## 5. FIsCAL INsTITUTIONs ANd FIsCAL OUTCOMEs

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### Overview and challenges
- MENAP and CCA countries face the difficult challenge of reducing fiscal vulnerabilities to strengthen economic resilience while fostering higher and more inclusive growth through structural reforms.
- Elevated global growth and trade uncertainties and prospects for lower and more volatile oil prices will weigh on MENAP oil exporters in particular.
- Well-developed and credible fiscal institutions can help ease the burden of adjustment and reduce fiscal vulnerabilities on a lasting basis.
- Chapter scope: examines gaps in fiscal institutions in the Middle East and Central Asia and estimates the impact of fiscal institutions on fiscal outcomes across three roles:
  - (1) strengthening fiscal discipline and ensuring long-term sustainability;
  - (2) building resilience by enhancing the ability of fiscal policy to stabilize the economy;
  - (3) improving the predictability of fiscal policy by lowering its volatility.

### Weak fiscal institutions in the Middle East and Central Asia
- Regional pattern:
  - Measures of key fiscal institutions in MENAP and CCA countries tend to be weaker compared with peers, with important regional variations.
  - MENAP oil exporters have much lower budget transparency compared to other oil-exporting countries; measures for Algeria, Iraq, Qatar, and Saudi Arabia did not improve between 2012 and 2017.
  - Some MENAP and CCA oil importers have seen notable improvements in budget transparency in recent years.
  - Improvements in budget transparency seem positively associated with revenue mobilization.
- Revenue and tax system observations:
  - Most MENAP oil exporters register very low nonresource tax revenues mainly because of large resource revenues.
  - MENAP oil importers’ tax systems suffer low progressivity and complexity, with multiple tax exemptions and rates.
- Medium-term fiscal frameworks and PFM:
  - MENAP oil exporters score higher than other oil exporters on the MTFF indicator, driven largely by favorable elements in a few countries (Algeria, Kuwait).
  - Most CCA countries fare well in terms of MTFF.
  - Countries in the CCA perform poorly on public procurement but score relatively well on public financial management compared to emerging market economies.
- Capacity constraints:
  - Fragile states and conflict-affected countries face significant challenges in developing strong fiscal institutions due to limited administrative capacity.
- IMF staff assessment snapshot:
  - more than 80 percent of CCA countries and half of MENAP oil exporters have MTFFs;
  - a majority of MENAP oil importers do not have a formal MTFF.
- Fiscal rules adoption:
  - Only one-quarter of MENAP and CCA countries (Algeria, Armenia, Azerbaijan, Georgia, Iran, Kazakhstan, Pakistan) have adopted fiscal rules, particularly budget balance or debt rules.
  - Armenia and Georgia amended their fiscal rules (with IMF capacity development) to reduce procyclical bias and increase flexibility. Somalia plans to introduce a debt rule.

### How fiscal institutions influence fiscal outcomes (empirical estimates)
- Mechanism: adopting best practices for fiscal transparency, MTFF, PFM, and procurement increases accountability and limits discretionary and politically motivated changes in fiscal policy.
- Key estimated impacts (counterfactuals with other conditions unchanged; regressions run separately for individual fiscal institutions):
  - Disciplinary effect (slower public debt accumulation over the medium term):
    - more than 4 percent of GDP and close to 5 percent of GDP in the Gulf Cooperation Council (GCC) and non-GCC oil-exporting countries, respectively, compared to current level of debt;
  - Stabilization effect (reduced procyclicality of fiscal policy):
    - across all MENAP oil exporters, procyclicality could be reduced by 30 percent;
    - for CCA countries, procyclicality would be strongly reduced by more than 20 percent;
  - Predictability effect (reduced volatility of discretionary spending):
    - across MENAP oil exporters, volatility of government spending could be lowered by as much as 19 percent;
    - in the CCA, volatility of fiscal policy could be lowered by about 8 percent.
- Country-group specific estimates:
  - MENAP oil importers: slower pace of debt accumulation by about 3½ percent of GDP and a 14 percent lower volatility of fiscal policy.
  - CCA: slower pace of debt accumulation by 2 percent of GDP; procyclicality reduced by more than 20 percent; volatility lowered by about 8 percent.
- Statistical significance: reported coefficients are significant at 90–99 percent confidence bands for many indicators; some effects are not statistically significant (noted in original figures).

