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Questions and Answers
What is the word 'Public' in Public Fiscal Management significant?
What is the word 'Public' in Public Fiscal Management significant?
The word 'Public' signifies that the management of funds is concerned with the effective administration of funds collected and spent by governments.
Does the PFM cycle start with budgeting and end with audit?
Does the PFM cycle start with budgeting and end with audit?
True
What are the main goals of the PFMS?
What are the main goals of the PFMS?
The main goals of the PFMS are to increase revenue, ensure a fair taxation process, implement efficient resource allocation, ensure transparency and accountability for expenditures, and encourage citizen participation.
Does independent audit and evaluation play a vital role in the functioning of PFMS?
Does independent audit and evaluation play a vital role in the functioning of PFMS?
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What are the types of benchmarks used in PFM?
What are the types of benchmarks used in PFM?
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What are the essential aspects of the PFM Institutional Framework?
What are the essential aspects of the PFM Institutional Framework?
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What are the key factors that influence the successful implementation of fiscal rules?
What are the key factors that influence the successful implementation of fiscal rules?
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Which of the following is not a type of fiscal rule?
Which of the following is not a type of fiscal rule?
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Debt rules are the most frequently used by countries compared to all other fiscal rules.
Debt rules are the most frequently used by countries compared to all other fiscal rules.
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The IMF Data Mapper indicates that many countries implemented fiscal rules after the financial crisis of 2008.
The IMF Data Mapper indicates that many countries implemented fiscal rules after the financial crisis of 2008.
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What is the primary rationale for imposing fiscal rules after the 2008 financial crisis?
What is the primary rationale for imposing fiscal rules after the 2008 financial crisis?
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What prerequisites are essential for successful implementation of fiscal rules?
What prerequisites are essential for successful implementation of fiscal rules?
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The Medium Term Fiscal Policy (MTFP) prioritises balancing government revenue and expenditure within a medium term.
The Medium Term Fiscal Policy (MTFP) prioritises balancing government revenue and expenditure within a medium term.
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India implemented a Medium Term Fiscal Policy (MTFP) before enacting the Fiscal Responsibility and Budget Management Act (FRBMA) in 2003.
India implemented a Medium Term Fiscal Policy (MTFP) before enacting the Fiscal Responsibility and Budget Management Act (FRBMA) in 2003.
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The IMF Data Mapper reveals a significant number of countries solely apply national fiscal rules.
The IMF Data Mapper reveals a significant number of countries solely apply national fiscal rules.
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What is the primary goal of the Fiscal Council Dataset?
What is the primary goal of the Fiscal Council Dataset?
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Sri Lanka's economic crisis was triggered by a series of events, including terrorist attacks, the COVID-19 pandemic, and a lack of financial discipline.
Sri Lanka's economic crisis was triggered by a series of events, including terrorist attacks, the COVID-19 pandemic, and a lack of financial discipline.
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What is the key factor that caused significant strain on Sri Lanka's economy prior to the pandemic?
What is the key factor that caused significant strain on Sri Lanka's economy prior to the pandemic?
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Gotabaya Rajapaksha's election victory was fueled by promises of freebies and massive tax cuts.
Gotabaya Rajapaksha's election victory was fueled by promises of freebies and massive tax cuts.
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Sri Lanka's decision to implement a purely organic farming program resulted in increased farm output and reduced food prices.
Sri Lanka's decision to implement a purely organic farming program resulted in increased farm output and reduced food prices.
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How did Sri Lanka's reliance on International Sovereign Bonds (ISBs) without adequate repayment provisions contribute to the nation's financial crisis?
How did Sri Lanka's reliance on International Sovereign Bonds (ISBs) without adequate repayment provisions contribute to the nation's financial crisis?
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International Sovereign Bonds (ISBs) are an ideal strategy for managing a country's debt, as they offer favorable interest rates and longer payback periods.
International Sovereign Bonds (ISBs) are an ideal strategy for managing a country's debt, as they offer favorable interest rates and longer payback periods.
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Sri Lanka's decision to directly finance its budget deficits through the Central Bank fueled inflation and led to a steep rise in the inflation rate.
Sri Lanka's decision to directly finance its budget deficits through the Central Bank fueled inflation and led to a steep rise in the inflation rate.
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Sri Lanka's reliance on a fixed exchange rate played a positive role in curbing the outflow of capital.
