Transcript Fiscal Space for Infrastructure Borrowing in South

Fiscal Space for
Infrastructure
Borrowing in
South-Eastern Europe
Brussels, September 21, 2005
Background and Objectives
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SEE-7 countries are contemplating significant new
borrowing for infrastructure investment, based on bilateral
and multilateral funding.
What key issues need to be kept in mind when evaluating
proposed borrowing/investments? Is there ‘fiscal space’?
The analysis is indicative, does not address the quality of
individual projects, and must be supplemented by more
detailed analysis by each Government,…
…but strongly suggests a need to carefully consider
macro/fiscal constraints when planning/proposing new
investments.
Fiscal Space
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“The availability of budgetary room that
allows a government to provide resources
for a desired purpose without any
prejudice to the sustainability of its
financial position”.
Several macroeconomic trends
show clear improvement…
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From 2000 to 2003, public debt/GDP was cut in all
countries except Croatia, sometimes substantially.
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Achieved through stronger policy efforts, real
appreciation, and (sometimes) debt restructuring.
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A general downward trend in fiscal deficits reflects
government commitment to fiscal responsibility.
…but many challenges remain
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High government spending/GDP (BiH, Croatia, SaM)
High public debt/GDP (Albania, BiH, Croatia, SaM)
Large external debt/GDP (Bulgaria, Croatia, SaM)
High current account deficits (all countries) create large
external financing needs (10-18% of GDP)
Future loan terms hardening while grants declining
Pre-EU accession/integration costs
Risk of macro instability in the event of reversal/decline in
anticipated flows
Managing vulnerabilities requires sustained macro
adjustment/reform, with the burden falling on fiscal policy
Adjustment will lead to
reduced financing needs
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‘Base case’ scenarios assume continuation of fiscal
discipline and other reform efforts.
Indicative projections by World Bank staff, with
reference to IMF projections.
Outcomes assumed necessary to keep the economies
on a path of sustainable growth.
Envisage still high but reduced financing needs in
the medium term (10-16 percent of GDP)
Planning starts at the project and
sectoral level...
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High quality infrastructure investments will be crucial
for growth.
Ensuring quality requires careful project
evaluation/public investment planning, sound
sectoral policies/regulatory framework, and (in multicountry projects) good cross-country cooperation.
Indicators of reform progress still show that much
remains to be done in the infrastructure sectors
…but also needs to consider
macro/fiscal constraints
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Prudent economic management demands analysis of
the impact of new borrowing on macro sustainability
Investments should fit into (still substantial) overall
financing limits
Borrowing beyond these limits could raise the
current account deficit and debt to levels which send
alarm signals
Resulting damaging perceptions of macro
performance could in turn reduce investment and
borrowing by the domestic private sector
Creating fiscal space for high
quality public investments
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Cutting wasteful current spending.
Dropping planned public investments with
clearly lower rates of return.
Enhancing the overall efficiency of public
spending.
Enhancing the financial sustainability of the
sector receiving investments through deeper
reform and restructuring.
Scaling back/phasing investments.
Conclusions
To achieve desired growth, investments must be subjected to:
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rigorous evaluation
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strong supporting reforms/ regulatory framework
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enhanced cross-country cooperation
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These considerations become more important with the
currently limited fiscal space/external borrowing limits.
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To avoid compromising fiscal adjustment and increasing
external vulnerability, any foreign financing will need to
fit into such limits.
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Domestic budgetary resources will need to finance an
increasing share of public investments.
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The same considerations ultimately apply to publicprivate partnerships.