## Introduction — Fiscal Rules: coping with Revenue volatility in Lesotho and Swaziland (45073-afrdp-fiscal-rules)

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### Policy challenges and constraints
- SACU receipts are a sizable but volatile source of revenue for Lesotho and Swaziland; under SACU, customs duties and excise are pooled and shared.
- Historical example: "SACU earnings for Lesotho and Swaziland declined from an average 25 percent of GDP in 2009/10 to 12 percent in 2010/11, followed by a sharp recovery in 2012/13 (to reach 24 percent)."
- Main fiscal challenges:
  - Volatility: "abrupt changes of more than 10 percentage points of GDP" in a year; drivers include South Africa’s economic performance, forecast-based transfers and adjustment mechanism, and large customs-duty share.
  - Procyclicality: high susceptibility to South Africa’s business cycle; mid-2000s revenue buildup led to procyclical fiscal expansions prior to 2008–09 crisis.
  - Uncertainty: annual transfers for the following year are agreed at year-end; large forecast errors complicate budget planning.
  - Prospects: expected secular declines in SACU revenues reflecting South Africa’s slowdown.
- Table 1 lines (as in source):
  - Botswana1026
  - Namibia1134
  - Lesotho2647
  - Swaziland1954
- Key institutional constraints limiting adjustment:
  - Exchange rate peg to the South African rand (Common Monetary Area) limits exchange rate and monetary policy scope.
  - Scarce external financing and limited international reserves (reserves were drawn down after the 2010 decline).
  - Dominant public sector, market distortions, infrastructure bottlenecks, and financial sector weaknesses restrict private sector adjustment.
- Consequence: fiscal adjustment burden falls on fiscal policy; spending inertia increases public domestic debt and lowers international reserves when SACU transfers fall.

### Modeling approach and calibration
- Two stand-alone models:
  - Short-term deterministic dynamic equilibrium model (Berg and others 2010a) incorporating short-term constraints: no market access, limited domestic borrowing, fixed exchange rate; focuses on international reserves rather than public debt.
  - Long-term stochastic real business cycle model for a small open economy with Ricardian and liquidity-constrained households to analyze welfare and debt dynamics.
- Short-term fiscal rule parameterization:
  - Government spending adjustment rule: d_t^g = γ (R_t^sa − R̄^sa)
  - Central bank reserves target: IR_t = IR̄ + (R_t^sa − R̄^sa) + (CA_t − CĀ) − ω_S (π_t^S − π̄_S)
  - Under the fixed exchange rate, ω_S is set very large to preserve the peg.
- Calibration details:
  - Numerical simulations calibrated for Lesotho and Swaziland; initial steady-state ratios based on 2013 data.
  - International reserves initial steady state: cover five months of imports.
  - Government deposits: reach about 27 percent of GDP for Lesotho and 9.5 percent for Swaziland in 2014.
- Steady-state parameters — selected (exact values preserved):
  - SACU revenue (in % GDP) A*: Lesotho 27.4; Swaziland 18.4
  - Share of public investment φs: Lesotho 35.7; Swaziland 17.4
  - Capital mobility v: 500 for both countries
  - Macro ratios:
    - Private consumption (in % GDP): Lesotho 80; Swaziland 80.5
    - Private investment (in % GDP): Lesotho 17; Swaziland 5
    - Public consumption (in % GDP): Lesotho 28.1; Swaziland 21.1
    - Public investment (in % GDP): Lesotho 12.6; Swaziland 4.5
    - Export (in % GDP): Lesotho 42.2; Swaziland 56.1
    - International reserve (in % GDP; equivalent to five months of imports): Lesotho 40.5; Swaziland 29.1

