## ppea2019018 ## Source details **Canonical URL:** [ppea2019018](https://www.imf.org/-/media/files/publications/pp/2019/ppea2019018.pdf) ## Other formats - [Markdown version](/-/media/files/publications/pp/2019/ppea2019018.pdf.md) - [Structured JSON version](/-/media/files/publications/pp/2019/ppea2019018.pdf.json) --- ### EXECUTIVE SUMMARY — Background and introduction - Eleven case studies used to explore IMF engagement on social spending and draw lessons for the future. - Paper based on desk reviews by Fiscal Affairs Department (FAD) and Strategy, Policy and Review (SPR) teams. - Case studies chosen to cover wide spectrum of country circumstances, stages of development, regions, and both surveillance and Fund-supported programs. - Focus on approach and process of IMF engagement; not an assessment of impact. - Main challenges identified: competing priorities, poor data availability and quality, occasional lack of specific expertise within country teams. ### EXECUTIVE SUMMARY — Key findings (context) - Social spending issues featured in staff dialogue in all case studies with varying scope and intensity. - Systematic/long-standing engagement examples: Italy and Japan on population aging and pensions. - Short-term/shock-motivated deeper engagement examples: Bolivia, Cyprus, Ukraine. - Dialogue persistent over time in surveillance cycles or program phases. - Topic coverage: - Social protection programs discussed in all ten cases. - Social insurance predominant in Advanced Economies (AEs) (Italy, Japan). - Social assistance predominant in Emerging Market Economies (EMEs) and Low-income and Developing Countries (LIDCs). - Education central in five out of ten countries; health central in four out of ten countries. - Macro‑criticality dimensions: - Fiscal sustainability relevant in 9 countries. - Spending efficiency relevant in 9 countries. - Spending adequacy relevant in 5 countries. - Policy advice focused mostly on fiscal sustainability, then spending efficiency and adequacy. - Fiscal adjustment needs and budget constraint considerations shaped dialogue in all case studies. ### EXECUTIVE SUMMARY — Nature of interaction and resources - Social spending featured in policy discussions and published IMF country documents; reflected in staff reports and selected issues papers in most cases. - In-house analytical work used in nine cases; ranged from macro-fiscal long-run projections to micro-based incidence analyses. - Internal IMF resources (mainly FAD) provided expertise in five cases and tools/templates/databases in four cases. - Sectoral expertise enabled more in-depth analysis and integration into macro-fiscal strategy (examples: Cyprus, Italy, Jamaica, Kyrgyz Republic, Ukraine). - Technical Assistance (TA) pivotal in supporting scheme design in programs (Cyprus, Jamaica, Kyrgyz Republic, Ukraine). - In four out of six countries receiving IMF TA, International Development Institutions (IDIs) participated (Cyprus, Jamaica, Kyrgyz Republic). - In Cyprus and Ukraine, Fund TA supported teams over extended periods and across many topics. - Quick mobilization of resources was key in crisis contexts. ### EXECUTIVE SUMMARY — Key takeaways and lessons - Avoid a priori narrow focus; fiscal sustainability, spending efficiency, and spending adequacy may all be important. - Strengthen outreach and communication to include broader external stakeholders and anchor advice in a broad macro-fiscal narrative. - Leveraging internal and external resources (including IDIs) improved integration and traction. - Engagement with Civil Society Organizations (CSOs) was less systematic than with IDIs. - In IMF-supported programs, conditionality (quantitative and structural) on social spending was regularly used. ### Synergies with other workstreams and stakeholder interaction - Interaction with IDIs frequent; explicit coordination on specific social spending areas occurred in some cases (South Africa, Mongolia, Cyprus). - Interaction with World Bank or regional IDIs more frequent in LIDCs and EMEs than in AEs. - Cooperation on specific projects beyond TA was generally uncommon. - Interaction with CSOs occurred in only four countries. ### Policy advice framing, targeting, and communication - Policy objectives generally clear but not always situated within broader macro-fiscal context. - Country teams usually adopted medium-term perspective; short-term focus relevant in all program countries but only one surveillance country. - Where fiscal sustainability primary concern, advice often focused on means-tested programs (Bolivia, Cyprus, Jamaica, Kyrgyz Republic, Mongolia). - Staff reports often did not articulate implementation or targeting challenges; perceived narrow focus on targeting generated external criticism (Kyrgyz Republic, Mongolia). - Strong communication and ownership (example: Cyprus) helped reduce controversy. ### Role of IDIs and conditionality - In nine countries policy advice benefited from systematic interaction with IDIs; in five cases drew on IDI analysis and input. - Policy alignment with IDIs was often broad. - Conditionality used in all IMF-supported program case studies; SBs and spending floors used depending on country group and PRGT guidelines. - Traction stronger when supported by country ownership and factors such as continued engagement, internal expertise, TA, collaboration with IDIs, selective conditionality, and appropriate sequencing. ### Recommendations and way forward (key) - Do not narrow focus to a subset of macro‑criticality dimensions unless country‑justified. - Use in-house analytical work and mobilize expertise efficiently; consider cross-country departmental projects and rapid mobilization in crises. - Foster country ownership: continued engagement, selective conditionality, sequencing, integration into program design. - Collaborate with IDIs (notably World Bank in EMEs and LIDCs) to complement in-house expertise. - Strengthen interaction with broader stakeholders and outreach via communication strategies explaining synergies, constraints, trade-offs, and timelines. ### Bolivia — highlights and analytical findings - Context (2004–14): - Poverty rate fell from 63 to 39 percent. - Extreme poverty dropped from 45 to 14 percent. - Gini index fell from 0.59 in 2004 to 0.48 in 2014. - End of commodity boom in 2014 led to unsustainability of higher social spending; shift to fiscal consolidation to maintain macroeconomic stability and debt sustainability. - IMF interaction: - Surveillance context with analytical support (2013 impact evaluation of social transfers and targeting fuel subsidies). - 2015–16 staff analyzed determinants of poverty and inequality; in‑house expertise on inequality deepened analysis. - Coordinated IMF‑World Bank work plan covered education, health, water, sanitation, youth unemployment, and social protection. - Analytical findings: - Reduction in poverty and inequality mainly driven by labor income growth at the bottom. - Non-labor income increases contributed for certain groups but overall small. - Pro‑poor labor policies (e.g., marked minimum wage increases) and transfers to specific groups (e.g., elderly poor) played roles. - Estimated that about two-thirds of inequality reduction was due to the commodities price boom: one-third directly via rural incomes and one-third indirectly via increased government revenue enabling social program expansion. - Staff recommendations and scenarios: - Baseline (2015 Staff Report): moderate and gradual consolidation of the non-hydrocarbons primary deficit over the medium term, with a capital budget execution rate of around 80 percent. - Active policy scenario: more ambitious but gradual reduction of the non-hydrocarbons primary deficit and debt, including income tax and VAT revenue measures and expenditure measures on investment, energy subsidies, and the wage bill. - Recommend gradually reducing energy subsidies and offsetting impacts on vulnerable with targeted social assistance. - Strengthen social safety nets via competition among service providers and improved beneficiary information systems. - Strengthen pension system by raising contribution rate and retirement age. - Efficiency findings and policy recommendations: - Despite high health and education spending, outcomes poor relative to peers; social protection efficiency low because small share of resources reached the poor. - IMF staff recommended: (i) higher but progressive fees for users of social services; (ii) greater competition in provision of social services; (iii) better targeting of existing social benefits; (iv) reform health financing away from capacity-based remuneration toward performance-based incentives. - Implementation and lessons: - Access to education, health, water, electricity greatly increased. - Some competition measures in health implemented; beneficiary information system progress slow. - Ownership and coordination with World Bank, IADB and ILO supported traction. - Communication could be strengthened beyond staff reports and working papers (workshops, roundtables). ### Cyprus — context, program, and policy actions - Context: - Recession since 2009; public debt-to-GDP close to 90 percent in 2012. - May 2013 IMF-supported program approved: about €1 billion (US$1.3 billion); total financing close to €10 billion with ESM providing €9 billion. - Program emphasized fiscal consolidation, debt reduction, financial sector restructuring, and banking recapitalization. - Policy advice and TA: - Program priorities: protect vulnerable households and reallocate savings within social protection toward effective programs. - Structural benchmarks supported introduction of Guaranteed Minimum Income (GMI). - Timely TA with World Bank participation (February 2013, July 2013) to consolidate/social protection schemes, improve targeting, and mitigate labor market effects. - External analysis from EC and ECB complemented Fund work. - Specific recommendations and actions: - Pensions: index retirement age to life expectancy; switch benefit indexation from wages to prices; integrate low-income pensioner scheme into GMI; freeze cost-of-living indexation as prior action. - Labor market: reduce public wage bill to fund ALMPs; make ALMP participation mandatory; condition in-work and public assistance benefits on ALMP participation; authorities adopted most measures. - Social assistance: TA found spending low, fragmented, and poorly targeted; MEFP committed to implement new social welfare system and GMI; authorities designed and implemented GMI. - Health: increase share paying for services; tighten eligibility for subsidized care; roll out national health insurance carefully. - Education: increase teacher hours, merge schools, reduce teacher compensation, introduce tertiary fees, replace fragmented scholarships, and reduce education wage bill. - Reception and lessons: - IMF approach generally received positive response though criticized (UN assertion regarding health spending). - Communication included interviews, reports, meetings with CSOs, parties, stakeholders; buy-in improved over time. - Crisis acted as catalyst for rapid reforms; prior surveillance engagement enabled quick mobilization of resources and TA. ### Ghana — context, program objectives, and outcomes - Context: - Strong inclusive growth until large fiscal and external imbalances emerged in 2012. - Overall poverty rate declined from 52.7 percent in 1991 to 21.4 percent in 2012. - Extreme poverty rate declined from 37.6 percent in 1991 to 9.6 percent in 2012. - Public debt assessed at high risk of debt distress at program request; public debt-to-GDP reached over 70 percent in 2015. - Program (March 2015 ECF request): - Aim: support policy adjustment, restore debt sustainability, rebuild external buffers, revive transformation agenda. - Primary balance projected to improve by 6¾ percent of GDP over about 3 years on a commitment basis; adjustment designed ~ three-quarters primary spending and one-quarter revenue. - Authorities committed to safeguard social and priority spending, expand targeted schemes such as LEAP. - Nature of IMF interaction: - 2014 surveillance analyzed social inclusion feeding into 2015 program. - 2015 ECF program included an indicative target (IT) social spending floor covering specific social safety net and selected education and health programs. - Structural benchmarks targeted human resource management in health and education to improve efficiency. - TA recommended wage bill rationalization and price subsidy reforms (hiring freeze excluding education and health; streamline allowances; eliminate fuel subsidies via automatic pricing formula). - Heavy reliance on World Bank analysis (November 2016 Social Protection Assessment and PER). - Implementation and outcomes: - National Household Registry established in 2015 to improve targeting. - Targeting revised for LEAP (proxy means test plus geographical targeting). - New social programs launched in 2017: (i) Free Senior High School; (ii) Planting for Jobs and Food; (iii) Infrastructure for Poverty