Country Reports
2015
January 30, 2015
Canada: Staff Report for the 2014 Article IV Consultation
Description: KEY ISSUES Economic outlook: The Canadian economy has expanded at a solid pace since 2013, but rebalancing of growth away from household consumption and residential investment remains incomplete, owing mainly to weak business investment. Growth momentum is expected to continue alongside a strengthening U.S. recovery despite substantially lower oil prices. Risks to the outlook are modestly tilted to the downside given sluggish global growth, effects unfolding from sharply lower oil prices, and housing market risks. Key domestic vulnerabilities in housing markets and the household sector remain elevated but contained fro m a financial stability perspective. Policies for balanced and sustained recovery: An appropriate policy mix should help facilitate rebalancing to generate a broader and more durable recovery, reduce domestic vulnerabilities, and further strengthen financial system resilience: • Macro policies: Monetary policy can remain accommodative for now given that inflation expectations are well-anchored, stronger business investment is still a missing link, risks to an export-led recovery are to the downside, and housing markets are expected to cool as U.S. interest rates rise and with lower oil prices. Fiscal consolidation should proceed in light of longer-term challenges at the provincial level, but federal authorities should consider adopting a neutral stance going forward, using available fiscal resources for targeted measures to support growth. Structural policies to improve productivity in the economy would increasingly need to complement this policy mix. • Housing sector and financial sector policies: Further macro-prudential policy action may be needed to guard against risks to financial stability if household balance sheet vulnerabilities resume rising. Reforms to limit government exposure to housing markets and encourage appropriate risk retention by the private sector should continue. Improving complex coordination across federal and provincial authorities in supervision and stress- testing of depository institutions and strengthening macro-prudential and crisis management frameworks will reinforce the resilience of Canada’s financial system. Policy response to past advice: Since the 2013 Article IV Consultation mission, the authorities have taken some further steps to limit taxpayer exposure to the housing sector and strengthen mortgage insurance underwriting practices. Some work on FSAP recommendations has also started to enhance stress testing, address data gaps, and towards establishing a cooperative capital markets system. The authorities have also intensified their efforts towards addressing interprovincial trade barriers and export diversification.
January 30, 2015
Republic of Madagascar: Selected Issues
Description: This Selected Issues paper presents a study on poverty in Madagascar. Madagascar is a country with general, widespread, and increasing poverty. Most of the population is extremely poor and struggling to pay for food. Madagascar has the potential to grow rapidly. It is endowed with abundant natural resources, a unique wildlife, and a young, vibrant, and rapidly growing population. Taking full advantage of the young population will require higher investment in education and healthcare. Economic inequality appears to have declined and the poorest have in fact increased their consumption. Thus, while it is true that more people are poor today than in 2001, on average those who are deepest into poverty appear to be economically better off today than in 2001. Poverty is primarily a rural challenge. An overriding majority of the population lives in rural areas and rural poverty rates are almost double those of urban areas.
Notes: Also available in French
January 30, 2015
Republic of Madagascar: Staff Report for the 2014 Article IV Consultation
Description: KEY ISSUES Context: Madagascar is one of the poorest countries in the world. Weak economic growth has contributed to persistent and increasing poverty with deteriorating social indicators. In a fragile environment, the uncertainty linked to political instability, weak institutions, and weak governance has eroded the foundation for solid economic growth, with short-term rent-seeking having taken precedence over longer-term nation building. Outlook and Risks: The authorities are at a crossroads. A well-prioritized medium-term economic program that is implemented concertedly would increase growth and reduce poverty. This will require resources in order to undertake essential investment in infrastructure, as well as to increase social spending on education and health. However, there are downside risks, whereby a slow pace of reform implementation would keep Madagascar on a path of economic stagnation and persistent poverty. Fiscal Policy: There is a need to increase fiscal space in order to raise the level and efficiency of pro-poor/pro-growth spending while preserving debt sustainability. This will involve a broadening of the tax base, supported by a comprehensive revenue mobilization strategy, improving the composition and quality of budgetary spending, and reinforcing public financial management. Monetary and Exchange Rate Policies: To facilitate an active monetary policy and safeguard macroeconomic stability, it will be important to increase central bank independence, strengthen its oversight mechanisms, and recapitalize the central bank. A floating regime remains appropriate, but it will be important to ensure that the foreign exchange market is liquid and reflects market conditions. Structural Reforms: There is a need to strengthen the economic climate, including through improved governance and social development policies that would send a clear signal, both within society and to development partners, confirming the government’s commitment to reform. To help build public support for continued reforms, it would be advisable to build an early track record of “small victories/quick wins”.
