## 2. Stock Flow Adjustments Over Time and 2013-21 Average

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### Major themes and section structure
- Section headings included: 2. Stock Flow Adjustments Over Time and 2013-21 Average; 3. Debt Dynamics and Stock Flow Adjustments Over Time; 4. Debt, Deficit and SFA; 5. Debt Dynamics Scenarios; 6. The Impact of Stock Flow Adjustments Over Time in Member States.
- Tables referenced: 1. Estimated SFA, 2013–21; 2. Scenario Assumptions; 3. Countries For Which Debt Does Not Stabilize Under Each Case; 4. Coverage of Public Debt and Fiscal Deficit.
- Annex I: Reasons for Discrepancies Between Change in Debt and Fiscal Deficit.

### Overview: context, recent trends, and policy imperatives
- Growth rebound and policy context:
  - WAEMU experienced a growth rebound starting in Q3-2020 that continued in 2022.
  - Policy responses to the pandemic led to the suspension of the Convergence Pact and fiscal rules in April 2020.
- Debt surge drivers and risks:
  - Debt surged due to large fiscal deficits and particularly large fiscal and quasi-fiscal extra-budgetary and below-the-line transactions (stock flow adjustments, SFA).
  - Risks from higher debt: financing constraints in a shallow regional market, possible crowding out of bank credit to the private sector, higher financing costs, deeper sovereign-bank nexus risks, deterrence of investors and donors, larger current account deficits, weaker official reserves, and pressure on the peg.
- Policy imperatives:
  - Reintroduce a regional set of fiscal rules and a Convergence Pact.
  - Design a new fiscal anchor with a debt correction mechanism that addresses extra-budgetary and below-the-line operations.
  - Emphasize domestic revenue mobilization to increase capacity to repay debt.

### Debt Dynamics and Stock Flow Adjustments in WAEMU countries
- Historical SFA magnitudes and heterogeneity:
  - SFA averaged 1.5 percent of regional GDP per annum from 2013 to 2021.
  - Excluding the pandemic period (2020-2021), historical SFA average 1.1 percent of regional GDP over 2013–2019.
  - Two countries exhibit average SFA of 2 percent of GDP or above; two countries have SFA below 1 percent of GDP.
- Quantified contributions of SFA to debt accumulation:
  - SFA contributed about 13 percentage points of regional GDP to existing debt since 2013.
  - SFA account for about half of the increase in debt to GDP over that period (28 percent).
  - For 2019–2021, SFA contributed 5 percentage points of regional GDP to debt (about half of the total increase of about 12 percentage points).
- Correlation and interpretation:
  - Positive correlation of 0.34 between initial debt level and contribution of SFA to debt accumulation over 2013–2021 at the country level.
  - Possible explanations: higher use of SFA by more indebted countries and weaker PFM capacity.
- Drivers and measurement issues:
  - SFA arise from asset valuation effects, differences in institutional coverage, extra-budgetary and off-budget funds, changes in financial assets (privatizations, contingent liabilities, government deposits), arrears, carryover, accounting differences, financial instruments coverage, and debt relief.
  - In WAEMU many fiscal deficits cover central government only while debt data often cover broader public and publicly guaranteed debt.
  - Recommendation: adopt improved accounting frameworks, including GFSM 2001/14 (rather than GFSM 1986) and broader institutional coverage to align deficit and debt perimeters.
- PFM containment priorities for SFA:
  - Increase coverage of the measured fiscal deficit to better align with debt coverage.
  - Limit off-budget operations, including quasi-fiscal operations by SOEs.
  - Strengthen oversight of SOEs to limit fiscal risks and contingent liabilities.
  - Strengthen internal control over expenditures and implement accrual accounting.
  - Prevent accumulation of new expenditure arrears and prepare settlement plans for old arrears.
  - Improve management of public-private partnerships to reduce fiscal risks.