Eradication Program (IPEP). - More than 50 percent of IPEP targets met as of June 2018. - Social spending ITs met about half of the time due to lack of fiscal space and timely data. - Structural benchmarks met with delay; quick wins included student enrollment ratio increasing by over 30 percent following Free Senior High School. - Policy design highlights (Table 8): - Create fiscal space for sustainable financing for social programs — Fiscal sustainability. - Expand enrollment rate in primary and secondary education — Spending adequacy. - Expand basic health services — Spending adequacy. - Improve targeting of social assistance programs — Spending efficiency and adequacy. - Lessons: - Surveillance engagement builds expertise for program design. - Program-supported fiscal space creation can enable social agenda; creating fiscal space takes time. - Transparency and on-budgeting of off-budget spending matter for allocation efficiency. - Good data crucial for monitoring social spending ITs. - More public communication on social objectives could bolster reform momentum. ### Italy — context, analytical work, and policy advice - Context and social spending: - Real per capita incomes fallen to late 1990s level; unemployment averaged 10 percent for more than 20 years. - Over 20 percent of households at risk of poverty. - Public debt over 130 percent of GDP in 2018; annual gross financing needs around 25 percent of GDP. - Social spending over half of primary spending; pensions were 16 percent of GDP in 2017. - Education spending 4 percent of GDP versus OECD average 5.2 percent of GDP. - Italy lacked a modern, targeted GMI. - Nature of IMF interaction: - Analytical work in 2014 and 2017 on pensions; provided sensitivity analyses using conservative assumptions. - Cooperation with EC, access to microsimulation model data and codes. - Policy recommendations: - Pensions: discontinue 14th pension payment; tighten survivor pension eligibility; harmonize self-employed contributions; re-calibrate benefit formula; strengthen NDC system; avoid reversal of past reforms. - Health: protect outcomes while containing spending and address regional efficiency differences. - Education: increase spending and focus on upper secondary completion, tertiary participation, and quality; introduce outcome-based reforms. - Social assistance: adopt modern GMI targeted to poor with capped benefits at 40–70 percent of relative poverty level, gradual phase-outs, conditional in-work benefits, strengthened controls and local capacity. - Objectives (Table 9): - Improve public pension financial position — Fiscal sustainability. - Maintain public health expenditures while protecting quality/access — Fiscal sustainability. - Increase education spending, focus on outcomes — Spending adequacy and efficiency. - More efficient and adequate GMI — Spending adequacy and efficiency. - Lessons: - Close engagement with domestic agencies and IDIs enriched analysis. - IMF can provide impartial technical assessments even in high-capacity countries. - Political economy constraints may limit reform success and cause reversals. ### Jamaica — context, program design, and outcomes - Context: - Stalling growth 2008–12, high public debt; IMF assistance requested in 2013. - 2013 program targeted increase in central government primary fiscal surplus from 5.2 percent of GDP in 2013 to 7.5 percent to reduce debt. - High unemployment and poverty headcount around 14 and 20 percent in 2012. - Nature of interaction: - Strengthening social safety net core to protect vulnerable during adjustment. - 2013–2016 programs included spending floor on identified social schemes; continued in 2016 program. - TA on expenditure rationalization in 2012; 2016 joint IMF-World Bank TA to design offsets to regressive tax reform and boost PATH. - Monitoring and joint oversight with World Bank and IADB. - IMF staff engaged with trade unions, private sector, media, and opposition for public awareness. - Policy advice and outcomes: - Focus on creating fiscal space through tax and spending measures while strengthening safety nets. - Pension reform measures emphasized: raise contributions and retirement age (to 65), lower accrual rate, adjust benefit formula. - Steps during 2016–18 contained wage bill pressures; centralized database for allowances under development. - Social protection recommendations: increase selected benefits, improve beneficiary identification and exit mechanisms, strengthen administrative capacity. - 2014 social protection strategy launched; authorities committed to maintaining real value of social protection spending for three years. - In 2018, social program spending increased by 16 percent, especially PATH and school feeding. - Lessons: - TA instrumental in informing program measures. - Joint monitoring with development partners supported implementation. - Engagement with national stakeholders facilitated communication and acceptance. ### Japan — demographics, reforms, and IMF engagement - Demographics and spending pressures: - Life expectancy over 84 years in 2018. - Public health spending increased from 5.8 percent of GDP in 2000 to 9.0 percent in 2017. - Public pension spending increased from 7.3 percent of GDP in 2000 to 10.2 percent in 2013. - Major reforms: - Pensions: macroeconomic indexation in 2004; carry-over system for deflation in 2016 effective April 2018; wage-price indexation revised April 2021; mandatory contribution rate raised from 13.9 percent in 2004 to 17.8 percent in 2015, and to 18.3 percent in 2017. - Health and long-term care: 2015 reform increased out-of-pocket from 10 percent to 20 percent with exemptions; Social Security System Reform Promotion Act and consumption tax increases (from 5 to 8 percent in April 2014; planned to 10 percent delayed to October 2019). - IMF interaction: - Annual Article IV consultations; analyses in Selected Issues and working papers (2012, 2013, 2018). - Staff studied demographics’ effects on natural rate of interest and general equilibrium effects of structural reforms. - Policy recommendations: - Health: (1) rationalize services; (2) improve efficiency; (3) increase copayments and premiums with mitigation for vulnerable. - Pensions: (1) raise basic pension eligibility age to 67; (2) reduce benefits for wealthy retirees; (3) eliminate preferential tax treatment for pension income; (4) collect contributions from dependent spouses; preferred option: raise retirement age with strengthened safety net. - Financing analysis: - Dynamic general equilibrium overlapping generations model favored gradual consumption tax increases to finance aging costs over other options. - Lessons: - Multiple analytical perspectives in surveillance strengthen traction. - Multiyear research agenda and continuous follow-up important. - Complementarity with development partners can improve sectoral insights and messaging. ### Kyrgyz Republic — adjustment, policy, and implementation issues - Context and fiscal adjustment (Spring 2015): - Fiscal adjustment plan included reduction in current spending of 2.3 percentage points of GDP over 2016–17. - Overall fiscal deficit to be reduced by 0.8 percentage points of GDP during 2016–17. - Including on-lending, adjustment in fiscal balance expected 3.7 percentage points of GDP. - Planned reductions in compensation of employees of 0.3 percentage points of GDP and purchases of goods and services of 0.4 percentage points of GDP in 2016. - IMF engagement and program design: - Focus on social assistance increase to protect vulnerable from energy subsidy reform. - Program commitment to increase social assistance in Memorandum of Economic and Financial Policies for 2015-2018. - Indicative Target (floor) on social assistance (Unified Monthly Benefit and Monthly Social Benefit). - Staff provided distributional analysis at first review (February 2016). - Implementation delays: - Structural benchmark on subsidy review delayed across reviews; met in Summer 2017. - Delays due to deteriorating macro prospects, limited capacity, wage bill containment challenges, and political economy constraints. - TA and stakeholder engagement: - TA provided with World Bank support in Spring 2017; cooperation with UNICEF and CSOs. - Selected Issues Paper on “Income Inequality in the Kyrgyz Republic” published February 2016. - Policy advice and outcomes: - Advice concentrated on fiscal sustainability and spending efficiency—streamline and expand means-tested programs and improve targeting. - Social assistance spending high among comparators but low coverage and progressivity; need to phase out inefficient spending and reform energy subsidies to finance a strengthened safety net. - Timeline: 2017 reform moved to universal child benefits; IMF cautioned universal benefits would reduce benefits for poorest due to financing constraints. - 2018 recommendation to introduce elements of targeting included as structural benchmark in fourth and fifth reviews. - Reforms to create fiscal space (wage bill, tax exemptions, subsidy reform) did not gain traction. - Lessons: - Leveraging internal and external expertise beneficial. - Focus on creating fiscal space and strengthening capacity crucial. - Clear communication of feasibility, trade-offs, and linkages needed; authorities’ communication plans important for traction. ### Mongolia — social transfers, political economy, and IMF engagement - Context: - More than 70 social transfer programs with overlapping coverage; about one-third of population below poverty line. - Child Money Program (CMP) introduced 2005, converted 2006 to universal benefit for households with children under 18. - IMF interaction: - Staff relied mainly on World Bank and ADB expertise; limited engagement with UNDP or CSOs. - 2009 SBA focused on rationalizing untargeted social spending; 2010 HDF introduced universal cash benefits financed by earmarked mineral revenue. - 2017 program refocused CMP targeting to 40 percent poorest and scaling up food stamp program; ADB included conditionality to reduce CMP coverage to 40 percent poorest. - Policy developments and reversals: - Authorities later sought broader CMP coverage; staff judged broader coverage not fiscal-significant but warned it could endanger ADB financing and IMF assurances. - Authorities reduced CMP coverage to poorest 80 percent and reversed planned increases in other targeted programs; ADB did not oppose. - Progressive income tax introduced early 2018 was reversed months later. - Policy advice: - Channel CMP to 40 percent poorest; use savings to scale up better-targeted food stamps; rationalize and consolidate transfer programs. - Macro-criticality dimensions: Fiscal sustainability and spending efficiency. - Implementation and traction: - Fund advice lacked traction due to political pressure and commodity price upticks improving revenues. - Lessons: - Consider authorities’ preferences for traction; universality perceived as social cohesion and administratively easier. - Complement team skills early with technical expertise and TA. - Need tools/expertise for commodity exporters to design sustainably financed safety nets. - Broaden stakeholder engagement and develop communications strategy early. ### South Africa — education focus and lessons - Policy recommendations on basic education: - Strengthen teacher training and accountability. - Improve targeting of education resources between urban and rural areas. - Make national assessments mandatory and externally monitored. - Provide every learner with textbooks and assign frequent homework. - Staff questioned shift toward tertiary education subsidies, arguing they disproportionately benefit the better off. - In-depth analytical work leveraging World Bank increased engagement credibility. - Political economy constraints impede traction, especially on wage bill management; continuous surveillance engagement important. - Macro-criticality of social spending for inclusive growth was made convincingly in surveillance (2018 Article IV). ### Ukraine — context, reforms, and fiscal impacts - Context: - Large structural imbalances, repeated BOP crises, high debt, financial sector crises, conflict in eastern Ukraine. - Fiscal deficit decline: 9 percent to 4.5 percent of GDP between 2012 and 2014; further decline by 2.5 percent to about 2 percent of GDP between 2014 and 2018. - Public debt contracted from 80 percent of GDP in 2014 to below 70 percent of GDP in 2018. - IMF interaction and TA: - Intensive collaboration and program conditionality over past decade; TA on pension, energy subsidy, and social assistance reforms (missions 2014–2016). - Headquarters experts reviewed reforms and impact assessments; coordination with World Bank extensive. - Policy advice and measures: - Pension reforms: increase effective retirement age (statutory increases to 65 and 60), stricter early retirement, link retirement age to contribution histories, discontinue most special pensions, stricter contribution history requirements, rule-based fiscally conservative indexation. - Energy subsidies and social assistance: replace untargeted subsidies with targeted, fully monetized benefits; increase envelope for energy-related benefits: - Around 1 percent of GDP in 2015. - 1.8 percent of GDP in 2016. - 2.3 percent of GDP in 2017. - 2.1 percent of GDP in 2018. - Need for centralized social beneficiary database; full monetization of subsidies expected by March 2019 per IMF TA. - Short-term fiscal adjustment: wage bill curtailment (temporary wage freezes). - Revenue measures: improve compliance and collection efficiency; reduce exemptions and special schedules. - Against advice, social insurance contribution rates reduced from 43 to 22 percent in 2017, requiring larger budget subsidies to Pension Fund due to limited compliance gains. - Health and education measures: - Pharmaceutical procurement outsourced; per-capita hospital beds reduced. - New health financing concept approved late 2017 with National Health Service implementation starting 2018. - School closures began 2015; improved targeting of school lunch program from December 2015; further network rationalization planned through 2020. - Lessons: - Reforms implemented amid political economy constraints and conflict; selectivity and persistence important. - Milestones, patience, and continuous Fund involvement over 10 years with consistent conditionality critical to achieving reforms. - Intensive cooperation between area and functional departments and strategic interaction with World Bank improved effectiveness. *Source: ppea2019018 (IMF staff).* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Background and introduction - This paper uses eleven case studies to explore the nature of the IMF’s past engagement on social spending and draw lessons for the future. - The 2017 IEO Report on “The IMF and Social Protection” (IEO, 2017) found increased engagement on social protection issues as the IMF expanded focus on inclusive growth and protection of vulnerable groups. - The paper is based on desk reviews conducted by a team from the Fiscal Affairs Department (FAD) and Strategy, Policy and Review (SPR) departments and summarizes their findings. - The case studies were chosen to cover a wide spectrum of country circumstances, and type and intensity of engagement, including countries at different stages of development and in different regions, and covering both surveillance and Fund-supported programs. - The paper focuses on the approach and process of IMF engagement; it is not intended to provide an assessment of the impact of policy advice on social spending issues. - Main challenges identified in the case studies include competing priorities, poor data availability and quality, and in some instances lack of specific expertise within country teams. ### Summary of findings — A. Context - Social spending issues were part of IMF staff dialogue with the authorities in all case studies, with varying scope and intensity. - In some countries engagement was systematic and long-standing (e.g., Italy and Japan on population aging and pensions). - In other countries short-term developments or shocks motivated deeper engagement (e.g., Bolivia, Cyprus, Ukraine). - Dialogue was persistent over time (e.g., surveillance cycles or program phases). - Engagement covered all social spending topics, but most cases focused on social protection programs (discussed in all ten cases). - Social insurance was the predominant focus in Advanced Economies (AEs) such as Italy and Japan. - Social assistance was the predominant focus in Emerging Market Economies (EMEs) and Low-income and Developing Countries (LIDCs). - Education and health issues were central only in a minority of cases (education in five out of ten countries; health in four out of ten countries). - Fiscal sustainability was typically the entry point for engagement, with discussions often broadening to spending efficiency and spending adequacy as engagement deepened. - Fiscal sustainability was relevant in 9 countries. - Spending efficiency was relevant in 9 countries. - Spending adequacy was relevant in 5 countries. - Policy advice consequently focused mostly on ensuring fiscal sustainability and to a lesser extent on spending efficiency and adequacy. - Fiscal adjustment needs and/or budget constraint considerations were key in shaping dialogue and policy advice on social spending issues in all case studies. ### Summary of findings — B. Nature of Interaction - Social spending issues featured systematically in policy discussions with country authorities and in published IMF country documents; engagement was reflected in staff reports and selected issues papers in most cases. - Engagement relied heavily on country-teams’ own resources; in nine cases some analytical work was developed in-house to support discussions with authorities. - In-house analysis ranged from macro-fiscal focused approaches (e.g., long-run social spending projections for population ageing in Italy and Japan) to micro-based distributional analysis (e.g., incidence analysis in Jamaica and Kyrgyz Republic). - Internal IMF resources contributed to deepening engagement. - Other IMF departments (mainly FAD) supported country teams in many cases, including by providing expertise in five cases and tools, templates and databases in four countries. - Sectoral expertise enabled more in-depth analysis and more comprehensive policy advice (examples: Cyprus, Italy, Jamaica, Kyrgyz Republic) and helped integrate social spending reforms into macro-fiscal strategy (examples: Cyprus, Jamaica, Ukraine). - Technical Assistance (TA) on social spending provided key input in many cases, particularly to support design of social insurance and assistance schemes in programs (Cyprus, Jamaica, Kyrgyz Republic, Ukraine). - In four out of six countries receiving IMF TA, International Development Institutions (IDIs) participated in TA delivery (Cyprus, Jamaica, Kyrgyz Republic). - In two program countries Fund TA systematically supported teams over extended periods and covered many topics (Cyprus and Ukraine), enabling very detailed policy advice and better integration into macro-fiscal strategies. - Quick mobilization of resources was key in crisis contexts. ### Key takeaways and lessons - All macro-criticality dimensions — fiscal sustainability, spending efficiency, and spending adequacy — may be potentially important for ensuring that social spending systems support inclusive growth and stability; an a priori narrow focus should be avoided. - Outreach and communication efforts need to be strengthened to include a broader set of external stakeholders and to be anchored in a broad narrative on the macro-fiscal context of policy advice. - Leveraging internal and external resources (including IDIs) enabled better integration of social spending reforms into macro-fiscal strategy and enhanced traction with authorities. - Engagement with Civil Society Organizations (CSOs) was less systematic than engagement with IDIs. - For countries with an IMF-supported program, conditionality (both quantitative and structural) on social spending was regularly used. *Source: ppea2019018 - EXECUTIVE SUMMARY (IMF).* ### 9. Synergies with other workstreams, while not prominent in the case studies, helped ### 9. Synergies with other workstreams, while not prominent in the case studies, helped ### Interaction with other international and external stakeholders - Interaction with IDIs or other international institutions was frequent, but cooperation or coordination on specific social spending issues or projects was less common. - Explicit coordination with IDIs on specific social spending areas occurred: - South Africa: World Bank focused on health, poverty and inequality; IMF staff on labor markets and minimum wages. - Mongolia: IMF team aligned key social spending policy advice to that provided by ADB and World Bank, without any internal analysis. - Cyprus: close interaction with European institutions allowed IMF teams to leverage their expertise (e.g., on age-related spending). - Interaction and dialogue with the World Bank or regional IDIs was more frequent in LIDCs and EMEs than in AEs. - Cooperation on specific projects, beyond TA, was generally not common. - Interaction with Civil Society Organizations (CSOs) was less systematic than interaction with IDIs: only four countries had some interaction with CSOs. ### Policy advice — objectives, framing, and perspective - Objectives of staff’s policy advice on social spending were clear in most cases but not always clearly situated within the broader macro-fiscal context. - Immediate objectives were typically stated in surveillance and program documents (examples: reduce spending pressure from aging in Italy and Japan; protect vulnerable households from effects of needed structural reforms or large shocks in Ukraine). - Mapping of social spending to short- and medium-term macro‑fiscal context, and reconciliation of trade-offs (e.g., preserving fiscal and economic stability while strengthening social spending systems), was not always clearly communicated. - Country teams generally took a medium-term perspective; a short-term focus was relevant in all program countries but only in one of the surveillance countries considered. ### Focus on means-tested programs and communication - Where fiscal sustainability was a primary concern, IMF policy advice often focused on means-tested programs. - Examples of countries where recommendations included introducing or strengthening means-tested programs: Bolivia, Cyprus, Jamaica, Kyrgyz Republic, Mongolia. - Staff reports often did not articulate possible implementation or other challenges of targeting reforms. - Perceived narrow focus on targeting generated external criticism in some cases (Kyrgyz Republic and Mongolia), notably by CSOs. - In Cyprus, targeting reforms were less controversial due to stronger capacity and ownership of the authorities and a better articulated staff communication strategy and outreach, including to CSOs. - Communication on social spending engagement was uneven across case studies: - Well-articulated narrative supporting staff advice: Cyprus. - Less emphasis on communication: Mongolia. - Lack of communications strategy or broad stakeholder outreach may have contributed to perceptions of an a priori IMF bias against “universality” of social spending programs. ### Role of interaction with IDIs in shaping policy advice - In nine countries, policy advice benefitted from systematic interaction with IDIs and other international institutions; in five cases it drew on IDIs analysis and input. - In most cases IMF policy advice was broadly aligned with that of the IDIs. - Systematically leveraging broad external expertise is most beneficial in areas complementing in-house expertise (examples: implementation of spending schemes such as setting up a conditional cash transfer program, or education and health systems design). ### Conditionality and traction of policy advice - Conditionality on social spending was used in all case studies with IMF-supported programs. - In AEs and EMEs, structural benchmarks (SBs) helped promote implementation of social spending reforms in crisis situations, emphasizing spending efficiency to support sizeable consolidation efforts (examples: Guaranteed Minimum Income program in Cyprus; reform of social assistance programs linked to energy consumption in Ukraine, with both supported by IMF TA). - SBs were also used in LIDCs and EMEs to facilitate implementation of key structural reforms (examples: Mongolia promoting transition from universal to means-tested child benefits; Ghana to improve resource management in the health and education sectors), though they were not often met. - Spending floors (e.g., indicative targets on a subset of social spending items) were commonly used in LIDCs in line with guidelines for PRGT program design. - Traction of policy advice was stronger when supported by country ownership. - Factors improving traction: continued engagement, internal expertise, TA, collaboration with IDIs, selective conditionality, appropriate sequencing, and integration into broader policy strategy and program design (examples: Cyprus, Bolivia, Jamaica). ### Lessons and way forward (key recommendations) - Avoid a narrow focus on a subset of macro‑criticality dimensions unless justified by country context; all macro-criticality dimensions may be important to ensure social spending supports economic growth and stability. - In-house analytical work deepens engagement; efficient use of in-house expertise and resources is key given constraints. Options to explore include greater reliance on cross-country departmental projects and mobilizing internal expertise quickly in crises. - Country ownership is critical for enhancing traction; foster continued engagement, use selective conditionality, sequence reforms appropriately, and integrate reforms into broader program design. - Collaboration with IDIs, in particular the World Bank in EMEs and LIDCs, can enable more in‑depth engagement and better traction, especially in areas complementing