Country Reports

July 24, 2014

People’s Republic of China—Macao Special Administrative Region: Staff Report for the 2014 Article IV Consultation Discussions

Description: KEY MESSAGES Setting. Discussions took place for the first time since the handover of Macao SAR from Portugal to China in 1999. Prudent macroeconomic management has underpinned rapid development in the territory, which is now the world’s largest gaming center. As a small, open and tourism-dependent economy, Macao SAR is currently also benefiting from loose global monetary conditions and a Mainland-related boom. Outlook and risks. Growth should stay strong over the next few years at 8–10 percent buoyed by gaming exports and investment, with inflation remaining around 5–5½ percent. However, the economy is vulnerable to external shocks, in particular a slowdown in tourism, due to shocks in the Mainland or Hong Kong SAR or other setbacks to the global recovery. The buoyant property market could also correct if demand fundamentals shift or interest rates rise abruptly with the withdrawal of unconventional monetary policy abroad. Macroeconomic policies. The policy stance is appropriate, with scope for further tightening of macroprudential policies should property prices continue to rise sharply. If downside risks materialize, targeted fiscal stimulus should be used to buttress growth. In the event of a severe property downturn, some countervailing measures could be cautiously unwound. The currency board is the best arrangement for Macao SAR. Financial stability. Important progress has been made in strengthening financial stability in line with the 2011 FSAP recommendations. Prudential measures should focus on managing potential credit and liquidity risks from a gaming slowdown and the property sector, as well as spillovers from shocks in the Mainland and Hong Kong SAR. Longer term challenges. Looking further ahead, Macao SAR’s public finances face a moderation in gaming revenues juxtaposed against spending needs from population aging. A sovereign wealth fund to manage part of the territory’s fiscal reserves and medium-term budgeting could therefore be useful. As the gaming sector matures, economic diversification toward other services will be key for stable growth.

July 24, 2014

Burkina Faso: Selected Issues

Description: This Selected Issues paper on Burkina Faso focuses on the growth prospects of the country. Growth has become more robust and more resilient to chocks, resulting in the economy growing faster than regional standards. However, the perception within the country is that the population has not really benefited from this strong performance and that growth was not inclusive. Indicators show that results are mitigated. The improvements can be attributed to the authorities’ numerous measures on the matter but there are still some identified constraints that must be resolved in order to truly tackle the problem of poverty in the country. The level of the authorities’ poverty line has more than tripled over that period. Despite rapid demographic growth, World Development Indicators show notable improvements in living conditions in the country. The progress in poverty reduction and growth inclusiveness has been supported by numerous measures and projects undertaken by the Burkinabè authorities. The strategy for accelerated growth and durable development is a framework of measures aiming at reducing poverty while insuring economic stability.

Notes: Also available in French

July 23, 2014

Togo: Poverty Reduction Strategy Paper-Joint Staff Advisory Note

Description: This Joint Staff Advisory Note on the Poverty Reduction Strategy Paper for Togo, discusses that the new Strategy for Boosting Growth and Promoting Employment (SCAPE) presents the overarching reference framework for the Government’s development agenda and reflects the authorities’ aspiration to become, over the next 15–20 years, a middle income country, in which the rule of law and human rights are respected. The SCAPE draws upon the results of a nationally representative household survey (QUIBB). Being comprehensive, the SCAPE offers less in terms of prioritization. In light of persistent capacity constraints and limited financing, it would have been advantageous if the SCAPE had presented a clearer perspective on the Government’s role in the development process, if a more focused growth and social development strategy had been articulated, and if SCAPE’s implementation mechanisms had been closer aligned with existing decision-making mechanisms. The IMF staff suggests that the SCAPE’s analysis could be supplemented with additional analyses on the impact of SCAPE policies on poverty, inequality and (rural) employment.

July 23, 2014

United States: Selected Issues

Description: This Selected Issues paper on the United States of America examines the recent US labor force penetration rate (LFPR) dynamics. LFPR dynamics can be driven by structural factors and cyclical ones related to job prospects. With participation rates for older workers lower than for prime age workers, demographic models suggest that aging of the baby boom generation explains about 50 percent of the near 3p.p. LFPR decline during 2007–2013. State-level panel regression analysis is used to tie down the cyclical effect, which is estimated to account for about 30–40 percent of the decline. Significant remaining slack in the labor market points to an important role for macroeconomic and labor supply policies. This suggests a still important role for stimulative macroeconomic policies to help reach full employment. Macroeconomic policy should remain accommodative for a while given sizeable labor market slack. This slack goes beyond that signaled by the unemployment rate and takes account of the LFPR being below trend and many employees working part time ‘involuntarily’.

