123.2
Expenditure & Net Lending
135.4
139.3
171.0
149.0
145.8
Overall Balance
17.0
0.6
-31.9
42.8
-22.6
External Debt
20.0
16.4
16.0
17.5
19.0
Current Account Balance
2.0
-1.8
-19.3
-16.3
-9.4
Intl.Reserves (months of imports)
NA
NA
NA
NA
NA
Exch Rate (Dom.currency/US$)
1.9
1.8
1.5
1.4
1.3
Current Account Balance
2.0
-1.8
-19.3
-16.3
-9.4
Intl.Reserves (months of imports)
NA
NA
NA
NA
NA
Exch Rate (Dom.currency/US$)
1.9
1.8
1.5
1.4
1.3
TABLE 4: FISCAL VULNERABILITY INDICATORS OF
SELECTED COUNTRIES (2001-2005)
(in percent of GDP, unless otherwise indicated)
Marshall Islands
2001
2002
2003
2004
2005
Revenue & Grants
70.1
64.2
65.0
56.2
58.1
Expenditure & Net Lending
61.9
68.2
54.0
56.6
60.2
Overall Balance
8.2
-4.0
11.0
-0.4
-2.1
External Debt
77.0
70.6
71.2
76.4
70.6
Current Account Balance
8.8
8.6
16.3
4.4
0.5
Intl.Reserves (months of imports)
NA
NA
NA
NA
NA
Exch Rate (Dom.currency/US$)
1.0
1.0
1.0
1.0
1.0
TABLE 4: FISCAL VULNERABILITY INDICATORS OF
SELECTED COUNTRIES (2001-2005)
(in percent of GDP, unless otherwise indicated)
Micronesia
2001
2002
2003
2004
2005
Revenue & Grants
64.2
71.8
71.8
53.7
51.0
Expenditure & Net Lending
73.1
65.0
63.8
58.6
54.2
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
Intl.Reserves (months of imports)
NA
NA
NA
NA
NA
Exch Rate (Dom.currency/US$)
1.0
1.0
1.0
1.0
1.0
TABLE 4: FISCAL VULNERABILITY INDICATORS OF
SELECTED COUNTRIES (2001-2005)
(in percent of GDP, unless otherwise indicated)
Palau
2001
2002
2003
2004
2005
Revenue & Grants
43.1
42.4
54.0
54.3
53.6
Expenditure & Net Lending
64.6
66.3
62.6
61.7
54.2
Overall Balance
-20.3
-28.3
-2.4
-6.9
-3.9
External Debt
16.2
16.6
15.9
14.0
13.2
Current Account Balance
-9.4
-11.0
9.6
12.6
15.1
Intl.Reserves (months of imports)
NA
NA
NA
NA
NA
Exch Rate (Dom.currency/US$)
1.0
1.0
1.0
1.0
1.0
TABLE 4: FISCAL VULNERABILITY INDICATORS OF
SELECTED COUNTRIES (2001-2005)
(in percent of GDP, unless otherwise indicated)
PNG
2001
2002
2003
2004
2005
Revenue & Grants
29.7
27.8
28.2
31.1
28.1
Expenditure & Net Lending
33.2
31.8
29.4
29.6
26.2
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
Intl.Reserves (months of imports)
5.7
4.5
5.6
5.8
5.1
Exch Rate (Dom.currency/US$)
3.4
3.9
3.5
3.2
3.1
TABLE 4: FISCAL VULNERABILITY INDICATORS OF
SELECTED COUNTRIES (2001-2005)
(in percent of GDP, unless otherwise indicated)
Samoa
2001
2002
2003
2004
2005
Revenue & Grants
31.9
33.8
32.8
32.5
40.0
Expenditure & Net Lending
34.3
35.9
33.4
33.4
40.6
Overall Balance
-2.3
-2.1
-0.6
-0.9
-0.6
Domestic Debt
61.0
59.0
53.0
50.0
48.0
External Debt
61.4
62.0
59.6
51.5
48.1
Current Account Balance
0.1
-0.6
2.9
4.4
2.2
Intl.Reserves (months of imports)
3.6
4.2
3.4
3.5
3.9
Exch Rate (Dom.currency/US$)
3.4
3.5
3.2
2.9
2.7