in-house expertise. - Strengthen interaction with broader external stakeholders and outreach through well-developed communication strategies to enhance understanding of the IMF’s role and policy advice on social spending. - Outreach and communication should focus on a broad narrative of social spending issues, explicitly spelling out synergies, complementarities, constraints, interdependencies (e.g., revenue mobilization and measures for strengthening spending programs), trade-offs, and the magnitude and timeline of consolidation measures and mitigating actions for vulnerable households. ### Bolivia — highlights from the case study - Context and outcomes (2004–14): - Strong economic growth during 2004–14 reduced poverty and inequality, aided by the commodity boom in energy, minerals, and agriculture sectors. - Poverty rate fell from 63 to 39 percent. - Extreme poverty dropped from 45 to 14 percent. - Gini index fell from 0.59 in 2004 to 0.48 in 2014. - End of commodity boom in 2014: - Higher social spending became unsustainable with lower commodity prices and reassessment of private investment and productivity prospects. - Need for fiscal consolidation to maintain macroeconomic stability and ensure debt sustainability. - Focus shifted to improving efficiency and adequacy of social spending to preserve gains in poverty and inequality reduction. - Nature of IMF interaction: - Staff engaged in a surveillance context with policy discussions focused on improving adequacy and quality of social spending, supported by analytical work. - In 2013 staff provided an impact evaluation of social transfers and better targeting of fuel subsidies (IMF 2014). - During 2015–16 staff analyzed determinants of poverty and inequality during the boom, including role of social spending policies (IMF 2015, IMF 2016, IMF 2017). - In‑house expertise on inequality and distributional impacts helped deepen empirical analysis. - Policy advice benefitted from collaboration with the World Bank, Inter-American Development Bank and ILO; coordinated IMF‑World Bank work plan covered education, health, water, sanitation, youth unemployment, and social protection. - Policy advice evolution: - During the boom: advice focused on ensuring social spending adequacy and supporting authorities’ policies to reduce poverty and inequality; encouraged multi-year budgeting and better investment planning. - Analytical findings: - Reduction in poverty and inequality driven mainly by labor income growth at the bottom end of the income distribution. - Increases in non-labor income contributed for certain groups but overall contribution was relatively small. - Pro‑poor labor policies (e.g., marked increases in minimum wages) and higher transfers to specific groups (e.g., elderly poor) played roles. - Labor income increases concentrated in informal, low-skilled service and manufacturing sectors. - More recent work estimated about two-thirds of inequality reduction was due to the commodities price boom: one-third directly through its impact on rural incomes, and one-third indirectly through its impact on government revenue that allowed substantial expansion in social programs. - As the boom receded: policy advice turned to fiscal sustainability with the objective of preserving gains in poverty and inequality. - Baseline scenario in the 2015 Staff Report: moderate and gradual fiscal consolidation of the non-hydrocarbons primary deficit over the medium term, with a capital budget execution rate of around 80 percent. - Active policy scenario: more ambitious but gradual reduction of the non-hydrocarbons primary deficit and debt, including revenue measures on income tax and VAT and expenditure measures on investment, energy subsidies, and the wage bill. - Staff recommended gradually reducing energy subsidies and offsetting impacts on the most vulnerable with targeted social assistance. - Suggested strengthening social safety nets by enhancing competition among service providers and strengthening the information system on beneficiaries of all social programs. - Recommended strengthening the pension system by raising the contribution rate and retirement age to boost replacement rates while ensuring fiscal sustainability. *Source: IMF staff.* ### 31. Policy discussions on improving social spending efficiency were based on analytical ### ppea2019018 - 31. Policy discussions on improving social spending efficiency were based on analytical ### Analytical findings on social spending efficiency - Despite high levels of health and education spending, outcomes were relatively poor compared to peer countries. - Staff analysis indicated spending efficiency in social protection was low because only a small share of resources reached the poor. - Analytical work highlighted inefficiencies in the health and education sectors. ### IMF staff policy recommendations for Bolivia (from analytical findings) - (i) higher but progressive fees for users of social services; - (ii) greater competition in the provision of social services; - (iii) better targeting of existing social benefits; - (iv) reform of financing mechanisms for health spending away from a capacity-based remuneration system (where general practitioners were paid fixed salaries and hospitals were financed based on capacity considerations) toward a system that rewards performance to increase incentives for cutting costs. ### Implementation and progress (Bolivia) - Access to education, health services, water, electricity has greatly increased in the past decade. - Some reforms to increase competition among health providers were implemented following the Fund’s policy recommendations, though the degree of competition introduced was uncertain. - Efforts were started to put in place an information system covering all beneficiaries, although progress has been slow. Implementation of the system will be key for improving the capacity of the administration of social programs. ### Objectives of IMF policy advice (Bolivia) — from Table 6 - Social spending to reduce poverty and inequality, and mitigate the impact of other reforms on the vulnerable — Spending adequacy while ensuring fiscal sustainability - Improve education and health spending efficiency — Spending efficiency - Strengthen social safety nets — Spending efficiency - Strengthen the pension system — Spending adequacy while ensuring fiscal sustainability ### Lessons from Bolivia (paragraphs 33–37) - Ownership played an important role in ensuring traction: the authorities were keen on reducing poverty and inequality and achieving better education and health, and positively engaged with the Fund. - Fund advice through different periods of the commodity price cycle provides insights for other commodity exporter countries: during a commodity boom, countries can utilize revenue gains to enhance social spending adequacy, and manage increases during the boom so as to avoid unsustainability of spending during price declines. Improving social spending efficiency during the period of commodity bust and fiscal consolidation can then help to protect social gains achieved during the boom. - Policy advice benefited from leveraging internal expertise, including analytical work on inequality and the distributional impact of social spending. - Staff’s work benefited from the work of IDIs: coordination with the World Bank provided deeper insight into social programs (quality services in education, health, water, and sanitation) and allowed for coordinated policy advice. Continued involvement with IADB, other IDIs, and think tanks also helped policy discussions. - Communication of Fund advice was important and could have been strengthened: communication occurred mainly through IMF staff reports and working papers. Going forward, communication could be strengthened by using more diverse channels, such as workshops and roundtables, to reach a broader set of key stakeholders and enhance awareness of the policy trade-offs and impact of social spending policies. --- ### Cyprus: context and IMF engagement highlights - Cyprus’ economy fell into a recession in 2009 and weak growth continued through 2012, with the public debt-to -GDP ratio reaching close to 90 percent in 2012. - In May 2013, a three-year IMF-supported program was approved (about €1 billion, or US$1.3 billion). Total financing was close to €10 billion with the European Stability Mechanism providing €9 billion. - The program included sizeable fiscal consolidation—emphasizing more efficient and more sustainable social spending—debt reduction, deep financial sector restructuring, and a major recapitalization of the banking sector. - The IMF engaged on social spending issues since the early 2000s; pre-crisis analytical work focused on the need for pension, health, and social benefit reforms to improve fiscal sustainability and efficiency. ### Policy advice and technical assistance (Cyprus) - Program priorities included protecting vulnerable households (including the working poor) and generating savings to reallocate within the social protection system toward the most effective programs. - Structural benchmarks (SBs) supported social protection reforms, including introducing a guaranteed minimum income (GMI) scheme. - Timely technical assistance (TA) with World Bank participation provided inputs for program design: a broad public expenditure TA in February 2013 and further TA in July 2013 focused on consolidating and streamlining social protection schemes, improving targeting, and mitigating labor market effects. - External analysis from the EC and ECB complemented Fund work, including long-term projections of age-related spending and participation in TA missions. ### Specific policy recommendations and actions (Cyprus) - Pension system: - Advice included indexing retirement age to life expectancy at retirement, switching indexation of pension benefits from wages to prices, aligning public pension benefits to private pension benefits, and lessening reliance on consumption taxes to finance age-related expenditures. - A 2009 pension reform increased contribution rates; subsequent staff analysis noted that the increase was not sufficient to cover financing needs and could have adverse labor market effects. - In December 2012, increases in the public pension retirement age were automatically linked to life expectancy at retirement and early retirement penalties were introduced. Further increases in contribution rates were approved. - Program prior actions included freezing cost-of-living indexation of pension increases. IMF TA in July 2013 advised integrating the low-income pensioner scheme into a GMI and improving targeting, and removing eligibility discretion for the disability pension. - Labor market: - TA advised lowering the public wage bill to free up resources for active labor market programs (ALMPs) and priority spending. - Recommendations included making participation in ALMPs mandatory, conditioning in-work and public assistance benefits on participation in ALMPs, and partially withdrawing proposed GMI benefit amounts for low earning households to mitigate perverse work incentives. - Authorities adopted most of the recommended measures, including measures to contain public wage increases and decrease public employment, particularly in education. - Social assistance: - February 2013 TA found spending low, the system fragmented, and targeting weak. Recommendations included better targeting, rationalization of schemes, consolidation, reviewing eligibility criteria, benefit taxation, and strengthening means-tested benefits—e.g., introducing a GMI program covering the working poor. - The MEFP committed to “implement a new social welfare system to improve the targeting of social assistance, consolidate welfare programs, and streamline administration costs” (structural conditionality). Authorities designed and implemented a GMI. - Health and education: - Health: advised increasing the share of people paying for health services, tightening eligibility criteria for subsidized care, and suggesting a comprehensive health insurance system in the medium term. A national health insurance system is now being carefully rolled out to ensure sustainability. - Education: advised increasing teacher hours, merging schools to address class sizes, reducing teacher compensation, introducing fees for tertiary education, replacing fragmented scholarships with a single well-targeted grant, and reducing the education wage bill. The education wage bill was reduced. ### Reception, communication, and lessons (Cyprus) - The IMF approach generally received a positive response from the authorities, though there was some criticism (for example, the UN asserted that fiscal consolidation decreased health spending for vulnerable populations and increased wait times). - Communication efforts included interviews, reports, meetings with CSOs, political parties, and other stakeholders. Initial public buy-in was limited but improved over time. - Lessons: - Fund advice on social spending gained traction only after the crisis; crisis and program contexts acted as catalysts for rapid reforms. - Good times should be used to improve the effectiveness of the safety net so it can act as an effective stabilization tool during crises. In Cyprus, strengthening social assistance and setting up a GMI program became central only during the crisis. - Within a country’s social and political context, teams should consider how to maximize traction of advice during “good times.” *Source: IMF staff.