Sri Lanka's reliance on a fixed exchange rate played a positive role in curbing the outflow of capital.
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Sri Lanka's reliance on external assistance from countries like China and India was a primary contributor to its current financial difficulties.
Sri Lanka's reliance on external assistance from countries like China and India was a primary contributor to its current financial difficulties.
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What is the primary objective of the IMF bailout package provided to Sri Lanka?
What is the primary objective of the IMF bailout package provided to Sri Lanka?
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In the aftermath of the IMF bailout package, Sri Lanka's economy is on a solid path to recovery, and the nation's financial health is expected to improve steadily.
In the aftermath of the IMF bailout package, Sri Lanka's economy is on a solid path to recovery, and the nation's financial health is expected to improve steadily.
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What were the consequences of Gotabaya Rajapaksa's decision to flee Sri Lanka?
What were the consequences of Gotabaya Rajapaksa's decision to flee Sri Lanka?
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The IMF bailout package has effectively resolved all of Sri Lanka's economic woes, and the nation is now on a path to stable economic growth.
The IMF bailout package has effectively resolved all of Sri Lanka's economic woes, and the nation is now on a path to stable economic growth.
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The Sri Lankan debt in 2022 reached dangerous levels, exceeding 100% of its GDP.
The Sri Lankan debt in 2022 reached dangerous levels, exceeding 100% of its GDP.
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How did Venezuela's economic crisis unfold?
How did Venezuela's economic crisis unfold?
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Hugo Chavez's policies, while initially helping the poor, ultimately resulted in a significant deterioration of Venezuela's economy.
Hugo Chavez's policies, while initially helping the poor, ultimately resulted in a significant deterioration of Venezuela's economy.
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What is the primary reason for Venezuela's economic decline?
What is the primary reason for Venezuela's economic decline?
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Venezuela's economic crisis can be attributed to the socialist agenda of price and currency controls.
Venezuela's economic crisis can be attributed to the socialist agenda of price and currency controls.
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The Bolivarian Revolution put Hugo Chavez into power in 1998.
The Bolivarian Revolution put Hugo Chavez into power in 1998.
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Venezuela's economic decline was a slow, gradual process that unfolded over several decades.
Venezuela's economic decline was a slow, gradual process that unfolded over several decades.
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Maduro's decision to remove five zeroes from the Venezuelan currency had a positive impact on stabilizing the bolivar and improving the nation's economic situation.
Maduro's decision to remove five zeroes from the Venezuelan currency had a positive impact on stabilizing the bolivar and improving the nation's economic situation.
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The USA eased sanctions on Venezuela in October 2023, allowing Venezuela to resume exporting oil and gas products.
The USA eased sanctions on Venezuela in October 2023, allowing Venezuela to resume exporting oil and gas products.
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The IMF's involvement in Venezuela's crisis was a significant factor in restoring the nation's economic stability.
The IMF's involvement in Venezuela's crisis was a significant factor in restoring the nation's economic stability.
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The Venezuelan economy has rebounded significantly and has achieved substantial economic growth in recent years.
The Venezuelan economy has rebounded significantly and has achieved substantial economic growth in recent years.
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The Venezuelan government has successfully addressed the public's concerns about economic inequality.
The Venezuelan government has successfully addressed the public's concerns about economic inequality.
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The recent elections in Venezuela have been lauded as free and fair, ushering in a new era of political stability.
The recent elections in Venezuela have been lauded as free and fair, ushering in a new era of political stability.
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Study Notes
Session 1: Financing Public Policy - Macroeconomic View
- Public Finance: Session focused on financing public policy from a macroeconomic perspective.
Session Structure
- Overview of PFM and its relation to Governance: Review of Public Financial Management (PFM) and its connection to governance.
- PFM cycle from Budgeting to Audit: Detailed look at the process of PFM, from budget creation to audit.
- PFM Institutional Framework: Examination of the institutional structures supporting PFM.
- Benchmarks of PFM activities: Methods to evaluate PFM performance.
- Case studies in failure of PFM: Analysis of instances where PFM systems have failed.
Background and History
- Significance of "Public" in PFM: Public financial management has great significance.
- Post-World War II scenario: Resource crunches following World War II demanded infrastructure and governance reforms.
- System Importance: Just having money alone was not adequate. Robust systems were critical.
- Fairness in allocation: Fair methods of resource allocation and distribution.