TABLE 4: FISCAL VULNERABILITY INDICATORS OF
SELECTED COUNTRIES (2001-2005)
(in percent of GDP, unless otherwise indicated)
Solomon Islands
2001
2002
2003
2004
2005
Revenue & Grants
23.5
18.8
37.6
48.9
48.5
Expenditure & Net Lending
36.2
29.8
39.5
40.6
49.0
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
Intl.Reserves (months of imports)
2.8
2.1
3.6
5.7
4.7
Exch Rate (Dom.currency/US$)
5.6
7.5
7.5
7.5
7.5
TABLE 4: FISCAL VULNERABILITY INDICATORS OF
SELECTED COUNTRIES (2001-2005)
(in percent of GDP, unless otherwise indicated)
Tonga
2001
2002
2003
2004
2005
Revenue & Grants
27.5
29.9
27.3
27.5
26
29
31.3
30.4
26.2
25.8
-1.5
-1.5
-3.1
1.3
0.1
68
72
68
62
53
External Debt
40.4
46.3
43.9
40.9
35.6
Current Account Balance
-9.2
4.9
-3
4
-2.2
1.8
2.8
2
4.8
4
1.97
2.18
2.19
2.04
1.94
Expenditure & Net Lending
Overall Balance
Domestic Debt
Intl.Reserves (months of imports)
Exch Rate (Dom.currency/US$)
TABLE 4: FISCAL VULNERABILITY INDICATORS OF
SELECTED COUNTRIES (2001-2005)
(in percent of GDP, unless otherwise indicated)
Vanuatu
2001
2002
2003
2004
2005
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
38
41
41
38
37
29.7
28.2
26.1
24.6
23.4
2
-9
-10.2
-9.5
-7.1
3.1
5.2
4.3
4.3
4.8
145.3
139.1
122.2
111.9
109.05
Public Sector Debt
Domestic Debt
External Debt
Current Account Balance
Intl.Reserves (months of imports)
Exch Rate (Dom.currency/US$)
FISCAL VULN. INDICATORS (Contd)
• OVERALL FISCAL BALANCES: NEGATIVE EXCEPT IN RMI:
RECEIVING SUPPORT UNDER COMPACT I & II.
• AVERAGE NEGATIVE OVERALL BALANCE: (2000-2005)
KIRIBATI: 20% OF GDP; VANUATU : 7% & FIJI: 5% OF GDP
• KIRIBATI: DEFICITS FINANCED BY SUBSTANTIAL DRAWDOWN
FROM REVENUE EQUALISATION RESERVES FUND (RERF)
• IN TUVALU BY SIMILAR RECOURSE TO TUVALU TRUST FUND
(TTF)
• FIJI’S FISCAL DEFICITS: ENTIRELY FINANCED BY DOMESTIC
BORROWING UNTIL 2005
• 2006: FIJI RESORTED TO INTERNATIONAL BOND MKT
MONETISATION
• CENTRAL BANK MONETISATION: NOT UNCOMMON
• DEFICITS IN PNG, SOLOMONS & VANUATU: DEFICITS
FINANCED THROUGH CENTRAL BANK BORROWING
• PNG’S BUDGET DEFICITS MID 1990S: DUE TO
DEFENCE SPENDING ON BOUGAINVILLE, TAX
REDUCTIONS, AGRICULTURAL SUBSIDIES, &
PERSISTENT EXPENDITURE OVERRUNS: MONETISED
BY ITS CENTRAL BANK
• VANUATU’S UN-SUBSCRIBED BONDS FOR BUYING
AIRCRAFT FOR AIR VANUATU WERE PICKED UP BY
RESERVE BANK OF VANUATU
FINANCING FISCAL DEFICITS
• DOMESTIC BORROWING & LOANS FROM ADB & WB
• FIJI: NOT ELIGIBLE FOR BORROWING ON
CONCESSIONAL TERMS
• OTHER PICS: TOOK LOANS FROM ADB & WB
• GOVERNMENT DEBT IN MOST PICs IS EXTERNAL
• SAMOA’S GOVERNMENT HIGH AT 50% OF GDP IN
2005, DEBT-SERVICING COSTS: LESS THAN 8% OF XGS
• FIJI’S FISCAL DEFICITS: 2001-06: DOM BORROWING
FINANCING FISCAL DEFICITS Contd…
• FIJI’S TOTAL GOVERNMENT DEBT IN 2006
