Public Investment and Fiscal Policy
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IMF Executive Board Holds Informal Seminar on Public Investment and Fiscal Policy
On April 2, 2004, the Executive Board of the International Monetary Fund (IMF) held a seminar on public investment and fiscal policy1. The seminar provided an opportunity for an exchange of views on issues raised in staff papers that consider: ways in which high-quality public investment in infrastructure can be promoted in a fiscally responsible manner, and protected when fiscal adjustment is called for; the coverage of fiscal indicators and targets; and the treatment of public-private partnerships in the fiscal accounts.
Ms. Anne O. Krueger, Acting Managing Director and Acting Chair, made the following remarks at the conclusion of the seminar:
"Executive Directors welcomed the opportunity to discuss the fiscal policy and accounting issues raised by the paper on Public Investment and Fiscal Policy and the background paper on Public-Private Partnerships. They commended the staff for addressing important issues regarding Fund fiscal policy advice related to public investment, and generally supported the staff's conclusions. While noting that a declining share of investment in GDP in a number of countries would not necessarily be a cause for concern, in particular when private sector investment fills the shortfall, Directors agreed that infrastructure gaps may be an impediment to growth, and that fiscal adjustment, including under Fund-supported programs, may have contributed in some instances to insufficient spending on infrastructure, at least in the short run. They therefore attached importance to exploring ways in which infrastructure gaps could be narrowed and high-priority infrastructure projects protected when fiscal adjustment is required.
"Against this background, Directors stressed the overarching importance of ensuring that borrowing to finance public investment is consistent with macroeconomic stability and debt sustainability. In light of these considerations, they emphasized that the primary focus of fiscal analysis and policy advice should continue to be the overall fiscal balance and gross public debt. However, in recognition that borrowing undertaken to finance public investment can contribute to growth, they recommended that greater importance be attached to safeguarding public investment, especially in infrastructure, and they welcomed the staff's suggestion that appropriate attention be paid to the current fiscal balance, which excludes capital spending and revenues, as a supplementary fiscal indicator.
"Directors welcomed the ongoing close cooperation between the Fund, the World Bank, and other multilateral development banks (MDBs) in the areas of public finance and expenditure prioritization, as well as the decision of the World Bank to redirect its lending to infrastructure, especially in countries facing acute infrastructural gaps.
"Most Directors agreed with the staff proposal that the Fund should ensure that financing from MDBs, bilateral donors, and market sources for infrastructure investment be accommodated under program targets if it is judged to be consistent with macroeconomic stability and long-term debt sustainability, and there are reasonable assurances that new projects have been subjected to rigorous cost-benefit analysis. A few Directors cautioned that this could create a bias against private involvement in infrastructure and against other productive government spending programs.
"Directors stressed that, over the medium term, the factors determining the appropriate level of public investment are complex, and depend on the government's own evolving priorities. They noted that the primary responsibility for safeguarding public investment remains with national authorities, who should strengthen their efforts to create the budgetary space for an appropriate public investment program, in line with other budget priorities and consistent with a sustainable fiscal stance. Directors also noted that the adoption of mechanisms aimed at reducing the volatility and procyclicality of fiscal policy could help ensure a higher level and a smoother path of public investment over time. Most Directors therefore saw merit in considering as a supplemental indicator for fiscal policy and analysis the structural or cyclically adjusted fiscal balance, but were mindful of the important difficulties to overcome in constructing reliable indicators in this area. Directors looked forward to further staff analysis of this topic.
"Directors commented on a number of other important considerations. First, they emphasized that the structure of revenue and current spending remains of critical importance. They observed that cuts in distortionary taxes, or increases in efficient social programs and spending on human capital, may be equally or more deserving of priority in fiscal policy than infrastructure investment in certain country circumstances. Second, public investment should be of high quality, and to this end, procedures for selecting and overseeing projects in many countries need to be strengthened. A number of Directors noted in this respect that increased lending by the MDBs for infrastructure may not only help ease financing constraints, but also provide a useful quality control of the projects financed.
"Directors generally supported redefining the fiscal balance to cover the whole of the public sector excluding commercially run public enterprises. They observed that inclusion of the balance of these enterprises in measures of fiscal balances could be an obstacle to their undertaking an appropriate level of investment. In this respect, they noted that the coverage of fiscal indicators in Fund reports varies significantly across regions, and that this undermines comparability of treatment in this area. Directors therefore generally welcomed the proposed more uniform approach to coverage. Most Directors also broadly endorsed the preliminary criteria for identifying commercially run public enterprises, proposed by the staff, but noted that further study is required in determining the most appropriate criteria, and indicated that flexibility in their application would be appropriate for now.
"Some Directors, however, questioned the feasibility of achieving uniformity of coverage in fiscal indicators and targets across the Fund membership in the foreseeable future, given existing data limitations, and advocated transitional mechanisms which would allow some additional flexibility with respect to investment of commercially-run public enterprises, in particular to avoid having the immediate exclusion of profitable commercial enterprises negatively affect the fiscal balance. Directors agreed that information on the finances of excluded public enterprises should continue to be reported to the public and covered under the Fund's surveillance activities, as appropriate.
"Directors highlighted the potential for public-private partnerships (PPPs) in terms of attracting private capital to infrastructure investment and securing efficiency gains in asset building and service provision. They also observed that, when PPPs are being contemplated, it is important for the government to consider what types of risks would be most appropriately shifted to the private sector. They underscored the need to assess carefully the appropriate role for PPPs, and to ensure that there is full disclosure of their fiscal impact.
"Directors saw the lack of internationally accepted accounting and reporting standards for PPPs as a possible obstacle to the development of efficient PPPs, and urged the staff to work with the relevant accounting bodies to promote preparation of such standards. They also noted that, in developing these standards, careful consideration should be given to appropriate ways of reflecting in the government's accounts the fiscal risks posed by PPPs. In the meantime, Directors generally supported the proposed approach to disclosing, and reflecting in debt sustainability analysis, the known and potential costs to government (net of the relevant revenues) stemming from PPPs. However, some Directors questioned the proposal to count the present value of committed service payments under PPP contracts as a liability which should be added to the debt for the purpose of assessing debt sustainability.
"Most Directors supported the proposed pilot approach to implementing the proposals put forward by the staff, within the Fund's existing budgetary envelope. These pilot studies would focus in particular on modifying the coverage of fiscal indicators, and assessing the fiscal implications of PPPs. Directors agreed that the focus should be on a few countries from different regions, and that the pilots should be agreed to by the countries concerned, and should be undertaken in conjunction with the World Bank and other relevant MDBs, in line with their respective mandates. Directors looked forward to the report on progress with the pilots," Ms. Krueger stated.
1 This PIN summarizes the views of the Executive Board, as expressed during the April 2, 2004 informal seminar, based on the reports "Public Investment and Fiscal Policy " and "Public-Private Partnerships."
IMF EXTERNAL RELATIONS DEPARTMENT