Notes: Also available in French
January 29, 2015
Ireland: Ex Post Evaluation of Exceptional Access Under the 2010 Extended Arrangement
Description: This paper presents an Ex Post Evaluation of the 2010 Extended Fund Facility (EFF) arrangement with Ireland. The Fund approved in December 2010 an exceptional access EFF arrangement for SDR 19.466 billion (2,321.8 percent of quota) in support of Ireland’s home-grown program and as part of a broader financing package of Ireland and its European partners. The program focused on addressing the Irish banking crisis to break the adverse feedback loop between banks, the sovereign, and the real sector. It aimed to restore the banking system to health, including by establishing a smaller banking sector with high capital buffers and more stable funding sources; and to secure fiscal sustainability while limiting the near-term demand drag from fiscal consolidation. Large external financing was a key element of the crisis response. Program implementation was very strong. The program succeeded in stabilizing the banking sector and reducing its size, and fiscal developments were also broadly as anticipated. Domestic demand was, however, weaker than programmed and unemployment remained high, amid a very challenging external environment. Program success, including regaining market access at low interest rates, benefitted also from actions at the wider euro area level. The Ex Post Evaluation draws several lessons from Ireland’s experience under the EFF: ? The main lessons emerge from what worked well: Strong country ownership, setting (and meeting) realistic and tailored targets were key for success, combined with effective communication and pro-active engagement. Addressing a banking crisis requires strong and credible actions upfront. ? Some areas offer lessons for future program design: While the main pillars of the financial sector program were sound, more proactive and stronger supervisory interventions and other supportive steps could have strengthened banks’ balance sheets and bank profitability and helped resolve problem loans; bank recapitalization should be limited to those with viable medium-term business strategies; unsecured and non-guaranteed creditors of failed banks should be bailed in, provided a strategy to ring fence potential systemic risks can be put in place; macro-financial linkages require careful attention and timely steps to limit sovereignbanking sector feedback loops; fiscal policy has to be mindful of debt sustainability but also of domestic demand conditions, and it needs a clear anchor. ? There are also lessons related to Fund policies: Ireland’s EFF underscores the importance of addressing shortcomings of the systemic exemption clause in Criterion 2 of the exceptional access criteria; and it suggests the need to explore ways to secure stronger upfront commitments from monetary union authorities, when those are critical for program success.
January 29, 2015
Ireland: Second Post-Program Monitoring Discussions; Staff Report; and Press Release
Description: Ireland’s recovery has strengthened yet political challenges to adjustment appear to have increased. The recovery is led by job creation and investment financed by retained earnings rather than lending. But uncertainties around medium-term prospects are wide given external risks and domestic crisis legacies. Sustaining recovery and rebuilding space for policy maneuver are therefore key policy priorities. However, weak polls for the governing coalition and adjustment fatigue—reflected in widespread protests against water charges—may constrain policy efforts, as seen in limited fiscal adjustment in 2015. A clear strategy to underpin reaching budget balance in the medium term is needed:Budget balance is a sound medium-term goal as it will put Ireland’s high public debt firmly on a downward path and enable fiscal policy to cushion the economy. As growth is likely to diminish over the medium term, steady structural adjustment of about ¾ percent of GDP annually is appropriate to avoid undue drag on growth.A strategy is needed to achieve the restraint envisaged by the authorities in the face of strong spending pressures. Such a strategy should include reforms to generate savings while protecting core services, flexibility in reallocating spending, and preparedness to implement new measures including on the revenue side if needed.Completing bank repairs and ensuring financial resilience are needed to ensure a revival of bank lending that supports a lasting recovery: Although bank capitalization, liquidity, and profitability are much improved, nonperforming loans (NPLs) remain exceptionally high. Priorities are further progress on durable resolution of distressed mortgages—supported by more timely repossession proceedings to motivate borrower engagement on restructures—and ensuring steady workouts or disposals of distressed commercial loans.Recent proposals by the Central Bank of Ireland (CBI) to strengthen regulation of mortgage loan origination are a welcome step to increase the resilience of banks and households to property cycles and help moderate such cycles in future.
