Transcript contents

Tunisia - Macroeconomic and Fiscal
Framework
Mario A. Gutierrez
Macroeconomic and Fiscal Expert
1
Contents
• Concept and Uses of a Macroeconomic Framework
• Functional Relationships in Financial Programming: How
it works. Flow of Funds concept.
• Example of Financial Programming short-term: Demand
Management Policies; and Financial Programming
medium-term: Supply side Policies (Structural Policies).
• National Accounts.
• External accounts.
• Government Accounts.
• Monetary/Financial accounts..
• Interrelationships among the macroeconomic accounts.
Macroeconomic Framework and
Economic Policy
2
What is a Macroeconomic Framework?
• A macroeconomic framework provides a consistent picture of the
macroeconomic situation of a country: GDP growth, inflation, the
government balance and financing, and relations to the external
accounts.
• Relies on interrelationships among key macroeconomic variables:
ex. GDP growth and tax revenue.
• As it takes into account the interrelationships among the four
macroeconomic sectors of the economy (real, fiscal, external and
monetary/financial sectors) it ensures consistent projections for
GDP and the government budget: i.e., projections that satisfy
macro-economic identities and constraints.
Macroeconomic Framework and
Economic Policy
3
Uses of a Macroeconomic Framework
• Budget preparation:
– Revenue envelope (GDP growth and transfers) and
interest payments: determines room for primary
expenditures
– Financing required (government borrowing requirements)
and how it affect the public debt?
– What room does the budget leave for private sector
credit?
• Financial Programming (short and medium term):
– Consistent set of policy measures designed to achieve a
sustainable balance of payments and induce price stability
and growth.
– What adjustments are required for fiscal sustainability and
price stability, and to stimulate economic growth?
Macroeconomic Framework and
Economic Policy
4
Functional Relationships in Financial Programming:
How it works: Flow of Funds concept
• The economy is divided into four aggregate
analytical sectors: Private sector, Non-Financial
Public sector, Banking sector, and External sector.
For each sector we distinguish between the
sources and uses of funds:
• Sources (right side): sources to finance the
acquisition of financial assets.
• Uses (left side): net acquisition of financial assets
(including money).
Macroeconomic Framework and
Economic Policy
5
Macroeconomic
Sectors
Private Sector
Macroeconomic
Accounts
National Accounts
Government
Fiscal
Accounts
Monetary/Financial
Sector
Monetary/Financial
Accounts
Rest of the World
Balance of
Payments
Macroeconomic Framework and
Economic Policy
6
Private Sector
(National Accounts)
Uses
Sources
dMd
Sp
- dDp
- Ip
- dFp
Sources: Sp - Ip: Private Saving (national disposable income
– private consumption)- Private Investment.
Uses: dMd - Dp - dFp: Change in the demand for money –
Change in the private sector’s domestic and foreign demand
for credit.
Macroeconomic Framework and
Economic Policy
7
Non-Financial Public Sector
(Fiscal Accounts)
Uses
Sources
- dFg
Sg
- dDg
- Ig
• Sources: Sg - Ig: Non-Financial Public Sector Savings
(current revenue – current expenditure) – Public Sector
Investment.
• Uses: -dFg - dDg: Change in the non-financial public sector’s
net foreign borrowing - Change in the non-financial public
sector’s domestic demand for credit.
Macroeconomic Framework and
Economic Policy
8
Banking Sector
(Monetary/Financial Accounts)
Uses
Sources
dR
dM
+ dD
+ dFb
• Sources: dM - dFb: Change in the supply of money + Change in
the financial sector’s foreign borrowing.
• Uses: dR + dD: Change in foreign rserves + Change in total
domestic credit (= dDp + dDg).
Macroeconomic Framework and
Economic Policy
9
External Sector
(Balance of Payments)
Uses
Sources
dF
Sx
- dR
• Sources: Sx: External saving = - balance in the current
account of the balance of payments.
• Uses: dF – dR: Change in the aggregate foreign borrowing of
the country – change in net international reserves.
