## The Importance and Drivers of Stock-Flow Adjustments — Mali

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### Background on Debt Dynamics and Stock-Flow Adjustments
- Public debt in Mali doubled over the past decade to reach 52.5 percent in 2022.
- Domestic debt rose to 25.2 percent of GDP in 2022 from below 5 percent in 2013.
- External debt increased to 27.3 percent of GDP in 2022, from 21½ percent.
- Recent shocks contributing to rising debt: regional and global sanctions, the COVID-19 pandemic, the fallout of the war in Ukraine, increasingly frequent extreme weather events, insecurity, and political instability.
- Definition: Stock-flow adjustments (SFAs) represent extra-budgetary and below-the-line operations that do not reflect standard spending and revenue; when positive, SFAs increase debt faster than the fiscal deficit implies.

### Possible Causes of Stock-Flow Adjustments
- Differences in institutional coverage between fiscal accounts and debt statistics.
- Simultaneous use of cash and accrual accounting for different transactions, creating a disconnect between cash-based debt and accruals-based deficit.
- Asset valuation effects (e.g., exchange rate movements affecting external debt measured in local currency).
- Changes in financial assets due to privatizations or accumulation/depletion of government deposits.
- Extra-budgetary and off-budget funds leading to public borrowing outside the central government budget.
- Contingent liabilities, including government guarantees (e.g., recapitalizations of banks or State-Owned Enterprises), which do not appear in the fiscal deficit until called.

### Size of SFAs in Mali and Impact on Public Debt
- SFAs have varied markedly over the past decade and on average have been positive, at just under 1 percent of GDP.
- 2014: SFAs = -2.5 percent of GDP; headline deficit = 2.9 percent of GDP; effective fiscal deficit including SFA = 0.4 percent of GDP.
- 2019: SFAs > 3 percent of GDP; headline deficit = 1.7 percent of GDP; effective fiscal deficit including SFA = 5 percent of GDP.
- 2020: SFAs > 3 percent of GDP; headline deficit = 5.4 percent of GDP; effective fiscal deficit including SFA = 8.4 percent of GDP.
- Of the 28 percentage point increase in the debt-to-GDP ratio over the past decade, SFAs contributed 9 percentage points (just under a third).
- Since 2018, SFAs contributed 7 percentage points to the 16 percentage point rise in the public debt-to-GDP ratio (more than 40 percent of the total increase).
- Regional context:
  - Median SFA across sub-Saharan Africa (SSA) averaged 1.1 percent of GDP over 2013-2019.
  - During the pandemic, median SFA across SSA averaged 1.5 percent of GDP.
  - In the WAEMU region, SFAs added 13 percentage points to public debt ratios over the period.
  - Country heterogeneity examples: Guinea-Bissau and Senegal SFAs added 20 percentage points to public debt ratios over ten years to 2022; Burkina Faso and Niger added 5 percentage points or less.
- Possible data-related driver: change in the debt database since 2016 leading to recording/disbursement timing differences; COVID-19 restrictions may have exacerbated reporting delays.

### Debt Dynamics Scenarios Involving SFAs
- Baseline projection: assumes zero SFAs and fiscal deficit returns to the 3-percent WEAMU ceiling by 2026.
- Scenario 1 (Historical SFAs): SFAs remain at historical average = 0.9 percent of GDP.
  - Result: Mali debt-to-GDP ratio would be 3.5 percentage points higher in 2027 than in the baseline, reaching close to 60 percent of GDP.
- Scenario 2 (Double historical SFAs): SFAs = 1.8 percent of GDP.
  - Result: Debt would be over 65 percent of GDP by 2027, close to the 70 percent debt ceiling of the WAEMU region.
- WAEMU region: if SFAs double their historical average, the regional debt-to-GDP ratio would be expected to rise over the medium term versus the baseline where it falls back.

### Implications and Policy Recommendations
- Key implications:
  - SFAs significantly contribute to debt accumulation and weaken the informativeness of the headline fiscal deficit.
  - Heterogeneity in SFAs across WAEMU members can lead to unequal treatment under deficit-based fiscal rules and undermine credibility and effectiveness of WAEMU fiscal rules.
  - Reducing SFAs alone is insufficient; the fiscal deficit remains the larger contributor to Mali’s rising debt and significant fiscal consolidation is required for debt sustainability.
- Recommended actions to reduce or better monitor SFAs:
  - Identify and report all drivers of debt accumulation, including below-the-line and extra-budgetary operations; introduce systematic reconciliation of fiscal and debt accounts and link fiscal- and debt-recording systems.
  - Improve and harmonize accounting standards and practices across the region, including full, region-wide implementation of GFSM 2001/14 in line with the WAEMU Directive on fiscal statistics.
  - Apply consistent institutional coverage above and below the line and expand the use of accrual accounting for consistency.
  - Track and systematically report government guarantees and other fiscal risks; strengthen oversight of State-Owned Enterprises and limit quasi-fiscal operations.
  - Account for SFAs when preparing budgets and medium-term fiscal frameworks to increase credibility of fiscal strategies.
  - Prevent accumulation of expenditure arrears and prepare settlement plans to reduce past arrears.
- Final policy note: Significant fiscal consolidation remains critical to put debt on a declining path; failure to consolidate would lead to continually increasing debt vulnerabilities.

*Source: IMF Selected Issues Paper SIP/2023/058 (completed May 9, 2023).*

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_Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2023/english/sipea2023058.pdf_