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Financial Programming and Policies, Part 2

Module 1

“What is Financial Programming, Part 2?”

About Module 01

• What is Financial Programming (FPP)?

• How to do Financial Programming?

• Objectives

• Policies

• Projection

• Issues in Program Design

• Overview of the FPP2.x Course

What is Financial Programming (FPP)? (1 of 2)

• A framework that links a number of objectives to a number of policy

measures.

• The objectives are typically an improvement in the current account, a

lower rate of inflation, and a higher growth rate.

• A basic framework linking these policy instruments to the policy

outcome.

• Is typically developed in comparison with a baseline scenario.

What is Financial Programming (FPP)? (2 of 2)

• A hands-on approach to understand macroeconomic policy analysis

over the business cycle (i.e. 1-3 years).

• Simulates economic sector scenarios in a consistent manner.

An Example of Program Objectives:

Ghana (ECF), 2009

Targets for 2009-2011:

• Achieve real non-oil GDP growth of 5.5%.

• Keep inflation in the range of 7-9% per year through the end of the

program period.

• Achieve an overall budget deficit of 4.5% of GDP by 2011.

• Maintain international reserves coverage equal to 3 months of imports.

An Example of Policy Measures:

Ghana (ECF), 2009

• Fiscal adjustment in the first year of 3.5% of GDP.

• Revenue mobilization.

• Cuts in low-priority spending.

• Flexible pricing of energy products to avoid costly subsidies.

• Implement a comprehensive public sector reform program.

• Further strengthen the recently-adopted inflation targeting regime,

including by a revamped central bank communications strategy.

Example of IMF program projections: Ghana 2009 (3-year PRGF/ECF)

Source: http://www.imf.org/external/pubs/ft/scr/2009/cr09256.pdf

Behavioral Relationships

• Consumption Function

• Investment Function

• Price Formation Function or Phillips Curve

• Demand for Imports

• Supply of Exports

Issues in Program Design:

Ownership (1 of 2)

Policymakers have the lead role in designing their own program so

commitment is key to…

a) Sending a strong signal;

b) Focusing the public’s and the markets’ expectations; and

c) Improving credibility of the program itself.

Issues in Program Design:

Ownership (2 of 2)

• Front-Loaded Policies Recommended

• Strong Political Backing Needed

• Collaboration between Authorities’ Economic Team and IMF staff

• Good Communication to Markets, the Public, and Domestic

Stakeholders

Issues in Program Design:

Realism

• Set conservative assumptions about external environment and

prospects of foreign financing.

• Account for confidence effects (that may lead to capital inflows

and economic boom).

• Test forecasts with different statistical methods.

• Assess risks analysis for programs (e.g. DSA in market-access

countries)

Ghana Program:

From the Letter of Intent (June 26, 2009)

“…The new government is committed to addressing the economic

imbalances, re-stabilizing the economy, and placing it on a path of

sustained high growth…

“The attached Memorandum of Economic and Financial Policies (MEFP)

reviews recent economic developments and policies, and outlines

adjustment and reform policies intended under the program.”

Steps in the FPP Process

"How to do FPP"

Step 1 – Project economic sectors under existing policies.

Step 2 – Form your baseline based on Step 1.

Step 3 – Identify the problems in the baseline projection.

Step 4 – Set the program objectives to adjust for the baseline.

Step 5 – Identify the policy measures to achieve the program objectives.

Step 6 – Project forward the impact of your proposed policy measures on the baseline.

Step 7 – Iterate to achieve economic and accounting consistency.