### Short-term results: BBR versus SSR
- Rule definitions:
  - BBR (Balanced Budget Rule): γ = 0 (government fully adjusts spending to cyclical SACU revenue changes).
  - SSR (Structural Surplus Rule): γ = 1 (expenditures do not respond to cyclical changes; surpluses saved in good times and withdrawn in bad times).
- BBR scenario findings:
  - SACU volatility is fully transmitted to expenditures and growth.
  - Positive revenue shocks: temporary growth increase, widened trade deficit, real exchange rate appreciation; especially large trade deficit for Lesotho.
  - Negative shocks: symmetric contraction; large boom-and-bust in domestic demand create larger oscillations in international reserves for Lesotho; Swaziland’s reserves remain closer to steady-state.
- SSR scenario findings:
  - SSR smooths public spending at its structural level, mitigating growth volatility and domestic demand fluctuations.
  - Reserve accumulation in good times:
    - Lesotho reserves rise from 40 percent to about 46 percent of GDP during the first two periods.
    - Swaziland reserves rise from 25 percent to 33 percent of GDP during the first two periods.
  - SSR enables use of reserves to stimulate the economy during bad times and helps avoid boom-bust cycles.
- Operational challenge: estimating steady-state SACU revenues is difficult; methods include long-term trend formulas, country-share approaches, or historical revenue-to-GDP averages — must account for downside risks.

### Long-term welfare analysis and optimal fiscal rules
- Long-term fiscal rule specification in stochastic model:
  - S_t / Y_t = s̄ + d_tax (T_t − T̄)/Y_t + d_SACU (R_t^SA − R̄^SA)/Y_t + d_debt (B_t/Y_t − B̄)
  - Regime mapping by feedback coefficients: 0 = BBR, 1 = SSR, >1 = CCR (Countercyclical Rule).
- Household types:
  - Ricardian households: access to domestic and international markets, accumulate capital.
  - Liquidity-constrained households: no access to finance, cannot accumulate capital.
- Welfare implications:
  - BBR (d_tax = 0; d_SACU = 0): extreme procyclicality; spending cuts amplify income volatility and hurt liquidity-constrained households.
  - SSR (d_tax = 1; d_SACU = 1): targets long-term fiscal balance; allows borrowing/drawing down savings to smooth expenditures and reduce procyclicality.
  - CCR (d_tax > 1; d_SACU > 1): more aggressive smoothing; government borrows more than shock size to protect liquidity-constrained households; welfare-enhancing overall but requires greater debt accumulation during adjustment.
- Optimal-coefficient result (exact):
  - Optimal coefficients reported: (d_tax = 6, d_SACU = 1.25) — a strongly countercyclical fiscal rule yields the largest welfare gains relative to the BBR benchmark.
- Distributional drivers:
  - Liquidity-constrained agents drive preference for aggressive countercyclical policy; Ricardian agents oppose high responses due to financing-cost effects.
  - Net effect: CCR increases welfare for the population as a whole because gains to liquidity-constrained agents outweigh Ricardian losses.

### Design, institutional groundwork, and implementation steps
- Success factors for fiscal rules:
  - Clear fiscal objectives and a fiscal variable with a clear numerical target.
  - Exceptional circumstances mechanism and ex post deviation procedures.
  - Clear statutory basis, effective monitoring, and accountability.
- Public Financial Management (PFM) prerequisites:
  - Top-down budgeting and comprehensive reporting.
  - Medium-term budget framework with fiscal priorities.
  - Effective budget execution systems—commitment controls and cash management.
  - Reliable data and forecasting capacity.
  - Internal and external audits and regular publication of fiscal data.
  - Fiscal rules often embedded in Financial Responsibility Laws (FRLs) and monitored by independent fiscal institutions.
- Country-specific PFM needs:
  - Swaziland: prepare coherent medium-term fiscal framework; improve cash management and commitment control; enact Public Financial Management Bill to increase transparency and channel expenditures through budget procedures.
  - Lesotho: strengthen budget execution and monitoring; improve cash management, bank account reconciliation, public investment management; strengthen medium-term budgeting.
- Implementation considerations:
  - Government commitment required to save SACU windfalls in good times and maintain prudent spending amid political pressures.
  - No perfect timing: preparation and stakeholder engagement can begin before full policy buffers are established.

