Stability Pact for Southeast Europe Meeting of Working Table II Sofia, May 17, 2005

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Stability Pact for Southeast EuropeMeeting of
Working Table IISofia, May 17, 2005
Office for South East Europe European Commission
/ World Bank
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Franz KapsSpecial World Bank Representative
for South East EuropeE-mail fkaps_at_worldbank.org

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Borrowing and investments in SEEIs There
Fiscal Space?
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Fiscal Space

• The availability of budgetary room that allows a
  government to provide resources for a desired
  purpose without any prejudice to the
  sustainability of its financial position.

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Key Challenges

• High government spending/GDP High public
  debt/GDP
• Large external debt/GDP
• High current account deficits (including grants)
  relative to GDP
• Future loan terms are hardening as incomes rise
• Risk of macro instability in event of reversal/
  decline in anticipated flows
• Significant portion of flows currently met
  through a combination of uncertain and volatile
  financing sources (incl. grants, private
  creditors)
• Managing vulnerabilities requires sustained macro
  adjustment / structural reform
• Harder terms of new borrowing plus recent history
  of debt restructuring and prospective
  pre-accession costs need to be factored into
  fiscal sustainability calculations

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Creating fiscal space

• Cutting wasteful current spending.
• Dropping planned public investments with clearly
  lower rates of return.
• Enhancing the overall efficiency of public
  spending.
• Enhancing the financial sustainability of the
  sector receiving investments.
• Scaling back/phasing investments.

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Planning starts at the project and sectoral
level...

• High quality infrastructure investments will be
  crucial for growth.
• Ensuring quality requires careful project
  evaluation, sound sectoral policies and
  regulatory framework, and (in multi-country
  projects) good cross-country cooperation.
• Indicators of reform progress still show that
  much remains to be done in the infrastructure
  sectors

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but also needs to consider macro/fiscal
constraints

• Prudent economic management demands analysis of
  the impact of new borrowing on macro
  sustainability
• Investments should fit into (still substantial)
  overall financing limits
• Borrowing beyond these limits could raise the
  current account deficit, financing needs and debt
  to levels which send alarm signals
• Resulting damaging perceptions of macro
  performance could in turn reduce investment and
  borrowing by the domestic private sector

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Conclusions

• To achieve desired growth, investments must be
  subjected to
• rigorous evaluation
• supported by strong reforms/ regulatory framework
• enhanced cross-country cooperation
• These considerations become more important with
  the currently very limited fiscal space
• Any foreign financing will need to fit into such
  limits and domestic budgetary resources will need
  to finance an increasing share of public
  investments.