### Enhancing fiscal discipline — country examples and magnitudes
- Potential reductions in debt accumulation from improved institutions (transparency, credible MTFFs, stronger PFM):
  - Algeria and Oman: debt accumulation could be lower by 4.5 and 6 percent of GDP, respectively, compared to current levels of debt.
  - Qatar and Saudi Arabia: debt accumulation could be lower by 5 percent of GDP.
  - Egypt, Lebanon, and Pakistan: could slow public debt buildup by about 4 percent of GDP.
  - Armenia, the Kyrgyz Republic, and Tajikistan: improving transparency and PFM combined with a credible MTFF could slow debt accumulation, on average, by 2 percent of GDP.
  - Fragile countries (Iraq, Lebanon, Sudan, Yemen): debt accumulation could be slower by about 6 percent of GDP despite limited capacity.

### Limiting the procyclicality of fiscal policy
- Improving budget cycle transparency and adopting credible MTFFs reduces procyclical fiscal policy, helping stabilize the economy.
- Examples of potential reductions in procyclicality:
  - Algeria, Qatar, and Saudi Arabia: procyclicality of fiscal policy can be reduced by more than 30 percent compared to the degree observed in recent years.
  - Azerbaijan and Uzbekistan: could lower the procyclicality of fiscal policy by more than 20 percent.
- Role of MTFFs: help policymakers implement countercyclical fiscal policy by reducing pressures to increase spending or cut taxes during upswings and by highlighting the need for sustainable actions.

### Improving the predictability of fiscal policy
- Improving budget transparency and procurement systems enhances predictability by lowering volatility of discretionary government spending.
- Examples and magnitudes:
  - Improving transparency and procurement systems could reduce volatility of fiscal policy by about 10 percent.
  - MENAP oil importers (Egypt, Mauritania, Pakistan): volatility could be lowered by 11 percent.
  - CCA countries (Azerbaijan, Tajikistan, Uzbekistan): volatility could be lowered by 13 percent.
  - Across MENAP oil exporters, volatility of government spending could be lowered by as much as 19 percent; in the CCA, volatility could be lowered by about 8 percent.
- Implementation horizon and constraints:
  - Improvements in fiscal institutions take time and may be hindered by administrative capacity and political constraints.
  - MENAP and CCA countries improved their MTFFs by 10 percent over four years, whereas improvements took more than five years in other countries.
  - The sizable benefits associated with enhancing fiscal institutions would be reaped only over the medium or long term.

### Strengthening PFM and procurement systems
- Effective PFM controls, compliance with internal budget procedures, and high quality and comprehensive audits would mitigate the overall rise in public debt.
- Quantified potential impact:
  - Strengthening PFM controls—limiting unreported extra-budgetary expenditure, improving tax payment efficiency, boosting oversight of fiscal risks from public enterprises—could lower public debt by about 3–3½ percent of GDP for MENAP oil exporters and importers.
- Recommended actions:
  - Adopt comprehensive approaches to analyze assets and liabilities of the public sector to enhance transparency and balance sheet management.
  - Undertake Fiscal Transparency Evaluations to compile public sector balance sheets and assess main risks to the fiscal outlook.
  - Build stronger PFM systems and effective procurement processes and controls to limit unreported extrabudgetary expenditures and reinforce oversight of fiscal risks.
- Recent country reforms referenced:
  - Mauritania and Algeria: adopted Organic Budget Laws.
  - Kuwait: passed a new procurement law establishing dedicated procurement bodies and introducing life-cycle costing and complaints procedures.
  - Saudi Arabia: new tendering and procurement law expected to improve public investment efficiency and tender transparency.
  - Azerbaijan and Uzbekistan: passed legislation to establish e-procurement and increased transparency of bidding and contracting.
  - Armenia: plans to strengthen public investment management framework.

