MDSX m08 Slides

Macroeconomic Diagnostics (MDSx)
Module 8
Fiscal Sustainability
This training material is the property of the International Monetary Fund (IMF) and is intended for use in IMF Institute for Capacity Development (ICD) courses.
Any reuse requires the permission of the IMF and ICD.
Required to effectively communicate video segments.
Course: MDSx
Module: 8
Section: 1
Video #: 1
Video Title: About Module 8
Video Type: Standard
Course: MDSx
Module: 8
Section: 2
Video #: 1
Video Title: Fiscal Sustainability
A definition…
A situation in which a government is expected to be able
to continue servicing its debt without an unrealistically Required Negative

Space
(Not for instructor
large adjustment to its balance of revenues and notes.)
Please do not adjust

text field positions.
expenditure, without debt restructuring or default
Key Concepts for Assessment:
Solvency
Ability to repay debt
Required Negative
Space
(Not for instructor
Liquidity notes.)
Ability to rollover debt Please do not adjust
Realistic adjustment
Plausible primary balance path
Solvency
Key Points:
Current debt stock is fully covered by expected future

primary balances
Required Negative
Space
(Not for instructor
Government able to service debt without renegotiating or notes.)
defaulting Please do not adjust

Debt ratio stabilizes or declines

Liquidity
Key Points:
Financing is sufficient to meet maturing obligations

Required Negative
Space
(Not for instructor
Continued market access and low risk of rollover notes.)

Well balanced debt profile and debt level is “not too high”
Realistic Adjustment
Key Points:
Realistic macroeconomic assumptions and projections

Required Negative
Space
(Not for instructor
Adjustment is economically and politically feasible notes.)

Potential growth is preserved at a satisfactory level

Debt Sustainability Analysis
The International Monetary Fund (IMF) Framework:
Market Access Countries (MAC) DSA

For high income countries Required Negative
Space
(Not for instructor
notes.)

Low Income Countries (LIC) DSF text field positions.
For low income countries

Course: MDSx
Module: 8
Section: 2
Video #: 2
Video Title: Public Debt Burden Indicators
Gross Debt
A definition…
All liabilities that require future payment of interest and/or
principal by the debtor to the creditor, or all liabilities held Required Negative
Space
(Not for instructor
in debt instruments. notes.)

Gross Financing Needs
A definition…
Overall new borrowing requirement (budget deficit) plus
debt maturing during the year. Required Negative

Space
(Not for instructor
notes.)

Gross
Financing
Needs
= Primary
Deficit + Debt
Service
Debt Burden Indicators
Used by IMF DSA Frameworks:
Gross Financing
Debt Stock
Needs Required Negative
Space
(Not for instructor
notes.)

Export Fiscal
GDP
Proceeds Revenue
Course: MDSx
Module: 8
Section: 3
Video #: 1
Video Title: Closed Economy Public Debt Dynamics
Government Budget Constraint
Government Expenditure Government Revenues
 non-interest (Gt)
=  tax and non-tax (Tt)
Required Negative
Space
 interest (it Dt) (Not for instructor
New debt (Dt - Dt-1) notes.)

𝑮𝒕+𝒊𝒕 𝑫 𝒕−𝟏=𝑻 𝒕 +(𝑫 𝒕 − 𝑫 𝒕−𝟏)

Insert visual content
to the left.
i = nominal interest rate

Government Primary Balance
The primary balance, PB is the difference between
revenue (T) and non-interest expenditure (G): Required Negative

Space
(Not for instructor
𝑷𝑩 𝒕 =𝑻 𝒕 − 𝑮 𝒕
notes.)

Insert visual content

to the left.
Public Debt Dynamics
In a Closed Economy:
𝑫 𝒕 =( 𝟏+𝒊𝒕 ) 𝑫 𝒕 −𝟏 − 𝑷𝑩 𝒕 Required Negative

Space
(Not for instructor
notes.)

