Public Information Notice: IMF Executive Board Holds Follow Up Meeting on Public Investment and Fiscal Policy

May 27, 2005

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On May, 20, 2005, the Executive Board of the International Monetary Fund (IMF) held a follow up meeting on Public Investment and Fiscal Policy.1 The Board first discussed the issue in April 2004 (see Public Information Notice No. 04/45)


The meeting provided an opportunity for Executive Directors to revisit their April 2004 discussion of public investment and fiscal policy in light of the results from eight pilot country studies, and further analytical work, which provided additional insight into the issues raised in connection with: promoting high-quality public investment in infrastructure in a fiscally responsible manner and safeguarding priority projects when fiscal adjustment is called for; determining the appropriate coverage of fiscal statistics, indicators, and targets; and developing efficient public-private partnerships and disclosing their fiscal implications.

Executive Board Assessment

Executive Directors welcomed the opportunity to discuss the paper on lessons from the eight pilot country studies on public investment and fiscal policy, the accompanying paper summarizing the individual pilot country studies, and the study on government guarantees and fiscal risk. Directors commended the staff for the follow-up work applying the approaches discussed by the Board in 2004. They welcomed the additional insight provided about options for increasing infrastructure investment in a fiscally responsible manner, the coverage of fiscal indicators and targets, the treatment of public enterprise accounts, and issues related to the fiscal implications of public-private partnerships (PPPs). They appreciated the pilot studies' coverage of a diverse group of countries in Latin America, Africa, Asia, and the Middle East, but some Directors regretted the non-participation of advanced economies. Directors generally supported the conclusions derived by the staff from the studies.

Directors reiterated the importance of public infrastructure investment for economic growth, while acknowledging the lack of hard evidence in the pilot countries covered by the staff study on the precise relationship between the two, and emphasized the relative importance of complementary factors such as macroeconomic stability and the investment climate. Public infrastructure investment and rehabilitation needs remain sizable, especially in low-income countries. Directors noted the possible causes and consequences of the decline in public investment observed in several of the pilot countries, particularly its impact on growth. Possible causes may include fiscal consolidation, including in the context of Fund-supported programs; a fall in public saving; completion of major public infrastructure projects; shifting preference toward a smaller public sector; and development of a private sector able to handle a broader set of activities. Directors accordingly encouraged the staff to investigate further the effects on growth of the quality and composition of public expenditure, including public investment, and to improve debt sustainability analyses by taking account of available robust estimates of the growth implications of public investment. However, they emphasized that the World Bank should take the lead role in exploring the growth implications of specific public investment projects.

Directors supported the focus on the overall fiscal balance and on complementary indicators, such as the current fiscal balance, when assessing the scope for increasing public investment and the quality of a country's fiscal policy. They considered that the scope for increasing public investment by relaxing overall fiscal targets remains quite limited in most countries, particularly in those that have a high debt burden and are vulnerable to macroeconomic shocks. They stressed the overarching importance of ensuring that any borrowing to finance public investment is consistent with macroeconomic stability and debt sustainability. Where this outcome is not assured, Directors underlined that increases in public investment will need to be matched by increases in public saving through better prioritization of expenditure and, in many countries, sustained efforts to mobilize additional revenue. More policy options will be available to countries with relatively low debt burdens and to countries with access to concessional financing on a sustained basis. Directors also emphasized the need to improve the quality of new investment by strengthening the institutional capacity for project appraisal, selection, and implementation, which remain the responsibility of the multilateral development banks. In this regard, they saw an important role for technical assistance from the multilateral development banks.

Directors stressed that a key conclusion emerging from the studies is that additional room for public infrastructure spending cannot be created by changes in fiscal accounting. Countries with different levels of economic and institutional development could well have different "optimal" ratios of public investment to GDP. An assessment of the scope for increasing public investment in any given country will require, in particular, careful analysis of macroeconomic conditions; debt sustainability; the quality of the proposed projects; and the trade-offs among taxes, public infrastructure spending, and other types of expenditure. Directors also emphasized the need to address non-infrastructure bottlenecks to economic development, in particular the policy and institutional environment for private investment, including especially the tax and regulatory frameworks and governance.