### Operational design options and trade-offs
- Revenue-rule operational forms:
  - Ceiling on annual spending of SACU revenues, or
  - Target on a balance excluding a volatile portion of SACU revenues (structural fiscal deficit target using steady-state SACU revenue).
- Stabilization fund design:
  - Accumulate SACU revenues in excess of the steady-state level; use to complement revenue when SACU falls below steady-state.
  - Withdrawals conditional on economy operating relative to potential and adequacy of international reserves.
- Steady-state smoothing trade-offs:
  - Short backward-looking horizon: better tracking of actual SACU revenues, less vulnerable to structural shocks, but yields more volatile steady-state revenues and may fuel procyclical policies.
  - Long backward-looking horizon: more stable steady-state revenues but vulnerable to structural shocks; prolonged saving/drawing cycles may be politically/socially untenable.
  - Staff estimate (exact): a five-year moving average would have lowered historical SACU revenue volatility by 40 percent on average, with a saving cycle of three or four years.

### Key empirical and illustrative evidence
- Empirical findings cited (exact phrasing preserved where quoted):
  - "Volatility of output caused by discretionary changes in fiscal policy lowers economic growth by more than 0.8 percentage point for every percentage point increase in volatility." (Fatas and Mihov 2003)
  - Variance of SACU transfers is estimated to be 38 percent higher than the variance of the actual revenues that Botswana, Lesotho, Namibia, and Swaziland are entitled to receive.
- Illustrative simulation:
  - Swaziland hypothetical: if a non-SACU deficit target of 17 percent of GDP had been introduced in 2008/09, expenditures would have been more stable, enabling additional saving before the crisis and higher spending during the crisis, mitigating cumulative fiscal imbalances over the medium term.

### Conclusions and policy recommendations (concise bullets)
- Fiscal rules can mitigate short-term adverse effects of SACU revenue volatility and yield long-term welfare gains:
  - BBR: ensures fiscal balance but transmits revenue shocks to output with high volatility.
  - SSR: saves windfalls to build reserves and smooth spending; an SSR that raises reserves above steady-state helps endure bad times.
  - CCR: more effective in stabilizing liquidity-constrained households’ consumption and can deliver the largest welfare gains but requires more borrowing and may be harder to implement.
- Recommended design and sequencing:
  - Aim fiscal rules at medium-term sustainability while managing short-term volatility.
  - Allow savings when SACU revenues exceed projections; consider using accumulated resources for infrastructure gaps.
  - Build PFM capacity first: reliable data and forecasting, comprehensive reporting, effective execution controls, audits, and publication of fiscal data.
  - Stabilization fund safeguards: create fund within the budget, ensure full transparency and accountability, implement strict rules for its use.
- Practical next steps for Lesotho and Swaziland:
  - Strengthen PFM systems and institution building as prerequisites for adopting rules-based frameworks.
  - Begin discussions, technical groundwork, and stakeholder engagement well before formal rule adoption.

*Source: 45073-afrdp-fiscal-rules — Introduction and Conclusion (IMF).*

### Introduction �����������������������������������������������������������������������������������������������������������

### Introduction

### Policy challenges and constraints
- Over the past decade, Lesotho and Swaziland have faced significant volatility in their fiscal revenues, owing to highly unstable Southern African Customs Union (SACU) receipts.
- Key thematic areas addressed in the content unit:
  - Policy Challenges and Constraints
  - Addressing Fiscal Policy Volatility in Lesotho and Swaziland
  - From Discretionary to a Rules-Based Fiscal Policy Framework
  - Conclusion

### Findings from model analysis
- The use of a structural balance target could smooth the growth impact from revenue shocks.
- A structural balance target could help preserve sufficient international reserves during bad times.
- From a long-term perspective, introducing fiscal rules suggests possible welfare gains.