Macroeconomic Framework and
Economic Policy
10
Consolidating Sources and Uses
• (1) (Sp + Sg + Sx) = (Ip + Ig) (total saving = total investment)
Consolidating only the three domestic sectors gives us the balance of
payments:
(Sg + Sp) – (Ip + Ig) = - Sx = dR – dFp – dFg - dFb
• (2) Sn (national saving) – I (domestic investment) = - Sx = dR – dF
(financing of the gap)
• An excess of national saving over domestic investment is reflected in
a surplus in the current account of the balance of payments (negative
foreign saving), which is also reflected in an accumulation of
international reserves and decline of foreign borrowing (capital
account of the balance of payments).
Macroeconomic Framework and
Economic Policy
11
 The flow of funds scheme helps to visualize the links that
exist between the changes in savings and investment
and changes in the financial variables (M, D, and F) and
changes in the capital account of the balance of
payments (including changes in foreign reserves).
 The flow of funds helps visualize the links between the
public and private sector: For a total of credit available to
the economy: more credit to the government → less
credit available for the private sector
Macroeconomic Framework and
Economic Policy
12
Example of Financial Programming: Demand
Management Policies
• In a short term financial programming the objective is an urgent
adjustment to financial flows to reduce pressures on inflation, the
public debt, and the balance of payments.
Problem: A country or region in a Monetary Union: No independent
exchange rate and no independent monetary policy:
• Diagnostic: Public balance is deteriorating and the public debt is
growing. Access to foreign financing is narrowing. Inflation is rising.
Financial program:
Objective: Contain the explosive growth of the public debt.
Targets: Set a ceiling for the public sector primary and overall
balance (public sector borrowing requirements)
Instruments: Reduction of government spending → reduction of
government borrowing requirements → reduction of demand
pressures (on inflation) → leave more space for growth of credit to
the private sector.
Macroeconomic Framework and
Economic Policy
13
Example of Medium Term Programming: Supply side
Structural Policies
• In medium term programs economic growth, investment and savings
(national and foreign) are at the center.
Objective: Raise domestic investment to stimulate economic growth.
Target: Increase national investment in non traditional sectors.
Instruments:
- Restructure the government budget to leave space for additional
public investment in infrastructure and human capital (health and
education).
- Improving the efficiency of the financial system to stimulate private
savings and investment.
- Improve regulations to protect savers and investors.
- Improve incentives for non-traditional sector activities.
Macroeconomic Framework and
Economic Policy
14
National Accounts
• Framework that classifies and aggregates real economic
activity  GDP  National Income
• Three equivalent approaches to GDP
Macroeconomic Framework and
Economic Policy
15
Gross domestic product
• Production approach
– GDP is the sum of all value added
• Income approach
– GDP is the sum of all incomes
• Expenditure approach
– GDP is the sum of all expenditures
Macroeconomic Framework and
Economic Policy
16
Macroeconomic Framework and
Economic Policy
17
External accounts: Balance of payments
• What is the BOP?
– Systematic summary of economy’s transactions with
the rest of the world, during specific time period
(flows)
Macroeconomic Framework and
Economic Policy
18
BOP components
Credit (+)
Exports of goods
Debit (–)
Imports of goods
Trade Account
Exports of Services
Income received from abroad
Transfers received from abroad
Imports of Services
Income paid abroad
Transfers sent
Current Account
Capital Transfers (incl. debt forgiveness)
Acquisition of non-prod. non-fin assets
Sale of non-produced non-fin. assets
Capital and Financial Account
Increases in foreign liabilities
Increases in foreign assets
a. FDI from abroad
b. Portfolio equity sold
c. Financial liabilities incurred
(loans, trade credit, bank deposits, etc)
a. Capital Transfers, FDI abroad
b. Portfolio equity bought
c. Other investments
(or repayment of previous debts)
Overall Balance
Decreases in reserves
Increases in reserves
Net Change in Foreign Reserves
19
Government Accounts (GFS 1986)
1.Total Revenue and Grants
RGg
Revenue
-Current
Tax revenue
Nontax revenue
-Capital
Grants
2.Total Expenditure and Net Lending
GNLg
Expenditure
-Current
Wages and salaries
Goods and services
Interest
Subsidies and other current transfers
-Capital
o/w: Fixed capital formation
Cg: Government consumption
CAPGg
NLg
3.Overall Balance (1 - 2 )
4.1 External
4.2 Domestic
Bank
Nonbank
Gg
CGg
Ig : Government investment
-Net Lending
4.Financing (4.1 + 4.2 = - 3)
Rg
CRg
GOB = RGg - GNLg
Fg
= NEFg + NDFg
NEFg
NDFg = NDCg + NBg
NDCg
NBg
20
Monetary/Financial accounts
• Systematic summary of Assets and Liabilities of Banking
Sector, at a specific point in time. (Balance sheet: Stocks)
• Includes the Monetary Authority, Deposit Money Banks
(Commercial Banks), and the Monetary Survey
Macroeconomic Framework and
Economic Policy
21
Role and structure of financial system
• Financial system intermediates resource flow among
economic sectors.