* ### 51. Strong ownership by the authorities supported reform implementation, as did ### 51. Strong ownership by the authorities supported reform implementation, as did ### Key factors supporting reform implementation - The government—newly elected in 2013—was reform-minded, which led to a constructive engagement with the Fund and a sense of partnership. - Adequate administrative capacity and information availability supported reform efforts, especially when the timeline for implementation was tight. - Long-standing surveillance engagement since the early 2000s enabled the Fund to quickly mobilize internal and external resources (e.g., with TA missions) during the crisis, because many issues had already been analyzed. - Focused policy advice and parsimonious conditionality under the IMF-supported program emphasized key social policy issues via the GMI introduction and pension reforms; wage bill reform helped free up resources for other priority spending. - Effective leveraging of external resources and close interaction with the EC and ECB ensured aligned policy advice; continual dialogue informed by internal and external analysis (including engagement with the World Bank) was useful in quickly diagnosing social spending needs and policy responses. ### Implementation mechanisms and support - Technical assistance (TA) missions were used to deepen engagement and support reform design and implementation. - External analytic inputs (including from the World Bank and UN) informed program design and reform priorities. --- ### C. Ghana — Context and program objectives ### Context (paragraphs 55–56) - Ghana experienced strong and broadly inclusive growth over two decades before large fiscal and external imbalances started to emerge in 2012. - The overall poverty rate declined from 52.7 percent in 1991 to 21.4 percent in 2012. - The extreme poverty rate declined from 37.6 percent in 1991 to 9.6 percent in 2012. - After 2012, rapidly rising public debt led to significantly higher interest payments, constraining social and development spending. - Public debt was assessed to be at high risk of debt distress at the time of the program request and the public debt-to-GDP ratio reached over 70 percent in 2015. - In March 2015 the authorities requested an ECF-supported program to support policy adjustment, restore debt sustainability and market confidence, rebuild external buffers, and revive Ghana’s transformation agenda. - The program envisaged a sizeable fiscal adjustment: the primary balance was projected to be improved by 6¾ percent of GDP over about 3 years on a commitment basis; the adjustment was designed to be roughly three-quarters primary spending and one-quarter revenue. - The authorities committed to safeguard social and other priority spending under the program, including expanding targeted social schemes such as Livelihood Empowerment Against Poverty (LEAP). ### Nature of IMF interaction (paragraphs 57–63) - In 2014, staff analyzed social inclusion during annual surveillance and recommended swift implementation of a strong package of policy measures to restore confidence and address large imbalances; this analysis provided useful inputs for the 2015 program. - The 2015 ECF-supported program aimed to strengthen the social safety net to restore real incomes of the poor and mitigate possible adverse distributional impacts of fiscal consolidation. - An indicative target (IT) was set on a social spending floor to protect priority spending; coverage was slightly adjusted throughout the program and included specific social safety net programs and selected education and health programs. - Structural benchmarks targeted improving human resource management in health and education to improve spending efficiency. - TA on public sector wage bill rationalization and price subsidy reforms recommended measures including a hiring freeze for the civil service (excluding education and health), streamlining civil service allowances, and eliminating fuel subsidies by implementing an automatic pricing formula. - Staff relied extensively on World Bank analysis, including a November 2016 Social Protection Assessment and Public Expenditure Review (PER) that identified areas for strengthening social spending: better targeting of social assistance, education and health programs; expanding coverage of well-targeted schemes. - Fiscal space from reforms was partly used to safeguard priority spending, including expanding LEAP and strengthening National Health Insurance Scheme, Labor-Intensive Public Works, and the school feeding program. - In 2015 the National Household Registry was established to improve targeting of the social safety net. - Through the Ghana Social Opportunities Project, targeting was revised (proxy means test together with geographical targeting introduced for LEAP) and access to conditional cash transfers and cash-earning opportunities was expanded. - The government launched new social programs in 2017 including: (i) Free Senior High School; (ii) Planting for Jobs and Food; and (iii) Infrastructure for Poverty Eradication Program (IPEP). More than 50 percent of the targets established under IPEP had been met as of June 2018. - The social spending ITs were met about half of the time; lack of fiscal space and lack of timely data on social spending developments were key constraints. - Structural benchmarks on human resource management in health and education were met with delay, reflecting implementation capacity weaknesses. - Quick wins included the student enrollment ratio increasing by over 30 percent in the year following the launch of the free Senior High School program. ### Stakeholder views - Civil society organizations (CSOs) mostly supported the program’s focus on macroeconomic stability and debt sustainability as preconditions for better social outcomes. - Some CSOs (e.g., Development Pathways) felt the Fund could have put greater emphasis on ensuring government gave higher priority to social protection programs. --- ### Policy advice and program design (paragraphs 61–63) - Program aimed for a sizeable and front-loaded fiscal adjustment while creating fiscal space for social and other priority spending through: - Expanding revenue collection. - Restraining the public wage bill via strict limits on net hiring (except education and health) and on other primary expenditures. - Energy subsidy reform (government liberalized petroleum prices on July 1, 2015, following Fund TA advice). - A civil service reform strategy to rationalize civil service size and reduce the wage bill-to-revenue ratio while improving public services. - Fiscal space was used to safeguard and expand well-targeted programs such as LEAP and to strengthen social objectives consistent with the Ghana Shared Growth and Development Agenda (2014–17). --- ### Table 8: Objectives of IMF Policy Advice (as presented) - Create fiscal space for sustainable financing for social programs — Relevant Macro-criticality dimension: Fiscal sustainability - Expand enrollment rate in primary and secondary education — Relevant Macro-criticality dimension: Spending adequacy - Expand basic health services — Relevant Macro-criticality dimension: Spending adequacy - Improve targeting of the social assistance programs — Relevant Macro-criticality dimension: Spending efficiency and adequacy --- ### Lessons (paragraphs 66–70) - Engagement during surveillance allowed staff to gain knowledge and expertise crucial for program design; the 2014 Article IV staff report recommended a more ambitious adjustment scenario to set off a virtuous cycle enabling higher social and infrastructure spending while safeguarding social indicators. - Emphasis on creating fiscal space under the IMF-supported program helped generate resources for the authorities to implement their social agenda; Fund-supported programs, with TA inputs (including a PER from the World Bank), can help governments decide on expanding fiscal space via expenditure consolidation and revenue mobilization, supporting spending adequacy. Program design should recognize that creating fiscal space takes time. - Transparency is important for monitoring social objectives; moving off-budget spending into the budget helps improve allocation efficiency. - Good data are crucial for effectively monitoring an IT on social spending; social spending data rely on functional classification and program-level data, while fiscal data are generally provided on an economic classification, creating challenges that need early recognition. - More public communication on the social objectives of IMF-supported programs could bolster reform momentum through a more inclusive and transparent policy dialogue, requiring IMF engagement on broader social issues in addition to core macroeconomic and fiscal issues. *IMF ENGAGEMENT ON SOCIAL SPENDING—CASE STUDIES (excerpts provided).* ### References ### ppea2019018 - References ### Ghana: Cited Documents - International Monetary Fund, 2014, “Ghana: Staff Report for the 2014 Article IV Consultation,” IMF Country Report No. 14/129 (Washington: International Monetary Fund). - ________, 2015a, “Ghana: Request for a Three-Year Arrangement Under the Extended Credit Facility,” IMF Country Report No. 15/103 (Washington: International Monetary Fund). - ________, 2015b, “Ghana: First Review Under the Extended Credit Facility Arrangement and Request for Waiver and Modifications of Performance Criteria - Press Release; Staff Report; and Statement by the Executive Director for Ghana,” IMF Country Report No. 15/245 (Washington: International Monetary Fund). - ________, 2016, “Ghana: Second Review Under the Extended Credit Facility Arrangement and Request for Waiver for Nonobservance of Performance Criterion-Press Release; Staff Report; and Statement by the Executive Director for Ghana,” IMF Country Report No. 16/16 (Washington: International Monetary Fund). - ________, 2017a, “Ghana: Third Review Under the Extended Credit Facility Arrangement and Request for Waiver for Nonobservance of Performance Criteria, and Modifications of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Ghana,” IMF Country Report No. 16/321 (Washington: International Monetary Fund). - ________, 2017b, “Ghana: 2017 Article IV Consultation, Fourth Review Under the Extended Credit Facility Arrangement, Request for Waiver for Nonobservance of Performance Criteria, and Request for Extension and Rephasing of the Arrangement-Press Release; Staff Report; Staff Supplement; and Statement by the Executive Director for Ghana,” IMF Country Report No. 17/262 (Washington: International Monetary Fund). - ________, 2018, “Ghana: Fifth and Sixth Reviews Under the Extended Credit Facility, Request for Waivers for Nonobservance of Performance Criteria, and Request for Modification of Performance Criteria-Press Release; Staff Report; and Statement by the Executive Director for Ghana,” Country Report No. 18/133 (Washington: International Monetary Fund). - Molini, Vasco and Pierella Paci, 2015, Poverty Reduction in Ghana: Progresses and Challenges, (Washington: World Bank). - National Development Public Commission (NDPC of Ghana), 2014, “Ghana Shared Growth and Development Agenda (GSGDA) II, 2014-2017.” - World Bank, 2016, ”Ghana: Social Protection Assessment and Public Expenditure Review,” (Washington: World Bank). - ________, 2018, ”Ghana-Social Opportunities Project,” (Washington: World Bank). *Italic: Source content: ppea2019018 - References* ### Italy: Context and Findings - Growth and social outcomes: - Real per capita incomes have fallen to the level of the late 1990s. - Unemployment rates have averaged 10 percent for more than 20 years. - Over 20 percent of households are at risk of poverty. - Fiscal constraints: - Public debt stood over 130 percent of GDP in 2018. - Annual gross financing needs are around 25 percent of GDP. - Social spending composition: - Social spending represents over half of primary spending in Italy, with the bulk allocated to pensions. - Pension expenditures were 16 percent of GDP in 2017, the second highest (after Greece) in the EU. - Italy has the lowest education spending among OECD countries at 4 percent of GDP versus an average of 5.2 percent of GDP. - Other observations: - Italy was the only euro area country that lacked a modern, guaranteed minimum income scheme targeted to the poor. - Health expenditures were reined in over the last decade through measures improving monitoring and control. ### Italy: Nature of IMF Interaction and Analytical Work - Analytical work and cooperation: - IMF staff analyzed social