### Policy implications and recommendations
- Fiscal rules (specifically a structural balance target) are a viable instrument to manage volatility from SACU revenue shocks in Lesotho and Swaziland.
- Developing strong institutions and improving public financial management are necessary steps to ease the transitions to a rules-based fiscal policy framework.
- Groundwork and steps toward a rules-based policy are emphasized as prerequisites for successful fiscal rules implementation.

### Analytical components and supporting materials (as organized in the unit)
- Policy Challenges Associated with SACU Revenues
- Policy and Institutional Constraints
- Can Fiscal Rules Help?
- Managing SACU Revenue in a “Constrained” Economy
- Welfare-Enhancing Role of Fiscal Rules
- Groundwork for Successful Fiscal Rules
- Steps Toward a Rules-Based Policy

*Source: Introduction, 45073-afrdp-fiscal-rules*

### Introduction

### 45073-afrdp-fiscal-rules - Introduction

### Overview
- Managing fiscal revenue volatility is a serious policy challenge for many countries; Lesotho and Swaziland have faced significant revenue volatility largely owing to highly unstable SACU receipts.
- Example historical changes in SACU earnings: "SACU earnings for Lesotho and Swaziland declined from an average 25 percent of GDP in 2009/10 to 12 percent in 2010/11, followed by a sharp recovery in 2012/13 (to reach 24 percent)."
- Adverse effects of revenue falls include fiscal adjustment and contraction in domestic absorption, weakening short-term economic growth, worsening fiscal and external balances, increasing government debt, and lowering international reserves.
- Paper objectives (assuming no immediate changes in the revenue-sharing formula): (1) explore if a fiscal rule can mitigate short-term adverse effects of revenue volatility; (2) examine whether such rules are welfare enhancing over the long term; (3) recommend a road-map for transitioning to a rules-based fiscal framework based on lessons from other countries.

### Policy challenges associated with SACU revenues
- SACU receipts are a sizable but volatile source of revenue for Lesotho and Swaziland; under SACU, customs duties and excise are pooled and shared.
- SACU receipts also represent an important source of foreign inflows and contribute to the stock of international reserves.
- Main fiscal challenges posed by SACU revenues:
  - Volatility: "abrupt changes of more than 10 percentage points of GDP" in a year; volatility drivers include (1) South Africa’s economic performance, (2) forecast-based revenue transfers and the adjustment mechanism, and (3) the relatively large share of SACU receipts derived from customs duties.
  - Procyclicality: high susceptibility to South Africa’s business cycle; revenue buildup in mid-2000s led to significant budget expansions and procyclical fiscal policies prior to the 2008–09 crisis.
  - Uncertainty: annual transfers for the following year are agreed at year-end based on revenue prospects; large forecast errors in South African Treasury budget documents make budget planning difficult.
  - Prospects: expected secular declines in SACU revenues in coming years, largely reflecting the slowdown in South Africa’s economy.

- Table 1 (as presented):
  - "Table 1. Average Size of the SACU Revenue (Annual average, 2005/06 – 2015/16)"
  - Lines as shown in source:
    - "Botswana1026"
    - "Namibia1134"
    - "Lesotho2647"
    - "Swaziland1954"

### Policy and institutional constraints
- Key constraints limiting adjustment options:
  - Exchange rate and monetary policy scope is limited under the exchange rate peg to the South African rand at parity (Common Monetary Area arrangement).
  - External financing is scarce; both countries have limited access to international financing.
  - Insufficient international reserves provide a limited buffer to SACU shocks; reserves were drawn down after the 2010 decline and proved insufficient to avoid rapid fiscal consolidation.
  - Dominant public sector and economic rigidities: small private sector, market distortions (e.g., restrictions on land sales), infrastructure bottlenecks, and financial sector institutional weaknesses limit private response to shocks.
- Consequence: burden of fiscal adjustment falls primarily on fiscal policy; contemporaneous spending adjustment is difficult owing to fiscal spending inertia, leading to increased public domestic debt and declines in international reserves when SACU transfers fall.

