## _howtonote1601 - Annex 2 of IMF 2016b elaborates on some of these trade-offs.

## Source details

**Canonical URL:** [_howtonote1601 - Annex 2 of IMF 2016b elaborates on some of these trade-offs.](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/howtonotes/2016/_howtonote1601.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/howtonotes/2016/_howtonote1601.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/howtonotes/2016/_howtonote1601.pdf.json)

---

### Expenditure arrears and PFM weaknesses
- Expenditure arrears can result from failures at any or all stages of the PFM cycle, including:
  - inadequate legal frameworks,
  - unrealistic budgeting,
  - lack of or problems with a financial management information system,
  - gaps in fiscal reporting.
- A liquidation strategy should:
  - communicate the government’s plan, timetable, and criteria for the liquidation of arrears,
  - apply to all outstanding payments incurred by all parts of the public sector (including state-owned enterprises),
  - include measures to avoid the accumulation of new arrears.

### Macroeconomic framework choices and buffers
- For highly undiversified countries, preserving a peg can provide an anchor only if:
  - large financial buffers exist and/or
  - credible fiscal adjustments are possible in the face of persistent shocks (IMF 2016b; Husain and others 2015).
- Large swings in commodity prices can lead to deteriorations in household and corporate balance sheets with negative spillovers into the finance and banking sectors, potentially affecting the fiscal adjustment.
- Appropriately coordinated macro-financial policies can help mitigate financial sector vulnerabilities and their fiscal consequences.
- When monetary and fiscal policies are well coordinated, a credible fiscal adjustment may allow monetary easing to support economic activity.
- Countries should avoid monetization of the fiscal deficit.

### Protecting non-resource sector growth and competitiveness
- Limiting negative impact of fiscal adjustment on non-resource sector growth and competitiveness is important; design of adjustment and structural reforms can help protect and promote diversification.
- Growth-friendly measures:
  - Avoid measures that negatively impact the business environment (e.g., distortionary fees).
  - Contain or reduce real public wages where they tend to be high, especially if public sector wages are a reference for private sector wage setting (IMF 2016c).
- Structural reforms:
  - Promote a larger and more competitive non-resource tradable sector.
  - Improve the business environment by enhancing institutional quality and governance (IMF 2015a).
  - Increase labor market flexibility, labor force participation, and internal competition.
  - Consider fiscal reforms to promote growth (e.g., well-targeted R&D tax incentives; see IMF 2015c).
- Strengthen safety nets:
  - Targeted cash transfers to compensate only lower-income groups,
  - Targeted and productive public spending to build physical and human capital,
  - Expand existing programs that can be scaled quickly (e.g., school meals, public works, reduction in education and health care user fees).

### Composition of the fiscal adjustment
- Different adjustment strategies are feasible depending on desired size of adjustment and country circumstances.
- Key approaches:
  - Careful review of size and efficiency of all spending components; public expenditures may account for more than two-thirds of the non-resource economy in some countries.
  - Fiscal adjustments can involve major rethinking of the size and functions of the state.
  - Revenue-enhancing adjustments: many resource-rich countries have low non-commodity revenues due to absence of taxes in some cases and low collection efforts.

### Expenditure policy and public investment
- Public investment tends to scale up during booms and can reach levels above other countries.
- Evidence suggests large scaling up often involved poor-quality projects and low efficiency with little impact on growth (IMF 2015a).
- Cuts in public investment could be appropriate and may have limited impact on domestic activity if efficiency is low and import components are large.
- Priority should be given to efficient investment projects and avoid cutting investments with large positive impact on growth or significant social benefits.
- Improving public investment management can close up to two-thirds of the efficiency gap (Gupta and others 2014; Dabla-Norris and others 2011; Albino‑War and others 2014).
- The IMF’s Fiscal Affairs Department has developed the Public Investment Management Assessment (PIMA).
- Short-run current expenditure cuts should focus on larger spending items; across-the-board cuts should be avoided (IMF 2014).
- Typical short-term measures on wage bill:
  - freeze on wages,
  - streamlining of bonuses and allowances,
  - partial or selective hiring freezes.
- Longer-term reforms require expenditure reviews and institutional reforms, including:
  - functional reviews of government departments,
  - strengthening wage and employment management (IMF 2016c),
  - human resource management improvements, censuses of government employees, public sector restructuring, outsourcing non-core functions.
- Reform of domestic energy pricing:
  - Resource-rich countries tend to have the largest energy subsidies—amounting to 10–50 percent of budgetary expenses in oil exporters during the recent boom (IMF 2015a).
  - Key elements of reform: communication campaign; phased and gradual price increases; well-designed mitigation measures for households and firms; measures to improve SOE efficiency and service delivery; introduction of an automatic pricing formula to reduce chances of reform reversal.
  - Savings from subsidy reform should be used to build fiscal buffers or spending in other priority areas.

