Nina Budina

Liquidity Constraints and Investment in Transition Economies: The Case of Bulgaria

We use Bulgarian firm level data to investigate the impact of liquidity constraints on investment performance. Internal funds are an important determinant of investment in most industrialized countries. We test whether internal funds are important for firm investment during the current transition process in Bulgaria. We use a simple accelerator model of investment to test whether liquidity constraints are relevant in the case of Bulgaria. Our estimations are based on data for the period 1993-1995, prior to the Bulgarian financial crisis in 1996-97. It turns out that Bulgarian firms are liquidity constrained, and that firms’ size and financial structure help to distinguish between firms that are more and less liquidity constrained. In our view liquidity constraints can be given a different interpretation in the case of transition economies as compared to Western economies. A more in depth analysis of the data reveals that liquidity constraints and consequently the access to external funds for Bulgarian firm investment are to be seen against the background of soft-budget constraints and the failure of the financial system to enforce an efficient allocation of funds. In our view the lack of liquidity constraints may actually been seen as a sign of financial weakness in the case of Bulgaria.

Nigeria's growth record : Dutch disease or debt overhang ?

Nigerias oil boom has not brought an end to perennial stagnation in the non-oil economy. Is this the unavoidable consequence of the resource boom or have misguided policies contributed? This paper indicates that the extreme volatility of expenditure rather than Dutch Disease effects are behind the disappointing non-oil growth record. Fiscal policies failed to smooth highly volatile oil income; on the contrary government expenditure was more volatile than oil income. The authors provide econometric evidence showing that volatility of expenditure was increased by debt overhang problems. Moreover, they also find evidence of voracity effects that exacerbated expenditure volatility prior to 1984.

Fiscal Rules at a Glance

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Fiscal Sustainability, Volatility and Oil Wealth: A Stochastic Analysis of Fiscal Spending Rules

Whether fiscal policy is sustainable depends on a governments future revenue and expenditure streams, both of which are highly uncertain. In commodity-rich countries, this problem is intensified by unpredictable and volatile commodity prices. We show how spending rules for oil income and non-oil primary deficits interact and influence the stochastic distribution of future debt stocks and demonstrate the variance reducing impact of feedback rules for primary deficits in a case study of oil-and-gas exporter Azerbaijan.

Long-Term Fiscal Risks and Sustainability in an Oil-Rich Country: The Case of Russia

Russia entered the global crisis with strong fiscal position, low public debt, and large fiscal and monetary reserves, which helped it cushion the crisis shocks. But the rise in the non-oil fiscal deficit in 2007-08 and, more importantly, the massive impact of the global crisis in late 2008 and 2009 have dramatically altered Russias medium-term and long-term economic and fiscal outlook. While Russia is emerging from this crisis on a much stronger footing than during the 1998-09 crisis thanks to its strong-pre crisis fundamentals, large fiscal reserves and solid management of the crisis, it will nevertheless need to implement sustained fiscal adjustment in the coming years. Both revenue and expenditure measures will be needed. This will require 2-3 percentage points of GDP in fiscal adjustment for about five years in addition to keeping total expenditure levels at a relatively low 31.5 percent of GDP, consistent with long-term social expenditure needs and requirements of long-term fiscal sustainability. Following a period of adjustment, if Russia would restrain its long-term non-oil deficits to the permanent income (PI) equivalent of its oil revenues as proposed in this paper, its fiscal policy will return to long-term sustainable path. The long-term, sustainable level of non-oil fiscal deficit is estimated at about 4.3 percent of GDP. With the 2009 actual non-oil fiscal deficit of about 14 percent of GDP, this implies significant and sustained fiscal adjustment over the medium term. The expenditure needs of the social security system as well as a reduction in key non-oil taxes represent a major fiscal risk to all scenarios.