### Moving toward well-designed fiscal rules
- Empirical evidence: well-designed fiscal rules can strengthen fiscal discipline and reinforce stabilizing capacity of fiscal policy.
- Guidance by country type:
  - MENAP oil exporters: budget balance rules and expenditure rules may help reduce procyclicality while ensuring intergenerational equity.
  - MENAP oil importers: budget balance rules and debt rules may help contain rapid rise of public debt while allowing fiscal policy to respond to shocks.
- Design and institutional prerequisites:
  - Mere adoption of fiscal rules without strong fiscal institutions is unlikely to improve outcomes.
  - Procedural rules, enforcement and monitoring mechanisms, independent bodies providing macroeconomic assumptions and monitoring compliance, and comprehensive PFM systems are crucial preconditions.
  - Flexible yet effective fiscal rules with well-defined escape clauses, monitoring and enforcement mechanisms can preserve fiscal discipline.
- Country-specific advice:
  - Algeria, Azerbaijan, and Pakistan: could reap gains by fostering compliance with existing rules.
  - Kyrgyz Republic: should consider a lower cap for public debt when calibrating its fiscal rule.
  - Algeria and Pakistan: would benefit from ensuring compliance with existing MTFFs.
  - Qatar and the United Arab Emirates: efforts to bolster fiscal policy frameworks via explicit fiscal anchors would help reduce procyclical fiscal policies.

### Revenue institutions and revenue mobilization
- Strengthening revenue institutions can foster domestic nonresource revenue mobilization, especially for MENAP and CCA oil exporters.
- Recommended measures:
  - Align institutions with good practices for internal management.
  - Improve procedures that regulate tax officials’ discretionary powers.
  - Develop core tax procedures and capabilities.
  - Ease filing and payment procedures via electronic filing.
  - Implement modern organizational structures and compliance risk management approaches.
  - Adopt a medium-term revenue strategy focused on comprehensive tax system reform.
- Association observed: greater transparency and credible MTFFs are associated with enhanced domestic nonresource revenue mobilization.

### A call for stronger institutions for improved policy outcomes
- Regional priorities:
  - MENAP oil exporters: avoid procyclical fiscal policies, rebuild buffers, insulate economies from global oil price volatility.
  - MENAP oil importers: reduce precariously high levels of public debt to create space to address growth weaknesses.
  - CCA countries: rebuild fiscal buffers to enhance macroeconomic stability and reduce vulnerabilities to external shocks.
- Transparency initiatives recommended for countries with low transparency scores (Algeria, Iraq, Qatar, Saudi Arabia) to reinforce fiscal discipline and reduce procyclicality and volatility of fiscal policy.
  - Noted reform: Saudi Arabia has published more comprehensive budget statements, quarterly budget performance reports, and audited financial statements (including for the state oil company); further gains could come from more detailed budget projections, outturns, fiscal risks, and broader institutional coverage of fiscal reporting.
  - Tunisia and Uzbekistan: recent fiscal transparency evaluations in collaboration with IMF capacity development; Uzbekistan intends to participate in the 2021 Open Budget Index assessment for the first time.
- Building a credible MTFF enhances fiscal discipline and reduces pace of debt accumulation and procyclicality.

### Box 5.1 — Lessons from fiscal reforms in Georgia (summary)
- Reforms since 2003 included:
  - New budget law strengthening the medium-term fiscal framework, unifying central and local budgets, accelerating approval and execution, and introducing program budgeting.
  - Adoption of numerical fiscal rules (debt, budget balance, and expenditure rules) in 2011 and enhancements in 2018.
  - Streamlining tax policy and strengthening tax administration with e-government taxpayer services and procurement.
  - Improving coverage, analysis, and reporting of fiscal risks.
- Outcomes:
  - Improved fiscal transparency measured by the Open Budget Index.
  - Tax revenues rose and revenue collection efficiency higher than peers.
  - Types of taxes streamlined from 21 to 6; restructured Revenue Service.
  - Flexible fiscal rules helped foster fiscal discipline, limited rise in public debt, and reduced volatility of government expenditure.
- Fiscal rule limits after revision:
  - fiscal rules limit public debt to 60 percent of GDP, the budget balance to 3 percent of GDP, and expenditures to 30 percent of GDP.
  - Revisions included eliminating a procyclical expenditure ceiling, clarifying deficit and public debt scope under the rule, and defining escape clauses.