### Non-resource revenues and tax system reform
- Increasing non-resource revenues is critical to lowering budget vulnerability to commodity prices and improving equity and accountability.
- Building better tax systems requires time and investment in tax administrations and taxpayer education (example: planned VAT introduction in the Gulf Cooperation Council likely to take about two years).
- A well-designed tax system relies on a limited number of broad-based taxes:
  - Scope for boosting revenues from goods and services: resource-rich countries tend to collect only about half of what other countries do; establishing a broad-based VAT could lead to substantial revenue mobilization.
  - Consider rationalizing exemptions, broadening the base, reviewing registration thresholds, and raising rates.
  - Complement with selective excise taxes (e.g., tobacco, alcohol, soft drinks).
  - Expand direct taxes (income and property); reduce tax exemptions, lower income thresholds, streamline allowances, and adopt progressive tax rate structures where appropriate.
  - On corporate taxes: protect the tax base by eliminating tax holidays and streamlining deductions and allowances; consider taxing capital gains attributable to immovable property located in the country.
  - Improve tax and customs administration: compliance, staff skills and productivity, reduce overall costs, and develop effective IT systems.
- Avoid excessive dependence on fees:
  - In 2012, fees and stamps represented about 10 percent of total revenues raised by MENA oil exporters (Mansour 2015).
  - Fees are distortionary, have limited revenue potential, increase budgetary rigidities, reduce transparency, and undermine the business environment.

### Privatization
- Privatization of SOEs can provide up-front resources and remove persistent drains on the budget in cases where SOEs are loss-making.
- Long-term revenue impacts are ambiguous: if SOEs paid dividends, revenues may fall unless offset by higher corporate income taxes.
- Privatizations may serve other objectives (diversification, productivity) but can have short-term adverse impacts such as job losses, wage cuts, and higher consumer prices; appropriate safety nets should accompany reforms.

### Strengthening fiscal frameworks and precautionary savings
- A well-designed fiscal framework that accounts for large uncertainty can improve fiscal management and intergenerational equity.
- Commodity revenue uncertainty implies a need for prudent policies and larger precautionary savings than in other countries (October 2015 Fiscal Monitor, IMF 2015a).
- Running overall fiscal surpluses during commodity booms is an important countercyclical tool and can help prevent “Dutch disease” effects.
- Approaches to estimate precautionary savings include:
  - Reducing gross debt during windfalls to shield the budget by borrowing when prices fall (may be costly and insufficient for long shocks).
  - Adopting “conservative” commodity price assumptions in the annual budget or using averages of past and/or projections of future prices.
  - Using a value-at-risk approach: stabilization buffers based on assessed volatility of commodity prices (IMF 2012); traditionally focuses on self-insurance for a limited number of years.
- Recent turbulence highlights benefits of precautionary buffers accounting for long-term uncertainty; many resource-rich countries have limited buffers, with Norway an exception that has delinked annual budgets from commodity prices.
- Buffer design considerations:
  - Accumulate financial buffers during booms so returns protect the budget from most shocks,
  - Partially deplete buffer in response to extreme shocks to allow gradual adjustment,
  - Buffer size depends on dependence on resource revenues and degree of risk aversion (IMF 2015a).

### Fiscal policy, structural reforms, and diversification
- Fiscal policy, structural reforms, and economic diversification can help contain impacts of commodity price cycles.
- Reforms improving public financial management, a diversified economy, and a broader tax base reduce reliance on volatile resource-sector revenues.
- Fiscal regimes for extractive industries should balance limiting revenue volatility and ensuring an appropriate government share.
- Transparency across the policy framework improves adherence.
- In countries where the resource sector dominates fiscal revenues (Equatorial Guinea, Azerbaijan, Kuwait, Qatar, Saudi Arabia), mitigating revenue volatility necessarily implies focusing on non-resource sector development—a long and difficult process (Callen and others 2014).