### Modeling fiscal rules and scenarios
- Two stand-alone models are used to analyze fiscal rules:
  - Short-term deterministic model (dynamic equilibrium model developed by Berg and others 2010a) that incorporates short-term constraints: lack of access to financing, nominal price rigidities, fixed exchange rate, no market access, limited domestic borrowing, absence of short-term domestic revenue measures. Focuses on international reserves rather than public debt.
  - Long-term stochastic real business cycle model for a small open economy (with Ricardian and liquidity-constrained households) to analyze welfare implications and public debt dynamics.
- Fiscal rule parameterization in short-term model:
  - Government spending adjustment rule: d_t^g = γ (R_t^sa − R̄^sa)  (Equation (1) in source).
  - Central bank reserves target: IR_t = IR̄ + (R_t^sa − R̄^sa) + (CA_t − CĀ) − ω_S (π_t^S − π̄_S)  (Equation (2) in source).
  - Under the fixed exchange rate, ω_S is set very large to preserve the peg.
- Calibration details:
  - Numerical simulations calibrated for Lesotho and Swaziland; initial steady-state ratios based on 2013 data.
  - International reserves in initial steady state set to cover five months of imports for both countries.
  - Government deposits: deposits reach about 27 percent of GDP for Lesotho and 9.5 percent for Swaziland in 2014.

### Short-term model results: BBR versus SSR
- Definitions:
  - BBR (Balanced Budget Rule): spending policy parameter γ = 0; government fully adjusts spending to cyclical changes in SACU revenues.
  - SSR (Structural Surplus Rule): spending policy parameter γ = 1; expenditures do not respond to cyclical changes—surpluses are deposited during good times and withdrawn during bad times.
- Baseline (BBR) scenario results:
  - SACU revenue volatility is fully transmitted to expenditures and growth.
  - First two periods of positive revenue shock: temporary growth increase, widened trade deficit, real exchange rate appreciation, especially large trade deficit for Lesotho.
  - Subsequent two periods of negative shock: symmetric contraction; large boom-and-bust cycles in domestic demand create larger oscillations in international reserves for Lesotho; Swaziland’s reserves remain closer to steady-state.
- SSR scenario results:
  - SSR smooths public spending at its structural level, mitigating growth volatility and domestic demand fluctuations.
  - Reserve accumulation in good times: Lesotho reserves rise from 40 percent to about 46 percent of GDP; Swaziland reserves rise from 25 percent to 33 percent of GDP during the first two periods (good times).
  - SSR enables use of reserves to stimulate the economy during bad times and helps avoid boom-bust cycles.
- Operational challenge: estimating steady-state SACU revenues is difficult; possible methods include formulas based on long-term trends of the total SACU revenue pool and country shares or historical averages of the revenue-to-GDP ratio; must account for downside risks.

### Welfare analysis and long-term fiscal rules
- Long-term stochastic model structure:
  - Two household types: Ricardian (access to domestic and international markets, accumulate capital) and liquidity-constrained (no access to finance, cannot accumulate capital).
  - Government follows a structural rule: S_t / Y_t = s̄ + d_tax (T_t − T̄)/Y_t + d_SACU (R_t^SA − R̄^SA)/Y_t + d_debt (B_t/Y_t − B̄)  (Equation (3) in source).
  - Feedback coefficients d_tax and d_SACU determine regime: 0 = BBR, 1 = SSR, >1 = CCR (Countercyclical Rule).
- Welfare implications of fiscal rules:
  - BBR (d_tax = 0; d_SACU = 0): extreme procyclicality; instantaneous spending cuts amplify income volatility and severely affect consumption of liquidity-constrained households.
  - SSR (d_tax = 1; d_SACU = 1): targets long-term fiscal balance; allows borrowing/drawing down savings to smooth short-term expenditures, alleviating procyclicality while restoring structural surplus over medium term.
  - CCR (d_tax > 1; d_SACU > 1): more aggressive smoothing—government borrows more than the shock size to smooth consumption of liquidity-constrained households; welfare-enhancing overall but requires greater debt accumulation during adjustment.
- Optimal rule findings:
  - Welfare comparisons use expected present discounted utility and compensating variation metric.
  - Optimal coefficients reported: (d_tax = 6, d_SACU = 1.25) — a strongly countercyclical fiscal rule yields the largest welfare gains relative to BBR benchmark.
  - Results driven mainly by liquidity-constrained agents who prefer aggressive countercyclical policy; Ricardian agents prefer lower responses to avoid higher financing costs.
  - Overall, a CCR increases welfare for the population as a whole because gains to liquidity-constrained agents outweigh Ricardian losses.