January 27, 2015
Former Yugoslav Republic of Macedonia: Fourth Post-Program Monitoring Discussions
Description: KEY ISSUES The jobs and growth agenda should remain a top policy priority, with efforts focused on relaxing key constraints for domestic firms. Priorities include properly implementing and monitoring recent initiatives to enforce payment discipline in both public and private sector contracts, as well as upgrading the professional status of inspection bodies, clarifying their mandate, and streamlining their work. The public-sector led growth strategy will put pressure on other types of spending if consolidation is to proceed in the current low-tax environment. Investment spending should target gaps in transport and energy infrastructure to maximize the payoff for medium-term growth. At the same time, with public debt rising steadily to over 50 percent of GDP by 2017, fiscal policy should aim at reducing the deficit to below 2.6 percent of GDP by 2016. In the absence of further tax policy changes to boost revenues, a comprehensive spending review that seeks to minimize the growth impact of current expenditure compression should therefore be undertaken. More comprehensive public debt management is needed to support external sustainability. To further reduce risks, particularly currency risk, the strategy should be expanded to cover the debt of SOEs and contingent liabilities. Increased reliance on foreign currency borrowing also has important implications for central bank reserve developments and domestic liquidity that should be taken into account in evaluating government financing options. The monetary easing cycle has reached its end. The combination of relaxed financial conditions and tight prudential regulation has helped revive credit growth while preserving the health of the financial sector. While temporary supply-side developments have recently generated deflationary pressures, the focus of monetary policy henceforth should be on maintaining the attractiveness of holding denar-denominated assets in support of the exchange rate peg. Outstanding credit is scheduled to fall below 200 percent of quota at end-year. The external position and capacity to pay are sufficiently strong to allow for a cessation of post-program monitoring.
January 20, 2015
Republic of Poland: Arrangement Under the Flexible Credit Line and Cancellation of the Current Arrangement-Staff Report; Press Release; and Statement by the Executive Director for the Republic of Poland
Description: KEY ISSUES Background: Poland’s strong fundamentals and sound policies helped it to successfully withstand several bouts of market turbulence and paved the way for economic recovery. While Poland has benefited from its continued transformation into a more open and dynamic economy, its substantial trade and financial linkages with global markets, combined with still-large financing needs, also make it vulnerable to external shocks. Outlook and risks: With only modest growth in its trading partners, economic activity in Poland is expected to remain moderate in the near term. Risks remain tilted to the downside amid concerns about a protracted slowdown in the euro area, continued geopolitical tensions in the region, and uncertainty surrounding normalization of monetary policy in the United States. Domestically, the risk of continued disinflation remains high. Flexible Credit Line (FCL): Against this background, the authorities are requesting a new two-year precautionary FCL arrangement with proposed lower access in the amount of SDR 15.5 billion (918 percent of quota) and cancellation of the current arrangement, approved on January 18, 2013. Poland’s improved economic fundamentals and increased policy buffers have reduced financing needs. However, external risks remain elevated. In this context, the authorities consider that a new FCL in the requested amount would provide an important insurance against external risks, help sustain market confidence, and support their economic strategy. At the same time, the authorities consider that the substantial reduction in access sends a clear signal of their intention to fully exit from the FCL once external risks recede. In staff’s view, Poland continues to meet the qualification criteria for access under the FCL arrangement. Fund liquidity: The impact of the proposed commitment of SDR 15.5 billion on Fund liquidity would be manageable. Process: An informal meeting to consult with the Executive Board on a possible FCL arrangement for Poland was held on December 19, 2014.
January 20, 2015
Georgia: First Review Under the Stand-by Arrangement and Request for Modification of a Performance Criterion—Staff Report; and Press Release
Description: KEY ISSUES Context. Macroeconomic developments have been in line with the program. Growth has recovered, led by domestic demand, with the Russia-Ukraine crisis having limited economic impact so far. Growth should reach 5 percent in 2014. Georgia and the EU started applying their Deep and Comprehensive Free Trade Area (DCFTA) agreement provisionally in September. Although some ministers left the cabinet in November, the ruling Georgian Dream government has kept its majority and has reaffirmed its commitment to Georgia’s goal of increased European integration. Outlook and Risks. Growth should remain at 5 percent in 2015. Downside risks stem from possible escalation of regional tensions and weaker recovery in the Euro area. On the upside, lower oil prices could boost growth and reduce the current account deficit. Policies. Although this year’s fiscal deficit should come in below target, the composition of spending has again shifted from capital to current and the substantial increase in government spending planned for the fourth quarter could lead to balance of payments pressures. The 3 percent of GDP deficit in the 2015 draft budget is consistent with the program objectives of preserving fiscal sustainability and supporting external adjustment. The draft budget envisages increases in pensions, teacher salaries, drug benefit coverage, and capital spending paid for by higher excises on tobacco, alcohol, and incoming international phone calls. Annual inflation rose to 3½ percent in October but remains below the National Bank of Georgia’s (NBG) inflation target of 6 percent for 2014. The stability of the lari against the U.S. dollar has resulted in appreciation against key trading partners. The current account deficit has widened in 2014 as expected with the economic recovery but should decline in the medium term supported by fiscal consolidation, exchange rate flexibility, reforms to improve competitiveness, and greater trade opportunities. Reserve accumulation under the program will strengthen resilience to shocks. The NBG is committed to implementing the FSAP recommendations. Program. The program is on track, with all September conditionality met except for the structural benchmark on preparing an access to finance study which has now been reset. SDR40 million will become available upon the completion of the review.