### Annex — Chilean experience (1982–1988)
- Context and macro outcome:
  - Sharp drop in world copper prices, rising interest rates, and significant real appreciation of the peso led to a massive recession.
  - Economic growth: from 5.3 percent in 1981 to –14 percent in 1982.
  - Fiscal balance: surplus of 5.5 percent of GDP in 1982 turned to a deficit of 3.4 percent in 1982 as revenues collapsed.
  - Unemployment: from 8.5 percent in 1981 to 24 percent by the end of 1982.
  - Exchange rate peg abandoned; capital outflow controls imposed as international reserves were depleted.
  - Private sector balance sheets deteriorated due to heavy external indebtedness; the financial system became highly vulnerable.
- Key objectives: preserve competitiveness; fiscal adjustment supported by two consecutive IMF programs.
- Fiscal adjustment measures:
  - Tax measures:
    - increased taxes on tobacco products,
    - temporary surcharges on personal income and real estate,
    - introduced a gambling tax,
    - raised the automobile road tax by 60 percent for one year,
    - temporarily increased import tariffs (reversed in 1985 to preserve competitiveness and contain inflation),
    - broadened VAT coverage, increased rate of taxes on luxury goods and property,
    - 1986 income tax reform: lowered tax rates for enterprises and individuals and provided tax benefits for reinvestment of earnings.
  - Spending measures:
    - reduced current expenditures, especially the wage bill,
    - 1982: wage indexation of public and private wages abolished and wage floor for collective bargaining lowered,
    - salaries of higher-paid public sector employees cut by 10 percent,
    - wage increases in public sector kept below inflation throughout adjustment,
    - public current expenditures declined from around 32 percent of GDP in 1982 to 26 percent in 1987.
  - Structural reforms:
    - reduce size of the state and liberalize the economy,
    - strengthen the tax system,
    - safeguard the financial system,
    - privatization of the social security system and several public enterprises,
    - progressive liberalization of exchange and trade system,
    - adoption of a liberal foreign investment code,
    - simplification of personal and income taxes,
    - recapitalization of financial institutions.
- The successful large fiscal adjustment was supported by strengthening fiscal institutions.

### Fiscal consolidation and recovery (Chile example excerpt)
- Fiscal balance moved from "3.4 percent of GDP in 1982" to "a surplus of 1.1 percent of GDP in 1988."
- Real GDP:
  - Recovered in 1984 with an annual growth of "6.3 percent."
  - Climbed to "7.4 percent" by 1988.
- Fiscal framework improvements included:
  - Introduction of a resource fund.
  - Introduction of a structural fiscal balance rule.
  - Buildup of precautionary savings.
- Policy outcome: Enabled authorities to implement countercyclical fiscal policies during commodity price shocks and smoothed economic growth.