### Debt dynamic simulations and scenario findings
- Scenario framework (four scenarios combining two SFA assumptions and two fiscal deficit targets converging by 2025):
  - Baseline: converge in 2025 to 3 percent deficit with Zero SFA (teams’ projections with minimal SFA starting 2022).
  - Scenario 1: converge in 2025 to 4 percent deficit with Zero SFA.
  - Scenario 2: converge in 2025 to 3 percent deficit with Historical SFA (1.5 percent of regional GDP per annum).
  - Scenario 3: converge in 2025 to 4 percent deficit with Historical SFA (1.5 percent of regional GDP per annum).
- Simulation outcomes (regional summary):
  - Baseline (3 percent deficit, Zero SFA): debt gradually declines; debt stabilization and buffer recovery.
  - Scenario 1 (4 percent deficit, Zero SFA): debt slightly higher in 2027 and broadly stable; buffers are not recovered.
  - Scenario 2 (3 percent deficit, Historical SFA): non-stabilizing debt path over the medium term (mild increase).
  - Scenario 3 (4 percent deficit, Historical SFA): quickly explosive debt pattern over the medium term.
  - Conclusion: only the Baseline (3 percent deficit and elimination of SFA) is consistent with debt stability and buffer recovery; controlling SFA is essential under any feasible deficit target.
- Country-level non-stabilizing debt outcomes (per Table 3):
  - Converge in 2025 to 3 percent deficit, Zero SFA: MLI has non-stabilizing debt.
  - Converge in 2025 to 3 percent deficit, Historical SFA: BEN, CIV, GNB, MLI, NER, TGO have non-stabilizing debt.
  - Converge in 2025 to 4 percent deficit, Zero SFA: CIV, MLI, NER have non-stabilizing debt.
  - Converge in 2025 to 4 percent deficit, Historical SFA: BEN, BFA, CIV, GNB, MLI, NER, SEN, TGO have non-stabilizing debt.
- Equity considerations:
  - Heterogeneous SFA across countries implies an unfair fiscal burden under a common above-the-line deficit target; countries with large historical SFA face effective tightening if SFA are addressed.
  - Urgent need to monitor and quantify SFA sources to include them in budget planning and medium-term fiscal strategy.

### Supporting arrangements for a revamped fiscal rule
- Core design elements:
  - Introduce a debt correction mechanism that triggers fiscal adjustments when debt exceeds thresholds or increases too fast (including to correct for SFA).
  - Include an escape clause with: (i) a limited and clearly defined set of events triggering it, (ii) time limits on deviations, and (iii) requirement to return to the targets and possibly offset accumulated deviations.
  - Define a common and feasible perimeter for debt-creating flows and harmonize deficit and debt perimeters to prevent artificial SFA.
  - Commit over time to broaden the perimeter and move operations through a Single Treasury Account to enhance transparency.
- Operational targets and recalibration:
  - Use operational targets (e.g., wage bill ceilings) to aid planning and make short-term adjustments feasible.
  - Recalibrate the rule at regular intervals (suggestion: every 5 years) with guidelines on when growth, interest rates, or debt indicators warrant changes.
- Monitoring, enforcement, and institutions:
  - Enhance monitoring and accountability possibly by strengthening the WAEMU Commission’s role or establishing national fiscal councils (or associating them with existing institutions).
  - Consider fiscal sharing mechanisms to support idiosyncratic shocks, including: (1) compensating temporary deviations via additional efforts by unaffected countries, (2) establishing a regional stabilization fund with annual contributions, or (3) pooling risks through a targeted common budget for security or health emergencies.
- Communication strategy:
  - Publish a credible medium-term fiscal strategy and regular government reports on implemented measures, costs, and risks.
  - Publish independent assessments (by a fiscal council or audit agency) of conformity of fiscal policy with the rule.
  - Clearly communicate activation, duration, size, and adjustment path associated with any escape clause activation.

