Aspects of Fiscal Performance in Some Transition Economies Under Fund-Supported Programs

The paper reviews some key medium- and longer-term fiscal problems confronting transition economies such as government solvency and the longer-run sustainability of the fiscal-financial-monetary program. Many transition economies, especially those in the early stages of transition, rely quite heavily on seigniorage revenues obtained through the issuance of base money. Excessive reliance on seigniorage causes the real revenues from money creation to decline as rising inflation causes domestic and international currency substitution. It is essential to focus on the accounts of the consolidated general government sector (including the lower tiers of government and the off.budget entities) and the central bank, the monetary and quasifiscal agent of the state. As reliable data on the quasi.fiscal deficit of the central bank tend to be unavailable, the paper proposes to treat all credit extended by the central bank to the nongeneral government sectors as quasifiscal grants or subsidies. The conventional general government financial deficit often bears no relationship to the government.s underlying financial position. Myopic accounting conventions encourage short.sighted policies like the slashing of infrastructure investment and the use of sequestration and internal current arrears (e.g. on salaries). In some of the less advanced transition economies, tax revenues are falling to unsustainably low levels, threatening the very survival of the state. In a number of the more advanced transition economies, the problem is one of unsustainably (or at least undesirably) high levels of general government spending, levels associated with the most affluent welfare states in the OECD. Structural reform measures, such as trade reform and privatization, have often been undertaken with little regard for their implications for future government revenues and spending obligations. Finally, the paer notes that effective conditionality is often harder to impose the more urgent and important it is, especially where larger and more influential IMF program countries are concerned.