### Nigerian adjustment (1982–1990): from trade restrictions to economic liberalization
- External shock and immediate effects:
  - Significant drop in oil prices in 1981–82.
  - Export volumes declined "by more than 25 percent."
  - Current account balance deteriorated from "a surplus of about 5 percent of GDP in 1980" to "a deficit of about 10 percent in 1982."
  - International reserves were reduced to very low levels by 1982.
- Initial policy response (1982–86): trade restrictions and fiscal/administrative measures
  - Trade measures:
    - Large increases in tariffs.
    - Reintroduction of an advance import deposit scheme (to "as much 250 percent for luxury goods").
    - Broadened import licensing/prohibition coverage and tightened administrative import controls.
    - Tightened capital controls.
  - Spending cuts:
    - Capital expenditures fell to "41 percent in 1983, from 62 percent of the federal government expenditures in 1981–82" and were "further reduced by half in 1984."
    - Current expenditures continued to grow due to large interest payments, increased transfers to state governments, and subventions to SOEs and public entities.
  - Fiscal outcomes:
    - Fiscal discipline eroded; federal government overall fiscal deficit averaged "6.5 percent of GDP from 1982 to 1985."
    - Fiscal deficit largely financed by the domestic banking system → rapid growth of net domestic assets of domestic banks and inflationary pressures.
    - Nominal exchange rate relatively constant (policy of gradual depreciation of the naira against a basket of seven currencies) but real effective exchange rate increased.
    - Production weakened; "Real GDP decreased on average by 3.7 percent per year from 1982 to 1985."
- Structural adjustment (1986–90): liberalization and reform
  - Exchange rate: Adopted a market-determined exchange rate system via a Second-Tier Foreign Exchange Market; initial dual rates unified over time.
  - Trade: Eliminated import licensing, export duties and most export licenses; abolished most price controls.
  - Fiscal and structural reforms:
    - Policies to improve allocation of public expenditure.
    - Rationalization of states’ fiscal positions.
    - Size of public sector reduced via commercialization and privatization of several SOEs.
  - Transitional effects and outcomes:
    - Large depreciation increased oil revenue in domestic currency but raised external public debt to "more than 100 percent of GDP in 1986," sharply increasing external debt service.
    - Depreciation and a more relaxed fiscal stance in 1987–88 led to macro pressures: overall fiscal deficit reached "13.5 percent of GDP in 1988" and inflation averaged "37 percent per year between 1987 and 1989."
    - Economic performance improved 1988–1990 with average real GDP growth of "8.4 percent per year."
    - Authorities reduced the fiscal deficit to "2.9 percent of GDP in 1990."
  - Longer-run note: Fiscal policy remained procyclical during the 1990s and most of the 2000s, leaving limited buffers for later commodity price drops.

### Canada: taming the deficits and reducing debt
- Initial conditions (early 1990s):
  - Overall deficit higher than "5 percent of GDP in 1992 and 1993."
  - Interest bill nearly "30 percent of expenditures."
  - Debt was "65 percent of GDP."
- 1994 budget consolidation targets and measures:
  - Targeted a "3½ percent of GDP" reduction in the overall deficit for 1993/94–1995/96.
    - "0.4 percentage point of GDP" from tax increases.
    - "3 percentage points" from expenditure reductions.
  - Tax measures: higher excises and corporate income tax rates, broadening of personal and corporate income tax bases.
  - Expenditure cuts: wages, employment, unemployment insurance, agricultural and business subsidies; public service reduced by "nearly 45,000 positions over a two-year period."
  - Institutional features: medium-term target (interim target overall deficit of "3 percent of GDP in three years" and balanced budget within five years), contingency reserve, semi-annual parliamentary briefings.
- Outcomes (1993–2002):
  - General government primary balance improved by "10 percentage points of GDP" over 1993–2000.
  - General government maintained a surplus through 2002, "8.5 percentage points above the initial 1993 position."
  - Debt reduced from "100 percent to 61 percent of GDP."

### Malaysia 1985–1990: revitalization of the private sector
- Early-1980s context:
  - Large deficits in early 1980s pushed to "17 percent of GDP by 1982."
  - By 1985 government debt had doubled, reaching "83 percent of GDP" with SOEs accounting for "25 percent of GDP."
- Reform package under Fifth Malaysia Plan (1986–90):
  - Spending reforms: freeze on public employment, deferral of wage adjustments, rationalization of non-essential capital expenditures.
  - Institutional changes: improved strategic prioritization and devolution to line ministries.
  - Tax and investment policy: abolished excess profit tax, dismantled import duties on protected manufacturing sectors, reduced corporate tax rates, created tax holidays and targeted allowances.
  - Revenue measures: widened the sales tax base and improved revenue administration to offset revenue losses.
  - Privatization and liberalization: SOEs restructured or liquidated; proceeds earmarked to pay down debt; new laws liberalized regulatory framework and relaxed foreign investment rules.
- Outcomes:
  - Government expenditure fell "by 9 percentage points of GDP" between 1986 and 1990 ("7 percentage points of which were current expenditures").
  - Private investment increased to "32 percent of GDP from 14 percent."
  - Growth averaged "around 8 percent of GDP" from 1986 to 1997.
  - Real per capita income nearly doubled.
  - Poverty declined from "19 percent to 6 percent."