### Conclusions and policy recommendations
- Reintroduce a regional fiscal rule and Convergence Pact with:
  - A correction mechanism to ensure the debt ceiling is not breached and to compensate deviations.
  - Mechanisms to capture or compensate for extra-budgetary and below-the-line operations (SFA), either by including them in the deficit measure or via a robust correction mechanism.
  - Supporting arrangements: escape clause, enforcement and accountability mechanisms, operational intermediate targets, harmonized perimeters, and improved PFM.
- Maintain the debt ceiling at or below 70 percent of GDP; do not increase it given heightened global volatility and the need for buffers.
- Strengthen domestic revenue mobilization:
  - Prioritize revenue administration and tax policy reforms, broaden tax bases, simplify the tax system, and strengthen tax administration and compliance.
  - Put more emphasis on the threshold on the tax revenue to GDP ratio.
- Technical Assistance:
  - TA can provide detailed elaboration of specific needs and PFM reforms required to contain SFA and support effective implementation of the revamped fiscal framework.

### Annex I — Reasons for discrepancies between change in debt and fiscal deficit (SFA drivers)
- Enumerated reasons for SFA:
  - Extra-budgetary and off-budget funds (borrowing outside the central government budget).
  - Difference in institutional coverage between fiscal balance and debt (e.g., central government deficit vs. wider public or publicly guaranteed debt).
  - Asset valuation effects (e.g., persistent real exchange rate changes, globally declining interest rates).
  - Change in financial assets due to privatizations, contingent liability realizations/recognitions, or accumulation/depletion of government deposits.
  - Arrears (inconsistencies between cash and accrual measures and timing effects).
  - Carryover (committed expenditures spent in later years).
  - Government guarantees (included in debt in some IMF programs but not in the deficit until called).
  - Differences in accounting between debt and deficit (cash vs. accrual, valuation bases).
  - Financial instruments covered in debt (differences in instruments included, e.g., Maastricht debt instruments).
  - Debt relief (restructuring disconnects debt evolution from the deficit).
- Implications for SFA persistence:
  - Some factors (arrears, carryover, accounting differences, some valuation effects) are not expected to affect the average SFA residual over many years unless they are increasing.
  - Other factors (off-budget borrowing, coverage differences, persistent valuation effects, accumulation of assets, creation of guarantees, changes in instruments covered, debt relief) can produce persistent positive or negative SFA contributions.

*Source: sipea2023028 — 2. Stock Flow Adjustments Over Time and 2013-21 Average (IMF Selected Issues Paper).*

### 2. Stock Flow Adjustments Over Time and 2013-21 Average ................................................................

### 2. Stock Flow Adjustments Over Time and 2013-21 Average

### Major themes and section structure
- 2. Stock Flow Adjustments Over Time and 2013-21 Average ....................................................................8
- 3. Debt Dynamics and Stock Flow Adjustments Over Time .......................................................................9
- 4. Debt, Deficit and SFA .............................................................................................................................9
- 5. Debt Dynamics Scenarios .
...................................................................................................................11
- 6. The Impact of Stock Flow Adjustments Over Time in Member States .................................................12

### Tables referenced in the unit
- 1. Estimated SFA, 2013–21 .
.......................................................................................................................8
- 2. Scenario Assumptions ..........................................................................................................................10
- 3. Countries For Which Debt Does Not Stabilize Under Each Case ........................................................12
- 4. Coverage of Public Debt and Fiscal Deficit ..........................................................................................15

### Annex
- I. Reasons for Discrepancies Between Change in Debt and Fiscal Deficit ..............................................19

*Source: sipea2023028 - 2. Stock Flow Adjustments Over Time and 2013-21 Average (PDF chapter/section)*

### References .............................................................................................................

### sipea2023028 - References

### Overview
- WAEMU experienced a growth rebound starting in Q3-2020 that continued in 2022, supported by favorable pre-Covid macroeconomic performance and swift policy actions.
- Policy responses to the pandemic led to the suspension of the Convergence Pact and fiscal rules in April 2020, resulting in the loss of a fiscal anchor.
- Debt surged due to large fiscal deficits and particularly large fiscal and quasi-fiscal extra-budgetary and below-the-line transactions (stock flow adjustments, SFA).
- Key concerns from higher debt levels:
  - Risks related to financing constraints: shallow regional market, possible crowding out of bank credit to the private sector, higher financing costs, and deeper sovereign-bank nexus risks.
  - Risks to fiscal sustainability: higher debt may deter investors and donors.
  - External viability risks: larger current account deficits, weaker official reserves, and pressure on the peg given tighter global financing conditions.
- Policy imperatives:
  - Reintroduce a regional set of fiscal rules and a Convergence Pact.
  - The previous fiscal target of 3 percent of GDP has limits; a new fiscal anchor should include a debt correction mechanism and address extra-budgetary and below-the-line operations.
  - Emphasize domestic revenue mobilization to increase capacity to repay debt.