WAS 53% OF GDP
• WITH CONTINGENT LIABILITIES PUBLIC
DEBT: CLOSE TO 60% OF GDP
• FIJI’S EXTERNAL DEBT: LOW AT AROUND
11% OF GDP UNTIL 2006
•MINIMAL OVERSEAS BORROWING
• SEPT 2006: FIJI’S FIRST BOND ISSUE IN INTL
BOND MARKET FOR US$ 150 MILLION: LOAN
PROCEEDS FOR MEETING 2007 BUDGET
DEFICIT REQUIREMENTS
TWIN DEFICITS
• FISCAL DEFICITS: LEAD TO RISE IN AGGREGATE DEMAND
• SPILLS OVER INTO DEMAND FOR FOREIGN GOODS AND SERVICES
• BUT FOR SUBSTANTIAL AID INFLOWS AND REMITTANCES, CURRENT
ACCOUNT BALANCES IN PICS WOULD HAVE BECOME NEGATIVE & LARGE
• TABLE 5 PRESENTS BUDGET, TRADE & CA DEFICITS
• PNG:COMMODITY PRICE BOOMS & HIGH EXPORT EARNINGS IN RECENT
YEARS WITH TRADE SURPLUS
• SOLOMONS: ANOTHER EXCEPTION: PLENTIFUL AID DURING 2001-2004
• OTHER 4 MAJOR PICs : SIZEABLE CURRENT ACCOUNT DEFICITS
Table 5: Budget, Trade and Current Account Deficits of Selected Countries:19902004
(% of GDP)
Budget Deficit
Averages
PICs
Trade Deficits
Averages
Current Account Deficit
Averages
199094
1995
-99
200004
199094
199599
200004
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)
• CA DEFICITS: FINANCED UNDER FIXED EXCHANGE
RATE REGIMES BY A STEADY DRAWDOWN OF THE
INTERNATIONAL RESERVES.
• WEAKENING FIJI’S RESERVES: FROM 6.3 MONTHS OF
IMPORT COVER IN 2002 TO 3.2 MONTHS OF IMPORTS
COVER IN 2006.
• PRESSURES ON FIJI DOLLAR: DEVALUATION
RUMOURS
• RESERVE BANK OF FIJI IMPOSED IN DECEMBER 2006
EXCHANGE CONTROLS
• CREDIT CEILINGS & INCREASES IN INTEREST RATES.
SIGNS OF MACROECONOMIC INSTABILITY
• FIJI’S 2006 SITUATION: SIMILAR TO PNG
CONDITIONS IN 1990s
• PNG’S EXPANSIONARY FISCAL POLICIES FOR 4
YEARS PRECEDING 1997 ELECTIONS: TAX
REDUCTIONS, AGRICULTURAL EXPORT SUBSIDIES,
PERSISTENT EXPENDITURE EXCESSES AND HEAVY
TRANSFERS TO UNVIABLE SOEs
• MASSIVE ANNUAL BUDGET DEFICITS IN A ROW
• PNG GOVT DEBT: ROSE TO 60% OF GDP IN 1996
FROM 45% IN 1990
• BALANCE OF PAYMENT CRISES ENSUED
MACROEC INSTABILITY:PNG (contd)
• 1996: INTL RESERVES FELL TO HALF-MONTH OF IMPORTS
• SWITCHED ON TO FLOATING EXCHANGE RATES REGIME
• EXTERNAL STABILITY: ONLY FOR A SHORT PERIOD
• CONTRACTION IN EXPORTS: DROUGHT IN 1997 & ASIAN FIN. CRISIS
• ANOTHER CURRENT ACCOUNT CRISIS
• 1999: BUDGETARY REFORMS BEGAN FOR RESTORING STABILITY
• MONTHS LEADING UP TO 2002 ELECTIONS: FISCAL EXCESSES BY GOVERNMENT
• 2002-2004: DETERIORATION OF BUDGET & CURRENT ACCOUNT BALANCES
• 3 YEARS OF NEGATIVE GROWTH
• 2005: SENSIBLE POLICIES & MINERAL EXPORT BOOM
• 2006: INTL. RESERVES: 5 MONTHS IMPORT COVER: RECORD LEVEL
SOLOMON ISLANDS CASE
• SOLOMON IS: 3 DECADES OF FISCAL DEFICITS SINCE 1978
• STAGNANT REVENUES: TAX & CUSTOMS EXEMPTIONS
•RISE IN RECURRENT EXPENDITURES: WAGES & SALARIES:
TRANSFERS TO LOCAL GOVTS & WEAK EXPENDITURE CONTROLS.
