## 1. Debt Dynamics ## Source details **Canonical URL:** [1. Debt Dynamics](https://www.imf.org/-/media/files/publications/selected-issues-papers/2024/english/sipea2024012.pdf) ## Other formats - [Markdown version](/-/media/files/publications/selected-issues-papers/2024/english/sipea2024012.pdf.md) - [Structured JSON version](/-/media/files/publications/selected-issues-papers/2024/english/sipea2024012.pdf.json) --- ### Overview - Regional growth and shocks - Regional economic growth averaged 5.9 percent in 2021-2023. - Growth was largely owing to the service sector. - Fiscal outcomes and stock-flow adjustments (SFAs) - WAEMU fiscal deficit: 2.3 percent of GDP in 2019 → 5.5 percent of GDP in 2020 → peak at 6.9 percent of GDP in 2022. - SFAs averaged 1.5 percent of GDP over the past decade. - Public debt: about 45 percent of GDP in 2019 → about 59 percent of GDP in 2022 → about 61 percent of GDP in 2023. - External and financial pressures - Reserves reached $15.8 billion by end 2023 (3.3 months of prospective imports), below IMF estimated reserve adequacy. - Sovereign exposures at 38 percent of total banks’ assets at end-2022. - Growing public borrowing raises risks to debt sustainability, external viability, and financial stability. ### Ensuring Desired Fiscal Consolidation - Consolidation target and timing - Fiscal convergence towards a deficit of 3 percent of GDP should be achieved by 2025—barring exceptional circumstances. - Exceptions noted: Burkina Faso projected to converge in 2027; Mali projected to converge by 2026 (Mali not in an active IMF-supported program). - Risks of delay - Further delays in fiscal convergence could pose significant debt sustainability risks and further restrain fiscal space. - Policy emphasis - Members’ adjustment plans should emphasize domestic revenue mobilization (DRM) while controlling expenditure, notably the wage bill. ### Domestic Revenue Mobilization and Expenditure Control - Rationale and challenges - DRM is crucial to reverse the persistent increase of debt service to revenue ratio and to finance increased government expenditure since the Covid pandemic (interest spending, wage bill, and capital expenditure). - Limited progress toward the regional revenue goal of 20 percent of GDP. - Wage bill constraint - Wage bill growth needs to be contained to meet the target of 35 percent of tax revenue (as per the expired fiscal rule). - Maintain the definition of the wage bill ceiling as a ratio to tax revenue (not total revenue). - Tax policy reform priorities - Broaden the tax base, including medium-sized firms. - Reduce VAT exemptions (agribusiness, transportation, construction). - Accelerate removal of business tax exemptions. - Streamline personal income tax regime. - Strengthen controls on fiscal evasion. - Rationalize excise taxes. - Simplify personal income tax system and implement a single taxpayer identification number. - Fiscal expenditure snapshot (Text Table 1; percent of GDP) - Total Expenditure: 19.8 ; 23.0 ; 3.2 - Current Expenditure: 12.9 ; 15.1 ; 2.2 - o/w wages: 5.2 ; 5.7 ; 0.6 - o/w interest: 1.2 ; 2.2 ; 0.9 - o/w goods and services: 2.8 ; 2.8 ; 0.1 - Capital Expenditure: 6.7 ; 7.2 ; 0.6 ### Fiscal Rule Design and Debt Ceilings - Reintroduction of regional fiscal rule - Urgent reintroduction of a regional fiscal rule via the Pact with original ceilings recommended. - Recommended ceilings: 3 percent of GDP deficit ceiling and 70 percent of GDP debt ceiling. - Reduce SFAs to a minimum alongside rule reintroduction. - Rationale for 3 percent deficit and 70 percent debt ceilings - Simulations indicate only a 3 percent of GDP deficit target in the absence of SFAs is consistent with debt stabilization and recovery of fiscal buffers. - A 4 percent of GDP ceiling could stabilize debt at a higher level if SFAs were eliminated but would not restore buffers. - A 4 percent of GDP ceiling with SFAs at historical averages would lead to an explosive debt path. - Implications of increasing debt ceiling to 80 percent of GDP - Raising debt limit from 70 percent to 80 percent of GDP could raise interest rates by about 1.2 percentage points on non-concessional debt if it resulted in 10 percent of GDP higher actual debt level in the new steady state. - Based on current debt composition, this could add more than 1 percent of GDP in higher interest payments. - The additional interest expenditure would reduce fiscal space by over 1 percent of GDP, fully offsetting the increase in fiscal space sought via changing