### Debt Dynamics and Stock Flow Adjustments in WAEMU Countries
- Historical patterns:
  - WAEMU public debt has been rising since the 2010s despite repeated WEO vintages forecasting declines.
  - SFA are a major driver: SFA averaged 1.5 percent of regional GDP per annum from 2013 to 2021.
  - Excluding the pandemic period (2020-2021), historical SFA average 1.1 percent of regional GDP over 2013–2019.
  - Substantial heterogeneity across countries: two countries exhibit average SFA of 2 percent of GDP or above, and two countries with SFA below 1 percent of GDP.
- Quantified contribution of SFA:
  - SFA contributed about 13 percentage points of regional GDP to existing debt since 2013.
  - SFA account for about half of the increase in debt to GDP over that period (28 percent).
  - For 2019–2021, SFA contributed 5 percentage points of regional GDP to debt (again about half of the total increase of about 12 percentage points).
- Correlation and interpretation:
  - Positive correlation (0.34) between initial debt level and contribution of SFA to debt accumulation over 2013–2021 at the country level.
  - Possible explanations include higher use of SFA by more indebted countries and weaker PFM capacity.
- Drivers and measurement issues:
  - SFA arise from asset valuation effects, differences in institutional coverage, extra-budgetary and off-budget funds, changes in financial assets (privatizations, contingent liabilities, government deposits), arrears, carryover, accounting differences, financial instruments coverage, and debt relief.
  - In WAEMU many fiscal deficits cover central government only while debt data often cover broader public and publicly guaranteed debt.
  - Recommendation to adopt improved accounting frameworks, including adoption of the GFSM 2001/14 (rather than GFSM 1986) and broader institutional coverage to align deficit and debt perimeters.
- Containment priorities for SFA (PFM recommendations):
  - Increase coverage of the measured fiscal deficit to better align with debt coverage and improve comprehensiveness and reliability of fiscal data.
  - Limit off-budget operations, including quasi-fiscal operations by SOEs.
  - Strengthen oversight of SOEs to limit fiscal risks and contingent liabilities.
  - Strengthen internal control over expenditures and implement accrual accounting.
  - Prevent accumulation of new expenditure arrears and prepare settlement plans for old arrears.
  - Improve management of public-private partnerships to reduce fiscal risks.

### Debt Dynamic Simulations and Scenarios
- Scenario framework (Table 2): four scenarios combining two SFA assumptions and two fiscal deficit targets converging by 2025:
  - Baseline: converge in 2025 to 3 percent deficit with Zero SFA (teams’ projections with minimal SFA starting 2022).
  - Scenario 1: converge in 2025 to 4 percent deficit with Zero SFA.
  - Scenario 2: converge in 2025 to 3 percent deficit with Historical SFA (1.5 percent of regional GDP per annum).
  - Scenario 3: converge in 2025 to 4 percent deficit with Historical SFA (1.5 percent of regional GDP per annum).
- Simulation outcomes:
  - Baseline (3 percent deficit, Zero SFA): debt gradually declines (debt stabilization and buffer recovery).
  - Scenario 1 (4 percent deficit, Zero SFA): debt slightly higher in 2027 and broadly stable, but buffers are not recovered.
  - Scenario 2 (3 percent deficit, Historical SFA): non-stabilizing debt path over the medium term (mild increase).
  - Scenario 3 (4 percent deficit, Historical SFA): quickly explosive debt pattern over the medium term.
  - Conclusion: The only scenario consistent with debt stability and buffer recovery is the Baseline (3 percent deficit and elimination of SFA). Controlling SFA is essential under any feasible deficit target.
- Country-level results (Table 3):
  - Converge in 2025 to 3 percent deficit, Zero SFA: MLI has non-stabilizing debt.
  - Converge in 2025 to 3 percent deficit, Historical SFA: BEN, CIV, GNB, MLI, NER, TGO have non-stabilizing debt.
  - Converge in 2025 to 4 percent deficit, Zero SFA: CIV, MLI, NER have non-stabilizing debt.
  - Converge in 2025 to 4 percent deficit, Historical SFA: BEN, BFA, CIV, GNB, MLI, NER, SEN, TGO have non-stabilizing debt.
- Equity and fairness:
  - Heterogeneous SFA across countries implies an unfair fiscal burden under a common above-the-line deficit target; countries with large historical SFA face effective tightening if SFA are addressed.
  - Urgent need to monitor and quantify SFA sources to include them in budget planning and medium-term fiscal strategy.