• SHORT LIVED RECOVERY ON CURRENT ACCOUNT: 1990-95
• LOGGING & LOG EXPORTS: DID NOT LAST LONG
•1998: ASIAN FINANCIAL CRISIS
• 1999: ETHNIC CONFLICT: NEGATIVE GROWTH FOR 3 YEARS
•FALL IN REVENUES & DECLINE IN EXPORTS
•2001: FISCAL DEFICIT: 12% OF GDP
SOLOMON ISLANDS CASE (Contd)
• RESERVES LEVEL IN 2001: 2 MONTHS OF IMPORT COVER
• 2002: REGIONAL ASSISTANCE MISSION TO SOLOMON ISLANDS
• DONORS SETTLED DEBT SERVICING OBLIGATIONS TO INTL AGENCIES.
• IMPROVEMENTS IN FISCAL MANAGEMENT SINCE 2003 STABILISED THE
ECONOMY & FISCAL POSITION
• CONDITIONS : NOT VERY DISSIMILAR TO THE ONES OBSERVED IN
CARIBBEAN CONTEXT IN MID 1990S (HILAIRE 2000):
• EXTERNAL CURRENT ACCOUNTS SLIPPING INTO DEFICITS;
• FOLLOWED BY THE PLUMMETING OF FOREIGN RESERVES;
• WITH SPECTRE OF DEFAULT ON FOREIGN LOANS LOOMING; AND
• EXCHANGE RATES BEING UNDER THREAT.
WAY OUT: FISCAL ADJUSTMENT PROGRAM
• BROADER DEFINITION: FISCAL ADJUSTMENT WOULD MEAN
CHANGE IN FISCAL STANCE
• EITHER TIGHTENING OR LOOSENING
• TERM FISCAL CONSOLIDATION HAS A DIRECT CONNOTATION
• REDUCING GOVT.DEFICIT & DEBT ACCUMULATION
• FISCAL ADJUSTMENT FACILITATES EXTL ADJUSTMENT
EXPERIENCES IN INDUSTRIAL COUNTRIES
• GENUINE FEARS : IMPACT OF FISCAL ADJUSTMENT IN
SHORT-RUN: POTENTIAL TO TRIGGER A RECESSION
• INVESTIGATIONS OF SUSTAINED CONSOLIDATION
EXPERIENCES IN INDUSTRIAL COUNTRIES (McDERMOTT
AND WESTCOTTT 1996A): LOSS FROM SLOWDOWN IN THE
SHORT-RUN IS OFFSET BY GAINS IN THE LONG RUN.