𝑫𝒕 𝑫 𝒕 −𝟏 𝑷𝑩 𝒕
= ( 𝟏 +𝒊𝒕 ) −
𝒀𝒕 𝒀𝒕 𝒀𝒕
Required Negative
Space
𝐷𝑡−1 is divided by 𝑌𝑡 (Not for instructor
notes.)
We can express: 𝑌 𝑡 =𝑌 𝑡 −1 ( 1+ 𝑔𝑡 ) (1 + 𝜋 𝑡 )
We can also write: (1+ 𝑖𝑡 )= ( 1 +𝑟 𝑡 ) (1 + 𝜋 𝑡 )
r = real interest π = inflation rate based g = real growth

rate on GDP deflator rate
(1 +𝑟 𝑡 )
𝑑𝑡 = 𝑑 𝑡 − 1 − 𝑝𝑏𝑡
Required Negative
Space
(1 +𝑔 𝑡 ) (Not for instructor
notes.)

Course: MDSx
Module: 8
Section: 3
Video #: 2
Video Title: Closed Economy Public Debt Dynamics in Excel
Video Type: Excel
EXCEL
Placeholder to insert full canvas diagram or chart.
(Draft in PowerPoint and within the guides.)
Course: MDSx
Module: 8
Section: 3
Video #: 3
Video Title: Interest Rate - Growth Differential
Interest Rate - Growth Differential
The differential between the average interest rate paid on
government debt and the growth rate of the economy.

Required Negative
Space
(1 +𝑟 𝑡 ) (Not for instructor
𝑑𝑡 = 𝑑 𝑡 − 1 − 𝑝𝑏𝑡 notes.)
(1 + 𝑔 𝑡 ) Please do not adjust
(𝑟 𝑡 − 𝑔𝑡 )
𝑑 𝑡 − 𝑑 𝑡 −1 = 𝑑 𝑡 − 1 − 𝑝𝑏𝑡
( 1 +𝑔𝑡 )
Key to assess government debt sustainability.

Positive: unfavorable debt dynamics
Negative: favorable debt dynamics
Required Negative
Space
(Not for instructor
notes.)

The higher the Interest Rate - Growth Differential (i > g), the text field positions.
larger the fiscal effort necessary to put the debt ratio on a

downward path.
An Example:
Projections
Required Negative
Space
(Not for instructor
notes.)

An Example:
Projections
Required Negative
Space
(Not for instructor
notes.)

Course: MDSx
Module: 8
Section: 3
Video #: 4
Video Title: Open Economy Public Debt Dynamics
In an Open Economy:
d f
Dt  D  et  Dt
t
Required Negative
Space
Debt stock at time t Exchange rate at time t (Not for instructor
notes.)

Dynamics of total debt in an Open Economy:
𝐷𝑡 =( 1 −𝛼 𝑡 − 1) ( 1+𝑖𝑡 ) 𝐷 𝑡 −1 +𝛼 𝑡 −1 ( 1+𝑖𝑡 )( 1+ 𝜀 𝑡 ) 𝐷 𝑡 −1 − 𝑃𝐵 𝑡
𝑓
Required Negative
Space
(Not for instructor
notes.)
α - share of if- nominal ε – change in Please do not adjust

foreign interest rate on the exchange text field positions.
currency debt debt in foreign rate (+

in total debt currency depreciation)
In an Open Economy:
𝛼𝑡 − 1 ( 1+𝑖𝑡 ) ( 1+𝜀 𝑡 )
𝑓
( 1− 𝛼𝑡 −1 )( 1+𝑖𝑡 )
𝑑𝑡 = 𝑑 𝑡 −1 + 𝑑𝑡 −1 − 𝑝𝑏𝑡
( 1+ 𝑔𝑡 )( 1+ 𝜋 𝑡) ( 1+ 𝑔𝑡 )( 1+ 𝜋 𝑡) Required Negative
Space
(Not for instructor
notes.)
𝑖𝑓 nominal interest rates on foreign currency debt
𝑖 nominal interest rates on domestic currency debt text field positions.
g rate of real GDP growth

π rate of inflation
α share of foreign currency debt in total debt
ε change in nominal exchange rate of local currency
In an Open Economy:
( ( 1 − 𝛼 𝑡 −1 ) ( 1+𝑟 𝑡 ) +𝛼𝑡 −1 ( 1+𝑟 𝑡 )

