## Fiscal Space in Low-Income Countries

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**Canonical URL:** [Fiscal Space in Low-Income Countries](https://www.imf.org/-/media/files/news/seminars/2a1_presenter_moreno-badia.pdf)

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### Presentation and context
- Presenter: Marialuz Moreno Badia, Fiscal Affairs Department.
- Event: IMF-JICA Conference, FISCAL RISKS, FISCAL SPACE, AND THE SUSTAINABLE DEVELOPMENT GOALS, February 2017.
- Framing quote attributed to Christine Lagarde (July 6, 2014): “Decisions to scale up public spending (be it on infrastructure, education, or health) and to what extent, should be made on a case-by-base, country-by-country basis. And with a careful analysis of tradeoffs –public financial sustainability comes first.”
- Working definition cited: “Fiscal space in general refers to room for undertaking discretionary fiscal policy relative to existing plans without undermining fiscal sustainability.” — Assessing Fiscal Space: An Initial Consistent Set of Considerations.

### Background: country groups and investment needs
- GDP per capita and basic indicators as shown:
  - LIDC2,185285.6
  - EM9,970 42 4.3
  - AE48,530 105 2.0
- Incremental Annual Investment Needs, Average for 2015–30 (Billions in 2013 USD) by income grouping (figures shown):
  - 181
  - 473
  - 224
  - 604
- Infrastructure endowment indicators and reference years:
  - Density and fixed-line telephones (subscribers per 1,000 people, 2004)
  - Water (% of households with access, 2002)
  - Density and paved road network (km/1,000 km2, 2001)
  - Electrical generating capacity (MW per 1 million people, 2003)
- Source for investment needs: Schmidt-Traub, Guido, “Investment Needs to Achieve the Sustainable Development Goals.” Sustainable Development Solutions Network Working Paper, 2015.
- Source for infrastructure endowments: Yepes, Tito, Justin Pierce, and Vivien Foster. “Making Sense of Africa’s Infrastructure Endowment: A Benchmarking Approach.” World Bank Policy Research Working Paper 4912, World Bank, Washington.

### Act I — Stylized facts: debt, financing, volatility, and growth
- Public debt and capital stock, 2010–15 (34 low-income countries):
  - Public debt ratios rose for 25 of these between 2010 and 2015.
  - Countries with the largest increases (top quartile): Cameroon, Central African Republic, The Gambia, Ghana, Lesotho, Mozambique, Republic of Congo, Yemen, and Zambia.
- Decomposition of government debt evolution (2003–2014): components include primary balance, stock-flow adjustment, debt relief, and interest-growth differentials; debt level shown as percent of GDP.
- LIDC financing mix (percent of GDP): domestic, non-concessional, concessional financing cited with concessional “still at Center Stage.”
- Real interest rate differentials: charts show dispersion with nonconcessional minus concessional and nonconcessional minus domestic comparisons.
- Macroeconomic volatility (SD, 2000–15, sample median): Δ ToT Δ REER Growth across LIDC, EM, AE with volatility patterns noted.
- Tax revenue volatility: weighted average tax revenues (percent of GDP) and largest annual positive and negative changes, median observation 1971–14, showing pronounced swings for LIDC relative to EM and AE.
- Average growth rates:
  - Average Growth Rates for the 2009–14 and 2015–20 (forecast) periods (percent) displayed by group.
- Financial depth (ratio of M2 to GDP, percent) and mineral vs non-mineral growth distinctions.
- Narrative summary: LIDCs exhibit higher volatility and financing constraints; concessional finance remains central but with large dispersion in rates.

### Act II — Method: anchoring fiscal space and safe debt
- DSA thresholds for public debt under CPIA-based strength categories (percent of GDP):
  - DSA threshold (weak=49)
  - DSA threshold (medium=62)
  - DSA threshold (strong=75)
- Methodological tensions noted:
  - “What’s the anchor?” — existing thresholds may be too restrictive or provide little guidance on safety margins.
  - Need to account explicitly for trade-offs: return vs. risks.
- Core analytic elements to assess fiscal space:
  - Past debt
  - Fiscal behavior
  - Contingent liabilities
  - Incorporate uncertainty and shocks
- Conceptual decomposition introduced:
  - Safe Debt
  - Fiscal Space
  - Buffer Zone
- Illustration: safe debt, buffer, and fiscal space conceptualized as percent of GDP distance between current debt and calibrated breach thresholds under shocks.

### Act III — Quantifying room for maneuver and buffers
- Fiscal behavior matters: under benign conditions, sizable fiscal space can exist.
- Safe Debt Level (percent of GDP): calibration based on distance between country-specific 2014 actual debt level (WEO 2020 projection for "WEO 2020") and the calibrated initial debt that breaches the CPIA threshold under shocks over a six-year horizon with 95 percent probability.
- Fiscal space, 2003 onwards (percent of GDP, median):
  - Presented by mineral vs non-mineral and regional groupings (Asia highlighted).
  - Baseline and alternative scenarios include Student-T Distribution and ToT Persistence.
- Prudent debt buffers, 2003 onwards (percent of GDP, median):
  - Charts show required buffers under Baseline, Student-T Distribution, and ToT Persistence scenarios; message: “But you need buffers to avoid the cliff.”
- Fiscal space under different financing mix and FX scenarios (percent of GDP, average) shown with scenario labels (Baseline, Decline CL 50%/FL, Decline CL 50%/FL w/ RER, 4% dep.).
- Additional fiscal space under DRM scenario (percentage points of GDP) and distribution across countries shown.
- Scaling-up investment scenarios:
  - Increase in Fiscal Space Compared to Baseline (percent of GDP) and Number of Countries distribution.
  - Change in Government Investment, avg. 2005-09 to 2010-14 (percent of GDP).
  - Increase in Fiscal Space under Scaling-Up Investment with Baseline and Higher efficiency assumptions.

### Findings, scenarios, and key quantitative points
- Public debt ratios increased for 25 of 34 low-income countries between 2010 and 2015; top-quartile countries with largest increases listed above.
- DSA-based CPIA thresholds cited explicitly: weak=49, medium=62, strong=75 (percent of GDP).
- Buffers up to 30 percent of GDP! (explicit emphasis in the presentation).
- Safe debt calibration uses a six-year time horizon with a 95 percent probability criterion for breaching CPIA thresholds.
- Scenarios considered include Baseline, Student-T Distribution (fatter tails), ToT Persistence, and declines in commodity-related revenues with exchange rate effects.

### Policy implications and recommendations
- Fiscal space can be created, but careful trade-offs between scaling up spending and fiscal sustainability are essential.
- Three core policy levers (the “Three Arrows”):
  - Domestic revenue mobilization
  - Spending efficiency
  - Fiscal institutions
- Scaling up spending should be guided by:
  - Country-specific analysis of returns versus risks.
  - Attention to financing mix (concessional vs non-concessional vs domestic).
  - Adequate buffers to absorb shocks and volatility.
- Debt Sustainability Analyses (DSAs) provide useful debt limits but offer little explicit guidance on safety margins; augment DSA-based limits with calibrated buffers and scenario analysis.

### Bottom line and epilogue
- Enhancing the ability to achieve the Sustainable Development Goals requires:
  - Sizable fiscal space under benign conditions.
  - Recognition that volatility matters a great deal.
  - Focused efforts on domestic revenue mobilization, spending efficiency, and stronger fiscal institutions to sustainably scale up investment and public spending.

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_Source: https://www.imf.org/-/media/files/news/seminars/2a1_presenter_moreno-badia.pdf_