The IMF, fiscal space and development programmes

26 September 2008

By Nancy Dubosse, Afrodad

IMF programmes for low-income countries continue to restrict governments’ choices of how to fund development and how to manage the trade-offs.

Fiscal space refers to the amount of freedom governments have to control both their revenues and their expenditures. At the mid-way point for achieving the Millenium Development Goals (MDGs), it is clear that meeting them will require governments to undertake social spending that makes use of both domestic revenue and foreign aid. Countries require the space to develop appropriate fiscal frameworks to raise and allocate revenue, but the IMF may be restricting their ability to do this.

The IMF’s definition of fiscal space is the room in a government’s budget that allows it to provide resources for a desired purpose without damaging the sustainability of its financial position or the sustainability of the economy. Fiscal space is created by evaluating revenues from foreign and domestic sources, and then prioritising expenditures and improving their efficiency. This definition focuses on the current basket of resources available.

Others, particularly those within civil society, focus instead on the government’s capacity to fund economic and social infrastructure necessary to aid growth and development, without necessarily restricting it to existing resources. Additional resources, including increased grants or borrowing, would expand the fiscal space so that more could be spent on priority activities.

Experience on the ground

Forthcoming Afrodad research, African experiences with the PRGF and fiscal space, explores the intersection between fiscal space and the ownership principle. It finds that countries under the Poverty Reduction and Growth Facility (PRGF) and the Policy Support Instrument (PSI) may not have choices about their spending and, most importantly, are not being allowed to manage trade-offs. This calls into question the sovereignty of the countries over their development strategies.

There is no doubt that structural benchmarks and conditions of the PRGF and PSI have an impact on fiscal space. Their primary aim is to improve the fiscal position through better collection of taxes and improved management of public resources, but these conditions limit the options that a government has in developing the appropriate fiscal framework for its development strategy.

Of the five countries studied (Cameroon, Malawi, Mozambique, Rwanda, and Uganda) the common conditions are ceilings on new domestic and foreign borrowing, and limits on arrears in debt repayment. Although contracting new debt would erode the fiscal space created by debt relief, and is a potentially unsustainable means of financing development programmes, it should remain a policy option of the government. The decision to borrow should be influenced by internal forces (including parliamentary debate, and public consultations) and not external actors.

What also comes out strongly in the study is that fiscal space has become synonymous with increases in public spending; that is, a widening of budget deficits. This ignores the basket of policy options available to the partner country, and the fact that deciding how to raise and allocate resources is a fundamentally political decision. The sustainability of the fiscal space created by debt relief is also called into question as countries such as Cameroon and Malawi take on more debt, including to the IMF.

Overall, ownership of PRGFs and PSIs is narrow. Citizens are not adequately consulted on the issues and lack the capacity to question them. Local governments and parliaments are similarly often in the dark. Considering that fiscal space is really the political space to decide on government expenditures, this absence of broader democratic ownership is particularly worrying.