Crisis, Conflict, Fiscal Space and the MDGs in Tunisia and Egypt. Rob Vos Marco V. Sanchez United Nations

Transcription

1 Crisis, Conflict, Fiscal Space and the MDGs in Tunisia and Egypt Rob Vos Marco V. Sanchez United Nations Amman, 28 March 2012

2 Crisis, Recovery, Crisis Global recession Continued financial fragility and high unemployment in advanced economies Are we on the verge of renewed financial crisis and economic recession? Volatile commodity prices Food price inflation Unstable government revenue Volatile capital flows Challenging macro policy making

3 Social impacts have varied Countries with fiscal space to conduct counter-cyclical policies have recovered faster Less impact where better social protection programs (including food price subsidies) and stronger priority human development programs But: Many countries have less fiscal space now Demand impulses inadequate if unemployment caused by more structural problems

4 The future ain t what it used to be Greater sense of economic insecurity Reaching the MDGs in uncertain and volatile environment increasingly difficult, unless synergies can be found with needs to deal with food security, unemployment, social inequality and unless more can be done to build resilience against a volatile global economy Need for integrated/coherent policy responses

5 Tunisia: a fast growing economy before the revolution One of the fastest growing economies in the MENA region Growth rooted in service sectors and labour-intensive and export-oriented manufacturing (with strong govt. support) Prudent fiscal policies External balance strengthened through remittances, tourism and strong export growth Pro-poor growth: job growth favours low-income, unskilled and semi-skilled (female) workers Robust social spending supports MDG achievement

6 So what went wrong? Some groups were left out: High rates of youth unemployment and skill mismatches in labour market (inequality of opportunities) Vulnerability to external shocks remained: Inflationary pressures from high energy and food prices Global crisis hurt tourism and export sectors Slower growth (6.3 to 3.1%), but not devastating; higher inflation (up to 5%), but not dramatic Growing discontent with overwhelming government control and perceived corruption Paradox: relatively controlled situation that ran out of hand

7 Growth costs of revolution (Tunisia, GDP growth, p)

8 Fiscal legacy for post-conflict regime Inflexibility: high share of mandatory expenditures Rising budget deficit (>3% GDP in 2009): Generous increases in public sector wages Heavy fiscal burden of food and energy price subsidies Lower government revenue because of crisis Stimulus measures Manageable public debt, however Weaker domestic financing base (domestic savings fell with lower remittance incomes)

9 Crisis, conflict and MDGs Tunisia had made much progress towards MDGs already by 2005 The global economic crisis did not halt MDG progress owing to countercyclical public spending Likely stronger impact from Revolution: Negative output growth and employment and income losses in 2011 Temporary disruption of social services

10 Fiscal implications of putting Tunisia back on track to achieve the MDGs Three baseline scenarios ( ) generated using MAMS: Reflects observed and projected growth till 2010 and alternative assumptions for period: pre-crisis/conflict (path as if economy recovers from global crisis towards pre-crisis growth rates) countercyclical (path with dip in economy caused by conflict, but government spending kept high at growth rate of 2009 countercyclical policies) pro-cyclical (path with dip in economy caused by conflict, but government spending grows pro-cyclically in line with GDP)

11 GDP and government spending in alternative baseline scenarios, (growth rate in %) GDP growth rate - pro-cyclical & countercyclical baseline scenarios GDP growth rate - pre-crisis baseline scenario Gov. consumption - pro-cyclical & pre-crisis baseline scenarios Gov. consumption - countercyclical baseline scenario

12 MDG targets not met in any scenario (1) MDG 2: primary completion rate (%) target = Contercyclical baseline scenario Pro-cyclical baseline scenario Pre-crisis baseline scenario

13 MDG targets not met in any scenario (2) MDG 4: child mortality rate (per 1,000 live births) target = Contercyclical baseline scenario Pro-cyclical baseline scenario Pre-crisis baseline scenario

14 MDG targets not met in any scenario (3) MDG 5: maternal mortality rate (per 100,000 live births) target = 18.7 Contercyclical baseline scenario Pro-cyclical baseline scenario Pre-crisis baseline scenario

15 MDG targets not met in any scenario (4) MDG 7a: drinking water coverage (% of population) target = Contercyclical baseline scenario Pro-cyclical baseline scenario Pre-crisis baseline scenario

16 MDG targets not met in any scenario (5) MDG 7b: basic sanitation coverage (% of population) target = Contercyclical baseline scenario Pre-crisis baseline scenario Pro-cyclical baseline scenario

17 How would it cost Tunisia to meet the MDG targets? MDG scenarios: public spending is scaled up to required level to meet the MDG targets. The model simulations assume non-linear trend towards the targets; that is, there are diminishing marginal returns to the interventions and other MDG determinants. Additional public spending is financed alternatively through: Domestic borrowing (db) Foreign aid (ftr) Foreign borrowing (fb) Increased direct taxation (tax).