spending issues in 2014 and 2017, including pension reform options, and quantified the impact of authorities’ assumptions on social spending projections. - IMF staff provided sensitivity analyses using more conservative assumptions; this work was reflected in publications by the Italian Fiscal Council. - Regular technical and policy discussions occurred with the Ministry of Economy and Finance (MEF), INPS, and the Ministry of Public Administration and Simplification. - IMF working papers on pensions were discussed in a Focus paper by the Fiscal Council. - IMF staff cooperated closely with EC counterparts; in 2018 the EC granted IMF staff access to data and codes of a microsimulation model of the EU/EUROSTAT to analyze Italy’s tax and transfer system. - IMF analysis influenced EC adjustments in the 2018 Ageing Working Group by highlighting optimistic assumptions about demographics, employment, and productivity. ### Italy: Policy Advice (Pensions, Health, Education, Social Assistance) - Pension policy recommendations (short and medium-term): - Discontinue the 14th pension payment. - Tighten survivor pension eligibility criteria. - Harmonize self-employed contribution rates with those of other workers. - Re-calibrate the benefit formula using more realistic and conservative assumptions. - Strengthen the design of the phased-in notional defined contribution (NDC) system. - Avoid reversal of past pension reforms to prevent early retirement schemes. - Health policy recommendations: - Protect current public health outcomes (measured by mortality and morbidity) while containing spending. - Address regional differences in spending efficiency and quality of service. - Education policy recommendations: - Increase education spending (Italy: 4 percent of GDP; OECD average: 5.2 percent of GDP). - Focus on weak upper secondary completion rates, low tertiary participation ratios, and quality concerns (PISA performance below EU average). - Address regional disparities and introduce outcome-based policy reforms, including revised funding rules and evaluation systems. - Social assistance recommendations: - Adopt a modern, guaranteed minimum income (GMI) scheme targeted to the poor that avoids welfare dependence and disincentives to work and is not time bound. - Recommend capping benefits at 40–70 percent of the relative poverty level, include gradual benefit phase-outs and conditional in-work benefits; strengthen controls and local administrative capacity. - Note: Authorities adopted the Citizenship Income Program to replace the inclusion income program; staff’s assessment is in the 2018 Article IV Staff Report. ### Italy: Objectives of IMF Policy Advice (Table 9 highlights) - Improving the public pension system’s financial position — Relevant Macro-criticality dimension: Fiscal sustainability. - Maintaining the level of public health expenditures while protecting quality and access to service — Fiscal sustainability. - Increased education spending, focusing on improved outcomes — Spending adequacy and efficiency. - More efficient and adequate spending on social assistance, within a newly designed guaranteed minimum income (GMI) — Spending adequacy and efficiency. ### Italy: Lessons - Close engagement with domestic agencies and IDIs enriched social spending analysis. - The Fund can provide impartial technical assessments even in high-capacity countries, highlighting gaps in policy frameworks and optimistic assumptions and bringing international experience to safety net design. - Political economy constraints can limit reform success and may cause partial reversals; critical assessments must take political economy into account. ### Italy: References - Andrle, Michal, Shafik Hebous, Alvar Kangur and Mehdi Raissi, 2018, “Italy: Toward a Growth-Friendly Fiscal Reform,” IMF Working Paper No. 18/59 (Washington: International Monetary Fund). - Andrle, Michal, Alvar Kangur and Mehdi Raissi, 2018, “Italy: Quantifying the Benefits of a Comprehensive Reform Package,” IMF Working Paper No. 18/60 (Washington: International Monetary Fund). - International Monetary Fund, 2014, “Italy: Staff Report for the 2014 Article IV Consultation,” IMF Country Report No. 14/283 (Washington: International Monetary Fund). - ________, 2017a, “Italy: 2017 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Italy,” IMF Country Report No. 17/237 (Washington: International Monetary Fund). - ________, 2017b, “Italy: Selected Issues” IMF Country Report No. 17/238 (Washington: International Monetary Fund). - ________, 2019, “Italy: 2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Italy,” IMF Country Report No. 19/40 (Washington: International Monetary Fund). - Ufficio Parlamentare di Bilancio (UPB), 2018, “Medium-Long Term Projections of Pension Spending,” UPB Focus Paper No. 8 (Rome: Ufficio Parlamentare di Bilancio). ### Jamaica: Context and Findings - Economic background: - Stalling growth during 2008–12, high public debt, and development challenges led Jamaica to request IMF assistance in 2013. - A Stand-By Arrangement approved in February 2010 went off-track mid-program. - Under the 2013 program the government targeted an increase in the central government primary fiscal surplus from 5.2 percent of GDP in 2013 to 7.5 percent to help reduce high debt levels. - Program design and social protection: - Strengthening the social safety net was core to the Fund-supported program since 2013 to protect the vulnerable during adjustment, given the regressive shift from direct toward indirect taxation. - The 2013 four-year extended arrangement included a spending floor on identified social schemes; the 2016 IMF-supported program maintained this floor. - Jamaica had high unemployment and poverty headcount rates at around 14 and 20 percent in 2012, respectively, and a high incidence of violence. ### Jamaica: Nature of Interaction and Technical Assistance - Engagement with agencies: - IMF staff engaged with the Ministry of Finance and Public Service, the Planning Institute of Jamaica, and line ministries for education, health, labor and social security. - In 2012, IMF provided TA on expenditure rationalization to create fiscal space and strengthen social protection. - Joint TA and program design: - In 2016 IMF and World Bank jointly provided TA to design reform options offsetting negative welfare effects of regressive tax reform, notably boosting PATH (Programme of Advancement through Health and Education) and reforming pensions. - Authorities drew heavily on TA findings in designing reforms. - Monitoring and coordination: - Joint monitoring of progress by the Fund, the World Bank, and the IADB continued. - Completed reviews included benefit adequacy by IADB and World Bank. - Ongoing work included (i) a plan to regularly reassess PATH eligibility rules following World Bank recommendations (on track), and (ii) extension of coverage of selected active labor market programs (on track). - Stakeholder engagement: - IMF staff interacted with Jamaica Confederation of Trade Unions, Private Sector Organization of Jamaica, media, and opposition political party to increase public awareness and support for reforms. ### Jamaica: Policy Advice and Outcomes - Fiscal and social safety net priorities: - Focused on creating fiscal space through tax and spending measures to achieve fiscal adjustment targets while strengthening the social safety net. - Main focus on reducing wage bill spending; in 2016 staff emphasized pension reform measures: raising contributions and the retirement age (to 65), lowering the accrual rate, and adjusting the benefit formula. - Steps taken during 2016–18 helped contain wage bill pressures and made some progress in pension reform. - A centralized database for monitoring allowances is being developed to support containment of wage bill spending. - Deeper structural public wage bill reforms (e.g., workforce size reductions) have seen limited progress. - Social safety net strengthening: - Policy advice recommended: (i) increasing generosity of selected benefits to improve adequacy; (ii) improving identification and selection of beneficiaries and exit mechanisms (with World Bank support); (iii) strengthening administrative capacity to deliver social programs (with IADB support). - In 2014, the government launched a comprehensive social protection strategy with monitoring and evaluation, increased benefit levels, recertification of beneficiaries, and program overlap reduction. - Authorities committed to maintaining the real value of social protection spending for three years. - In 2018, spending on social programs increased by 16 percent, especially PATH and the school feeding program. ### Jamaica: Objectives of IMF Policy Advice (Table 10 highlights) - Mitigate adverse impact of tax and spending reforms on the poor in a budget-neutral manner — Relevant Macro-criticality dimension: Fiscal sustainability and spending adequacy. - Strengthen the social safety net (SSN), in particular PATH (improve coverage at the bottom of the income distribution) — Spending adequacy. - Strengthen SSN, in particular PATH (increase real value of benefits) — Spending adequacy. ### Jamaica: Lessons - Technical assistance was instrumental in informing program measures and designing offsets to regressive reforms. - Joint monitoring and coordination with World Bank and IADB supported implementation and assessed benefit adequacy. - Engagement with national stakeholders facilitated public communication and acceptance of reforms. *Italic: Source content: ppea2019018 - References* ### 92. Effective and timely mobilization of a range of expertise within the Fund was ### Effective and timely mobilization of a range of expertise within the Fund was important to support the country team in maintaining the authorities’ reform momentum. ### Jamaica: Fund support and lessons - Fund provided TA on both spending and tax reforms and a detailed evaluation of the social assistance system. - Continued technical and policy support was provided from headquarters. - Close cooperation with development partners: - TA engagement extensively leveraged the expertise of development partners, facilitating detailed engagement on design and implementation of the social assistance system and needed follow up. - Recommendation: promote a more systematic framework for inter-institutional engagement on social spending issues. - Communication and outreach: - Key part of a communication strategy is to know the audience and relevant counterparts and spokespersons. - Successive governments linked structural fiscal reforms (e.g., the broadening of the general consumption tax) and improvement of the social safety net to win public support. - Many eligible households are still not enrolled in social assistance programs, underscoring the importance of continued effective communication of reform components by the authorities. ### Japan — Context - Demographics and spending pressures: - Life expectancy of over 84 years in 2018. - Public health spending increased from 5.8 percent of GDP in 2000 to 9.0 percent in 2017. - Public pension spending increased from 7.3 percent of GDP in 2000 to 10.2 percent in 2013. - Both public health spending and public pension spending are among the highest in the OECD. - Reform objectives: contain fiscal pressure from age-related spending; increase coverage and improve quality of spending. ### Japan — Major reforms (examples) - Pensions: - 2004: introduced a macroeconomic indexation scheme; government did not apply the scheme when inflation was negative. - 2016: included deflation periods in indexation rules through a carry-over system—any unrealized benefit reduction because of a deflationary environment will be delayed to later years when the unused reduction can be applied with consumer price inflation (to become effective from April 2018). - Wage-price indexation revised; pension benefits would be adjusted downward when wage growth is negative from April 2021. - Mandatory pension contribution rate raised from 13.9 percent in 2004 to 17.8 percent in 2015, and to 18.3 percent in 2017. - Health and long-term care: - 2015 reform increased out-of-pocket spending from 10 percent to 20 percent, with reduced payments for those living below the poverty line and excluding those with less severe conditions from long-term care insurance (their care is instead covered by local governments). - Social Security System Reform Promotion Act mandated maintenance of universal insurance coverage, stabilization of health care financing, equalization of public insurance premiums across plans, and re-evaluation of benefit coverage. - Consumption tax rate was raised from 5 to 8 percent in April 2014; originally planned to reach 10 percent in October 2015, timeline extended to October 2019. Some additional revenue earmarked for medical care and long-term care. - 2015 “Amendment of the National Health Insurance Act to consolidate municipal public insurers with the prefecture authority” required prefectural coordination of financial management, prefecture-specific