*Source: IMF Fiscal Affairs Department — How to Adjust to a Large Fall in Commodity Prices (September 2016), Annex 2 content as provided.*

### Annex 2 of IMF 2016b elaborates on some of these trade-offs.

### _howtonote1601 - Annex 2 of IMF 2016b elaborates on some of these trade-offs.

### Expenditure arrears and PFM weaknesses
- Expenditure arrears can result from failures at any or all stages of the PFM cycle, including:
  - inadequate legal frameworks,
  - unrealistic budgeting,
  - lack of or problems with a financial management information system,
  - gaps in fiscal reporting.
- A liquidation strategy should:
  - communicate the government’s plan, timetable, and criteria for the liquidation of arrears,
  - apply to all outstanding payments incurred by all parts of the public sector (including state-owned enterprises),
  - include measures to avoid the accumulation of new arrears.

### Macroeconomic framework choices and buffers
- For highly undiversified countries, preserving a peg can provide an anchor only if:
  - large financial buffers exist and/or
  - credible fiscal adjustments are possible in the face of persistent shocks (IMF 2016b; Husain and others 2015).
- Large swings in commodity prices can lead to deteriorations in household and corporate balance sheets with negative spillovers into the finance and banking sectors, potentially affecting the fiscal adjustment.
- Appropriately coordinated macro-financial policies can help mitigate financial sector vulnerabilities and their fiscal consequences.
- When monetary and fiscal policies are well coordinated, a credible fiscal adjustment may allow monetary easing to support economic activity.
- Countries should avoid monetization of the fiscal deficit.

### Protecting non-resource sector growth and competitiveness
- Limiting negative impact of fiscal adjustment on non-resource sector growth and competitiveness is important; design of adjustment and structural reforms can help protect and promote diversification.
- Growth-friendly measures:
  - Avoid measures that negatively impact the business environment (e.g., distortionary fees).
  - Contain or reduce real public wages where they tend to be high, especially if public sector wages are a reference for private sector wage setting (IMF 2016c).
- Structural reforms:
  - Promote a larger and more competitive non-resource tradable sector.
  - Improve the business environment by enhancing institutional quality and governance (IMF 2015a).
  - Increase labor market flexibility, labor force participation, and internal competition.
  - Consider fiscal reforms to promote growth (e.g., well-targeted R&D tax incentives; see IMF 2015c).
- Strengthen safety nets:
  - Targeted cash transfers to compensate only lower-income groups,
  - Targeted and productive public spending to build physical and human capital,
  - Expand existing programs that can be scaled quickly (e.g., school meals, public works, reduction in education and health care user fees).

### Composition of the fiscal adjustment
- Different adjustment strategies are feasible depending on desired size of adjustment and country circumstances.
- Key approaches:
  - Careful review of size and efficiency of all spending components; public expenditures may account for more than two-thirds of the non-resource economy in some countries.
  - Fiscal adjustments can involve major rethinking of the size and functions of the state.
  - Revenue-enhancing adjustments: many resource-rich countries have low non-commodity revenues due to absence of taxes in some cases and low collection efforts.

### Expenditure policy and public investment
- Public investment tends to scale up during booms and can reach levels above other countries.
- Evidence suggests large scaling up often involved poor-quality projects and low efficiency with little impact on growth (IMF 2015a).
- Cuts in public investment could be appropriate and may have limited impact on domestic activity if efficiency is low and import components are large.
- Priority should be given to efficient investment projects and avoid cutting investments with large positive impact on growth or significant social benefits.
- Improving public investment management can close up to two-thirds of the efficiency gap (Gupta and others 2014; Dabla-Norris and others 2011; Albino‑War and others 2014).
- The IMF’s Fiscal Affairs Department has developed the Public Investment Management Assessment (PIMA).
- Short-run current expenditure cuts should focus on larger spending items; across-the-board cuts should be avoided (IMF 2014).
- Typical short-term measures on wage bill:
  - freeze on wages,
  - streamlining of bonuses and allowances,
  - partial or selective hiring freezes.
- Longer-term reforms require expenditure reviews and institutional reforms, including:
  - functional reviews of government departments,
  - strengthening wage and employment management (IMF 2016c),
  - human resource management improvements, censuses of government employees, public sector restructuring, outsourcing non-core functions.
- Reform of domestic energy pricing:
  - Resource-rich countries tend to have the largest energy subsidies—amounting to 10–50 percent of budgetary expenses in oil exporters during the recent boom (IMF 2015a).
  - Key elements of reform: communication campaign; phased and gradual price increases; well-designed mitigation measures for households and firms; measures to improve SOE efficiency and service delivery; introduction of an automatic pricing formula to reduce chances of reform reversal.
  - Savings from subsidy reform should be used to build fiscal buffers or spending in other priority areas.