### Supporting Arrangements for a Revamped Fiscal Rule
- Core design elements:
  - Introduce a debt correction mechanism that triggers fiscal adjustments when debt exceeds thresholds or increases too fast (including to correct for SFA).
  - Include an escape clause with: (i) a limited and clearly defined set of events triggering it, (ii) time limits on deviations, and (iii) requirement to return to the targets and possibly offset accumulated deviations.
  - Define a common and feasible perimeter for debt-creating flows and harmonize deficit and debt perimeters to prevent artificial SFA.
  - Commit over time to broaden the perimeter and move operations through a Single Treasury Account to enhance transparency.
- Operational targets and recalibration:
  - Use operational targets (e.g., wage bill ceilings) to aid planning and make short-term adjustments feasible.
  - Recalibrate the rule at regular intervals (suggestion: every 5 years) with guidelines on when growth, interest rates, or debt indicators warrant changes.
- Monitoring, enforcement, and institutions:
  - Enhance monitoring and accountability possibly by strengthening the WAEMU Commission’s role or establishing national fiscal councils (or associating them with existing institutions).
  - Consider fiscal sharing mechanisms to support idiosyncratic shocks, including: (1) compensating temporary deviations via additional efforts by unaffected countries, (2) establishing a regional stabilization fund with annual contributions, or (3) pooling risks through a targeted common budget for security or health emergencies.
- Communication strategy:
  - Publish a credible medium-term fiscal strategy and regular government reports on implemented measures, costs, and risks.
  - Publish independent assessments (by a fiscal council or audit agency) of conformity of fiscal policy with the rule.
  - Clearly communicate activation, duration, size, and adjustment path associated with any escape clause activation.

### Conclusions and Policy Recommendations
- Urgent need to reintroduce a regional fiscal rule and Convergence Pact with:
  - A correction mechanism to ensure the debt ceiling is not breached and to compensate deviations.
  - Mechanisms to capture or compensate for extra-budgetary and below-the-line operations (SFA), either by including them in the deficit measure or via a robust correction mechanism.
  - Supporting arrangements: escape clause, enforcement and accountability mechanisms, operational intermediate targets, harmonized perimeters, and improved PFM.
- Maintain the debt ceiling at or below 70 percent of GDP; do not increase it given heightened global volatility and the need for buffers.
- Strengthen domestic revenue mobilization as a core component of a sustainable fiscal strategy:
  - Prioritize revenue administration and tax policy reforms, broaden tax bases, simplify the tax system, and strengthen tax administration and compliance.
  - Put more emphasis on the threshold on the tax revenue to GDP ratio.
- Technical Assistance:
  - TA can provide detailed elaboration of specific needs and PFM reforms required to contain SFA and support effective implementation of the revamped fiscal framework.

*Source: IMF Selected Issues Paper — Revamping the West African Economic and Monetary Union (WAEMU) Fiscal Framework (sipea2023028).*

### Annex I. Reasons for Discrepancies Between Change in

### Annex I. Reasons for Discrepancies Between Change in Debt and Fiscal Deficit

### Overview
- The disconnect between fiscal balance and change in debt is labeled as “stock flow adjustments” (SFA).  
- The annex lists debt-creating factors that can generate a positive or negative SFA residual and notes whether these effects should persist on average over many years.