July 23, 2014

Kingdom of Swaziland: Staff Report for the 2014 Article IV Consultation

Description: KEY ISSUES Setting: Swaziland has gradually recovered from the fiscal crisis of 2010-11, buoyed by the improved revenues from the Southern African Customs Union (SACU). Growth modestly recovered, and international reserves rebounded. Swaziland’s challenges, however, remain significant, in view of its high vulnerability to exogenous shocks and its sluggish growth performance, while facing significant social and development challenges with high unemployment and the prevalence of HIV/AIDS. Swaziland now stands at a critical juncture to strengthen its resilience to exogenous shocks, address its weak growth performance, and meet critical social and development needs. Outlook and risks: Under the status-quo policies, the outlook is for continued sluggish growth and increasing fiscal and external imbalances, reflecting low private investment, elevated government spending, and prospective decline in SACU revenues. Risks are associated with the high volatility of the SACU revenues, possible negative spillovers from South Africa (including higher policy rate and lower growth), and uncertain prospects for preferential trade agreements with the U.S. and EU. Strengthening Resilience to Shocks: Over the medium term, international reserves should be targeted at five to seven months of imports, and public debt be kept below 30 percent of GDP. This calls for a prudent fiscal policy stance, with fiscal deficit below 2 percent of GDP. Raising growth: It is essential to enhance the efficiency of the public sector and promote private sector-led growth through structural reforms including improving business climate and accelerating land reforms. Maintaining financial stability: Financial soundness indicators are generally strong. The strong growth of the nonbank financial sector in recent years calls for strengthening of supervision and regulation for the sector. Past advice: There is broad agreement between the Fund and the authorities on macroeconomic policy and structural reform priorities. With the authorities’ fiscal consolidation efforts and the improved SACU revenues, fiscal and external sustainability is being restored, consistent with staff’s advice. However, progress on structural reforms—including re-launching the privatization process, improving access to modern finance and improving the business climate—has been modest.

July 23, 2014

Togo: Poverty Reduction Strategy Paper

Description: This Poverty Reduction Strategy Paper highlights that Togo’s Strategy for Boosting Growth and Promoting Employment offers a medium-term development framework for implementing the Government’s General Policy Statement, the Millennium Development Goals, and the Government’s vision for making Togo an emerging economy in 15 to 20 years, as well as making it a country that respects human rights and promotes the rule of law. The return of political stability and peace to the country created a favorable environment for better governance, resumption of international assistance, and significant reduction in exterior public debt. The Government’s medium-term economic policy for 2013–2017 will essentially be used to build and consolidate the foundations for Togo’s future economic emergence. The focus will be on new priorities: boosting growth; employment and inclusion; strengthening governance; and reducing regional disparities and promoting grassroots development. Designing a national land-use plan will territorialize development by creating a more balanced national economic space. The new land-use scheme will be based on dynamic, competitive, regional economies in which the urbanization of regional capitals and secondary towns is sufficiently controlled to allow true development hubs to emerge.

July 23, 2014

United States: Staff Report for the 2014 Article IV Consultation

Description: Focus. The 2014 Article IV Consultation focused on five broad themes to strengthen the recovery and improve the long-term outlook: raising productivity growth and labor force participation, confronting poverty, keeping public debt on a sustained downward path, smoothly managing the exit from zero policy rates, and securing a safer financial system. Main policy issues. • Policies are needed to boost longer-term potential output through investments in infrastructure, raising educational outcomes, improving the tax structure, and developing and expanding a skilled labor force (including through immigration reform, job training, and providing childcare assistance for working families). • Forging agreement on a credible, medium-term consolidation plan should be a high priority and include steps to lower the growth of health care costs, reform social security, and increase revenues. In the absence of such a comprehensive agreement, efforts should still focus on identifying more modest opportunities to relax the near- term budget envelope, paid for with future fiscal savings. • An enduring consequence of the past recession has been a jump in the number of families living in poverty. Improved employment prospects and economic growth will be essential to reverse this upward movement. An expansion of the Earned Income Tax Credit and an increase in the minimum wage should also be part of the solution. • The goal for monetary policy is to manage the exit from zero interest rates in a manner that allows the economy to converge to full employment with stable prices while avoiding financial instability and negative spillovers to the global economy. This is a complex undertaking. To facilitate it, steps could be taken to expand the Fed’s communications toolkit so as to provide greater clarity on how the Federal Open Market Committee assesses progress toward its longer-run goals. • Continued regulatory oversight is needed to counter the emergence of financial imbalances, particularly those that may be growing outside of the banking system. Policies should also be deployed to keep mortgage credit accessible and attract more private capital into housing finance while minimizing risks to taxpayers. • The U.S. external position is assessed to be broadly consistent with medium-term fundamentals and desirable policies.