standard premium rates, and re-insurance to municipalities with higher financial risk. ### Nature of IMF interaction with Japan - Primary channel: annual Article IV consultation. - Timeline of staff engagement: - 2012: highlighted need to contain public pension spending; analyzed reform impacts (discussed in main text, Selected Issues, published as working paper). - 2013: engaged on fiscal risks of rising public health spending (including long-term care); analyzed reform options (discussed in main text and Selected Issues, published as working paper). - 2018: focused on macroeconomic effects of demographic changes; analyses presented in two Selected Issues papers—one on healthcare reform and the other on macroeconomic and welfare effects of policy options to finance age-related spending (also published as a working paper). Staff studied demographics’ effects on the natural rate of interest and general equilibrium analysis of structural reforms’ potential to offset demographic effects. ### Policy advice and analytical findings - Fiscal risks: - Staff work emphasized fiscal pressures from rising public health and pension spending, a shrinking tax base, and the need to contain age-related spending. - Pension spending projected to decline slightly by 2050 as a result of past pension reforms, but further reforms remain necessary. - Public health spending projected to increase substantially with large uncertainties—constitutes a major fiscal risk. - Main policy recommendations: - Health spending: - (1) rationalize health care services; - (2) improve the efficiency of health care services; - (3) increase copayments and premium contributions with measures to mitigate impacts on the most vulnerable. - Pension spending: - (1) raise the basic pension eligibility age to 67; - (2) reduce benefits for wealthy retirees; - (3) eliminate preferential tax treatment for pension benefit income; - (4) collect contributions from dependent spouses. - Preferred option: raise the retirement age, with accompanying reforms to strengthen the social safety net. - Financing analysis: - Dynamic general equilibrium overlapping generations model found that financing aging costs through gradual increases in the consumption tax rate delivered better macroeconomic performance and higher welfare for most individuals than other options, including raising social security contributions, debt financing, and a uniform increase in health and long-term care copayments. ### Lessons and recommendations from IMF engagement - Providing multiple analytical perspectives in surveillance strengthens policy traction. - Close engagement and follow-up improve traction of IMF policy advice; follow-up to refine analyses and reengage authorities is important. - Tailor IMF engagement to country needs: - In advanced economies, focus may be on addressing long-term fiscal pressures from population aging and improving spending efficiency, rather than protecting social spending per se. - Benefit of multiyear research agenda: - Complex issues in advanced economies require in-depth analytical work and building expertise over multiple years. - Complementarity with development partners: - IMF advice could be strengthened by combining macro-focused recommendations with more detailed sectoral insights from development partners with appropriate expertise to improve reform quality and policy messaging consistency. *Source: IMF staff.* ### 109. In the Spring of 2015, the Kyrgyz authorities embarked on an ambitious medium-term ### 109. In the Spring of 2015, the Kyrgyz authorities embarked on an ambitious medium-term fiscal adjustment to ensure public debt sustainability. ### Context and fiscal adjustment plan - Adjustment initiated Spring of 2015 to ensure public debt sustainability amid a challenging macroeconomic environment characterized by a regional slowdown and double digit inflation. - Pressures on the public budget: impact of low growth on revenue, planned investment projects, and upcoming parliamentary elections. - Sizeable investment plans expected to significantly weigh on the debt trajectory. - Under the fiscal adjustment plan supported by an IMF program: - Reduction in current spending expected to be 2.3 percentage points of GDP over 2016–17. - Overall fiscal deficit to be reduced by 0.8 percentage points of GDP during 2016–17. - Including on-lending, the adjustment in the fiscal balance expected to be 3.7 percentage points of GDP. - Planned spending reforms included reductions in purchases of goods and services and in the public wage bill as a share of GDP. - The reduction expected in 2016 was 0.3 and 0.4 percentage points of GDP for the compensation of employees and purchases of goods and services, respectively. - Authorities committed to an analysis and review of subsidies, in particular in the energy sector, to reduce their fiscal cost. ### Nature of Fund interaction and program implementation - Fund engagement included a focus on social spending because an increase in social assistance was necessary to protect vulnerable households from planned energy subsidy reform and broader economic adjustment. - Commitment to increase social assistance explicitly recognized in the authorities’ Memorandum of Economic and Financial Policies for 2015-2018. - Program included an Indicative Target (floor) on social assistance spending (covering Unified Monthly Benefit and Monthly Social Benefit). - At first review (February 2016), staff provided a detailed analysis of distributional issues, presenting trends in poverty and inequality and discussing obstacles to improve distributional outcomes. - Suggested policies in staff analysis: - Consolidate and streamline social assistance programs. - Improve targeting. - Expand cash-transfers programs. - Improve poor households’ access to education and health services. - Program conditionality designed to support reform implementation was delayed: - Authorities planned to conduct a review of subsidies and draw up an action plan by end-June 2016 (structural benchmark). - Completion postponed to end-September 2016 (second review) and to end-July 2017 (third review). - Structural benchmark met in Summer of 2017 (fourth and fifth reviews). - Delays reflected deteriorating macroeconomic prospects, fiscal balances, limited progress in containing the wage bill, limited capacity, and political economy challenges in reforming subsidized energy prices. ### IMF collaboration, technical assistance, and stakeholder engagement - Fund provided technical assistance (TA) with support from the World Bank; in Spring 2017 TA in energy subsidy and social assistance was delivered jointly (two World Bank staff were part of the IMF mission team). - Ongoing cooperation and discussion between Fund and World Bank staff throughout the program. - Fund also engaged with UNICEF on child benefits and with CSOs on related issues. - The Kyrgyz Republic included in the first wave of a pilot on operationalization of analysis of inequality issues in Fund surveillance and program work; a Selected Issues Paper on “Income Inequality in the Kyrgyz Republic” published February 2016. ### Policy advice on social spending - Fund advice concentrated on fiscal sustainability and spending efficiency, focusing mainly on social assistance programs. - Two main aspects of advice: - Streamline, strengthen and expand programs prior to and in parallel with energy subsidy reform to improve efficiency and distributional outcomes (energy subsidies were inefficient and regressive). - Improve generosity and coverage of social assistance benefits, particularly for households in the lower part of the income distribution. - Evidence and recommendations: - Social assistance spending was at the high end among comparator countries, but exhibited low coverage of vulnerable households, limited generosity, and low progressivity due to extensive use of categorical programs. - The largest and only means-tested social assistance scheme provided income support to poor households with children and performed better on coverage and targeting. - Expansion of means-tested social assistance programs required creating fiscal space by phasing out inefficient and inequitable spending; energy subsidy reform seen as key to financing a strengthened social safety net. - Timeline and changes in child benefits policy: - Summer of 2017: authorities reformed the means-tested social assistance scheme and then moved to universal child benefits. - IMF staff cautioned that universal child benefits would substantially reduce the size of child benefits for existing means-tested recipients due to financing constraints, lowering benefits for lower-income households. - In 2018, IMF staff recommended introducing some elements of targeting to the newly adopted child allowance; recommendation included in program documents and supported by a structural benchmark introduced in the fourth and fifth reviews (February 2018). - Staff also advised reforms to create fiscal space (reduction in public wage bill, tax exemptions, energy subsidy reform), but these measures did not gain traction. - Policy dialogue and criticism: - Design of the structural benchmark resulted from extensive dialogue with the Ministry of Labor and Social Affairs and UNICEF (which supported universal child allowances). - Fund’s recommendation to reintroduce elements of targeting drew criticism for a perceived narrow focus on means testing. - A coalition of CSOs and members of Parliament succeeded in suspending the universal child allowance after low-income households experienced benefit reductions. - Criticism may have reflected limited clarity in IMF staff reports on the broad strategy, inter-dependence of components, and policy trade-offs (e.g., that lack of progress on subsidy reform and fiscal space would undermine expansion of social assistance). - IMF continued engagement with experts and CSOs to explain context and rationale of policy advice. ### Lessons learned and policy implications - Leveraging internal and external expertise offered clear benefits: - Fund relied on internal and external resources (World Bank, UNICEF) to complement country team work; collaboration was beneficial given development partners’ deep engagement with authorities. - Fund technical assistance provided a useful framework for leveraging World Bank expertise and analysis. - Focus on creating fiscal space and strengthening capacity is key to enabling social spending reforms: - Limited progress in structural reforms hindered resource mobilization and fiscal space for social assistance. - Main obstacle to sustainable financing for expanded social assistance was limited progress in removing energy subsidies or tax exemptions and slippages in revenue and expenditure targets. - Suggests greater focus on strengthening capacity by IMF and development partners, particularly to ensure follow-up on technical assistance. - Communication is critical: - Importance of clearly communicating feasibility of measures, trade-offs, and linkages between policy alternatives within macro-fiscal context and authorities’ objectives. - Authorities’ communication plans are important for enhancing traction on resource mobilization efforts. - Development partners could help design authorities’ communication strategies; well-articulated plans are key to successful energy subsidy reform strategies. *Source: ppea2019018 - 109.