austerity, policy choices and demonstration

The announcement of a policy increasing the social security contribution of workers with a reduction in employers' contribution was the spark that lead to a strong street demonstration Saturday 15th. The demonstration was already called for but the announcement of the new measures did put people on the street.

The complain was obviously the perceived unfairness of shifting money from workers to employers, and more broadly the austerity imposed by the financial rescue plan. Still, this simple view may be misleading. The demonstration was shared by several cities in Portugal, people interviewed were basically expressing the concern about the road taken by the Government with this specific policy. In the end, despite some fear it was a peaceful demonstration, gathering people from different ages and political views. More tense images from the demonstration walking by the IMF delegation in Lisboa can be somewhat misleading about the general feeling of the population, at least for now.

We need and should discuss the direct economic implications of this policy (see the posts of Susana Peralta and Francesco Franco on this).  Still, there is another sort of impact and in a sense a deeper one that may have implications for economic activity.

The demonstration was a clear call for the government to review the latest measure on social security contributions. Whatever the end result, whether the policy measure will be carried out as proposed, or modified or even dropped, there is the risk of this week events having an impact on the ability to introduced further reforms in the public sector, in the labour market, in the housing market, etc...

The necessary goodwill among social partners has been damaged to some extent, and there will be need to rebuilt trust between the government and the social partners, and between government and the population at large.

Also the impact on effort and willingness of people to move forward may be affected. Long term solutions for the portuguese economy have to involve development of new products and services, provide services and goods with high quality, and so on. But the commitment of workers to make more effort to develop new products, to increase productivity in current tasks, and even to smile when providing a service to the tourist may be at risk. Thus, the discussion on productivity gains needs to regain a central role - how does a policy proposal contribute to increase productivity? how fast and how much?

Source | The Portuguese Economy | http://theportugueseeconomy.blogspot.com/2012/09/austerity-policy-choices-and.html

IMF Executive Board Completes Fourth Review Under the Policy Support Instrument for Uganda

The Executive Board of the International Monetary Fund (IMF) has completed the fourth review under a three-year Policy Support Instrument (PSI) for Uganda. The Executive Board’s decision was taken on a lapse of time basis and enters into effect today¹. The PSI for Uganda was approved by the IMF’s Executive Board on May 12, 2010 (see Press Release No. 10/195). The IMF’s framework for PSIs is designed for low-income countries that may not need IMF financial assistance, but still seek close cooperation with the IMF in preparation and endorsement of their policy frameworks. PSI-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners.

The PSI-supported program with Uganda remains on track. All end-December 2011 quantitative assessment criteria were met, as were most of the structural benchmarks.

The stance of macroeconomic policy remains appropriate. Monetary tightening, initiated in July 2011 in response to rising inflation, has been effective in reducing demand and price pressures in the economy. High interest rates supported by tighter fiscal policy have strengthened the currency and raised reserve levels, while private sector credit growth and overall demand pressures are now much reduced. Prices have been generally stable for the last few months and annual inflation is coming down. The disinflationary effort has had limited effect on financial sector stability. Nonetheless, the tighter policies combined with weaker global demand are projected to reduce economic growth this year.

Looking forward, economic growth should recover significantly next year, as the expected decline in inflation will allow a phased and gradual relaxation of the monetary policy stance and a recovery of credit growth. The FY2012/13 budget aims at further moderate fiscal consolidation while increasing spending on infrastructure and other development priorities. In addition, tax policy measures will be introduced and a comprehensive reform of tax exemptions linked to a new tax procedure code carried out, both aimed at improving revenue and budget performance over the medium term. While external borrowing for development is expected to increase in the years ahead, debt sustainability analysis carried out jointly by the IMF and the World Bank establishes that Uganda continues to face a low risk of debt distress.

Key risks to the outlook arise mainly from external factors. Slower than expected global growth would worsen the trade deficit and possibly reduce remittances and capital flows. Higher energy prices would dampen growth, as would deterioration in the regional security environment. However, absent these risks materializing, economic growth is expected to continue to improve, reaching 6 percent by 2013/14, and achieving its estimated potential of about 7 percent by 2014/15.

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¹ The Executive Board takes decisions under its lapse of time procedures when it is agreed by the Board that a proposal can be considered without convening formal discussions.

Source | International Monetary Fund - Blog NEWS | http://imf-news.blogspot.com/2012/06/imf-executive-board-completes-fourth_19.html

IMF Executive Board Completes Fourth Review Under the Policy Support Instrument for Rwanda

The Executive Board of the International Monetary Fund (IMF) has completed on June 7, 2012, the fourth review under a three-year Policy Support Instrument (PSI) for Rwanda.¹ The Executive Board’s decision was taken on a lapse of time basis.²

The Rwandan economy continued to grow strongly, and its economic program supported under the PSI remains on track. Real GDP growth is estimated at 8.6 percent for 2011, driven by agricultural output, exports, and domestic demand. Inflation rose sharply—mainly due to rising food and fuel prices but also an accommodative monetary policy—but stayed in single digits (8.3 percent in March 2012) and was the lowest in the region. All quantitative assessment criteria for end-December 2011 including fiscal and monetary targets were met. Most structural benchmarks were also met, albeit some with delays. In completing the review, the Executive Board approved the modification of the end-June 2012 assessment criteria. Rwanda continues to be assessed at moderate risk of external debt distress.

Growth is expected to remain high in 2012, but risks remain—a renewed global slowdown or sharply higher world fuel prices could threaten growth, revenue, and inflation objectives. The fiscal framework for 2012/13 is in line with the main objectives of the PSI, and the authorities committed to delay non-priority spending rather than resort to additional domestic financing if revenue collections fall short of target. Efforts are ongoing to further strengthen public financial management and enhance revenue administration. Monetary policy is aimed at maintaining inflation in single digits, and efforts are continuing to improve the liquidity management framework. To that end, it will be important to be proactive in monetary policy and improve the functioning of the money and foreign exchange markets. Improving access to financial services while safeguarding financial stability remains a key objective for Rwanda. Careful management of the consolidation of Savings and Credit Cooperatives will be very important in that regard.

The Executive Board approved a three-year PSI for Rwanda on June 16, 2010 (see Press Release No. 10/247).

Source | International Monetary Fund - Blog NEWS | http://imf-news.blogspot.com/2012/06/imf-executive-board-completes-fourth_1230.html