### Box 5.2 — Empirical framework: fiscal institutions and fiscal performance (summary)
- Fiscal institutions measured by: transparency of budget cycle, adoption of credible MTFF, and introduction of fiscal rules; also quality of procurement and PFM.
- Outcomes studied: disciplinary effect (limiting increases in public debt), stabilizing effect (reducing procyclicality), and volatility (lowering fiscal policy volatility).
- Key empirical specifications (equations summarized):
  - Equation (1): change in gross public debt (∆D_it) regressed on fiscal institutions (FI_it) and controls to estimate disciplinary effect.
  - Equation (2): estimates cyclicality of fiscal policy via ∆LogG_it on ∆Y_it and controls to obtain time-varying country-specific coefficients.
  - Equation (3): regresses estimated cyclical coefficients on FI_it to assess effect on pro- or countercyclicality.
  - Equation (4): isolates discretionary changes in government spending; residuals used to compute volatility (σ_it) as five-year standard deviations.
  - Equation (5): regresses volatility (σ_it) on FI_it and controls to estimate impact of fiscal institutions on volatility.
  - Equation (6): assesses role of fiscal rules and interaction with procedural rules and monitoring (FR_it × PR_it) on change in public debt or cyclical coefficients.
  - Equation (7): estimates role of fiscal institutions in revenue mobilization (total revenue/GDP or nonresource revenue/GDP) with macro, structural, and political controls.
- Data and estimation:
  - Sample: 114 countries, including 31 Middle East and Central Asia countries; panel is unbalanced.
  - Five-year averages used for variables; fiscal institutions assumed stable over short-to-medium term.
  - Equations 1, 3, 5, and 6 estimated using Driscoll and Kraay (1998) method; Equation 7 estimated using fixed effects with robust standard errors.
  - Control variables include GDP per capita, inflation, financial development, openness to trade, terms of trade, real GDP growth volatility, oil price volatility, non-oil primary balance, and political/institutional variables (strength of democracy, rule of law, government effectiveness).
- Interpretation:
  - Negative δ1 and δ2 in Equations 3 and 5 imply fiscal institutions associated with lower procyclicality and reduced volatility.
  - Interaction FR_it × PR_it captures enhanced effectiveness of fiscal rules when supported by procedural and monitoring mechanisms.

*Prepared from Chapter 5 of the Regional Economic Outlook: Middle East and Central Asia (October 2019).*

### Chapter 1), while countries in the Caucasus and

### Fiscal Institutions and Fiscal Outcomes

### Overview and challenges
- MENAP and CCA countries face the difficult challenge of reducing fiscal vulnerabilities to strengthen economic resilience while fostering higher and more inclusive growth through structural reforms.
- Elevated global growth and trade uncertainties and prospects for lower and more volatile oil prices will weigh on MENAP oil exporters in particular.
- Ensuring well-developed and credible fiscal institutions can help ease the burden of adjustment and reduce fiscal vulnerabilities on a lasting basis.
- The chapter examines gaps in fiscal institutions in the Middle East and Central Asia and estimates the impact of fiscal institutions on fiscal outcomes across three roles:
  - (1) strengthening fiscal discipline and ensuring long-term sustainability;
  - (2) building resilience by enhancing the ability of fiscal policy to stabilize the economy;
  - (3) improving the predictability of fiscal policy by lowering its volatility.

### Weak fiscal institutions in the Middle East and Central Asia
- Measures of key fiscal institutions in MENAP and CCA countries tend to be weaker compared with peers, with important regional variations.
- MENAP oil exporters have much lower budget transparency compared to other oil-exporting countries; measures for Algeria, Iraq, Qatar, and Saudi Arabia did not improve between 2012 and 2017.
- Some MENAP and CCA oil importers have seen notable improvements in budget transparency in recent years.
- Improvements in budget transparency seem positively associated with revenue mobilization.
- Most MENAP oil exporters register very low nonresource tax revenues mainly because of large resource revenues.
- MENAP oil importers’ tax systems suffer low progressivity and complexity, with multiple tax exemptions and rates.
- MENAP oil exporters score higher than other oil exporters on the MTFF indicator, but this is driven largely by favorable elements in a few countries (Algeria, Kuwait).
- Most CCA countries fare well in terms of MTFF.
- Countries in the CCA perform poorly on public procurement but score relatively well on public financial management compared to emerging market economies.
- Fragile states and conflict-affected countries face significant challenges in developing strong fiscal institutions due to limited administrative capacity.
- IMF staff assessments indicate:
  - more than 80 percent of CCA countries and half of MENAP oil exporters have MTFFs;
  - a majority of MENAP oil importers do not have a formal MTFF.
- Only one-quarter of MENAP and CCA countries (Algeria, Armenia, Azerbaijan, Georgia, Iran, Kazakhstan, Pakistan) have adopted fiscal rules, particularly budget balance or debt rules.
- Armenia and Georgia amended their fiscal rules (with IMF capacity development) to reduce procyclical bias and increase flexibility. Somalia plans to introduce a debt rule.