deficit ceiling from 3 to 4 percent of GDP. - International experience: most countries set debt limits at or below 70 percent of GDP. - For WAEMU, debt beyond 80 percent of GDP can lead to an unsustainable debt path. ### Debt Dynamics Scenarios and Simulations - Note on baseline and scenarios (Figure 1) - Baseline: teams’ projections with zero SFA—converging to 3 percent of GDP deficit in 2025 for most countries (except BFA and MLI). - Scenario 1: deficit target of 4 percent of GDP converged in 2025 with zero SFA. - Scenario 2: 3 percent of GDP deficit target converged in 2025 with historical SFA (1.5 percent of GDP annually). - Scenario 3: 4 percent of GDP deficit target converged in 2025 with historical SFA. - Illustration of rollover cost impact (Panel 2) - WAEMU is spending 0.9 percent of GDP more on interest in 2023 compared to 2015-2019. - If current debt were fully rolled over at prevailing interest rates, higher interest rates would further increase the debt servicing bill by about 1.5 percent of GDP. ### Supporting Arrangements: Debt Correction Mechanism and Escape Clauses - Debt correction mechanism - A credible, well-defined debt correction mechanism should guide fiscal policy adjustment following breaches of a debt ceiling. - Potential features to consider: - Specify a timeframe for correction (many fiscal rules require corrective action within one to two years; examples vary across countries). - Indicate adjustment measures (some rules prescribe measures such as freezing public wages or cutting spending; others prescribe qualitative actions or leave discretion). - Avoid procyclicality (e.g., tightening expenditure ceilings in recession may be counterproductive). - Escape clauses - Well-defined escape clauses are essential to allow flexibility for managing large exceptional shocks without undermining rule credibility. - Design elements to specify: - Nature and size of triggers: triggers should be based on exogenous, outside-government-control events (severe recessions, major natural disasters, states of emergency, epidemics). For measurable events, clauses can specify minimum changes (example: GDP growth dropping by 2 percentage points below a moving average). - Procedures for activation and monitoring: activation typically requires parliamentary approval and endorsement by an independent fiscal agency; example: European Council invokes general escape clause based on European Commission recommendation. - Procedures for returning to the rule: predefined timeframes to re-instate compliance and/or correct cumulative deviations (examples: Panama requires return within 3 years in equal annual adjustments; Germany requires a plan to reduce extra borrowing “within a reasonable time frame”). - Careful trade-offs: precision of triggers versus uncertainty about shock nature and size; indicators should be measured as percent of GDP or rates, not nominal values; avoid criteria based on gaps between budget projections and past benchmarks. ### Strengthening Communication, Monitoring, and Accountability - Strengthening the role of the WAEMU Commission and communication - An effective communication strategy would help the WAEMU ensure credibility and transparency of the reintroduced fiscal rule. - Revisit and enhance the institutional accountability and enforcement framework by broadening the role of the WAEMU Commission in: - preparing forecasts on fiscal performance, - offering related guidance on appropriate policy actions, - assessing fiscal outcomes, and - effectively enforcing rules. - Ensure adequate perimeter for fiscal indicator definitions - Establishing and implementing a consistent definition of fiscal indicators across the region is crucial. - A consistent definition of the deficit and debt perimeter would: - support equal treatment across countries, and - facilitate the framework’s ability to capture all potential risks to debt creation and sustainability. - Annexes to the main legislation could: - elaborate the parameters of the deficit and debt criteria, and - set a deadline for each member state to adopt a harmonized definition of the public sector deficit and debt. - Compliance with the reporting standard could be a secondary focus of surveillance (potentially similar to the second-tier convergence criteria in the original Pact), alongside the deficit and debt ratios which would remain first-tier criteria. - There should be no carve-out for spending on items like investments or security, as this would undermine the credibility of