Policy Papers
2015
December 10, 2015
Gulf Cooperation Council (GCC)—Energy Price Reforms in the GCC—What Can Be Learned From International Experiences?
Description:
Energy prices in the GCC countries are low by international standards. These low prices have co-existed with rapid economic development in the region over the past 50 years, but the costs of this policy have also risen in terms of very high energy usage per capita. Providing energy at low prices has also effectively absorbed resources that could otherwise have been invested in human and physical capital or saved for future generations. The implicit cost of low energy prices in the GCC, in terms of foregone revenue, is estimated to be around 5 percent of GDP (about 8 percent of non-oil GDP) this year.
GCC countries have been embarking on energy price reform in recent years. The recent decision of the UAE to remove fuel subsidies is an important initiative. Nevertheless, energy prices are generally still below international levels and differ substantially across the GCC countries. In most countries, further steps are needed to raise energy prices to reduce the growth in energy consumption and to support the fiscal adjustment that is necessary in the current lower oil price environment.
Evidence in this paper suggests the inflationary impact of higher energy prices in the GCC is likely to be small, and while there may be some adverse effect on growth in the near-term, over the longer-term the growth benefits should be positive. Given the low weight of energy products in the CPI, first round effects of higher energy prices should be limited, while well anchored inflation expectations should help prevent second-round effects. On growth, a gradual increase in energy prices should have a manageable impact on industrial activity, although energy intensive industries will be adversely affected and will need to adjust. In the longer-term energy price reforms could generate significant permanent real income gains for the economy as a whole.
More broadly, international experiences suggest that the likelihood of success with energy price reforms increases if the reforms are:
December 10, 2015
Gulf Cooperation Council (GCC)—Tax Policy Reforms in the GCC Countries - Now and How?
Description:
GCC countries need to overhaul their tax systems and increase tax revenues. This is an important part of implementing a comprehensive medium term fiscal adjustment strategy, which should include three other main elements: raising domestic energy prices; containing recurrent spending, particularly wages; and enhancing the efficiency of public sector investment.
Tax reform in the GCC should introduce modern and efficient tax systems to the region. Existing tax systems are characterized by very low rates and narrow bases. Dating back to the mid-20th century, GCC taxation systems are not very efficient and generate persistently low revenues. Tax reforms will help mobilize tax revenues, provide the region with the opportunity to modernize tax laws and institutions, and create the foundations for financing the provision of government services when oil reserves dwindle. In addition to encouraging greater accountability, these systems will help promote equity and perceptions of fairness, while aligning GCC countries with international practices.
GCC countries should choose a combination of modern efficient tax instruments. These could be based on a low rate broad-based VAT tax together with selected excises, a business profits tax, and possibly a recurrent property tax. The combination of these taxes can ensure efficient and progressive tax systems in the region. Taxes should be at low rates with limited exemptions, with the aim of collecting revenues in line with country budget needs and constraints.
The VAT is an ideal revenue instrument for the GCC countries. It is a modern consumption tax that is highly effective in mobilizing tax revenue while avoiding economic distortions. Countries should move ahead with announcing the broad principles of the GCC VAT framework as soon as possible. International experience suggests that it will take 18–24 months from the time that a decision is made to implementation.
Tax reforms need to start as early as possible, preceded by careful coordination, planning, and communication. The budgetary impact of the low oil prices is immediate, while building the required modern tax institutions takes time. While coordination and harmonization across GCC governments would be beneficial, reforms should not wait for the last-mover. Individual countries can develop and implement tax reform as soon as they are ready politically and administratively. Early moves by some countries could provide a useful demonstration effect to other countries. Tax reforms need to be supported by a communication strategy to muster support for the reforms and overcome skepticism about the usefulness of modern taxation systems in oil-rich countries.