### How fiscal institutions influence fiscal outcomes (empirical estimates)
- Adopting best practices for fiscal transparency, MTFF, PFM, and procurement could improve fiscal outcomes by increasing accountability and limiting discretionary and politically motivated changes in fiscal policy.
- Key estimated impacts (counterfactuals with other conditions unchanged; regressions run separately for individual fiscal institutions):
  - Disciplinary effect (slower public debt accumulation over the medium term):
    - more than 4 percent of GDP and close to 5 percent of GDP in the Gulf Cooperation Council (GCC) and non-GCC oil-exporting countries, respectively, compared to current level of debt;
  - Stabilization effect (reduced procyclicality of fiscal policy):
    - across all MENAP oil exporters, procyclicality could be reduced by 30 percent;
    - for CCA countries, procyclicality would be strongly reduced by more than 20 percent;
  - Predictability effect (reduced volatility of discretionary spending):
    - across MENAP oil exporters, volatility of government spending could be lowered by as much as 19 percent;
    - in the CCA, volatility of fiscal policy could be lowered by about 8 percent.
- Country-group specific estimates:
  - MENAP oil importers: slower pace of debt accumulation by about 3½ percent of GDP and a 14 percent lower volatility of fiscal policy.
  - CCA: slower pace of debt accumulation by 2 percent of GDP; procyclicality reduced by more than 20 percent; volatility lowered by about 8 percent.
- The reported coefficients are significant at 90–99 percent confidence bands for many indicators; some effects (noted in original figures) are not statistically significant.

### Enhancing fiscal discipline — country examples and magnitudes
- Improving fiscal transparency, adopting credible MTFFs, and strengthening PFM systems could reduce the pace of public debt accumulation:
  - Algeria and Oman: debt accumulation could be lower by 4.5 and 6 percent of GDP, respectively, compared to current levels of debt.
  - Qatar and Saudi Arabia: debt accumulation could be lower by 5 percent of GDP.
  - Egypt, Lebanon, and Pakistan: could slow public debt buildup by about 4 percent of GDP.
  - Armenia, the Kyrgyz Republic, and Tajikistan: improving transparency and PFM combined with a credible MTFF could slow debt accumulation, on average, by 2 percent of GDP.
  - Fragile countries (Iraq, Lebanon, Sudan, Yemen): debt accumulation could be slower by about 6 percent of GDP despite limited capacity.

### Limiting the procyclicality of fiscal policy
- Improving budget cycle transparency and adopting credible MTFFs reduces procyclical fiscal policy, helping stabilize the economy.
- Examples of potential reductions in procyclicality:
  - Algeria, Qatar, and Saudi Arabia: procyclicality of fiscal policy can be reduced by more than 30 percent compared to the degree observed in recent years.
  - Azerbaijan and Uzbekistan: could lower the procyclicality of fiscal policy by more than 20 percent.
- MTFFs help policymakers implement countercyclical fiscal policy by reducing pressures to increase spending or cut taxes during upswings and by highlighting the need for sustainable actions.

### Improving the predictability of fiscal policy
- Improving budget transparency and procurement systems enhances predictability by lowering volatility of discretionary government spending.
- Examples:
  - Bahrain and Oman (mentioned in context of predictability improvements in the chapter).
- Improvements in fiscal institutions take time and may be hindered by administrative capacity and political constraints:
  - MENAP and CCA countries improved their MTFFs by 10 percent over four years, whereas improvements took more than five years in other countries.
  - The sizable benefits associated with enhancing fiscal institutions would be reaped only over the medium or long term.

### Broader findings and policy implications
- Adoption of numerical fiscal rules, if accompanied by procedural rules and monitoring and enforcement mechanisms, is associated with less procyclical fiscal policy.
- Greater transparency and credible MTFFs are associated with enhanced domestic nonresource revenue mobilization.
- Strengthening fiscal institutions—transparency, MTFFs, PFM, procurement, and fiscal rules—can deliver measurable improvements in public debt trends, stabilization capacity, and predictability of fiscal policy across MENAP and CCA countries.