### Non-resource revenues and tax system reform
- Increasing non-resource revenues is critical to lowering budget vulnerability to commodity prices and improving equity and accountability.
- Building better tax systems requires time and investment in tax administrations and taxpayer education (example: planned VAT introduction in the Gulf Cooperation Council likely to take about two years).
- A well-designed tax system relies on a limited number of broad-based taxes:
  - Scope for boosting revenues from goods and services: resource-rich countries tend to collect only about half of what other countries do; establishing a broad-based VAT could lead to substantial revenue mobilization.
  - Consider rationalizing exemptions, broadening the base, reviewing registration thresholds, and raising rates.
  - Complement with selective excise taxes (e.g., tobacco, alcohol, soft drinks).
  - Expand direct taxes (income and property); reduce tax exemptions, lower income thresholds, streamline allowances, and adopt progressive tax rate structures where appropriate.
  - On corporate taxes: protect the tax base by eliminating tax holidays and streamlining deductions and allowances; consider taxing capital gains attributable to immovable property located in the country.
  - Improve tax and customs administration: compliance, staff skills and productivity, reduce overall costs, and develop effective IT systems.
- Avoid excessive dependence on fees:
  - In 2012, fees and stamps represented about 10 percent of total revenues raised by MENA oil exporters (Mansour 2015).
  - Fees are distortionary, have limited revenue potential, increase budgetary rigidities, reduce transparency, and undermine the business environment.

### Privatization
- Privatization of SOEs can provide up-front resources and remove persistent drains on the budget in cases where SOEs are loss-making.
- Long-term revenue impacts are ambiguous: if SOEs paid dividends, revenues may fall unless offset by higher corporate income taxes.
- Privatizations may serve other objectives (diversification, productivity) but can have short-term adverse impacts such as job losses, wage cuts, and higher consumer prices; appropriate safety nets should accompany reforms.

### Strengthening fiscal frameworks and precautionary savings
- A well-designed fiscal framework that accounts for large uncertainty can improve fiscal management and intergenerational equity.
- Commodity revenue uncertainty implies a need for prudent policies and larger precautionary savings than in other countries (October 2015 Fiscal Monitor, IMF 2015a).
- Running overall fiscal surpluses during commodity booms is an important countercyclical tool and can help prevent “Dutch disease” effects.
- Approaches to estimate precautionary savings include:
  - Reducing gross debt during windfalls to shield the budget by borrowing when prices fall (may be costly and insufficient for long shocks).
  - Adopting “conservative” commodity price assumptions in the annual budget or using averages of past and/or projections of future prices.
  - Using a value-at-risk approach: stabilization buffers based on assessed volatility of commodity prices (IMF 2012); traditionally focuses on self-insurance for a limited number of years.
- Recent turbulence highlights benefits of precautionary buffers accounting for long-term uncertainty; many resource-rich countries have limited buffers, with Norway an exception that has delinked annual budgets from commodity prices.
- Buffer design considerations:
  - Accumulate financial buffers during booms so returns protect the budget from most shocks,
  - Partially deplete buffer in response to extreme shocks to allow gradual adjustment,
  - Buffer size depends on dependence on resource revenues and degree of risk aversion (IMF 2015a).

### Fiscal policy, structural reforms, and diversification
- Fiscal policy, structural reforms, and economic diversification can help contain impacts of commodity price cycles.
- Reforms improving public financial management, a diversified economy, and a broader tax base reduce reliance on volatile resource-sector revenues.
- Fiscal regimes for extractive industries should balance limiting revenue volatility and ensuring an appropriate government share.
- Transparency across the policy framework improves adherence.
- In countries where the resource sector dominates fiscal revenues (Equatorial Guinea, Azerbaijan, Kuwait, Qatar, Saudi Arabia), mitigating revenue volatility necessarily implies focusing on non-resource sector development—a long and difficult process (Callen and others 2014).