• NON-KEYNESIAN EC. LITERATURE: SUSTAINED FISCAL
ADJUSTMENT IN TERMS OF BUDGET & DEBT REDUCTION
WOULD RESULT IN LOWER INTEREST RATES
• EXCHANGE RATE DEPRECIATION
GIVE RISE TO “POSITIVE EXPECTATIONAL EFFECTS” THAT
WOULD SWAMP UNDESIRABLE EFFECTS OF FISCAL
CONTRACTION
ARGUMENT IN FAVOUR OF REDUCED
SPENDING
• SMALLER BUDGET REDUCES THE PERCEIVED
RISK THAT A GOVERNMENT MIGHT DEPRECIATE
ITS DEBT THRU HIGH INFLATION IN THE FUTURE
(PAYING OFF DEBT WITH CHEAPER MONEY)
• REDUCTION IN THE PERCEIVED RISK LEADS TO
FALL IN INTEREST RATES
• REDUCTION IN DEFAULT RISK PREMIUM
INTEREST RATES
• BUDGET REDUCTION IMPROVES IMAGE OF
GOVERNMENT SOLVENCY
REDUCED SPENDING (contd)
• COMPRESSION OF EXPENDITURE BY REDUCING
SALARIES & WAGES WILL HAVE AN IMPACT ON
PRIVATE SALARIES
• WOULD RAISE PROFITABILITY & COMPETITIVENESS,
THUS STIMULATING INVESTMENT & EXPORTS
• BUDGET REDUCTION: SIGNALS TO HOUSEHOLD &
BUSINESSES: FUTURE TAX BURDENS WOULD BE
LOWERED, AS DEBT FINANCING BY GOVERNMENT
WOULD DECLINE
• HOUSEHOLDS WOULD THEN INCREASE
CONSUMPTION & BUSINESS WOULD INCREASE
INVESTMENT SPENDING
• EVENTUAL OUTCOME: AN INCREASE IN OUTPUT
FISCAL CONSOLIDATION MEASURES
INCLUDE
• EFFECTIVE EXPENDITURE CONTROL & MONITORING
• EFFICIENT REVENUE SYSTEM
• MEASURES FOR RESPONDING TO CHANGING NON-TAX REVENUE
RECEIPTS & VOLATILE AID INFLOWS
• RE-DIRECTING SAVINGS INTO CAPITAL PROJECTS BY
REDUCING RECURRENT EXPENDITURES
• CAREFUL DEBT-MANAGEMENT
• MAINTAINING COMPETITIVE REAL EXCHANGE RATE : EXTERNAL
DEBT SERVICING DOES NOT POSE PROBLEMS IN THE LONG RUN.
EFFECTIVE EXPENDITURE CONTROL
• SINCE REVENUE MOBILIZATION IS CONSTRAINED BY
RIGIDITIES, FOCUS ON EFFECTIVE EXPENDITURE ADJUSTMENTS
•REDUCE THE WAGE BILL
•OVERCOME RELUCTANCE TO DOWNSIZE CIVIL SERVICE, WITH
GHOST-EMPLOYEES ON ITS ROLL & HIGH RATE OF ABSENTEEISM.
• BUDGETARY EXERCISES: UNREALISTIC FORWARD ESTIMATES:
EITHER UNDER ESTIMATES FOR O & M OF EXISTING ASSETS OR
OVER ESTIMATES FOR NEW CAPITAL PROJECTS
• PICs ARE “LITTERED LITERALLY WITH BUDGET PREPARATION
MANUALS” (HUGHES 2003)
• LACK OF SUSTAINED CAPACITY BUILDING EFFORTS, OFTEN
ADVERSELY AFFECTED BY LARGE TURN OVER OF KEY PERSONNEL
EFFECTIVE EXPENDITURE CONTROL
Contd…
• 2001-04: PNG’S FISCAL CONSOLIDATION: CONTINUOUS FOR 4 YEARS
• RESULTS : 3 YEARS IN A ROW: POSITIVE FISCAL BALANCE, MEETING
ALL DOMESTIC & EXTERNAL INTEREST PAYMENT OBLIGATIONS.
• IN 2006: REDUCING NUMBER OF DEPARTMENTS WAS POSTPONED TO A
LATER DATE AFTER THE 2007 GENERAL ELECTIONS
• SHORTLIVED CONSOLIDATION EPISODES IN OTHER PICs
• FIJI: PERIODICAL TIGHTENING OF PUBLIC EXPENDITURES: EFFECTS OF
COUPS: CUTS IN WAGE & SALARY BILL
• TIGHTENING PROVED UNPOPULAR, REVERSED AFTER SOME TIME
• DISRUPTED FISCAL ADJUSTMENT EFFORTS BOUND TO FAIL WITHOUT
ANY LASTING IMPACTS [(GUPTA ET AL. (2004)].