*Source: IMF staff calculations and analysis in Chapter 5, “Fiscal Institutions and Fiscal Outcomes,” Regional Economic Outlook: Middle East and Central Asia, October 2019.*

### 5. FIsCAL INsTITUTIONs ANd FIsCAL OUTCOMEs

### 5. FIsCAL INsTITUTIONs ANd FIsCAL OUTCOMEs

### Reducing Fiscal Policy Volatility
- Improving transparency and procurement systems could reduce volatility of fiscal policy by about 10 percent.
- Potential benefits are higher in:
  - MENAP oil importers (Egypt, Mauritania, Pakistan): volatility could be lowered by 11 percent.
  - CCA countries (Azerbaijan, Tajikistan, Uzbekistan): volatility could be lowered by 13 percent.

### Strengthening PFM and Procurement Systems
- Effective PFM controls, compliance with internal budget procedures, and high quality and comprehensive audits would mitigate the overall rise in public debt.
- Strengthening PFM controls—limiting unreported extra-budgetary expenditure, improving tax payment efficiency, boosting oversight of fiscal risks from public enterprises—could lower public debt by about 3–3½ percent of GDP for MENAP oil exporters and importers.
- Policy recommendations and recent reforms:
  - Adopt comprehensive approaches to analyze assets and liabilities of the public sector to enhance transparency and balance sheet management.
  - Undertake Fiscal Transparency Evaluations to compile public sector balance sheets and assess main risks to the fiscal outlook.
  - Build stronger PFM systems and effective procurement processes and controls to limit unreported extrabudgetary expenditures and reinforce oversight of fiscal risks.
  - Recent country actions referenced:
    - Mauritania and Algeria: adopted Organic Budget Laws.
    - Kuwait: passed a new procurement law establishing dedicated procurement bodies and introducing life-cycle costing and complaints procedures.
    - Saudi Arabia: new tendering and procurement law expected to improve public investment efficiency and tender transparency.
    - Azerbaijan and Uzbekistan: passed legislation to establish e-procurement and increased transparency of bidding and contracting.
    - Armenia: plans to strengthen public investment management framework.

### Moving toward Well-Designed Fiscal Rules
- Empirical evidence: well-designed fiscal rules can strengthen fiscal discipline and reinforce stabilizing capacity of fiscal policy.
- Guidance by country type:
  - MENAP oil exporters: budget balance rules and expenditure rules may help reduce procyclicality while ensuring intergenerational equity.
  - MENAP oil importers: budget balance rules and debt rules may help contain rapid rise of public debt while allowing fiscal policy to respond to shocks.
- Important design and institutional features:
  - Mere adoption of fiscal rules without strong fiscal institutions is unlikely to improve outcomes.
  - Procedural rules, enforcement and monitoring mechanisms, independent bodies providing macroeconomic assumptions and monitoring compliance, and comprehensive PFM systems are crucial preconditions.
  - Flexible yet effective fiscal rules with well-defined escape clauses, monitoring and enforcement mechanisms can preserve fiscal discipline.
- Country-specific advice:
  - Algeria, Azerbaijan, and Pakistan: could reap gains by fostering compliance with existing rules.
  - Kyrgyz Republic: should consider a lower cap for public debt when calibrating its fiscal rule.
  - Algeria and Pakistan: would benefit from ensuring compliance with existing MTFFs.
  - Qatar and the United Arab Emirates: efforts to bolster fiscal policy frameworks via explicit fiscal anchors would help reduce procyclical fiscal policies.

### Revenue Institutions and Revenue Mobilization
- Strengthening revenue institutions can foster domestic nonresource revenue mobilization, especially for MENAP and CCA oil exporters.
- Recommended measures:
  - Align institutions with good practices for internal management.
  - Improve procedures that regulate tax officials’ discretionary powers.
  - Develop core tax procedures and capabilities.
  - Ease filing and payment procedures via electronic filing.
  - Implement modern organizational structures and compliance risk management approaches.
  - Adopt a medium-term revenue strategy focused on comprehensive tax system reform.

