Tunisia - Macroeconomic and Fiscal Framework

1. Tunisia - Macroeconomic and Fiscal Framework Mario A. Gutierrez Macroeconomic and Fiscal Expert

2. Contents • Concept and Uses of a Macroeconomic Framework • Functional Relationships in Financial Programming: How it works. Flow of Funds concept. • Example of Financial Programming short-term: Demand Management Policies; and Financial Programming medium-term: Supply side Policies (Structural Policies). • National Accounts. • External accounts. • Government Accounts. • Monetary/Financial accounts.. • Interrelationships among the macroeconomic accounts. Macroeconomic Framework and Economic Policy

3. What is a Macroeconomic Framework? • A macroeconomic framework provides a consistent picture of the macroeconomic situation of a country: GDP growth, inflation, the government balance and financing, and relations to the external accounts. • Relies on interrelationships among key macroeconomic variables: ex. GDP growth and tax revenue. • As it takes into account the interrelationships among the four macroeconomic sectors of the economy (real, fiscal, external and monetary/financial sectors) it ensures consistent projections for GDP and the government budget: i.e., projections that satisfy macro-economic identities and constraints. Macroeconomic Framework and Economic Policy

4. Uses of a Macroeconomic Framework • Budget preparation: – Revenue envelope (GDP growth and transfers) and interest payments: determines room for primary expenditures – Financing required (government borrowing requirements) and how it affect the public debt? – What room does the budget leave for private sector credit? • Financial Programming (short and medium term): – Consistent set of policy measures designed to achieve a sustainable balance of payments and induce price stability and growth. – What adjustments are required for fiscal sustainability and price stability, and to stimulate economic growth? Macroeconomic Framework and Economic Policy

5. Functional Relationships in Financial Programming: How it works: Flow of Funds concept • The economy is divided into four aggregate analytical sectors: Private sector, Non-Financial Public sector, Banking sector, and External sector. For each sector we distinguish between the sources and uses of funds: • Sources (right side): sources to finance the acquisition of financial assets. • Uses (left side): net acquisition of financial assets (including money). Macroeconomic Framework and Economic Policy

6. Macroeconomic Sectors Private Sector Government Monetary/Financial Sector Rest of the World Macroeconomic Accounts National Accounts Fiscal Accounts Monetary/Financial Accounts Balance of Payments Macroeconomic Framework and Economic Policy

7. Sources: Sp - Ip: Private Saving (national disposable income – private consumption)- Private Investment. Uses:dMd - Dp - dFp: Change in the demand for money – Change in the private sector’s domestic and foreign demand for credit. Macroeconomic Framework and Economic Policy

8. Sources:Sg - Ig: Non-Financial Public Sector Savings (current revenue – current expenditure) – Public Sector Investment. • Uses: -dFg - dDg: Change in the non-financial public sector’s net foreign borrowing - Change in the non-financial public sector’s domestic demand for credit. Macroeconomic Framework and Economic Policy

9. Sources:dM - dFb: Change in the supply of money + Change in the financial sector’s foreign borrowing. • Uses:dR + dD: Change in foreign rserves + Change in total domestic credit (= dDp + dDg). Macroeconomic Framework and Economic Policy

10. Sources:Sx: External saving = - balance in the current account of the balance of payments. • Uses:dF – dR: Change in the aggregate foreign borrowing of the country – change in net international reserves. Macroeconomic Framework and Economic Policy

11. Consolidating Sources and Uses • (1) (Sp + Sg + Sx) = (Ip + Ig) (total saving = total investment) Consolidating only the three domestic sectors gives us the balance of payments: (Sg + Sp) – (Ip + Ig) = - Sx = dR – dFp – dFg - dFb • (2) Sn (national saving) – I (domestic investment) = - Sx = dR – dF (financing of the gap) • An excess of national saving over domestic investment is reflected in a surplus in the current account of the balance of payments (negative foreign saving), which is also reflected in an accumulation of international reserves and decline of foreign borrowing (capital account of the balance of payments). Macroeconomic Framework and Economic Policy

12. The flow of funds scheme helps to visualize the links that exist between the changes in savings and investment and changes in the financial variables (M, D, and F) and changes in the capital account of the balance of payments (including changes in foreign reserves). • The flow of funds helps visualize the links between the public and private sector: For a total of credit available to the economy: more credit to the government → less credit available for the private sector Macroeconomic Framework and Economic Policy

13. Example of Financial Programming: Demand Management Policies • In a short term financial programming the objective is an urgent adjustment to financial flows to reduce pressures on inflation, the public debt, and the balance of payments. Problem: A country or region in a Monetary Union: No independent exchange rate and no independent monetary policy: • Diagnostic: Public balance is deteriorating and the public debt is growing. Access to foreign financing is narrowing. Inflation is rising. Financial program: Objective: Contain the explosive growth of the public debt. Targets: Set a ceiling for the public sector primary and overall balance (public sector borrowing requirements) Instruments: Reduction of government spending → reduction of government borrowing requirements → reduction of demand pressures (on inflation) → leave more space for growth of credit to the private sector. Macroeconomic Framework and Economic Policy