EFFICIENCY IN REVENUE
MOBILIZATION
• NEED OVERHAULING
• SIMPLIFICATION OF THE TAX SYSTEM
• REVIEW OF TAX INCENTIVES IN ALREADY
FLOURISHING ACTIVITIES, LIKE TOURISM
• FOREIGN INVESTORS ARE INFLUENCED BY OTHER
FACTORS
• TAX FACTORS ARE FAR FROM THE MAIN CONCERN IN
DECIDING WHERE TO PLACE THEIR FUNDS ( DANIEL
ET AL. 2006)
EFFICIENCY IN REVENUE
MOBILIZATION (contd)
• MINISTERIAL DISCRETIONARY AD HOC EXEMPTIONS FROM
CUSTOM & IMPORT DUTIES, TAX HOLIDAYS BE DISCONTINUED
• SUSPECTED CASES OF CORRUPTION
• THEY UNDERMINE INTEGRITY AND REVENUE POTENTIAL
• PICs: HEAVILY DEPENDENT ON IMPORT AND EXPORT DUTIES
• REVENUE IMPLICATIONS OF FREE TRADE BY 2010
• REFORMS FOR ADDRESSING LIKELY FALL IN TAX REVENUES.
EFFICIENCY IN REVENUE
MOBILIZATION Contd…
• RECOMMENDED: (I) CONVERSION OF SELECTED IMPORT DUTIES TO
EXCISE TAXES, WHICH ARE WTO INCOMPATIBLE
• (II) BROADENING TAX SYSTEM BY INTRODUCING CONSUMPTION
BASED TAXES, SUCH AS VALUE-ADDED TAXES (VAT)
• HALF THE COUNTRIES IN THE REGION HAVE INTRODUCED VAT
• IMF STUDY: VAT ADMINISTRATION COULD BE IMPROVED BY FASTER
PROCESSING OF REBATES, IMPROVED COMPLIANCE AT PORTS (WHERE
MOST REVENUE IS COLLECTED) & CAPACITY FOR CONDUCTING AUDITS.
• VANUATU: NEED FOR DIRECT TAXATION:DECLINING IMP of OFC.
• REDUCE REGRESSIVITY OF INDIRECT TAXES
• INCREASE IN REVENUE MOBILISATION CONTRIBUTES TO STRENGTHEN
FISCAL CONSOLIDATION EFFORTS (GUPTA 2004)
RESPONDING TO VOLATILITY IN NON-TAX
REVENUE RECEIPTS & AID
• REVENUES FROM FISHING LICENSES: BE DEPOSITED IN TRUST FUNDS IN
KIRIBATI & IN TUVALU
• PRESENTLY A MULTIYEAR CONTRACT IS NEGOTIATED WITH FISHING
NATIONS THAT INVOLVE A FIXED YEARLY PAYMENT OVER THE TERM OF
THE CONTRACT
• THERE IS AN ASYMMETRY OF INFORMATION INVOLVED ABOUT THE
LIKELY CATCH AND THE LIKELY PRICE
• THE COUNTRY OWNER OF OFFSHORE FISHING FIRMS SHOULD BE ASKED
TO BID AGAINST EACH OTHER THROUGH AN AUCTION
• FORCE THEM TO BE “TRUTHFUL” ABOUT THEIR LIKELY CATCH.
• IN EXCHANGE FOR A FIVE YEAR FISHING CONTRACT, FIRMS SHOULD BE
ASKED TO BID A FIVE YEARLY STREAM OF PAYMENTS, WHICH WOULD
ENSURE MAXIMUM ACCESS FEES AS THE PRESENT LICENSE FEES ARE
WELL BELOW THE “TRUE RESOURCE RENT” (DUNCAN AND TEMU 1997).
RESPONDING TO VOLATILITY IN NON-TAX
REVENUE RECEIPTS & AID Contd…
• TO SAFEGUARD TRUST FUNDS: LIMIT ANNUAL
DRAWDOWNS FOR KEEPING PER CAPITA REAL VALUE
OF ASSETS
• KIRIBATI’S PARLIAMENT HAS LAID DOWN VALUE OF
RERF BE KEPT CONSTANT
• THERE WAS NO REQUIREMENT OF PRIOR APPROVAL
OF THE PARLIAMENT TO EXCESS DRAWDOWNS.