### Enumerated reasons for SFA (debt-deficit disconnect)
- Extra-budgetary and off-budget funds.
  - Borrowing outside the central government budget (sometimes due to emergency spending in the context of the Covid-19 pandemic) would drive a positive SFA.
- Difference in institutional coverage between fiscal balance and debt.
  - Example: deficits measured at the general government level while debt coverage is the wider public sector (profit-losing SOEs could drive a high SFA residual).
- Asset valuation effects.
  - Persistent changes in the real exchange rate can create a disconnect between external borrowing and change in the external debt stock measured in local currency (the effect should cancel out over time if RER were to mean revert).
  - Globally and persistently declining interest rates can increase debt valuation over time and explain positive SFA residual on average.
- Change in financial assets due to privatizations, contingent liability realizations/recognitions, or accumulation/depletion of government deposits.
  - These should drive a positive SFA residual if the country accumulates assets, and a negative residual when the country sells assets (e.g., privatization).
  - Some financial transactions of government and SOEs need to be recorded above-the-line (when these are transfers to SOE, unlike acquisitions of SOE shares which should be below-the-line), in which case they would not affect SFA residual.
- Arrears.
  - Under GFS, there should be full consistency between (i) cash deficit and change in commercial debt, and (ii) accrual deficit and change in total debt including arrears stock.
  - If cash and accrual accounting are used simultaneously for different transactions, this could create a disconnect—for instance if the cash change in commercial debt is compared to the deficit measured in accrual terms.
  - These should not affect the average SFA residual over many years (unless increasing), as they should be mainly offset the following year.
- Carryover.
  - Expenditure committed in one year may be spent in the following year: fiscal deficit recorded in t but debt increases in t+1.
  - If the same pattern repeats over time, these should not affect the average SFA residual over many years (unless increasing), as they should be mainly offset the following year.
- Government guarantees.
  - Sometimes included in debt in IMF programs, but have no equivalent in the deficit (until they are called and generate a financing need). When guarantees are created, they would drive a positive SFA residual, but not when the stock of guarantees remains constant.
  - Note: under GFS, guarantees should not be included in debt. But this is a practice in IMF programs.
- Differences in accounting between debt and deficit.
  - “Cash deficit” measures cash flows and the “accrual deficit” measures accrued flows, but debt data could be compiled using a basis of valuation different from cash flows or accrual transactions.
  - These differences should not affect the average SFA residual over many years, unless increasing, as they should be mainly offset the following year (or years, in case they take a few years to self-correct).
  - Example: in the EU, Maastricht debt is reported at nominal value (equal to face value). This valuation may differ from flows because some revaluations such as those resulting from exchange rate changes are not taken into consideration in the transactions. Flows such as those related to premiums and discounts are not included in the measurement of debt measured at cash flow value.
- Financial instruments covered in the debt.
  - Example: EU Maastricht debt includes only loans, debt securities, and currency and deposits, while the fiscal deficit may have been financed from other financial instruments as well (most notably other accounts payable). This example would offer a negative contribution to the SFA residual.
- Debt relief.
  - Debt restructuring will disconnect the evolution of debt from the deficit, and would offer a negative contribution to the SFA residual.

### Implications for SFA persistence
- Several listed factors (arrears, carryover, accounting differences, some valuation effects) are expected not to affect the average SFA residual over many years because they should be offset in subsequent periods—unless the underlying phenomenon is increasing.
- Other factors (off-budget borrowing, coverage differences, persistent valuation effects, accumulation of assets, creation of guarantees, changes in instruments covered, debt relief) can produce persistent positive or negative SFA contributions depending on their nature.

*Source: Annex I, “Reasons for Discrepancies Between Change in Debt and Fiscal Deficit,” IMF Selected Issues Paper.*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2023/english/sipea2023028.pdf_