During my tenure as Permanent Secretary at Treasury, I had pushed the Fund and Bank missions to conduct a seminar on each of their missions and publish the discussion as a blog. The following are some of the examples of similar blog posts.
The Think Tank Seminar focused attention on Pinto’s discussion of the fiscal space hypothesis. Proponents of this hypothesis argue that fiscal adjustment achieved through cuts in public infrastructure are likely to be suboptimal, resulting in slower growth and a worsening of the debt dynamics. But Pinto argues that the fiscal space hypothesis does not hold for debt intolerant countries. It is imperative in such countries to restore credit worthiness first, even if that requires cutting public infrastructure investment to raise the primary surplus and attain a healthy Government Inter-Temporal Budget Constraint (GIBC). Given that the latest IMF (2015) Debt Sustainability Analysis for the Maldives predicts that on current trends the public debt-to-GDP ratio could climb to 104% by 2034, such predictions naturally raise concerns for the Maldivian authorities. These concerns have been compounded by the substantial rise in interest rates on the domestic treasury bills market during the last few years.
The Seminar debated whether, as a country facing a potentially unsustainable debt dynamic, the Maldives should consider aggressive fiscal consolidation, including cutting infrastructure investment, as Brazil did during 2000–2003, or find some other way to ensure sustainability.
Participants agreed that the emerging market experiences presented in the book, and Pinto’s policy prescriptions, illustrated that orthodox economic theory still holds ground. Nevertheless, as is well known and as Pinto also explains, economic theory needs to have regard for country specific situations. Finding this balance between country specificity and economic theory is a delicate exercise, as is evident in the case of the domestic treasury bills market in Maldives where a very thin market determines outcomes. Discussants raised the question whether a country like Maldives was at a stage of development where lessons from large emerging markets applied fully, and whether the Pinto’s policy prescriptions based on emerging market experiences could be embraced fully. One discussant summarized this debate aptly with a quote from Tolstoy “Happy families are all alike, unhappy families are unhappy in their own way”.
Dr. Ashni Singh next shared the growth story of Guyana and his personal experiences as the former Minister of Finance. He began his talk by highlighting the many similarities between Maldives and Guyana. These similarities include a common colonial heritage, a location on the door step of big emerging markets (Brazil and India), together with similarity in geographical area, population size and the size of the economies. The two countries also share similar challenges in development: the dispersed nature of their populations, the concentration of population into a single urban center, and reliance on a limited number of industries for growth. He echoed many of the themes of Pinto’s book, including the need to ensure government debt sustainability. Dr. Ashni touched on Guyana’s experiences with unsustainable debt, with peak debt-to-GDP ratios of over 700% at one stage. He discussed the policies pursued by Guyana to bring the country back on a sustainable debt trajectory, which required reducing the debt-to-GDP ratio to 30%. Achieving debt sustainability and regaining creditworthiness had necessitated hard measures to boost revenues, introduce new tax measures and rationalize government expenditure, including infrastructure investment.
Yet, the reforms in Guyana called for a delicate balancing act between the demands from the constituencies and maintaining a credible GIBC. Dr. Singh noted that in addition to managing debt, structural reforms were also required, aimed at diversifying the drivers of growth, raising the quality of labor and reducing poverty. In conclusion, he emphasized that through his various engagements with the International Financial Institutions (IFIs) during his tenure as the Minister of Finance, he had tried to bring to the table the unique perspective of small states. He noted that a recent positive development on this front was the release of the “Staff Guidance Note on the Fund’s Engagement with Small Developing States” by the IMF.
The Think Tank Series is an excellent initiative which could contribute to deeper thinking at the policy level for Maldives. The inaugural lecture got off to a good start and gained from the presence of an FAD TA mission which was in country at the same time and contributed to the discussions.
In my presentation, I first considered the main objectives of all FRLs: (1) fiscal stability — both short-term fiscal stabilization objectives (which, in some countries, are accompanied by numerical fiscal rules) and longer term objectives of achieving fiscal sustainability and reductions in the debt/GDP ratio; (2) fiscal transparency objectives — upfront announcements by the government of a medium-term fiscal strategy and an annual budget statement of the policies that help achieve the medium-term fiscal targets; and (3) accountability of the government to parliament, particularly the provision of regular in-year budget execution reports, a mid-year formal budget review, and consolidated financial statement (which, in Maldives, are being prepared for the first time, for fiscal year 2009).
There was some discussion on how these principles could cope with fiscal decentralization. This issue was raised since a draft decentralization bill is before parliament (the People’s Majlis). With the possible creation of seven regional administrations, there will be a need for the MOFT to monitor subnational debt and ensure that fiscal reporting from provinces takes place in a timely way.
Mr. Helio Tollini, who has worked in both the executive and legislative branches in Brazil, presented the experience of Brazil’s FRL that was adopted in 2000. It is one of the few successful FRLs in Latin America. Although Brazil’s FRL is much more detailed than the one likely to be adopted in Maldives — reflecting the more complex and multi-tiered administration of this large Latin American country — the relevance for many issues addressed in Brazil’s FRL are nonetheless relevant in Maldives. Indeed, at the seminar, there were a number of similar questions that the Maldives authorities are grappling with that Brazil was also struggling in the 1990s prior to adoption of the FRL. These include: how should the budgets of constitutionally “independent” bodies such as parliament, the judiciary, and the Auditor General’s office be forced to share the fiscal responsibility provisions that may be embedded in a FRL. Another issue discussed was the need to restrict borrowing by subnational government administrations.
Full details are available at the link below:
Source URL: Medium