### From discretionary to a rules-based fiscal policy framework: groundwork and steps
- Success factors for fiscal rules:
  - Clear fiscal objectives addressed by the rule.
  - A fiscal variable targeted with clear link between numerical target and objective.
  - Mechanism for exceptional circumstances and ex post deviations.
  - Clear statutory basis with effective monitoring and accountability.
- PFM elements required to support fiscal rules:
  - Top-down budgeting with comprehensive reporting.
  - Medium-term budget framework with fiscal priorities.
  - Effective budget execution systems—commitment controls and cash management.
  - Reliable data and forecasting capacity to minimize errors.
  - Effective internal and external audits and regular publication of fiscal data.
  - Fiscal rules often included in Financial Responsibility Laws (FRLs) and monitored by independent institutions (fiscal councils).
- Country examples and lessons:
  - Chile: fiscal rule supported by an FRL, independent experts computing structural balance, transparency and methodology documented.
  - Botswana: sustained rules-based policies grounded in strong PFM, comprehensive budget documentation, reliable multiyear forecasts, sound cash management.
- Country-specific PFM needs:
  - Swaziland: prepare coherent medium-term fiscal framework; improve cash management and commitment control; enact Public Financial Management Bill to increase transparency and channel expenditures through budgetary procedures.
  - Lesotho: strengthen budget execution and monitoring; improve cash management, bank account reconciliation, public investment management; strengthen medium-term budgeting.
- Implementation considerations:
  - Introducing a rules-based framework requires government commitment to save SACU windfalls in good times and maintain prudent spending, needing stakeholder support despite political pressures.
  - No perfect timing to commence a rules-based framework; discussions and preparation can begin at any time to build necessary groundwork even if policy buffers are not yet fully secured.

*Source: 45073-afrdp-fiscal-rules - Introduction (IMF).*

### Conclusion

### Conclusion

### Main findings on revenue volatility and fiscal rules
- Lesotho and Swaziland have faced significant volatility in their revenues, largely owing to highly volatile SACU receipts.
- A significant decline in these revenues, as experienced in 2010–11, would pose serious policy challenges for their heavy reliance on SACU revenues.
- The paper demonstrates the advantages of fiscal rules in managing volatile SACU transfers:
  - A BBR (balanced budget rule) would ensure a fiscal balance without adversely affecting external balances, although it could require sizable fiscal adjustments in response to large negative SACU revenue shocks and result in high short-term output volatility.
  - An SSR (savings-stabilization rule) saves resources in good times to prepare for bad times; if implemented to build international reserves beyond the steady-state level, sufficient reserves would be secured to endure bad times.
  - Long-term welfare comparisons indicate welfare is higher with a CCR (countercyclical rule) than with an SSR, and welfare under an SSR exceeds that under a BBR. A CCR is more effective than an SSR in stabilizing the consumption of liquidity-constrained households, but a CCR requires greater debt accumulation during the adjustment period than an SSR and might be difficult to implement.

### Policy recommendations and design considerations
- Fiscal rules for Lesotho and Swaziland should:
  - Address medium-term fiscal and macroeconomic sustainability while managing short-term volatility.
  - Allow generation of savings in periods when SACU revenues exceed projections (analogous to stabilization funds in resource-rich countries).
  - Consider use of accumulated resources to help address infrastructure gaps.
- Success factors for fiscal rules:
  - Careful rule design and appropriate legislative and institutional arrangements.
  - An adequate public financial management (PFM) system as essential foundation.
  - Steps for Lesotho and Swaziland include improving PFM and stepping up institution building to support medium-term introduction of fiscal rules.