July 22, 2014

Zimbabwe: First and Second Reviews Under the Staff Monitored Program

Description: EXECUTIVE SUMMARY Zimbabwe’s performance under the Staff-Monitored Program (SMP) has been broadly satisfactorily through the difficult electoral transition period, and the authorities have taken corrective measures to restore a track record of policy implementation going forward. In the attached Letter of Intent (LOI), the authorities outline progress in implementing the SMP; the agreed quantitative targets and structural benchmarks to be monitored for the third review; and their plans to advance the structural reform agenda and to more generally strengthen performance under the SMP. Performance under the staff-monitored program. The SMP provided a useful anchor for Zimbabwe in an election year. However, progress in implementing the program was slowed by a long electoral process and a protracted post-election transition, as well as an adverse external environment. Thus, a number of quantitative targets and structural benchmarks were not met. The authorities have began implementing policy measures and a program of reforms aimed at addressing the fiscal gap that has emerged for 2014; improving the quality of public expenditures; enhancing financial sector stability; and moving forward delayed structural reform measures. The authorities have reiterated their continued commitment to the policies agreed under the SMP, and to enhanced engagement with the creditors and the international community. The authorities have agreed to the publication of the Letter of Intent, and the staff report.

July 22, 2014

Chile: Staff Report for the 2014 Article IV Consultation

Description:

KEY ISSUES
Politics: President Bachelet won the Presidential election on a platform to foster
inclusive growth and reduce inequality. Her government took office in March 2014 and is launching
an ambitious policy agenda that includes important reforms in several areas, including taxation,
education, productivity, and energy.
Outlook and risks: Chile’s global environment is shifting, with a dimmer outlook for its main
export, copper, and normalization of global monetary conditions. Growth has slowed markedly,
resulting in a modest output gap. The peso has depreciated, feeding into inflation. Staff projects
growth to bottom out in 2014 and then gradually recover. Key risks relate to a large and lasting
drop in copper prices and global financial volatility.
Policy mix: The freely floating peso is working as a shock absorber and will support the economic
recovery. The policy mix with broadly neutral fiscal and accommodative monetary policy is
appropriate. Room for further monetary easing has narrowed but space remains if domestic demand
flounders, so long as inflation expectations remain well anchored. On fiscal, given the strong
public finances, automatic stabilizers should be allowed to operate unimpeded and there is space
for stimuli in the event of a major downturn. The commitment to close the structural fiscal deficit
by 2018 is appropriate and should be phased in a way that avoids undue drag on the recovery. Should
risks materialize, the freely floating currency is the first line of defense.
Growth and equity reforms: Achieving strong growth while reducing inequality will require
structural reforms. The authorities’ agenda focuses on the right areas but many details remain work
in progress. Clarity on the details, timetables, and prioritization will reduce uncertainty and the
risk of delays.
Financial stability: Risks to financial stability appear contained, but it will be important to
push through with regulatory reforms underway, including initiatives currently in Congress. Further
effort will be needed to close regulatory gaps, in particular bank
capital requirements, relative to international benchmarks.

July 22, 2014

Chile: Selected Issues Paper

Description: This Selected Issues paper on Chile seeks to explain why foreign ownership of locally issued sovereign bonds is so low in Chile and its implications. The low foreign ownership seems to be the result of a combination of macroeconomic, regulatory, and technical factors. The Financial Stability Report discusses the issue, and points to the tax on capital gains, costs for custody of securities and other administrative costs, and the relatively small size of the sovereign bond market as the reasons. Our study also finds that a combination of factors contributed to the low foreign ownership, including a moderate supply of sovereign bonds shadowed by strong local demand, illiquid secondary market, tax and administrative burden, the dominance of inflation-indexed bonds, and inconvenience and potential risks associated with foreign exchange transactions. The small size of the market for nominal bonds, the lack of a liquid secondary market, the previous tax regime and existing administrative burden, and transaction costs in the foreign exchange market seem to be the main reasons.