The "How to" of Fiscal Sustainability : A Technical Manual for Using the Fiscal Sustainability Tool

Fiscal sustainability analysis (FSA) is an important component of macroeconomic analysis for many developing countries. To further enhance understanding of fiscal policy and the constraints faced by policymakers, the authors develop a toolkit for FSA in middle-income countries which builds on previous work in this area and on new developments in dealing with uncertainty. The FSA toolkit includes an Excel-based FSA tool and a technical manual accompanying it. The FSA tool is standardized and simple, but at the same time flexible enough to allow for user-defined country-specifics. This manual provides step-by-step technical instructions for running the FSA tool and includes mathematical appendices and a glossary.

Quantitative Approaches to Fiscal Sustainability Analysis: A New World Bank Tool Applied to Turkey

Fiscal sustainability analysis (FSA) is an important component of macroeconomic analysis. The authors review various quantitative approaches to FSA with a major objective to bring these approaches together and to present a user-friendly tool for FSA that reflects modern developments. They combine a dynamic simulations approach with a simplified version of the steady-state consistency approach. They also incorporate two different methods to deal with uncertainty: user-defined stress tests and stochastic simulations. The tool goes further by evaluating the required fiscal adjustment as a consequence of the stochastic realizations of the exogenous variables. Furthermore, the fiscal sustainability tool incorporates an endogenous debt feedback rule for the primary surplus, a fiscal policy reaction function. Besides outlining the theoretical framework, the authors also present a case study for Turkey.

Money Demand and Seigniorage in Transition

The major objective of the paper is to provide estimates of a money demand function and of the optimal seigniorage in the Czech Republic and compare it to other transition countries such as Bulgaria, Poland and Romania, and analyze the scope of budget deficit financing through money printing. To calculate the optimal seigniorage the steady-state condition is applied to the seigniorage maximizing rate of money growth. Hence, the discussion on using models of this type in a transition economy is an important part of the paper.An inherent part of this analysis is an estimate of money demand functions. Besides standard methods such as OLS or instrumental variables the possibility of a simultaneous estimate of the money demand function for the Czech Republic with the function of a reference country through seemingly unrelated regression is considered. This approach removes seasonality in data without losing observations or freedom, and consequently improves the estimate.The analysis shows that the interest rate started to play its role in the demand for money in spite of extensive use of direct measures in monetary policy and extensive credit rationing. It is emphasized that the Czech Republic applied restrictive fiscal and monetary policies with the pegged exchange rate as a nominal anchor during transition. This cannot be considered as a general framework for the transition period but it is possible because of the relatively stable macroeconomic situation and sufficient international reserves. The analysis confirms that Czech Republic does not tend to use seigniorage to finance its deficit.

Recognizing the Bias: Financial Cycles and Fiscal Policy

This paper argues that asset price cycles have significant effects on fiscal outcomes. In particular, there is evidence of debt bias—the tendency of debt to increase over the cycle— that is significantly larger for house price cycles than stand-alone business cycles. Automatic stabilizers and discretionary fiscal policy generally respond to output fluctuations, whereas revenue increases due to house price booms are largely treated as permanent. Thus, neglecting the direct and indirect impact of asset prices on fiscal accounts encourages procyclical fiscal policies.

'How To' of Fiscal Sustainability in Oil-Rich Countries: The Case of Azerbaijan

Assessing fiscal sustainability – i.e. considering whether or not a country can maintain its current fiscal policies without running into solvency problems and possible default – requires projections on a government’s future revenue stream, expenditures and contingent liabilities within a macroeconomic framework. Such an exercise is always subject to uncertainty. In commodity-rich countries dependent upon resource revenues, this is intensified by unpredictable and volatile commodity prices. We apply the Framework for Fiscal Sustainability and Managing Uncertainty to Azerbaijan: we explore the link between non-oil primary deficit and Oil Fund allocation rules and assess their impact on fiscal sustainability in Azerbaijan and allow for explicit analysis of the effects of uncertainty through scenario analysis and full stochastic analysis allowing Value-at-Risk assessments.