Country Reports
2019
December 6, 2019
Ukraine: Technical Assistance Report-State-Owned Enterprises–Fiscal Risk Management
Description: This Technical Assistance Paper on Ukraine highlights that good progress has been made in improving the disclosure and management of fiscal risks since the embedding of fiscal risks in the Budget Code in December 2018. The mission refined the financial model to analyze risks relating to Naftogaz that had been developed on the October 2018 mission. Despite updating the assumptions, the modelling still shows that the anticipated loss of transit gas revenue will have a significant negative impact on the Ukraine budget from January 2020. Appropriate mitigating action could ameliorate this negative impact, but there will still be a significant reduction in the inflows to the budget from Naftogaz. The next steps recommended by the mission include that Naftogaz, Ukrainian Railways and Energoatom models should be discussed with the State-owned Enterprises (SOE) and refined and that coverage should be expanded to include other major SOEs.
December 6, 2019
Malawi: Second and Third Reviews Under the Three-Year Extended Credit Facility Arrangement and Requests for Waivers of Nonobservance of Performance Criteria and Augmentation of Access-Press Release; Staff Report; and Statement by the Executive Director for Malawi
Description: This paper discusses Malawi’s Second and Third Reviews Under the Three-Year Extended Credit Facility Arrangement and Requests for Waivers of NonObservance of Performance Criteria and Augmentation of Access. Program-supported structural reforms advanced, addressing several important gaps that had previously been identified in public financial management. All quantitative performance criteria were met except those on the primary balance, which were missed largely due to faster than envisaged implementation of rural electrification and development projects, unexpected spending for disaster relief and to ensure safety during elections and post-election protests. The authorities aim to entrench macroeconomic stability, preserve debt sustainability, and advance governance reforms while attaining higher, more inclusive, and resilient growth. Essential reconstruction and security spending will be accommodated by reprioritizing spending and a modest relaxation in the FY 2019/20 domestic primary balance target. Monetary policy remains targeted on containing inflation and exchange rate flexibility will buffer shocks and preserve competitiveness. Financial sector resilience continues to be strengthened.
December 6, 2019
Ukraine: Technical Assistance Report-Strengthening Budget Formulation and Fiscal Risk Management
Description: This Technical Assistance Paper on Ukraine discusses that implementing strategic planning and a medium-term budget framework (MTBF) is a core component of Ukraine’s Public Financial Management (PFM) reform strategy. A pilot MTBF conducted in 2017 formed the basis for amendments to the Budget Code in December 2018, which firmly establish a MTBF as the basis for budget preparation. The amendments also establish a legal basis for related reforms, including regular spending reviews and monitoring and managing risks to public finances. The report also highlights that a central margin should also be established to accommodate budget volatility and meet the costs of genuinely urgent, unavoidable and unforeseeable expenditure pressures that may arise. In order to reinforce spending discipline, the margin should be tightly controlled, centrally managed and transparently reported. Strategic planning should also be improved to provide a stronger basis for integrated policymaking, strategizing, planning and budgeting. Creating a robust strategic planning system would assist in this regard.
December 5, 2019
Hungary: 2019 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for Hungary
Description: This 2019 Article IV Consultation discusses that in an increasingly uncertain global economic environment, Hungary’s growth registered one of the highest rates in Europe in 2018. The economy now appears to be running above capacity and wages are growing rapidly amid historically low unemployment. It is thus likely that growth will slow down over the medium term. Supply-side reforms can help sustain the momentum. Policies have reduced vulnerabilities substantially; however, measures to support the targeted fiscal consolidation could be more ambitious to ensure that room for fiscal policy manoeuvre is rebuilt. Wages outstripping labor productivity growth, slower export growth, and shortcomings in the business environment for small and medium enterprises call for invigorating structural reform efforts. Improvements in competitiveness are needed to sustain rapid income convergence and address demographic challenges. The government’s competitiveness program contains important elements. Focus should be on improving the business environment, enhancing the legal and regulatory framework, and increasing labor force participation.
December 5, 2019
Ukraine: Technical Assistance Report-Strengthening Public Financial Management
Description: This Technical Assistance report on Ukraine discusses a more sustainable fiscal consolidation. The Ukrainian authorities have recently adopted a broad Public Financial Management System Reform Strategy, paving the way to decisive action in critical areas including medium-term budgeting, analysis and management of fiscal risks, and public investment management. Fiscal policy in Ukraine has been hampered by the lack of a medium-term orientation for the State Budget. Medium-term macroeconomic forecasts are regularly produced, but these are not well integrated with budget planning, which remains mostly incremental and annual in scope. Recent reform initiatives have prioritized the development of a medium-term budget framework to the forefront of the reform agenda; however, additional steps are required for it to be fully implemented. Ukraine has undertaken a range of reforms in public investment management, designed to tackle some of its weaker institutions. Nevertheless, the strategic planning process remains unfit for purpose and does not facilitate prioritization of capital investment projects.