• KIRIBATI: CONSIDER APPROPRIATE LEGISLATIVE
AMENDMENTS IN PUBLIC FINANCE MGMT ACT
RE-DIRECTING MONEYS INTO CAPACITY
BUILDING INVESTMENTS
• REDUCTION IN WAGE BILL, SUBSIDIES & TRANSFERS:
SUBSTANTIAL ANNUAL SAVINGS
• REDIRECTING FUNDS SO SAVED FROM RECURRENT
EXPENDITURES INTO CAPITAL OUTLAYS IS POSITIVELY
RELATED TO PERSISTENCE OF FISCAL ADJUSTMENT
(GUPTA ET AL. 2004)
• SAMOA’S EXPERIENCES RELEVANT: CIVIL SERVICE
REFORMS
• 2001-2003: N0.OF MINISTRIES REDUCED:28 TO 13
RE-DIRECTING MONEYS INTO CAPACITY
BUILDING INVESTMENTS Contd…
• REDUCTIONS IN STAFF: NATURAL ATTRITION & FREEZING
VACANCIES
• WAGE BILL OF SAMOA IS WELL BELOW THAT OF PICs
• FISCAL CONSOLIDATION ENABLED SAMOA TO REDIRECT MORE
FUNDS FOR INVESTMENT PROJECTS
•LONGER PERIOD FISCAL CONSOLIDATION HAD LASTING IMPACTS
•COMPOSITION OF PUBLIC EXPENDITURE: DIFFERENT FROM PICs
•2006: BUDGET DEFICIT OF 0.4% OF GDP
DEBT-MANAGEMENT
• DOMESTIC BORROWING FOR FINANCING FISCAL DEFICITS
• LARGE SCALE IN FIJI & PNG
• FIJI: GOVERNMENT DEBT: INCLUDING CONTINGENT LIABILITIES
CLOSE TO 60% OF GDP DUE TO EXPANSIONARY POLICIES OF 20012006
• PNG‘S GOVT DEBT LEVEL DECREASED OVER 4-YEAR PERIOD:73% OF
GDP IN 2002 TO 51% IN 2005; & 42% IN 2006.
• EXTERNAL DEBT LEVEL ALSO DECREASED: 21% OF GDP IN 2006
• REDUCTIONS IN DEBT LEVELS: DUE TO FISCAL CONSOLIDATION
EFFORTS SINCE 2001
EXTERNAL DEBT
• PICs OTHER THAN FIJI: ELIGIBLE FOR BORROWING FROM INTERNATIONAL
FUNDING AGENCIES ON CONCESSIONAL TERMS
• PICs UTILIZED THE OPPORTUNITY IN THE PAST TO BORROW FROM ADB AND THE
WORLD BANK FOR SEVERAL CAPITAL PROJECTS.
• PICs HAVE TO EARMARK BUDGETARY SAVINGS FOR DEBT SERVICING BURDEN.
• EXTERNAL DEBT SERVICING NEEDS TO ENSURE ADEQUATE PROVISION FOR
FOREIGN EXCHANGE.
• CASES OF DEFAULTS IN THE 1990S: SOLOMON ISLANDS
• RMI FAILED IN 2006 TO MEET DEBT SERVICE REQIREMENTS
• ESTIMATES OF DEBT SUSTAINABILITY IN RMI: NET PRESENT VALUE OF EXTERNAL
DEBT TO GDP RATIO IS 80% & DEBT SERVICE AS PROPORTION OF EXPORTS AT
78%.
• AN ADB STUDY ON RMI (2007): EVEN IF NO NEW EXTERNAL DEBT WERE
INCURRED, DEBT SERVICE WOULD INCREASE OVER THE NEXT FIVE YEARS.
EXTERNAL DEBT (contd)
• SAMOA’S EXT DEBT WAS IN EXCESS OF 100% OF GDP IN MID 1990S
• FISCAL CONSOLIDATION: 1999-2003: REDUCTION IN DEBT STOCK
• 2006: 36% OF GDP
• IMF 2005 DEBT SUSTAINABILITY STUDY: ISOLATED SHOCKS WILL
NOT SERIOUSLY AFFECT THE DEBT RATIO
• COMBINATION OF SHOCKS: VOLATILITY IN AID & REMITTANCES &
HIKES IN OIL PRICE MIGHT RAISE DEBT LEVEL (ADB 2007).
• VANUATU: PARLIAMENT DEFINED THE “PRUDENT LEVEL” OF
EXTERNAL DEBT/GDP RATIO AT 40% & DEBT SERVICE/DOMESTIC
REVENUE RATIO AT 8% OF GDP
• OTHERS CONSIDER ADOPTING SIMILAR RESTRICTIVE LEGISLATION?