the targets. ### Conclusions (summarized findings, targets, and policy priorities) - Fiscal consolidation target - Fiscal consolidation to a deficit of 3 percent of GDP should be ensured by 2025 (unless otherwise agreed in the context of an IMF program). - The target for fiscal deficit of 3 percent GDP remains appropriate for preserving debt sustainability, providing credibility to fiscal policy, and anchoring expectations. - Emphasis on revenue and expenditure - Efforts need to emphasize domestic revenue mobilization while controlling expenditure (notably the wage bill). - Containing government expenditure includes bringing the wage bill to the suspended Pact target of 35 percent of tax revenues. - Debt ceiling and buffers - It is essential and urgent to reintroduce regional fiscal rules at the original ceilings—3 percent GDP for deficit and 70 percent GDP for debt. - It is essential to preserve the debt ceiling at 70 percent of GDP to contain further increases in interest spending. - Interest payment as percent of GDP have already increased in recent years (owing to both higher debt and higher interest rates) and would continue to increase if—with the heightened global and regional volatility—market rates may not go back to their historical low levels in the near to medium term. - It is essential to build fiscal buffers to cope with future shocks. - Large increases in indebtedness not only affect debt sustainability, but also regional financing stability and foreign reserves, thus posing risks for external viability. - Addressing drivers of debt accumulation - More emphasis should be put on understanding and addressing the drivers of debt accumulation, notably SFAs. - SFAs have contributed to rising public debt in the last decade, averaging 1.5 percent of GDP. - Regional and national authorities should make every effort to contain and address these extra-budgetary and below the line operations that increase the debt. - Not accounting for these operations would accelerate the rise in debt and may put it on an unsustainable path, especially with the possible occurrence of future shocks. - The initial steps by the WAEMU Commission in this area are welcome, and the efforts should intensify. - Mechanisms for deviations, assessment, accountability, and enforcement - It is critical to introduce broader mechanisms for deviations from the target and correction, as well as for assessment, accountability, and enforcement. - Enhanced support arrangements should include: - a credible debt correction mechanism, - well-designed escape clauses, and - an effective communication strategy. - These elements would ensure appropriate near-term fiscal adjustments following any breach of the fiscal or debt ceilings and avoid uncertainty about when the rule will resume. - It is also important to enhance communication, as well as the institutional accountability and enforcement framework. ### Key Statistics and Figures (preserved exactly as in source) - Regional economic growth averaged 5.9 percent in 2021-2023. - Fiscal deficit path: 2.3 percent of GDP (2019) → 5.5 percent of GDP (2020) → 6.9 percent of GDP (2022). - SFAs averaged 1.5 percent of GDP over the past decade. - Public debt: about 45 percent of GDP (2019) → about 59 percent of GDP (2022) → about 61 percent of GDP (2023). - Reserves: $15.8 billion by end 2023 (3.3 months of prospective imports). - Sovereign exposures: 38 percent of total banks’ assets at end-2022. - Fiscal expenditures (Text Table 1, percent of GDP): Total Expenditure 19.8 ; 23.0 ; 3.2 ; Current Expenditure 12.9 ; 15.1 ; 2.2 ; o/w wages 5.2 ; 5.7 ; 0.6 ; o/w interest 1.2 ; 2.2 ; 0.9 ; o/w goods and services 2.8 ; 2.8 ; 0.1 ; Capital Expenditure 6.7 ; 7.2 ; 0.6. - Interest spending increase: WAEMU is spending 0.9 percent of GDP more on interest in 2023 compared to 2015-2019. - Rollover illustration: fully rolling over current debt at prevailing rates would increase debt servicing bill by about 1.5 percent of GDP. - Empirical sensitivity: an increase in debt of 10 percentage points of GDP leads to an increase in sovereign spreads of 100–120 basis points for typical countries (Hadži-Vaskov and Ricci, 2022). - Potential interest rate impact of higher steady-state debt: about 1.2 percentage points on non-concessional debt if debt rose by 10 percent of GDP; could add more than 1 percent of GDP in higher interest payments. *Source: sipea2024012 - 1. Debt Dynamics; March 1, 2024; International Monetary Fund.