### Annex — Chilean experience (1982–1988)
- Context and macro outcome:
  - Sharp drop in world copper prices, rising interest rates, and significant real appreciation of the peso led to a massive recession.
  - Economic growth: from 5.3 percent in 1981 to –14 percent in 1982.
  - Fiscal balance: surplus of 5.5 percent of GDP in 1982 turned to a deficit of 3.4 percent in 1982 as revenues collapsed.
  - Unemployment: from 8.5 percent in 1981 to 24 percent by the end of 1982.
  - Exchange rate peg abandoned; capital outflow controls imposed as international reserves were depleted.
  - Private sector balance sheets deteriorated due to heavy external indebtedness; the financial system became highly vulnerable.
- Key objectives: preserve competitiveness; fiscal adjustment supported by two consecutive IMF programs.
- Fiscal adjustment measures:
  - Tax measures:
    - increased taxes on tobacco products,
    - temporary surcharges on personal income and real estate,
    - introduced a gambling tax,
    - raised the automobile road tax by 60 percent for one year,
    - temporarily increased import tariffs (reversed in 1985 to preserve competitiveness and contain inflation),
    - broadened VAT coverage, increased rate of taxes on luxury goods and property,
    - 1986 income tax reform: lowered tax rates for enterprises and individuals and provided tax benefits for reinvestment of earnings.
  - Spending measures:
    - reduced current expenditures, especially the wage bill,
    - 1982: wage indexation of public and private wages abolished and wage floor for collective bargaining lowered,
    - salaries of higher-paid public sector employees cut by 10 percent,
    - wage increases in public sector kept below inflation throughout adjustment,
    - public current expenditures declined from around 32 percent of GDP in 1982 to 26 percent in 1987.
  - Structural reforms:
    - reduce size of the state and liberalize the economy,
    - strengthen the tax system,
    - safeguard the financial system,
    - privatization of the social security system and several public enterprises,
    - progressive liberalization of exchange and trade system,
    - adoption of a liberal foreign investment code,
    - simplification of personal and income taxes,
    - recapitalization of financial institutions.
- The successful large fiscal adjustment was supported by strengthening fiscal institutions.

*Source: IMF Fiscal Affairs Department — How to Adjust to a Large Fall in Commodity Prices (September 2016), Annex 2 content as provided.*

### 3.4 percent of GDP in 1982 turned to a surplus of 1.1

### _howtonote1601 - 3.4 percent of GDP in 1982 turned to a surplus of 1.1

### Fiscal consolidation and recovery (Chile example excerpt)
- Fiscal balance moved from "3.4 percent of GDP in 1982" to "a surplus of 1.1 percent of GDP in 1988."
- Real GDP:
  - Recovered in 1984 with an annual growth of "6.3 percent."
  - Climbed to "7.4 percent" by 1988.
- Fiscal framework improvements included:
  - Introduction of a resource fund.
  - Introduction of a structural fiscal balance rule.
  - Buildup of precautionary savings.
- Policy outcome: Enabled authorities to implement countercyclical fiscal policies during commodity price shocks and smoothed economic growth.