)
𝑓
𝑑𝑡 = 𝑑𝑡 −1 − 𝑝𝑏𝑡
(1+𝑔 𝑡 )
Required Negative
Space
(Not for instructor
notes.)
𝑟=
( 1 +𝑖 )
−1 𝑓 ( 1+𝑖 ) (1+ 𝜀 )
𝑓 text field positions.
𝑟 = −1
(1+ 𝜋 ) ( 1+ 𝜋 )
is real effective interest rate is real effective interest rate on

on domestic currency debt foreign currency debt
In an Open Economy:
( 1 + 𝑟 𝑡 )
𝑤
𝑑𝑡 = 𝑑𝑡 −1 − 𝑝𝑏𝑡
( 1 +𝑔𝑡 )
Required Negative
Space
(Not for instructor
𝑟𝑤 weighted average of domestic and foreign real effective notes.)
interest rates: Please do not adjust
𝑤 𝑓
𝑟 𝑡 =𝛼 𝑡 − 1 𝑟 + ( 1 − 𝛼𝑡 −1 ) 𝑟 𝑡
𝑡
Course: MDSx
Module: 8
Section: 3
Video #: 5
Video Title: Open Economy Public Debt Dynamics in Excel
Video Type: Excel
EXCEL
Course: MDSx
Module: 8
Section: 4
Video #: 1
Video Title: Debt-Stabilizing Primary Balance
Debt-Stabilizing Primary Fiscal Balance
Is used…
To assess whether current fiscal policy is consistent with

a stable debt-to-GDP ratio.
Required Negative
Space
(Not for instructor
notes.)

To indicate how much effort is required to achieve a

stable debt ratio.
Derivation:
(1+𝑟 𝑡 )
Closed economy: 𝑑𝑡 = 𝑑 𝑡 − 1 − 𝑝𝑏𝑡
(1+𝑔 𝑡 ) Required Negative
Space
(Not for instructor
notes.)
( 1+𝑟 𝑡 𝑤
) text field positions.
Open economy: 𝑑𝑡 = 𝑑𝑡 −1 − 𝑝𝑏𝑡

( 1+𝑔 𝑡 )
Derivation:
𝑑 𝑡=𝜙 𝑡 𝑑𝑡 −1 − 𝑝𝑏𝑡 Required Negative

Space
(Not for instructor
notes.)
)
Course: MDSx
Module: 8
Section: 4
Video #: 2
Video Title: Debt-Stabilizing Primary Balance in Excel
Video Type: Excel
EXCEL
Course: MDSx
Module: 8
Section: 4
Video #: 3
Video Title: Baseline Scenario
Baseline Scenario
Built around the Macroeconomic Framework:
The most likely scenario for countries based on current

and projected government policies.
Required Negative
Space
(Not for instructor
notes.)

The programmed macroeconomic adjustment for
program (or near-program) countries.
Medium-Term Projections
Assumptions in the Baseline Scenario:

Macroeconomic assumptions –
Growth projections
Cost of financing
Required Negative
Inflation Space
(Not for instructor
notes.)
Exchange rate
Fiscal projections –
Primary balance
Medium-Term Projections
GDP growth:
Cyclical position of the economy
Other medium-term factors
Cost of financing: Required Negative

Space
(Not for instructor
Inflation forecast and monetary policy stance notes.)

Developments in the global financial markets
Primary balance path:

Projected government policies
Course: MDSx
Module: 8
Section: 4
Video #: 4
Video Title: Baseline Scenario in Excel
Video Type: Excel
EXCEL
Course: MDSx
Module: 8
Section: 5
Video #: 1
Video Title: Debt Level
High Debt
Related Risks:
Large primary fiscal surpluses to service it
Exacerbates vulnerability to shocks Required Negative

Space
(Not for instructor
notes.)
Exposure to a higher risk of a rollover crisis Please do not adjust

May be detrimental to economic growth

Debt Burden Indicators
Benchmarks:
Country specific definition of “low” and “high” levels of debt. Required Negative
Space
(Not for instructor
notes.)
Some countries run into difficulties at relatively low levels of Please do not adjust
debt.
IMF MAC Benchmarks for Classification
Public debt level (ratio to GDP):

50% for emerging markets
60% for advanced economies
Required Negative
Space
(Not for instructor
notes.)
Public growth financing needs (ratio to GDP):
10% for emerging markets
15% for advanced economies
Course: MDSx
Module: 8
Section: 5
Video #: 2
Video Title: Macro-Fiscal Stress Testing
Macro-Fiscal Stress Tests
Identifying Fiscal Risks:
Potential impact of adverse shocks on the debt path

Required Negative
Space
(Not for instructor
Macroeconomic risks comprise shocks to: notes.)