- PFM Focus: Administration of government funds and overall government activities. This includes managing resources and activities within a country's budget cycle.
- PFM Activities: Mobilisation of resources, management of expenditure, and recording/accounting for expenditure are core activities.
- PFM Cycle: Includes mid-term review and feedback for course correcting, final audit stages of public accountability, and ensuring mutual trust between government and citizens.
PFMS Objectives and Cycle
- Financial Objectives: Increasing revenue, fair taxation, efficient resource allocation, transparency, accountability and citizen participation.
- Economic Objectives: Ensuring macroeconomic stability, income redistribution to reduce inequality following constitutional processes and mechanisms.
- Audit and Evaluation: Independent audit and evaluation are critical components of any PFM system.
- PFMS Functions: PFMS encompass a broader set of functions beyond financial management.
PFM Cycle (Diagrammatic Representation)
- Diagram shows various entities & their relations: Media/Civil Society, Lobby Groups, Political Parties, External Audit, Legislature, Government Policy, etc.
- Different stages: Budget Formulation, Budget Execution, Budget Approval, and the role of the Legislature.
PFM Institutional Framework
- Structures & Processes: Constitutional and legal frameworks, regulatory frameworks and mechanisms for equalization, administrative architecture are important. This section also details budgeting processes, accounting, auditing, monitoring reporting and the management of assets, debts, contingent liabilities.
- Systems & Catalysts: Focuses on Separation of taxing powers, internal & external controls, institutional oversight by the legislature, political approaches for PFM evaluation, and the role of media and civil society in improving the PFM system.
Benchmarks of PFM activities
- Temporal and Normative Benchmarks: Comparing PFM performance over time to performance in other countries or using international norms.
- Key Indicators: Level of budget-actual expenditure correlation, limits of committed liabilities, limits on borrowing and fiscal deficits, and limits on contingent liabilities are critical.
- Evolving Benchmarks: Benchmarks evolve over time, specifically in response to crises.
- Social Trust and Consensus: Benchmarks are often related to how well the government and the people trust each other.
Tax Revenues as a Share of GDP, 2022 (Graphical Representation)
- Global Data Overview: World map data highlighting the share of tax revenues in various countries, relative to GDP, in 2022.
Tax Revenues as a Share of GDP, 2021 (Graphical Representation)
- Country-Specific Data: Specific countries' tax revenue data for 2021.
Tax: GDP Ratio (%) (Graphical Representation)
- Longitudinal Data: Data visualizing the Tax to GDP ratio over a time period.
Taxes on Incomes of Individuals and Corporations, 1980 to 2020 (Graphical Representation)
- Historical Trends: Global data on income tax rates over 40+ years. Data for several countries is visualized.
Top Marginal Income Tax Rate, 1900 to 2017 (Graphical Representation)
- Historical Top Tax Rates: Graph displays the historical evolution of top marginal income tax rates over many countries (and the time frame indicated.)
The Laffer Curve (Graphical Representation)
- Illustrative Model: A visual model of the theoretical relationship between tax rates and tax revenue.
Income Tax Reforms (Graphical Representation)
- Time Period Evolution: Graph shows how income tax reformation evolved over time for varying nations.
Indian Experience in Benchmarking
- Credibility Issues: Indian budget numbers often lack credibility due to window dressing and overstating revenues or understating expenditures.
- Independent Oversight: There's a need for institutions and mechanisms like fiscal councils to ensure accountability.
- International Ratings: Poor fiscal marksmanship influences international ratings negatively.
Shifting Sands of Fiscal Targets
- FRBM Act Amendments: The Fiscal Responsibility and Budget Management Act (FRBMA) has been amended multiple times, pushing out deadlines for fiscal targets.
- Debt Ratio Concerns: The country's debt ratio is a critical issue; both the central government and state governments' debt ratios are noteworthy
- Enforcement Challenges: No effective mechanisms exist for fully enforcing the fiscal targets which are often challenged by populism.
Fiscal Rules
- World Bank Perspective: Fiscal rules as long-lasting constraints on fiscal policy to ensure responsibility. This is done by setting numerical limits for budgetary aggregates to contain overspending.
- Categories of Rules: Four main types: Budget Balance Rules (BBR), Debt Rules (DR), Expenditure Rules (ER), and Revenue Rules (RR).
International Trends
- Global Response to Crisis: Many countries have adopted fiscal rules after the global financial crisis.