December 7, 2015
Implementation Plan in Response to the Board-Endorsed Recommendations for the IEO Evaluation Report of IMF Response to the Financial and Economic Crisis
Description:
This paper sets out Management’s response to the Independent Evaluation Office’s (IEO) evaluation of IMF Response to the Financial and Economic Crisis.
The implementation plan proposes specific actions focusing on the three of the four recommendations that received broad support from the Executive Board, namely (i) ensuring that the IMF as a quota-based institution has sufficient resources to contribute to future crisis resolution; (ii) developing guidelines for structuring engagements with other organizations, and (iii) consolidating and simplifying the current framework to identify and assess risks and vulnerabilities.
Some of the proposed actions to address the Board-endorsed IEO recommendations are underway as part of the 2014 Triennial Surveillance Report (TSR) Action Plan, the FY2016–18 Medium-Term Budget and the ongoing efforts to ratify the 2010 Quota and Governance Reforms. The paper also explains how implementation will be monitored.
December 7, 2015
Managing Capital Outflows - Further Operational Considerations
Description: The Guidance Note for the Liberalization and Management of Capital Flows (IMF 2013a) provides operational guidance to staff on the use of the Fund’s institutional view on the liberalization and management of capital flows (Box 1). It discusses appropriate policies with respect to the liberalization of capital flows and the management of disruptive capital inflows and outflows. With respect to capital outflows, the institutional view considers that capital flow management measures (CFMs) may be appropriate in crisis-type circumstances or, in the context of capital flow liberalization, if countries find that they have liberalized prematurely and are unable to handle the resulting capital flows. In non-crisis-type circumstances, the guidance considers outflows as being appropriately handled by macroeconomic, financial, and structural policies. It is intended to mirror the policy advice with respect to capital inflows. The guidance is, however, relatively brief and would benefit from some elaboration to lay out the possible configurations of policies in the context of the institutional view. This note seeks to provide such an elaboration, which is particularly relevant as capital outflows are becoming a more relevant policy challenge.
November 25, 2015
The Managing Director’s Statement on the Role of the Fund in Addressing Climate Change
Description:
The Fund has a role to play in helping its members address those challenges of climate change for which fiscal and macroeconomic policies are an important component of the appropriate policy response. The greenhouse gas mitigation pledges submitted by over 160 countries ahead of the pivotal Climate Conference in Paris in December represent an important step by the international community towards containing the extent of global warming.
Strategies for reducing emissions will reflect countries’ differing initial positions, political constraints and circumstances. Carbon pricing can, however, play a critical role in meeting in the most efficient and effective way the commitments that countries are now entering into; it can also raise substantial revenues that can be used to reduce other, more distorting taxes. Through its incentive effects, carbon pricing will also help mobilize private finance for mitigation activities and spur the innovation needed to address climate challenges. Finance ministries have a key role to play in promoting and implementing these policies and ensuring efficient use of the revenue raised.
The process of climate change is set to have a significant economic impact on many countries, with a large number of lower income countries being particularly at risk. Macroeconomic policies in these countries will need to be calibrated to accommodate more frequent weather shocks, including by building policy space to respond to shocks; infrastructure will need to be upgraded to enhance economic resilience. It will be important that developing countries seeking to make these adaptations have access to sufficient financial support on generous terms.
Financial markets will play an important role in helping economic agents and governments in coping with climate change-induced shocks. And heightened climate vulnerabilities and the structural adjustments associated with a shift towards a low-carbon economy over the medium-term will have important implications for financial institutions and financial stability.
This paper identifies areas in which the Fund has a contribution to make in supporting its members deal with the macroeconomic challenges of climate change, consistent with national circumstances. It draws on materials contained in a forthcoming Staff Discussion Note (Farid et al. 2015) and has benefited from the discussions at informal Board meetings on IMF work on climate change held on September 30 and November 24, 2015.