* ### 1. Debt Dynamics _________________________________________________________________________ 6 ### 1. Debt Dynamics ### Overview - Regional growth and shocks - Regional economic growth averaged 5.9 percent in 2021-2023. - Growth was largely owing to the service sector. - Fiscal outcomes and stock-flow adjustments (SFAs) - WAEMU fiscal deficit: 2.3 percent of GDP in 2019 → 5.5 percent of GDP in 2020 → peak at 6.9 percent of GDP in 2022. - SFAs averaged 1.5 percent of GDP over the past decade. - Public debt: about 45 percent of GDP in 2019 → about 59 percent of GDP in 2022 → about 61 percent of GDP in 2023. - External and financial pressures - Reserves reached $15.8 billion by end 2023 (3.3 months of prospective imports), below IMF estimated reserve adequacy. - Sovereign exposures at 38 percent of total banks’ assets at end-2022. - Growing public borrowing raises risks to debt sustainability, external viability, and financial stability. ### Ensuring Desired Fiscal Consolidation - Consolidation target and timing - Fiscal convergence towards a deficit of 3 percent of GDP should be achieved by 2025—barring exceptional circumstances. - Exceptions noted: Burkina Faso projected to converge in 2027; Mali projected to converge by 2026 (Mali not in an active IMF-supported program). - Risks of delay - Further delays in fiscal convergence could pose significant debt sustainability risks and further restrain fiscal space. - Policy emphasis - Members’ adjustment plans should emphasize domestic revenue mobilization (DRM) while controlling expenditure, notably the wage bill. ### Domestic Revenue Mobilization and Expenditure Control - Rationale and challenges - DRM is crucial to reverse the persistent increase of debt service to revenue ratio and to finance increased government expenditure since the Covid pandemic (interest spending, wage bill, and capital expenditure). - Limited progress toward the regional revenue goal of 20 percent of GDP. - Wage bill constraint - Wage bill growth needs to be contained to meet the target of 35 percent of tax revenue (as per the expired fiscal rule). - Maintain the definition of the wage bill ceiling as a ratio to tax revenue (not total revenue). - Tax policy reform priorities - Broaden the tax base, including medium-sized firms. - Reduce VAT exemptions (agribusiness, transportation, construction). - Accelerate removal of business tax exemptions. - Streamline personal income tax regime. - Strengthen controls on fiscal evasion. - Rationalize excise taxes. - Simplify personal income tax system and implement a single taxpayer identification number. - Fiscal expenditure snapshot (Text Table 1; percent of GDP) - Total Expenditure: 19.8 (change 2023) ; 23.0 (2015-2019 Avg.) ; 3.2 (change) - Current Expenditure: 12.9 ; 15.1 ; 2.2 - o/w wages: 5.2 ; 5.7 ; 0.6 - o/w interest: 1.2 ; 2.2 ; 0.9 - o/w goods and services: 2.8 ; 2.8 ; 0.1 - Capital Expenditure: 6.7 ; 7.2 ; 0.6 ### Fiscal Rule Design and Debt Ceilings - Reintroduction of regional fiscal rule - Urgent reintroduction of a regional fiscal rule via the Pact with original ceilings recommended. - Recommended ceilings: 3 percent of GDP deficit ceiling and 70 percent of GDP debt ceiling. - Reduce SFAs to a minimum alongside rule reintroduction. - Rationale for 3 percent deficit and 70 percent debt ceilings - Simulations indicate only a 3 percent of GDP deficit target in the absence of SFAs is consistent with debt stabilization and recovery of fiscal buffers. - A 4 percent of GDP ceiling could stabilize debt at a higher level if SFAs were eliminated but would not restore buffers. - A 4 percent of GDP ceiling with SFAs at historical averages would lead to an explosive debt path. - Implications of increasing debt ceiling to 80 percent of GDP - Raising debt limit from 70 percent to 80 percent of GDP could raise interest rates by about 1.2 percentage points on non-concessional debt if it resulted in 10 percent of GDP higher actual debt level in the new steady state. - Based on current debt composition, this could add more than 1 percent of GDP in higher interest payments. - The additional interest expenditure would reduce fiscal space by over 1 percent of GDP, fully offsetting the increase in fiscal space sought via changing deficit ceiling from 3 to 4 percent of GDP. - International experience: most countries set debt limits at or below 70 percent of GDP. - For WAEMU, debt beyond 80 percent of GDP can lead to an unsustainable debt path. ### Debt Dynamics Scenarios and Simulations - Note on baseline and scenarios (Figure 