### A Call for Stronger Institutions for Improved Policy Outcomes
- Regional priorities:
  - MENAP oil exporters: avoid procyclical fiscal policies, rebuild buffers, insulate economies from global oil price volatility.
  - MENAP oil importers: reduce precariously high levels of public debt to create space to address growth weaknesses.
  - CCA countries: rebuild fiscal buffers to enhance macroeconomic stability and reduce vulnerabilities to external shocks.
- Transparency initiatives recommended for countries with low transparency scores (Algeria, Iraq, Qatar, Saudi Arabia) to reinforce fiscal discipline and reduce procyclicality and volatility of fiscal policy.
  - Noted reform: Saudi Arabia has published more comprehensive budget statements, quarterly budget performance reports, and audited financial statements (including for the state oil company); further gains could come from more detailed budget projections, outturns, fiscal risks, and broader institutional coverage of fiscal reporting.
  - Tunisia and Uzbekistan: recent fiscal transparency evaluations in collaboration with IMF capacity development; Uzbekistan intends to participate in the 2021 Open Budget Index assessment for the first time.
- Building a credible MTFF enhances fiscal discipline and reduces pace of debt accumulation and procyclicality.

### Box 5.1 — Lessons from Fiscal Reforms in Georgia (summary)
- Reforms since 2003 included:
  - New budget law strengthening the medium-term fiscal framework, unifying central and local budgets, accelerating approval and execution, and introducing program budgeting.
  - Adoption of numerical fiscal rules (debt, budget balance, and expenditure rules) in 2011 and enhancements in 2018.
  - Streamlining tax policy and strengthening tax administration with e-government taxpayer services and procurement.
  - Improving coverage, analysis, and reporting of fiscal risks.
- Outcomes:
  - Improved fiscal transparency measured by the Open Budget Index.
  - Tax revenues rose and revenue collection efficiency higher than peers.
  - Types of taxes streamlined from 21 to 6; restructured Revenue Service.
  - Flexible fiscal rules helped foster fiscal discipline, limited rise in public debt, and reduced volatility of government expenditure.
- Fiscal rule limits after revision: fiscal rules limit public debt to 60 percent of GDP, the budget balance to 3 percent of GDP, and expenditures to 30 percent of GDP. Revisions included eliminating a procyclical expenditure ceiling, clarifying deficit and public debt scope under the rule, and defining escape clauses.

### Box 5.2 — Empirical Framework: Fiscal Institutions and Fiscal Performance (summary)
- Fiscal institutions measured by: transparency of budget cycle, adoption of credible MTFF, and introduction of fiscal rules; also quality of procurement and PFM.
- Outcomes studied: disciplinary effect (limiting increases in public debt), stabilizing effect (reducing procyclicality), and volatility (lowering fiscal policy volatility).
- Key empirical specifications:
  - Equation (1): change in gross public debt (∆D_it) regressed on fiscal institutions (FI_it) and controls to estimate disciplinary effect.
  - Equation (2): estimates cyclicality of fiscal policy via ∆LogG_it on ∆Y_it and controls to obtain time-varying country-specific coefficients.
  - Equation (3): regresses estimated cyclical coefficients on FI_it to assess effect on pro- or countercyclicality.
  - Equation (4): isolates discretionary changes in government spending; residuals used to compute volatility (σ_it) as five-year standard deviations.
  - Equation (5): regresses volatility (σ_it) on FI_it and controls to estimate impact of fiscal institutions on volatility.
  - Equation (6): assesses role of fiscal rules and interaction with procedural rules and monitoring (FR_it × PR_it) on change in public debt or cyclical coefficients.
  - Equation (7): estimates role of fiscal institutions in revenue mobilization (total revenue/GDP or nonresource revenue/GDP) with macro, structural, and political controls.
- Data and estimation:
  - Sample: 114 countries, including 31 Middle East and Central Asia countries; panel is unbalanced.
  - Five-year averages used for variables; fiscal institutions assumed stable over short-to-medium term.
  - Equations 1, 3, 5, and 6 estimated using Driscoll and Kraay (1998) method; Equation 7 estimated using fixed effects with robust standard errors.
  - Control variables include GDP per capita, inflation, financial development, openness to trade, terms of trade, real GDP growth volatility, oil price volatility, non-oil primary balance, and political/institutional variables (strength of democracy, rule of law, government effectiveness).
- Expected signs:
  - Negative δ1 and δ2 in Equations 3 and 5 imply FIs associated with lower procyclicality and reduced volatility.
  - Interaction FR_it × PR_it captures enhanced effectiveness of fiscal rules when supported by procedural and monitoring mechanisms.

*Prepared from Chapter 5 of the Regional Economic Outlook: Middle East and Central Asia (October 2019).*

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_Source: https://www.imf.org/-/media/files/publications/reo/mcd-cca/2019/october/english/menap-chapter5.pdf_