Guidelines for Fiscal Adjustment

Introduction

Fiscal policies are a key determinant of both national and international economic developments, and provision of advice on these policies plays a major role in the IMF's activities. This advice reflects the IMF's responsibility for undertaking surveillance of the policies of all member countries and of the international monetary system.1 At the individual country level, surveillance encourages countries to adopt policies that provide the basis for sustained economic growth and price stability. IMF surveillance of the global monetary system aims at promoting the balanced growth of world trade and an orderly and stable system of exchange rates.

The two main ways the IMF carries out its surveillance activities are through regular--usually annual--bilateral consultations with individual member countries (known as Article IV consultations) and through multilateral discussions held in the context of the World Economic Outlook (WEO) reviews conducted twice a year. The Article IV consultations always include a full assessment of the overall stance of fiscal policy, as well as of developments with respect to the government's tax, expenditure, and borrowing activities. Assessment of fiscal policy in the WEO emphasizes the multilateral effect of members' policies and their impact on the prospects for the international economy.

In the specific circumstances when the IMF provides financial support to a member undertaking economic reforms, it must be assured that the country is pursuing policies aimed at correcting economic and financial imbalances within a reasonable period of time. Substantial changes in fiscal policy are usually required to achieve growth-oriented adjustment and, as such, form a major part of the commitments a member country is required to make when receiving financial support from the IMF.2

This paper aims to acquaint policymakers with some of the issues and concerns that underlie the IMF's approach to fiscal adjustment--namely, the ways governments can use their fiscal stabilization and structural policies to achieve macroeconomic objectives relating to growth, inflation, and the balance of payments. As such, it covers issues related to governments' taxing, spending, and borrowing activities, as well as some fiscal aspects of institutional change. The focus is on the broad issues and practical policy options that need to be considered, rather than on the more technical or theoretical aspects of the literature on fiscal policy.

In keeping with its practical emphasis, the discussion is organized around four basic questions.

These questions are addressed in the following sections. A brief list of references is provided at the end.

1 More precisely, the IMF has a mandate under its Articles of Agreement to "exercise firm surveillance over the exchange rate of members" and to adopt "specific principles for the guidance of all members with respect to those policies." The IMF carries out this mandate by examining international monetary issues and by analyzing all aspects of member countries' macroeconomic and related structural policies, since these policies, taken together, have important implications for the exchange system.
2 For a description of Fund facilities and conditionality, see International Monetary Fund (August 1994).

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