1) - Baseline: teams’ projections with zero SFA—converging to 3 percent of GDP deficit in 2025 for most countries (except BFA and MLI). - Scenario 1: deficit target of 4 percent of GDP converged in 2025 with zero SFA. - Scenario 2: 3 percent of GDP deficit target converged in 2025 with historical SFA (1.5 percent of GDP annually). - Scenario 3: 4 percent of GDP deficit target converged in 2025 with historical SFA. - Illustration of rollover cost impact (Panel 2) - WAEMU is spending 0.9 percent of GDP more on interest in 2023 compared to 2015-2019. - If current debt were fully rolled over at prevailing interest rates, higher interest rates would further increase the debt servicing bill by about 1.5 percent of GDP. ### Supporting Arrangements: Debt Correction Mechanism and Escape Clauses - Debt correction mechanism - A credible, well-defined debt correction mechanism should guide fiscal policy adjustment following breaches of a debt ceiling. - Potential features to consider: - Specify a timeframe for correction (many fiscal rules require corrective action within one to two years; examples vary across countries). - Indicate adjustment measures (some rules prescribe measures such as freezing public wages or cutting spending; others prescribe qualitative actions or leave discretion). - Avoid procyclicality (e.g., tightening expenditure ceilings in recession may be counterproductive). - Escape clauses - Well-defined escape clauses are essential to allow flexibility for managing large exceptional shocks without undermining rule credibility. - Design elements to specify: - Nature and size of triggers: triggers should be based on exogenous, outside-government-control events (severe recessions, major natural disasters, states of emergency, epidemics). For measurable events, clauses can specify minimum changes (example: GDP growth dropping by 2 percentage points below a moving average). - Procedures for activation and monitoring: activation typically requires parliamentary approval and endorsement by an independent fiscal agency; example: European Council invokes general escape clause based on European Commission recommendation. - Procedures for returning to the rule: predefined timeframes to re-instate compliance and/or correct cumulative deviations (examples: Panama requires return within 3 years in equal annual adjustments; Germany requires a plan to reduce extra borrowing “within a reasonable time frame”). - Careful trade-offs: precision of triggers versus uncertainty about shock nature and size; indicators should be measured as percent of GDP or rates, not nominal values; avoid criteria based on gaps between budget projections and past benchmarks. ### Key Statistics and Figures (preserved exactly as in source) - Regional economic growth averaged 5.9 percent in 2021-2023. - Fiscal deficit path: 2.3 percent of GDP (2019) → 5.5 percent of GDP (2020) → 6.9 percent of GDP (2022). - SFAs averaged 1.5 percent of GDP over the past decade. - Public debt: about 45 percent of GDP (2019) → about 59 percent of GDP (2022) → about 61 percent of GDP (2023). - Reserves: $15.8 billion by end 2023 (3.3 months of prospective imports). - Sovereign exposures: 38 percent of total banks’ assets at end-2022. - Fiscal expenditures (Text Table 1, percent of GDP): Total Expenditure 19.8 ; 23.0 ; 3.2 ; Current Expenditure 12.9 ; 15.1 ; 2.2 ; o/w wages 5.2 ; 5.7 ; 0.6 ; o/w interest 1.2 ; 2.2 ; 0.9 ; o/w goods and services 2.8 ; 2.8 ; 0.1 ; Capital Expenditure 6.7 ; 7.2 ; 0.6. - Interest spending increase: WAEMU is spending 0.9 percent of GDP more on interest in 2023 compared to 2015-2019. - Rollover illustration: fully rolling over current debt at prevailing rates would increase debt servicing bill by about 1.5 percent of GDP. - Empirical sensitivity: an increase in debt of 10 percentage points of GDP leads to an increase in sovereign spreads of 100–120 basis points for typical countries (Hadži-Vaskov and Ricci, 2022). - Potential interest rate impact of higher steady-state debt: about 1.2 percentage points on non-concessional debt if debt rose by 10 percent of GDP; could add more than 1 percent of GDP in higher interest payments. *Source: sipea2024012 - 1. Debt Dynamics; March 1, 2024; International Monetary Fund.