Directors generally saw merit in the staff's call for comprehensive coverage of public enterprises in fiscal statistics, in line with the Government Finance Statistics Manual 2001 framework, to allow closer monitoring of their operations. They recognized, however, that due to data problems this will be a difficult task achievable only over time. Most Directors endorsed the approach proposed by the staff for moving forward in this area by progressively integrating public enterprise operations into countries' fiscal accounts, thereby ensuring greater uniformity of reporting across the membership over time. With regard to the treatment of public enterprises in fiscal indicators, Directors noted that hardly any public enterprise meets the criteria for commercial orientation proposed in the staff paper considered by the Board in April 2004. They, accordingly, broadly endorsed the proposed revised approach to the inclusion of public enterprises in fiscal indicators and targets, with its greater focus on the fiscal risks posed by the operations of public enterprises, rather than mainly on their commercial orientation. Most Directors also agreed that testing the revised criteria in a limited but representative sample of upcoming Article IV consultations could inform the design of a strategy for moving forward in a manner consistent with staff resource constraints. A few Directors felt that it would not be appropriate to allow for greater case-by-case flexibility in making decisions on integrating public enterprises in fiscal indicators and targets in a Fund-supported program context, and noted the difficulties of assessing fiscal risks posed by individual enterprises. These Directors called for the development of a more standardized approach.

Directors agreed that PPPs offer a potential avenue to increase infrastructure investment, provided they are appropriately structured, and the institutional framework is well developed. They agreed with the view that PPPs should be undertaken with the goal of increasing efficiency by attracting private capital to infrastructure investment, and strongly cautioned against pursuing PPPs because of a desire to move investment spending off budget. Furthermore, the government should assess carefully the risk associated with PPPs, and ensure that this risk is appropriately shared with the private sector, with the risk borne by the government reflected in the fiscal accounts. Directors endorsed the view that high priority should be given to strengthening the institutional framework for PPPs—including the establishment of a sound legal framework and the preparation of a public sector comparator—and called on the multilateral development banks to take the lead on these issues.

Directors saw the lack of an internationally accepted accounting and reporting standard for PPPs as a possible obstacle to the development of efficient PPPs. They endorsed continued staff work with the relevant accounting bodies to promote the preparation of such a standard in order to ensure full transparency of PPP operations, while acknowledging the considerable time-intensity and complexity that will be involved in this venture. In the meantime, Directors generally endorsed the proposed disclosure and reporting requirements for PPPs. In this connection, Directors noted the importance of valuing the contingent liabilities associated with guarantees. Regarding the incorporation of PPPs in debt sustainability analysis, most Directors saw merit in the proposed approach, which involves counting committed payments by the government under PPP contracts and expected payments arising from the calling of guarantees as future primary spending. A few Directors called for caution in factoring implicit contingent liabilities related to PPPs into debt sustainability analyses. Most Directors agreed that the issue of setting caps on expected costs arising from PPPs, including in Fund program design, should be determined on a case-by-case basis, with a focus on cases where these costs contribute, or limit the capacity to respond, to debt sustainability problems.

Directors noted the staff's assessment that further work along the lines being proposed may require significant additional staff resources, which will be quantifiable only over the longer term, depending on the pace at which national authorities can move to include public enterprises in the fiscal accounts, and the results of the testing in a sample of Article IV consultations of the revised criteria for assessing the fiscal risks posed by public enterprises. The issue of resource cost, as well as the balance of costs and benefits that emerges moving forward, will therefore need to be kept under close review.

1 This PIN summarizes the views of the Executive Board, as expressed during the May 20, 2005 meeting, based on IMF staff reports, "Public Investment and Fiscal Policy—Lessons from the Pilot Country Studies," "Public Investment and Fiscal Policy—Summaries of the Pilot Country Studies," and "Government Guarantees and Fiscal Risk."


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