- Reasons behind adoption: The aim is to foster trust in financial markets and to remove political bias from fiscal frameworks
- Essential Preconditions for Effective Enforcement: Effective enforcement of these rules for better reporting, budgetary reporting systems, audit, and the availability of public finance data.
IMF Data Mapper (Graphical Representation)
- Global Fiscal Rule Adoption: Visualization of fiscal rule adoption patterns across countries using an IMF datamapper.
Countries with Fiscal Councils: 2021 (Graphical Representation)
- Global Distribution of Fiscal Councils: World map showing regions with fiscal councils during 2021.
Case Studies in PFM Failure
- Focus: Analyses of specific cases where PFM systems have not been successful.
Macroeconomic Policy in Crisis
- Essential Policy Considerations: Macroeconomic policies should counter-cycle (expansionary during downturns, contractionary during overheating). Sound monetary policy, fiscal policy with stable debt-GDP ratios, inflation targeting, and robust financial markets are critical.
Reckless Populism (Short Summary of Observations/Issues)
- Impact of Pandemic and Crises: The Easter Sunday attacks and the pandemic led to severe economic shocks and significant impacts. Vulnerabilities were exposed.
- Poor Fiscal Management: Aggressive tax cuts, loan waivers, and subsidies in Sri Lanka led to fiscal issues.
- Impact on Debt Sustainability: Poor fiscal management and tax cuts led to difficulties in meeting international responsibilities.
- Vulnerability to External Shocks: Reliance on imports exposes a country to external shocks.
Crisis Deepens
- Unfavorable Geopolitical Factors: There were unfavourable factors affecting the country.
- Debt Sustainability: Previous governments failed in setting provisions for sovereign borrowing repayments.
- Currency Depreciation and Debt Implications: Huge depreciation resulted in inability to service international debts, including Chinese and IMF loans.
Role of Chinese Loans
- Infrastructure Projects: China has invested significantly in infrastructure in Sri Lanka, especially in port projects.
- Loans with Conditions: Some of these projects have been criticized for significant repayment issues and terms.
- Debt Servicing: A part of the challenge stems from borrowing and difficulties servicing those loans.
Unsustainable Debt
- High Debt Levels: Sri Lanka's debt was at unsustainable levels in 2022.
- Debt Structure: High reliance on external commercial debt contributed to the crisis.
- Revenue Shortfalls: Interest payments on debt consumed a significant share of revenue.
- Tax Structure Issues: Regressive tax systems are a challenge.
Crisis Erupts
- Critical Resource Depletion: The shortages of vital resources like goods, medicine, etc., caused serious problems.
- Impact of Inflation: Significant price increases led to shortages.
- Limited External Financing: Sri Lanka's dwindling access to external financing and limited reserves heightened the crisis and made the crisis unresolvable.
Fixed Exchange Rate and Deficit Financing
- Currency Devaluation: The devaluation of the Sri Lankan Rupee worsened the economic situation due to increased cost of imports.
- International Support: The recovery of the situation required external funding & assistance from reputable institutions (IMF) and countries like India and China.
July-Aug 2022
- Economic Crisis Severity: This period marked the height of the economic crisis.
- Currency Collapse: The Sri Lankan Rupee significantly depreciated, exacerbating the crisis.
- High Inflation and Food Shortages: Increased inflation and shortages of essential goods, especially food, created severe hardship.
GDP Growth- Inflation - Exchange Rate 2022-2025 (Graphical Representation)
- Economic Forecasts: Charts display projected GDP Growth, Inflation rates, and Exchange Rates from 2022 to 2025.
July 2022 to September 2024
- Consequences of Failing to Meet IMF Conditions: External sanctions and political implications related to failure to meet IMF conditions.
- Political Instability: Political repercussions related to a general election that occurred in Sri Lanka.
- Economical Distress in Sri Lanka: Continues struggles and high economic costs for Sri Lanka.
Issues for Reflection
- Comparative Analysis: Exploring what makes some PFM systems work better than others.
- Essential Features: The features of success in PFM reforms.
- Developing Country Concerns: Problems in strengthening PFM systems in countries emerging from conflict and turmoil.
- Indian PFM System: Assessing the strengths and weaknesses of the Indian PFM system.
- Strengthening Weaknesses: How to best address the weak points in the current Indian PFM system.
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