December 5, 2019
Hungary: Selected Issues
Description: This Selected Issues paper describes and discusses potential implications of recent changes in Hungary’s public debt strategy. Special attention is paid to the motivation for, and recent experiences with, the “Hungarian Government Security Plus Scheme” (MÁP+) for physical persons, introduced in June 2019. One of the main benefits of retail bonds is that they usually are perceived as more stable funding. However, it is argued that MÁP+ should be continuously monitored to ensure its objectives are achieved in the most cost-efficient manner and to avoid unintended distortions. The paper also focuses on specific public debt management policies in Hungary and it briefly discusses experiences with the retail bond programs in other countries but focuses mainly on the MÁP+ bond, the initial experience with this bond, and elaborates on its potential implications. MÁP+ has many reasonable objectives, although some of them, such as higher a savings rate of households and reduced external indebtedness, are to a major extent driven by macroeconomic policies. Going forward, the question remains whether these objectives can be achieved by appreciably lower cost to the budget given less expensive alternative funding sources and policy options. Public debt management also needs to respond to changing market conditions.
December 4, 2019
Ukraine: Technical Assistance Report-Public Investment Management Assessment
Description: This Technical Assistance report on Ukraine highlights that Ukraine currently has an efficiency gap of around 32 percent, which ranks it below average amongst emerging market countries and other comparators. Persistent under-investment, the currently high stock of debt, and ongoing institutional weaknesses, coupled with effects of the conflict in the East could see this gap continuing to grow, absent concerted efforts to reverse recent trends. The report also analyses that government policy on fiscal decentralization, articulated in the government’s 2014 coalition agreement, has the potential to significantly impact on the allocation of public investment. The institutional framework is weak in all areas. It is in terms of effectiveness of the institutions that the Ukrainian public investment management system really falls short. Twelve institutions are ranked as ineffective while a further two are moderately effective, with only one institution scoring a high rank in this category. While the picture looks bleak, some recent initiatives may bring about significant improvements.
November 25, 2019
Mexico: Arrangement Under the Flexible Credit Line and Cancellation of Current Arrangement-Press Release; and Staff Report
Description: This paper discusses Mexico’s Arrangement Under the Flexible Credit Line and Cancellation of Current Arrangement. Fiscal policy has stemmed the rise in the public debt ratio in the past two years; a very tight monetary policy stance has helped reduce headline inflation to the central bank’s target; and financial supervision and regulation are strong. The flexible exchange rate is playing a key role in the economy’s adjustment to external shocks. The Mexican economy, nonetheless, remains exposed to external risks, including renewed volatility in global financial markets, increased risk premia, and a sharp pull-back of capital from emerging markets, as well as continued uncertainty about Mexico’s trade relations with the United States. The new arrangement under the Flexible Credit Line (FCL) will continue to play an important role in supporting the authorities’ macroeconomic strategy by providing insurance against tail risks and bolstering market confidence. The proposed new commitment and cancellation of the current arrangement would have a net positive impact on the Fund’s liquidity position.
November 25, 2019
Ukraine: Technical Assistance Report-Distributed Profit Tax; Voluntary Disclosure of Assets; and BEPs Implementation
Description: This Technical Assistance report focuses on Ukraine’s distributed profit tax, voluntary disclosure of assets, and Base Erosion and Profit Shifting Work Program implementation. The recommendations largely favor simplifying rules, improving the definition of basic concepts, eliminating potential loopholes, and adhering more closely to international standards in some cases. Thus, for the sake of simplification, the report recommends that Controlled Foreign Corporation rules should apply to the ‘first onshore’ person rather than having to trace them back to the ultimate beneficial owner in Ukraine. Also, it recommends that the proposed interest deduction limitation should eliminate the carry-forward currently permitted, limit deductions to net interest expense and exempt the financial sector from this limitation. Some key definitions can be improved too. The report suggests that if there is an urgent need to promote private investments, the accelerated depreciation tool should be applied for plant and machinery and structures housing them for say another five years.
November 25, 2019
Ukraine: Technical Assistance Report-Enhancing the Medium-Term Budget Framework and Preparing Expenditure Baseline
Description: This Technical Assistance paper on Ukraine focuses on enhancing the medium-term budget framework and preparing expenditure baselines. While the inclusion of a contingency provision in the budget is prudent, it will be important that it is well communicated and strongly defended. There is a risk that the provision will be a general policy reserve, which can undermine budget discipline and disincentivize medium-term planning. The Budget Declaration submitted to the Cabinet is a significant step forward and contains many sound elements of a medium-term budget document. The Ministry of Finance should continue to expand its content in future years to better explain the basis of fiscal plans and improve transparency. Key enhancements include providing greater explanation on the main drivers of the medium-term macroeconomic and fiscal projections, reporting on compliance with fiscal rules, and further expanding the fiscal risk statement. Credible and robust expenditure baselines will take time to develop and the Ministry of Finance will need to play a central role.