Why fiscal adjustment?
Management of the government budget influences private economic decisions both directly, through taxation and the pricing of public goods and services, and indirectly, by affecting other macroeconomic variables. Depending on how they are financed, fiscal deficits can lead to inflation, distorted interest and exchange rates, current account deficits, and poor external creditworthiness. The combination of these factors can crowd out private investment and hurt growth. Fiscal balance is thus central to the success of adjustment. For this reason, fiscal adjustment has formed a major part of the IMF’s and the Bank’s policy-based assistance. As many as 250 of the Bank’s structural and sectoral adjustment loans approved in 1979-94 for 86 countries had fiscal reform components. To review the Bank’s assistance for fiscal management, OED examined 134 completed and ongoing adjustment loans in 26 countries with a long history of fiscal adjustment. The sample spanned five regions and covered 59 per