### Operational details and trade-offs for smoothing SACU revenues
- A revenue rule could be implemented as:
  - A ceiling on annual spending of SACU revenues, or
  - A target on a balance excluding a volatile portion of SACU revenues (structural fiscal deficit target with a steady-state SACU revenue).
- Stabilization fund design and operationalization:
  - The stabilization fund could accumulate SACU revenues in excess of the steady-state level and be used to complement fiscal revenue when SACU revenues fall below the steady-state level.
  - Withdrawals could vary depending on whether the economy is operating at/above potential, or below potential, and whether it is securing sufficient international reserves.
- Intrinsic trade-off in steady-state SACU revenue smoothing:
  - Short backward-looking horizon (little smoothing): better tracking of actual SACU revenues, less affected by structural shocks, but results in more volatile steady-state revenues that could fuel procyclical policies.
  - Long backward-looking horizon (high smoothing): more stable steady-state revenues but vulnerable to structural shocks; prolonged saving or drawing cycles could be politically and socially untenable.
  - Staff estimates suggest a five-year moving average would have lowered the historical volatility of SACU revenues by 40 percent on average, with a saving cycle of three or four years.

### Preconditions for effective fiscal-rule implementation
- Strengthening PFM systems is a prerequisite. The formal introduction of a fiscal rule requires:
  1. Reliable data with a minimum technical forecasting capacity (to predict budgetary aggregates with sufficient accuracy).
  2. Comprehensive budget reporting systems (to produce in-year and timely end-year reports).
  3. Effective internal and external audit systems (to ensure public resource utilization is fully accounted for).
  4. Publication of fiscal data (to allow external monitoring of the rule).
- Stabilization fund-specific safeguards:
  1. Create the fund within the budget.
  2. Ensure its full transparency and accountability.
  3. Implement strict regulation/rule for its use.

### Empirical and country-specific evidence referenced
- Empirical studies document a negative relationship between fiscal policy volatility and long-term growth (Aizenman and Marion 1993; Lensink, Bo, and Sterken 1999; Afonso and Furceri 2008).
- Fatas and Mihov (2003) show that volatility of output caused by discretionary changes in fiscal policy lowers economic growth by more than 0.8 percentage point for every percentage point increase in volatility.
- Hnatkovska and Loayza (2004) suggest the negative relationship is exacerbated in countries with weak institutions or inability to conduct countercyclical fiscal policies.
- Furceri (2007) finds higher government expenditure business-cycle volatility associated with lower growth (cross-country panel 1970–2000).
- SACU-specific mechanics and risks:
  - Ex ante revenues are estimated based on projected imports and excise collections and are adjusted ex post with a two-year lag to reflect actual collections.
  - Retroactive adjustments can impart sizable changes in the SACU pool; in 2010–11 Lesotho and Swaziland were hit twice (lower forecast of current SACU revenues and downward adjustment of past SACU revenues).
  - The variance of SACU transfers is estimated to be 38 percent higher than the variance of the actual revenues that Botswana, Lesotho, Namibia, and Swaziland are entitled to receive.

### Illustrative simulation and historical example
- Swaziland: Hypothetical simulation indicates that if a non-SACU deficit target of 17 percent of GDP had been introduced in 2008/09, expenditures would have been more stable, leading to additional saving before the crisis and allowing higher spending during the crisis, mitigating cumulative fiscal imbalances over the medium term.