MAINTENANCE OF COMPETITIVE REAL
EXCHANGE RATE
• EXTERNAL DEBT-SERVICING: GROWTH IN EXPORTS IS CRITICAL
• FISCAL DEFICITS RESULT IN INFLATIONARY PRESSURES
• WILL RAISE REAL EXCHANGE RATES
• RENDERING EXPORTS & TOURISM LESS COMPETITIVE
• AVOID SUBSTANTIAL AMOUNTS OF OFFICIAL TRANSFERS BEING
DIVERTED TO FINANCING HIGHER WAGE BILL & RECURRENT
EXPENDITURES, EITHER BUDGETED OR UNBUDGETED.
• INSTANCES OF ADDITIONAL, HIGHER ADJUSTMENTS IN SALARIES: COST
OF LIVING ADJUSTMENTS (COLA) & GOVT CONSUMPTION OF LOCAL
GOODS AND SERVICES
• SO CALLED “DUTCH DISEASE” EFFECT: PUSHING REAL EXCHANGE RATE:
ADVERSE IMPACT ON EXPORTS
MAINTENANCE OF COMPETITIVE REAL
EXCHANGE RATE Contd…
• PICs SHOULD BE AWARE OF POSSIBILITY OF DIVERSION
OF BORROWED MONEYS FOR MEETING UNBUDGETED
CONSUMPTION EXPENDITURES
• RISKS OF SUCH POSSIBILITIES ARE GREATER IN TIMES OF
POLITICAL INSTABILITY & NATURAL DISASTERS
• NEED FOR STRONG BUDGETARY CONTROL MECHANISM IN
PLACE
• COMPETITIVE REAL EXCHANGE RATE: CRITICAL NEED FOR
MEETING FUTURE DEBT-SERVICING OBLIGATIONS
PERSISTENCE OF FISCAL ADJUSTMENT
PROGRAM
• GUPTA ET AL. (2004): PERSISTENCE OF FISCAL ADJUSTMENT IS
NEEDED FOR LASTING EFFECTS
• PERSISTENCE OF FISCAL ADJUSTMENT IS POSITIVELY
DETERMINED BY REALLOCATION OF RECURRENT EXPENDITURES
TO PRODUCTIVE CAPITAL PROJECTS
• NEGATIVELY INFLUENCED BY LARGE OUTLAYS OF SALARIES
• PAST EFFORTS IN PICs OFTEN DISRUPTED BY THE AFTER-IMPACT
OF UNFORESEEN NATURAL & MAN-MADE DISASTERS
• KHAMFULA (2005): STUDY ON AFRICAN COUNTRIES: EXOGENOUS
SHOCKS ENDANGER FISCAL REFORM PROGRAMMES
CONCLUSIONS
• FISCAL DISCIPLINE: INFLUENCED BY POLITICAL FACTORS:
ELECTORAL SYSTEMS & COALITION ARRANGEMENTS
• MORE REPRESENTATIVE ELECTORAL SYSTEM IS LIKELY TO
ACHIEVE INCLUSIVENESS ONLY AT THE COST OF FISCAL
DISCIPLINE
• FABRIZIO AND MODY (2006): MORE FRAGMENTED COALITIONS &
GOVERNMENTS TEND TO BE LESS FISCALLY CONSERVATIVE
• IN FIJI, GOVT WAS DICTATED BY COALTION INTERESTS &
ELECTORAL SYSTEMS
CONCLUSIONS (contd)
•ACCOMMODATED CERTAIN INTERESTS RESULTING IN GREATER
COMPETITION OF FOR FISCAL RESOURCES
• SPECIAL SCHEMES WERE IMPLEMENTED WITH POOR CONTROL
OVER THE EXPENDITURES AND LACK OF SUPERVISION
• MANY OF THEM RESULTED IN SCAMS
• QUALITY OF BUDGETARY INSTITUTIONS MATTERS HERE
• THEY HAVE A MATERIAL BEARING ON FISCAL DISCIPLINE
• A NOTE OF CAUTION: TUSSLE BETWEEN FORCES SUPPORTING
SOUND INSTITUTIONS & POLITICS OF PRESSURES ON LIMITED
BUDGETARY RESOURCES WILL CONTINUE
Thank You