Financial System
(Financial Survey)
Banking System
(Monetary Survey)
Monetary Authorities
(Balance Sheet of the MA)
Other Financial Institutions
(Consol. Balance Sheets of OFI)
Deposit Money Banks
(Consol. Balance Sheets of the DMB)
22
Monetary authority
• Functions:
–
–
–
–
–
Issues currency
Holds country’s foreign reserves
Acts as banker to government
Oversees monetary system
Serves as lender of last resort
23
Monetary authorities: Balance sheet
Assets
Liabilities
Net foreign assets
Reserve money (RM)
Net Domestic Assets
Domestic credit (net)
Claims on the government (net)
Claims on the DMBs
Claims on other sectors
Currency issued
Held in banks
Held outside banks
Deposits of DMBs
Other items (net)
24
Deposit money banks
• Functions:
– Financial intermediation between savers and investors.
– Help transmit effects of monetary policy:
• Affect the money supply and liquidity through policies on
deposit taking and lending.
25
Deposit money banks: Balance sheet
Assets
Liabilities
Net foreign assets
Deposits
Reserves
Required reserves
Excess reserves
Demand
Time and savings
Foreign currency
Domestic credit
Liabilities to MA
Claims on government
Claims on other sectors
Other less liquid liabilities
Other items (net)
26
Monetary survey
• What is it?
– Consolidated balance sheet for entire banking system:
Consolidates balance sheet of DMBs and MA.
– Monetary statistics are stock data.
• Function:
– Allows monitoring of monetary and credit developments.
Needed for monetary policy.
27
Monetary survey: Balance sheet of the banking
system
Assets
Liabilities
Net foreign assets
Broad Money (M2)
Net Domestic Assets
Net Domestic credit
Net claims on government
Claims on the Private Sector
Other items (net)
Narrow Money (M1)
Currency in circulation
Demand Deposits
Quasi-Money (QM)
Time and savings deposits
Foreign currency deposits
28
Deposit money banks: Balance sheet
Assets
Liabilities
Net foreign assets
Deposits
Reserves
Required reserves
Excess reserves
Demand
Time and savings
Foreign currency
Domestic credit
Liabilities to MA
Claims on government
Claims on other sectors
Other less liquid liabilities
Other items (net)
Macroeconomic Framework and
Economic Policy
29
Interrelations among the macroeconomic accounts
30
Government Accounts GFS 2001
Total Revenue and Grants
Revenue
Tax and nontax revenue
Capital revenue
Sales of fixed assets, stocks,
land, and intangible assets
Capital transfers from nongovernmental
sources
Expense
Grants
Total Expenditure
Current expenditure
Capital expenditure
Net/Gross Operating Balance
Net acquisition of NFA’s
Purchases of fixed assets, stocks,
land, and intangible assets
Capital transfers
Lending minus repayments
Lending minus repayments (policy
purposes)
Net Lending/Borrowing
Net acquisition of FA’s
Deficit/Surplus
Financing
Change in cash, deposits, securities
& equity held for liquidity purposes
Net Borrowing
Privatization proceeds
Net incurrence of liabilities
31