14. Example of Medium Term Programming: Supply side Structural Policies • In medium term programs economic growth, investment and savings (national and foreign) are at the center. Objective: Raise domestic investment to stimulate economic growth. Target: Increase national investment in non traditional sectors. Instruments: - Restructure the government budget to leave space for additional public investment in infrastructure and human capital (health and education). - Improving the efficiency of the financial system to stimulate private savings and investment. - Improve regulations to protect savers and investors. - Improve incentives for non-traditional sector activities. Macroeconomic Framework and Economic Policy

15. National Accounts • Framework that classifies and aggregates real economic activity  GDP  National Income • Three equivalent approaches to GDP Macroeconomic Framework and Economic Policy

16. Gross domestic product • Production approach • GDP is the sum of all value added • Income approach • GDP is the sum of all incomes • Expenditure approach • GDP is the sum of all expenditures Macroeconomic Framework and Economic Policy

17. Macroeconomic Framework and Economic Policy

18. External accounts: Balance of payments • What is the BOP? • Systematic summary of economy’s transactions with the rest of the world, during specific time period (flows) Macroeconomic Framework and Economic Policy

19. Credit (+) Debit (–) Exports of goods Imports of goods Trade Account Exports of Services Imports of Services Income received from abroad Income paid abroad Transfers received from abroad Transfers sent Current Account Capital Transfers (incl. debt forgiveness) Acquisition of non-prod. non-fin assets Sale of non-produced non-fin. assets Capital and Financial Account Increases in foreign liabilities Increases in foreign assets a. FDI from abroad a. Capital Transfers, FDI abroad b. Portfolio equity sold b. Portfolio equity bought c. Financial liabilities incurred c. Other investments (loans, trade credit, bank deposits, etc) (or repayment of previous debts) Overall Balance Decreases in reserves Increases in reserves Net Change in Foreign Reserves BOP components

20. Government Accounts (GFS 1986) 1.Total Revenue and Grants RGg Revenue Rg -Current CRg Tax revenue Nontax revenue -Capital Grants 2.Total Expenditure and Net Lending GNLg Expenditure Gg -Current CGg Wages and salaries Goods and services Interest Subsidies and other current transfers -Capital CAPGg o/w: Fixed capital formation Ig : Government investment -Net Lending NLg Cg: Government consumption 3.Overall Balance (1 - 2 ) GOB = RGg - GNLg 4.Financing (4.1 + 4.2 = -3)Fg= NEFg + NDFg 4.1 External NEFg 4.2 Domestic NDFg = NDCg + NBg Bank NDCg Nonbank NBg

21. Monetary/Financial accounts • Systematic summary of Assets and Liabilities of Banking Sector, at a specific point in time. (Balance sheet: Stocks) • Includes the Monetary Authority, Deposit Money Banks (Commercial Banks), and the Monetary Survey Macroeconomic Framework and Economic Policy

22. FinancialSystem (Financial Survey) Banking System (Monetary Survey) Other Financial Institutions (Consol. Balance Sheets of OFI) Monetary Authorities (Balance Sheet of the MA) Deposit Money Banks (Consol. Balance Sheets of the DMB) Role and structure of financial system • Financial system intermediates resource flow among economic sectors.

23. Monetary authority • Functions: • Issues currency • Holds country’s foreign reserves • Acts as banker to government • Oversees monetary system • Serves as lender of last resort

24. Monetary authorities: Balance sheet

25. Deposit money banks • Functions: • Financial intermediation between savers and investors. • Help transmit effects of monetary policy: • Affect the money supply and liquidity through policies on deposit taking and lending.

26. Deposit money banks: Balance sheet

27. Monetary survey • What is it? • Consolidated balance sheet for entire banking system: Consolidates balance sheet of DMBs and MA. • Monetary statistics are stock data. • Function: • Allows monitoring of monetary and credit developments. Needed for monetary policy.

28. Monetary survey: Balance sheet of the banking system

29. Deposit money banks: Balance sheet Macroeconomic Framework and Economic Policy

30. Interrelations among the macroeconomic accounts

31. Government Accounts GFS 2001 Total Revenue and Grants Revenue Tax and nontax revenue Capital revenue Sales of fixed assets, stocks, land, and intangible assets Expense Capital transfers from nongovernmental sources Grants Total Expenditure Net/Gross Operating Balance Current expenditure Net acquisition of NFA’s Capital expenditure Purchases of fixed assets, stocks, land, and intangible assets Capital transfers Lending minus repayments Net Lending/Borrowing Lending minus repayments (policy purposes) Net acquisition of FA’s Deficit/Surplus Financing Change in cash, deposits, securities & equity held for liquidity purposes Net incurrence of liabilities Net Borrowing Privatization proceeds