*Source: Conclusion, 45073-afrdp-fiscal-rules*

### Appendix II. Fiscal Rules: International Experience

### Appendix II. Fiscal Rules: International Experience

### Baseline Calibration — Structural Parameters
- Preference
  - Degree of home bias ω: 0.54
  - Elasticity of substitution between traded and nontraded goods θ: 1.5
  - Elasticity of substitution between variety µ: 12
  - Elasticity of substitution between consumption and money demand χ: 8.5
  - Frisch labor supply elasticity φ: 2.5
- Production
  - Labor income share αT, αN: 0.7
  - Investment adjustment cost kT, kN: 25
  - Productivity of traded sector in the steady state zT: 1 (normalization)
  - Persistence of learning-by-doing (LBD) externality ρZ: 0.03
  - Depreciation of private capital δ: 0.015
  - Depreciation of public capital δg: 0.02
- Note: Parameter setting follows the Gleneagles model established by Berg and others 2010.

### Steady-State Parameters — Lesotho and Swaziland
- SACU revenue (in % GDP) A*: Lesotho 27.4; Swaziland 18.4
- Share of public investment (out of total public spending) φs: Lesotho 35.7; Swaziland 17.4
- Capital mobility v: 500 for both countries
- Macro ratios (exact values)
  - Private consumption (in % GDP): Lesotho 80; Swaziland 80.5
  - Private investment (in % GDP): Lesotho 17; Swaziland 5
  - Public consumption (in % GDP): Lesotho 28.1; Swaziland 21.1
  - Public investment (in % GDP): Lesotho 12.6; Swaziland 4.5
  - Export (in % GDP): Lesotho 42.2; Swaziland 56.1
  - International reserve (in % GDP; equivalent to five months of imports): Lesotho 40.5; Swaziland 29.1

### Baseline Calibration — Policy Parameters (Fiscal Rules)
- Fiscal rules considered
  - Balanced Budget Rule (BBR)
  - Structural Surplus Rule (SSR)
- Fiscal policy — Spending policy (deposit accumulation) γ:
  - BBR: 0 (no saving)
  - SSR: 1 (full saving)
- Efficiency parameters
  - Efficiency of public spending ζS: BBR 0.4; SSR 0.4
  - Efficiency of aid-financed public spending ζA: BBR 0.4; SSR 0.4
- Monetary/Exchange rate policy
  - Degree of sterilization g: BBR 0; SSR 0
  - Inflation targeting coefficient φπ: BBR 1.5; SSR 1.5

### Key Analytical Inputs for Fiscal-Rule Assessment
- Structural and steady-state parameterization used to evaluate fiscal rules under revenue volatility in Lesotho and Swaziland.
- Calibration draws on the Gleneagles model (Berg and others 2010) and sets explicit country macro ratios and rule specifications to compare BBR and SSR outcomes.

### References (selected from source)
- Berg, Andrew, Jan Gottschalk, Rafael Portillo, and Luis-Felipe Zanna. 2010a. “The Macroeconomics of Medium-Term Aid Scaling-Up Scenarios.” IMF Working Paper 10/160.
- Berg, Andrew, Tokhir Mirzoev, Rafael Portillo, and Luis-Felipe Zanna. 2010b. “The Short-Run Macroeconomics of Aid Inflows: Understanding the Interaction of Fiscal and Reserve Policy.” IMF Working Paper 10/65.
- Basdevant, Olivier. 2012. “Fiscal Policies and Rules in the Face of Revenue Volatility within Southern Africa Customs Union Countries (SACU).” IMF Working Paper 12/93.
- International Monetary Fund, Fiscal Affairs Department. 2009. “Fiscal Rules—Anchoring Expectations for Sustainable Public Finances.” IMF Policy Paper.
- Kopits, George, and Steven Symansky. 1998. “Fiscal Policy Rules.” IMF Occasional Paper 162.
- Kumhoff, Michael, and Douglas Laxton. 2009. “Simple, Implementable Fiscal Policy Rules.” IMF Working Paper 09/76.

*Source: Appendix II and accompanying appendices from "Fiscal Rules: coping with Revenue volatility in lesotho and swaziland" (PDF chapter content supplied).*

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_Source: https://www.imf.org/-/media/files/publications/dp/2017/45073-afrdp-fiscal-rules.pdf_