* ### 15. Enhancing communication, monitoring, and accountability is also essential, including ### 15. Enhancing communication, monitoring, and accountability is also essential, including ### Strengthening the role of the WAEMU Commission and communication - An effective communication strategy would help the WAEMU ensure credibility and transparency of the reintroduced fiscal rule. - Revisit and enhance the institutional accountability and enforcement framework by broadening the role of the WAEMU Commission in: - preparing forecasts on fiscal performance, - offering related guidance on appropriate policy actions, - assessing fiscal outcomes, and - effectively enforcing rules. ### Ensure adequate perimeter for fiscal indicator definitions - Establishing and implementing a consistent definition of fiscal indicators across the region is crucial. - A consistent definition of the deficit and debt perimeter would: - support equal treatment across countries, and - facilitate the framework’s ability to capture all potential risks to debt creation and sustainability. - Annexes to the main legislation could: - elaborate the parameters of the deficit and debt criteria, and - set a deadline for each member state to adopt a harmonized definition of the public sector deficit and debt. - Compliance with the reporting standard could be a secondary focus of surveillance (potentially similar to the second-tier convergence criteria in the original Pact), alongside the deficit and debt ratios which would remain first-tier criteria. - There should be no carve-out for spending on items like investments or security, as this would undermine the credibility of the targets. ### Conclusions (summarized findings, targets, and policy priorities) - Fiscal consolidation target: - Fiscal consolidation to a deficit of 3 percent of GDP should be ensured by 2025 (unless otherwise agreed in the context of an IMF program). - The target for fiscal deficit of 3 percent GDP remains appropriate for preserving debt sustainability, providing credibility to fiscal policy, and anchoring expectations. - Emphasis on revenue and expenditure: - Efforts need to emphasize domestic revenue mobilization while controlling expenditure (notably the wage bill). - Containing government expenditure includes bringing the wage bill to the suspended Pact target of 35 percent of tax revenues. - Debt ceiling and buffers: - It is essential and urgent to reintroduce regional fiscal rules at the original ceilings—3 percent GDP for deficit and 70 percent GDP for debt. - It is essential to preserve the debt ceiling at 70 percent of GDP to contain further increases in interest spending. - Interest payment as percent of GDP have already increased in recent years (owing to both higher debt and higher interest rates) and would continue to increase if—with the heightened global and regional volatility—market rates may not go back to their historical low levels in the near to medium term. - It is essential to build fiscal buffers to cope with future shocks. - Large increases in indebtedness not only affect debt sustainability, but also regional financing stability and foreign reserves, thus posing risks for external viability. - Addressing drivers of debt accumulation: - More emphasis should be put on understanding and addressing the drivers of debt accumulation, notably SFAs. - SFAs have contributed to rising public debt in the last decade, averaging 1.5 percent of GDP. - Regional and national authorities should make every effort to contain and address these extra-budgetary and below the line operations that increase the debt. - Not accounting for these operations would accelerate the rise in debt and may put it on an unsustainable path, especially with the possible occurrence of future shocks. - The initial steps by the WAEMU Commission in this area are welcome, and the efforts should intensify. - Mechanisms for deviations, assessment, accountability, and enforcement: - It is critical to introduce broader mechanisms for deviations from the target and correction, as well as for assessment, accountability, and enforcement. - Enhanced support arrangements should include: - a credible debt correction mechanism, - well-designed escape clauses, and - an effective communication strategy. - These elements would ensure appropriate near-term fiscal adjustments following any breach of the fiscal or debt ceilings and avoid uncertainty about when the rule will resume. - It is also important to enhance communication, as well as the institutional accountability and enforcement framework. *Source: WEST AFRICAN ECONOMIC AND MONETARY UNION — INTERNATIONAL MONETARY FUND (excerpt).* --- _Source: https://www.imf.org/-/media/files/publications/selected-issues-papers/2024/english/sipea2024012.pdf_