November 23, 2015
Statement by the Managing Director on the Work Program of the Executive Board - Executive Board Meeting, November 23, 2015
Description: The Managing Director’s Global Policy Agenda (GPA) presented to the IMFC last month highlights the challenges associated with a rapidly changing and uncertain world. The limited room for policy maneuver and the need to adapt to new realities pose difficult trade-offs between supporting demand and current activity, reducing financial risks as financial conditions tighten, and implementing needed structural reforms to revive growth. Against this backdrop the GPA called to support growth today, invest in resilience and safeguard financial stability, improve the sustainability of the public finances, implement the structural reforms needed for sustainable and inclusive medium-term growth, and secure the effectiveness of the 2010 reforms. This document translates the policy priorities and strategic directions laid out in the Fall 2015 GPA and the IMFC communiqué into an Executive Board agenda for the next twelve months. The key focus of this agenda is to continue to refine and adapt the Fund’s core activities―surveillance, lending, and capacity building―to the challenges faced by member countries. The 2015 Work Program continues the implementation of the 2014 Triennial Surveillance Review (TSR) recommendations and underpins a broader effort of the Fund to respond to the needs of the membership in an even more agile, integrated, and member-focused manner.
November 19, 2015
Macroeconomic Developments and Prospects in Low-Income Developing Countries - 2015
Description: This paper examines macroeconomic developments and prospects in low-income developing countries (LIDCs) against the back-drop of a sharp fall in international commodity prices. The focus here—by contrast with IMF (2014a)—is on recent developments and the near-term outlook, recognizing that the new price environment is likely to remain in place for several years to come. The paper also includes a section examining the experience of LIDCs with capital inflows over the past decade.
November 13, 2015
Review of the Method of Valuation of the SDR
Description:
This paper provides the basis for the quinquennial review of the method of valuation of the Special Drawing Right (SDR). The review considers the composition, size, and weighting of the SDR currency basket and the financial instruments used to determine the SDR interest rate.
The analysis in this paper is guided by the informal discussion of Executive Directors in July on initial considerations for the review. In light of Directors’ preference, the two currency selection criteria for SDR inclusion are maintained. Since China continues to meet the export criterion, a key focus of this paper is on assessing whether the renminbi (RMB) could be determined to be a freely usable currency, which is the second criterion.
The paper documents the rising international use and trading of the RMB since the 2010 SDR valuation review. A range of indicators suggests that use of the RMB in international transactions has risen substantially, albeit from a low base. The paper also finds that the RMB has become far more actively traded in foreign exchange markets, with sufficient depth to support operations of the size Fund members might undertake without an appreciable change in the exchange rate.
Full Text also available in Chinese.
November 9, 2015
Crisis Program Review
Description:
This paper provides an updated review of Fund-supported programs undertaken during the global financial crisis. It follows a series of previous reviews during 2009–12 that assessed program design and outcomes during the surge in Fund supported programs since 2008.
The review covers experience during 2008–15 for 32 arrangements financed from the Fund's general resources account (GRA). It covers 27 countries for which arrangements were approved during September 2008–June 2013, with two years or more of program performance.
November 3, 2015
Public Debt Vulnerabilities in Low-Income Countries - The Evolving Landscape
Description:
This is the first joint IMF/World Bank report on public debt vulnerabilities in low income countries (LICs). It examines debt-related developments and their underlying causes since the onset of the global financial crisis. The findings will inform the upcoming review of the IMF/WB debt sustainability framework for LICs.
Over this period, improved macroeconomic performance in LICs, combined with HIPC/MDRI debt relief and high demand for commodities, contributed to improved LIC creditworthiness. At the same time, new borrowing opportunities emerged as a result of the accommodative liquidity conditions in international capital markets, the deepening of domestic financial markets for some LICs, and the growing lending activities of non-Paris Club countries. These new financing possibilities helped mitigate the decline in Paris Club lending to LICs and have been associated with a shift toward greater reliance on non-concessional credit. The changing financing landscape has been most significant for frontier LICs.