### Nigerian adjustment (1982–1990): from trade restrictions to economic liberalization
- External shock and immediate effects:
  - Significant drop in oil prices in 1981–82.
  - Export volumes declined "by more than 25 percent."
  - Current account balance deteriorated from "a surplus of about 5 percent of GDP in 1980" to "a deficit of about 10 percent in 1982."
  - International reserves were reduced to very low levels by 1982.
- Initial policy response (1982–86): trade restrictions and fiscal/administrative measures
  - Trade measures:
    - Large increases in tariffs.
    - Reintroduction of an advance import deposit scheme (to "as much 250 percent for luxury goods").
    - Broadened import licensing/prohibition coverage and tightened administrative import controls.
    - Tightened capital controls.
  - Spending cuts:
    - Capital expenditures fell to "41 percent in 1983, from 62 percent of the federal government expenditures in 1981–82" and were "further reduced by half in 1984."
    - Current expenditures continued to grow due to large interest payments, increased transfers to state governments, and subventions to SOEs and public entities.
  - Fiscal outcomes:
    - Fiscal discipline eroded; federal government overall fiscal deficit averaged "6.5 percent of GDP from 1982 to 1985."
    - Fiscal deficit largely financed by the domestic banking system → rapid growth of net domestic assets of domestic banks and inflationary pressures.
    - Nominal exchange rate relatively constant (policy of gradual depreciation of the naira against a basket of seven currencies) but real effective exchange rate increased.
    - Production weakened; "Real GDP decreased on average by 3.7 percent per year from 1982 to 1985."
- Structural adjustment (1986–90): liberalization and reform
  - Exchange rate: Adopted a market-determined exchange rate system via a Second-Tier Foreign Exchange Market; initial dual rates unified over time.
  - Trade: Eliminated import licensing, export duties and most export licenses; abolished most price controls.
  - Fiscal and structural reforms:
    - Policies to improve allocation of public expenditure.
    - Rationalization of states’ fiscal positions.
    - Size of public sector reduced via commercialization and privatization of several SOEs.
  - Transitional effects and outcomes:
    - Large depreciation increased oil revenue in domestic currency but raised external public debt to "more than 100 percent of GDP in 1986," sharply increasing external debt service.
    - Depreciation and a more relaxed fiscal stance in 1987–88 led to macro pressures: overall fiscal deficit reached "13.5 percent of GDP in 1988" and inflation averaged "37 percent per year between 1987 and 1989."
    - Economic performance improved 1988–1990 with average real GDP growth of "8.4 percent per year."
    - Authorities reduced the fiscal deficit to "2.9 percent of GDP in 1990."
  - Longer-run note: Fiscal policy remained procyclical during the 1990s and most of the 2000s, leaving limited buffers for later commodity price drops.

### Canada: taming the deficits and reducing debt
- Initial conditions (early 1990s):
  - Overall deficit higher than "5 percent of GDP in 1992 and 1993."
  - Interest bill nearly "30 percent of expenditures."
  - Debt was "65 percent of GDP."
- 1994 budget consolidation targets and measures:
  - Targeted a "3½ percent of GDP" reduction in the overall deficit for 1993/94–1995/96.
    - "0.4 percentage point of GDP" from tax increases.
    - "3 percentage points" from expenditure reductions.
  - Tax measures: higher excises and corporate income tax rates, broadening of personal and corporate income tax bases.
  - Expenditure cuts: wages, employment, unemployment insurance, agricultural and business subsidies; public service reduced by "nearly 45,000 positions over a two-year period."
  - Institutional features: medium-term target (interim target overall deficit of "3 percent of GDP in three years" and balanced budget within five years), contingency reserve, semi-annual parliamentary briefings.
- Outcomes (1993–2002):
  - General government primary balance improved by "10 percentage points of GDP" over 1993–2000.
  - General government maintained a surplus through 2002, "8.5 percentage points above the initial 1993 position."
  - Debt reduced from "100 percent to 61 percent of GDP."

### Malaysia 1985–1990: revitalization of the private sector
- Early-1980s context:
  - Large deficits in early 1980s pushed to "17 percent of GDP by 1982."
  - By 1985 government debt had doubled, reaching "83 percent of GDP" with SOEs accounting for "25 percent of GDP."
- Reform package under Fifth Malaysia Plan (1986–90):
  - Spending reforms: freeze on public employment, deferral of wage adjustments, rationalization of non-essential capital expenditures.
  - Institutional changes: improved strategic prioritization and devolution to line ministries.
  - Tax and investment policy: abolished excess profit tax, dismantled import duties on protected manufacturing sectors, reduced corporate tax rates, created tax holidays and targeted allowances.
  - Revenue measures: widened the sales tax base and improved revenue administration to offset revenue losses.
  - Privatization and liberalization: SOEs restructured or liquidated; proceeds earmarked to pay down debt; new laws liberalized regulatory framework and relaxed foreign investment rules.
- Outcomes:
  - Government expenditure fell "by 9 percentage points of GDP" between 1986 and 1990 ("7 percentage points of which were current expenditures").
  - Private investment increased to "32 percent of GDP from 14 percent."
  - Growth averaged "around 8 percent of GDP" from 1986 to 1997.
  - Real per capita income nearly doubled.
  - Poverty declined from "19 percent to 6 percent."

*Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/howtonotes/2016/_howtonote1601.pdf*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/howtonotes/2016/_howtonote1601.pdf_