18 Additional public spending requirements to meet the MDG targets (deviation from baseline scenario, % of GDP per year) Countercyclical Pro-cyclical Pre-crisis ftr Tax fb db ftr tax fb db ftr tax fb db Primary education current capital Health current capital Water and sanitation current capital Total current capital

19 What macroeconomic trade-offs of MDG financing? Real exchange rate appreciation exports and economic growth would somewhat be penalized, especially under the foreign-financing scenarios Weaker demand low-skilled workers Upward pressure on the skill premium: greater demand for teachers, doctors and other trained workers YET not enough to offset underlying current towards lower skill premium GDP growth weakens further with domestic borrowing or increased tax revenues to finance the MDG strategy Private spending is crowded out Additional fiscal cost of % of GDP per annum as compared with external financing scenarios

20 Labour market effects in the countercyclical scenarios (average annual growth rate, %) Base foreign aid MDG scenarios taxation foreign borrowing domestic borrowing Real wages unskilled semi-skilled skilled Employment unskilled semi-skilled skilled total

21 Sound financing of MDG strategy? Domestic borrowing and increased taxation are less desirable and perhaps infeasible options to finance MDG spending requirements in Tunisia. Low domestic savings and declining remittances. Domestic bond market not sufficiently developed. Tax burden hovers around 20% of GDP; already considered high and difficult to increase for both political and economic (large informal sector) reasons. Tunisia may have to rely on foreign resources in the short run to reconstruct its political system, spur economic growth and broaden the tax base in order to finance human development goals.

22 Public debt in the baseline and foreignborrowing (fb) scenarios (% of GDP) fb - pre-crisis fb - pro-cyclical fb - countercyclical baseline - pre-crisis baseline - pro-cyclical baseline - countercyclical all baselines all baselines

23 Additional annual foreign aid and tax revenue requirements to finance cost of MDGs, (deviation from baseline scenario, % of GDP) Tax revenue Foreign aid (tax financing scenario) (ftr financing scenario) Countercyclical baseline Pro-cyclical baseline Pre-crisis baseline

24 Conclusions Growth costs Revolution in simulations estimated at about 2% of GDP (latest estimates: twice as much). Impact on MDG costs is small compared with spending requirements without Revolution but total requirements significant (5-6% of GDP p.y.) because of need to concentrate spending to close remaining gaps during The MDG strategy as such does not dynamize economy: Macroeconomic trade-offs Productivity gains from greater MDG achievement take time to materialize Labour market frictions remain

25 Conclusions (2) Because of short-to-medium run macroeconomic trade-offs: Tunisia will have to rely on foreign resources to reconstruct its political system, spur economic growth and finance development goals May have to rely on foreign aid to avoid (too) high public debt. Aid inflow would need to be about 6% of GDP over next five years (or between US$2.7 billion and US$3.9 billion per annum), less than offered by G8

26 Conclusions (3) Use of resources: Multi-year timeframe no piecemeal aid, but coordinated behind national development strategy only conditionality is to meet targets of NDS allow for gradual build-up of institutions, and allow for fiscal expansion during post-conflict reconstruction To dynamize growth, resolve skill matches in labour market (through higher value added diversification) and broaden own tax base complementary policies are needed as part of medium-term national development strategy

27 Egypt: Many similarities with Tunisia Similarities Robust GDP growth: 7% per annum in Affected by global crisis, but not dramatically and responded to with stimulus package On track to achieve most of the MDGs. Unemployment and inequality remain a problem. Key differences Growth has not been pro-poor High budget deficits, high initial public debt Low tax base Egypt faces bigger fiscal challenges, but MDG gaps are less (less spending requirements) and potential fiscal space larger (scope for increasing taxes)

28 Egypt: faster past progress, lower additional spending needed to meet MDGs MDGs 2 and 7b in simulated financing scenarios, (deviation from baseline, % of GDP) Foreign aid Domestic borrowing Foreign borrowing Moderate growth scenario - current capital total Optimistic growth scenario - current capital total

29 Questions for discussion What key policy questions for Jordan? How is global slowdown affecting economy? What impact on labour market? Any effect on progress towards MDGs and other social goals? Can social spending be sustained at adequate levels for achieving MDGs? Would this yield fiscal problems or other macroeconomic trade offs? How could model-based analysis help strengthen policy dialogue?

30 Crisis, Conflict, Fiscal Space and the MDGs in Tunisia and Egypt Rob Vos Marco V. Sanchez United Nations Amman, 28 March 2012

31 Supporting tables

32 Real macroeconomic indicators in MDGfinancing scenarios, (deviation from baseline scenario, % annual growth) Countercyclical Pro-cyclical Pre-crisis ftr tax fb db ftr Tax fb db ftr tax fb db Consumption - private Consumption - government Fixed investment - private Fixed investment government Exports Imports GDP at market prices Total factor employment (index) Total factor productivity (index) Real exchange rate (index)

33 Egypt: Borrowing space is limited for financing the MDG strategy Egypt: Domestic and foreign government debt in simulated financing scenarios, 2015 (% of GDP) Baseline scenario Domestic borrowing Foreign borrowing Moderate growth scenario - domestic government debt foreign government debt Optimistic growth scenario - domestic government debt foreign government debt