January 14, 2015
Senegal: Staff Report for the 2014 Article IV Consultation and Eighth Review Under the Policy Support Instrument
Description: EXECUTIVE SUMMARY Article IV issues. The government is committed to implementing the “Plan Sénégal Emergent” (PSE), which contains valid diagnostics and policies to boost growth and accelerate poverty reduction. GDP growth is projected to rise from less than 4 percent in recent years to 4.5 percent in 2014. Inflation remains low. Growth can potentially reach 7 percent by 2019 if PSE- related reforms are consistently and rapidly implemented. The authorities believe this growth rate will be achieved two years earlier. The impact of Ebola on growth will be limited in 2014 but can become substantial in 2015 should the epidemic spread in the region. Fiscal stance. The fiscal outlook has improved owing to stronger revenue performance and expenditure control, and the overall deficit is expected to fall to about 5 percent of GDP in 2014. The 2015 budget targets a further reduction in the deficit to 4.7 percent of GDP, less ambitious than the 4.0 percent of GDP recommended by staff. However, the authorities expect to limit the deficit close to the level recommended by staff by holding back appropriations for new public investment projects until feasibility studies are ready. Staff and authorities agreed that Ebola-related shocks could add 0.3 percent of GDP to the deficit in 2015. The authorities remain committed to bringing the fiscal deficit in line with the WAEMU target of 3 percent of GDP in the medium term. Structural reforms. The PSE offers an achievable development strategy, including the right mix of private investment to be crowded in by public investment in both human capital and infrastructure. However, unlocking private investment, including FDI, requires speeding up reforms to the business climate and improving public sector governance. Frontloading public investment without implementing the necessary structural reforms may jeopardize fiscal targets and debt sustainability while failing to raise growth from its sub-par trend. Program implementation. Performance under the PSI-supported program has been satisfactory with end-June 2014 program targets met except for a minor breach of the non- concessional borrowing ceiling due to weak debt management. This borrowing does not materially affect debt sustainability, and debt management weaknesses are being addressed. Staff recommends completion of the eighth PSI review and proposes a waiver of nonobservance of the assessment criterion on non-concessional borrowing.
January 14, 2015
United Republic of Tanzania: First Review Under the Policy Support Instrument
Description: KEY ISSUES Macroeconomic developments remain favorable. Economic growth was strong during the first half of 2014 and is expected to remain close to 7 percent. Inflation remains in mid-single digits, consistent with the authorities’ target of 5 percent by June 2015. New national accounts statistics show an upward revision of the 2007 GDP by 28 percent. The full series will be reflected in the program at the next review. Program performance through June was broadly satisfactory but has deteriorated since and risks have risen. While all end-June assessment criteria were met, most end-September indicative targets were missed. The continuous assessment criterion on non-accumulation of external arrears was also missed and structural reform implementation was slower than expected. These developments reflect a range of factors, including delays in donor financing related to governance concerns, delays in mobilizing external non-concessional borrowing (ENCB), revenue shortfalls, the authorities’ decision to front-load domestically-financed capital expenditure, and coordination issues. Discussions focused on how to mitigate risks to budget implementation related to financing uncertainty and revenue shortfalls. Meeting the fiscal deficit target for 2014/15 will require revising downward revenue and expenditure during the mid-year budget review. Addressing forcefully and expeditiously the governance concerns arising from the IPTL case will be critical both for the resumption of donor financing and the business environment. In the meantime, the financing mix will tilt towards larger and more front-loaded ENCB. Better coordination of monetary and fiscal policies is required to reduce, and eventually eliminate, recourse to conversion of liquidity paper into financing paper. Government arrears will be addressed comprehensively. A plan to verify and clear existing suppliers’ arrears (which continued to accumulate in 2013/14), better monitor, and prevent the emergence of new ones will be implemented in the coming year. Broad principles of a strategy to deal with arrears to pension funds have been agreed. Staff supports the authorities’ request for the completion of the first PSI review, and proposes a waiver for non-observance of an assessment criterion and the modification of assessment criteria.