* ### 124. Mongolia’s social protection policies have been greatly influenced by commodity price ### Mongolia’s social protection policies have been greatly influenced by commodity price fluctuations and the political environment. ### Nature of Interaction - Mongolia has more than 70 social transfer programs, many of which serve overlapping groups, yet about one-third of the population lives below the poverty line. - The Child Money Program (CMP): - Introduced in 2005 with the objective of providing targeted assistance through cash transfers. - Converted in 2006 into a universal scheme providing a benefit to all households with children under the age of 18. - IMF engagement during IMF-supported programs: - Staff had extensive discussions with the authorities and other international development institutions (IDIs) on social spending during both IMF-supported programs to support formulation of IMF policy advice and help develop a strategy for social safety net reform. - Staff relied mainly on the expertise of the World Bank and ADB, with limited discussions with other stakeholders including UNDP or civil society organizations. - 2009 18-month SBA-supported program: - Focused on rationalizing untargeted social spending given tight budget constraints. - Authorities undertook a study of the existing social protection system with development partners to identify inefficiencies. - At the end of the program, government introduced a new entitlement system in 2010 with higher universal cash benefits through the creation of a Human Development Fund (HDF) financed with earmarked mineral revenue. - 2017 IMF-supported program: - Refocused on the CMP and improving targeting by reducing CMP coverage to the 40 percent poorest households and using savings to scale up the better-targeted food stamp program. - ADB included conditionality (triggers) in its financial support program to reduce CMP coverage to the 40 percent poorest households. - 2017–18 policy discussions: - Authorities sought to return to broader CMP coverage. - Fund staff judged broader coverage not to have significant fiscal implications but warned it could derail ADB financing and thus risk IMF financing assurances. - ADB agreed to continue support with understanding CMP would be broadened to the 60 percent poorest households and authorities would increase financing of other poverty-targeted programs. - Authorities ultimately reduced coverage of the CMP to the poorest 80 percent of children and reversed much of the planned increase in other targeted programs to finance higher coverage; ADB did not oppose this change. - Policy discussions also aimed at introducing a progressive income tax system to address large income inequality, but the authorities reversed progressive income taxation reform a few months after it was introduced in early 2018. ### Policy Advice - Overarching objective: protect the most vulnerable households while implementing the needed large fiscal adjustment. - Main components of IMF policy advice: - Channel CMP benefits only to the most vulnerable households (target CMP to the 40 percent poorest households). - Relevant macro-criticality dimension: Fiscal sustainability and spending efficiency. - Direct resulting savings from CMP to scale up spending on the better-targeted food stamp program. - Relevant macro-criticality dimension: Spending efficiency. - Rationalize numerous social transfer programs by consolidating them (without cuts in benefits) to improve efficiency and generate some net administrative savings. - Relevant macro-criticality dimension: Spending efficiency. - Implementation and traction: - Fund advice did not gain traction; authorities reversed or did not implement policy advice due to political pressure and improving economic conditions from upticks in commodity prices improving fiscal revenue. - Authorities viewed universal child benefit as necessary for social cohesion and easier to administer; deviations were not considered macro-critical by staff due to marginal fiscal impact and did not affect continuation of the IMF-supported program. - Communications and stakeholder engagement: - Fund approach and policy advice were criticized in the media and by CSOs, reflecting that the broader macro-fiscal context of policy advice could have been better communicated; communications focused narrowly on targeting issues. - Some stakeholders (including ILO) emphasized maintaining universality of CMP and reinforcing its legal framework and adequacy of benefits to tackle poverty, especially rural poverty. ### Lessons - Consideration of authorities’ objectives and preferences is paramount for traction: - Despite in-depth discussions, differing views on reform strategy persisted; authorities preferred universal coverage and were concerned about higher administrative requirements for targeted schemes. - Deepening understanding of equity and efficiency impacts of the existing system might have increased chances of gaining traction for IMF advice. - Complement country team skills early with technical expertise: - Additional analytical work and earlier engagement with the Fund’s internal experts (including TA) and external expertise could have supported a broader reform strategy anchored in the macro-fiscal adjustment framework rather than focusing narrowly on making the CMP more targeted. - Enhance tools and expertise for commodity exporters: - CMP coverage discussions occurred against boom-bust commodity price cycles feeding into fiscal revenue, illustrating the need for sustainably financed social safety nets not susceptible to commodity price swings. - There is scope for further analytical work leveraging efforts on structural fiscal issues and revenue mobilization. - Broaden stakeholder engagement early in program design: - Broader coordination with other stakeholders (such as other agencies) and CSOs could help build support for reform strategies by clarifying rationale and constraints shaping policy advice and choices. - Develop a broad-based communication strategy: - Early involvement of the Fund’s Communications Department to design a communication strategy that engages stakeholders and explains how social spending advice is integrated into the broader macro-fiscal policy strategy would be beneficial. *Source: IMF staff.* ### 145. Improving basic education was identified as one of the key reforms to reignite strong ### 145. Improving basic education was identified as one of the key reforms to reignite strong and inclusive growth ### South Africa — Policy recommendations and findings - Key recommendations focused on basic education: - Strengthen the training and accountability of teachers. - Improve the targeting of education resources between urban and rural areas. - Make national assessments mandatory and externally monitored. - Provide every learner with textbooks. - Assign frequent homework. - Staff questioned the recent shift in education spending toward tertiary education subsidies, arguing that, consistent with international evidence from many EMs, tertiary education subsidies in South Africa disproportionally benefit the better off. - Staff leveraged World Bank analysis and in-house analytical work to provide granular policy advice. ### South Africa — Lessons - Political economy factors can impede traction of policy advice; traction on wage bill management was often difficult due to political constraints, requiring continuous engagement through Fund surveillance. - Clearly making the case for macro-criticality is key for effective engagement; for South Africa, the macro-criticality of social spending for promoting inclusive growth was made convincingly in surveillance documents, especially in the 2018 Article IV consultation. - In-depth analytical work leveraging other IDIs facilitated increased engagement and credibility of policy advice. *Italicized source attribution: IMF ENGAGEMENT ON SOCIAL SPENDING—CASE STUDIES (excerpts: paragraphs 145–148).* --- ### J. Ukraine ### Context and macro outcomes - Ukraine faced large structural imbalances, repeated balance of payments crises, high debt, financial sector crises, and failure to mitigate poverty; conflict in the eastern part of Ukraine curtailed policy space and increased defense spending. - Progress under IMF-supported programs reduced fiscal and current account deficits: - Fiscal deficit declined from 9 percent to 4.5 percent of GDP between 2012 and 2014. - Fiscal deficit declined by another 2.5 percent (to about 2 percent of GDP) between 2014 and 2018. - Public debt as a share of GDP contracted from 80 percent in 2014 to below 70 percent of GDP in 2018. ### Nature of Fund interaction and technical assistance - Collaboration between the Fund and Ukrainian governments was intense over the past decade; IMF-supported programs articulated social spending reform objectives: improve pension sustainability and equity; replace untargeted utility subsidies with targeted subsidies; unify and monetize social assistance; improve controls over health expenditure and separate a basic publicly financed package from privately financed services. - Technical Assistance (TA) supported expenditure rationalization and sectoral analysis (pension, energy subsidy, social assistance reforms); several TA missions visited Ukraine between 2014 and 2016, focusing partially or fully on social spending. - Headquarters experts reviewed proposed reforms, draft laws, and quantitative impact assessments; expert staff sometimes joined area department missions to provide detailed technical advice. - Fund advice was closely coordinated with development partners, especially the World Bank, including joint workshops and frequent discussions to develop a joint stance on reforms. ### Policy advice and reforms implemented - Overarching concerns: fiscal sustainability and spending efficiency. - Pension reforms and outcomes: - Policy focus: increase effective retirement age by raising statutory retirement ages (from 60 and 55 for men and women, respectively, to 65 and 60), and make early retirement rules stricter. - Program measures: retirement age gradually increasing by five years; link earliest permissible retirement age to contribution histories; most special pensions being gradually discontinued; increased required contribution history for full and partial pensions; benefit indexation became rule-based and fiscally conservative. - Social assistance and energy subsidy reforms: - Advice: improve transparency, targeting, and progressivity; move energy subsidies on-budget and phase them out via periodical tariff increases; review eligibility criteria and benefit formulas; streamline and consolidate programs. - Fiscal and welfare impacts: energy subsidy reform was the most important measure for fiscal space and welfare; strengthening energy-related social assistance was essential to mitigate tariff increases’ impact on vulnerable households. - Authorities increased the envelope for energy-related benefits: - Around 1 percent of GDP in 2015. - 1.8 percent of GDP in 2016. - 2.3 percent of GDP in 2017. - 2.1 percent of GDP in 2018. - There remains a need for a centralized social assistance beneficiary database and revision of parameters applied to utility subsidies. - A full monetization of subsidies was expected by March 2019, as initially recommended by IMF TA. - Other program measures: - In the short term, fiscal adjustment relied on measures curtailing the wage bill (e.g., temporary freezing of public sector wages). - Revenue measures focused on improving compliance and collection efficiency of corporate income tax, customs and excises, and reducing the scope of exemptions and special tax schedules. - Against IMF and World Bank advice, the government reduced social insurance contribution rates from 43 to 22 percent in 2017; as compliance did not significantly improve, budget subsidies to the Pension Fund had to be substantially increased. ### Table 15 — Selected IMF policy advice objectives (as presented) - Reduce pension spending and Pension Fund deficits through retirement age increases, tighter entitlement criteria, lower accrual rates — Relevant macro-criticality dimension: Fiscal sustainability - Differentially increase pension benefits, on a temporary basis, to protect low-income pensioners — Spending efficiency - Discontinue special pensions — Fiscal sustainability and spending efficiency - Replace universal energy subsidies with fully monetized, targeted benefit — Spending efficiency - Create a unified social beneficiary database — Spending efficiency - Rationalize pharmaceutical procurement — Fiscal sustainability - Reduce hospital beds — Fiscal sustainability - Rationalize school system, by merging and closing schools in line with declining student numbers — Fiscal sustainability - Improve targeting of school lunch program — Spending efficiency ### Health and education measures implemented during the program - Health: - Pharmaceutical procurement outsourced to international organizations. - Per-capita hospital bed numbers reduced. - New concept of health care financing approved in late 2017 (financing primary health care through a newly established National Health Service); implementation began in 2018. - Education: - Closure of smaller schools began in 2015. - Targeting of the school lunch program improved from December 2015; further rationalization of the school network planned through 2020. ### Lessons from Ukraine - Reforms were implemented in a difficult environment (political economy factors, conflict); lack of broad political support and conflict in Eastern Ukraine hindered reforms and delayed implementation (for example, increasing retirement age took almost 20 years to legislate). - Selectivity and persistence improved engagement effectiveness: focusing on issues with greatest short- and medium-term fiscal impact yielded better results than spreading efforts thinly. - Milestones, patience, and almost continuous Fund involvement over 10 years, with consistent program conditionality, were major factors in achieving reforms, even when delayed or incomplete. - Intensive cooperation between area and functional departments mobilized expertise and improved policy and conditionality design. - Strategic interaction with the World Bank allowed the IMF to focus its work and increase effectiveness; frequent coordination (e.g., monthly visits by the Bank’s pension specialist) helped present a joint vision and enabled effective monitoring and consultation. *Italicized source attribution: IMF ENGAGEMENT ON SOCIAL SPENDING—CASE STUDIES (excerpts: paragraphs 149–162, Table 15, and related text).* --- _Source: https://www.imf.org/-/media/files/publications/pp/2019/ppea2019018.pdf_