Economic growth text field positions.
Interest rates
Exchange rate
Primary balance
Contingent Liabilities
A definition…
Obligations of the government, whose timing and
magnitude depend on the occurrence of some uncertain Required Negative

Space
(Not for instructor
future event outside the government’s control. notes.)

Contingent Liabilities
Arise from explicit or implicit guarantees to:

Public entities
Public-private partnerships
Required Negative
Space
(Not for instructor
notes.)
Depositors
Support to private companies deemed too big to fail

Course: MDSx
Module: 8
Section: 5
Video #: 3
Video Title: Macro-Fiscal Stress Testing in Excel
Video Type: Excel
EXCEL
Course: MDSx
Module: 8
Section: 6
Video #: 1
Video Title: Summarizing What We Have Learned
Course: MDSx
Module: 8
Section: 7
Video #: 1
Video Title: Assessing Diagnostica

MDSX m08 Slides

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

MDSX m08 Slides

Uploaded by

Copyright:

Available Formats

Macroeconomic Diagnostics (MDSx)

A situation in which a government is expected to be able

to continue servicing its debt without an unrealistically Required Negative

Please do not adjust

Key Concepts for Assessment:

Current debt stock is fully covered by expected future

defaulting Please do not adjust

Debt ratio stabilizes or declines

Financing is sufficient to meet maturing obligations

Please do not adjust

Realistic macroeconomic assumptions and projections

Please do not adjust

Potential growth is preserved at a satisfactory level

The International Monetary Fund (IMF) Framework:

Market Access Countries (MAC) DSA

Please do not adjust

For low income countries

All liabilities that require future payment of interest and/or

Please do not adjust

Overall new borrowing requirement (budget deficit) plus

debt maturing during the year. Required Negative

Please do not adjust

Used by IMF DSA Frameworks:

Please do not adjust

Government Expenditure Government Revenues

Please do not adjust

𝑮𝒕+𝒊𝒕 𝑫 𝒕−𝟏=𝑻 𝒕 +(𝑫 𝒕 − 𝑫 𝒕−𝟏)

i = nominal interest rate

The primary balance, PB is the difference between

revenue (T) and non-interest expenditure (G): Required Negative

Please do not adjust

Insert visual content

𝑫 𝒕 =( 𝟏+𝒊𝒕 ) 𝑫 𝒕 −𝟏 − 𝑷𝑩 𝒕 Required Negative

Please do not adjust

r = real interest π = inflation rate based g = real growth

Please do not adjust

The differential between the average interest rate paid on

government debt and the growth rate of the economy.

Key to assess government debt sustainability.

Negative: favorable debt dynamics

Please do not adjust

larger the fiscal effort necessary to put the debt ratio on a

Please do not adjust

Please do not adjust

Please do not adjust

Dynamics of total debt in an Open Economy:

α - share of if- nominal ε – change in Please do not adjust

currency debt debt in foreign rate (+

g rate of real GDP growth

( ( 1 − 𝛼 𝑡 −1 ) ( 1+𝑟 𝑡 ) +𝛼𝑡 −1 ( 1+𝑟 𝑡 )

Please do not adjust

is real effective interest rate is real effective interest rate on

To assess whether current fiscal policy is consistent with

Please do not adjust

To indicate how much effort is required to achieve a

Please do not adjust

Open economy: 𝑑𝑡 = 𝑑𝑡 −1 − 𝑝𝑏𝑡

𝑑 𝑡=𝜙 𝑡 𝑑𝑡 −1 − 𝑝𝑏𝑡 Required Negative

Please do not adjust

Built around the Macroeconomic Framework:

The most likely scenario for countries based on current

Please do not adjust