# **_6.2.2. Fiscal savings of a nominal exchange rate devaluation net of social transfers_**

**_A 30 percent nominal devaluation with exchange rate pass-through elasticity of 60 percent and no wage indexation could generate a net fiscal savings of DF 4.35 billion, equivalent to 3.6 percent of GDP._** Incorporating a 30 percent public sector wage indexation reduces the net savings to 4.25 percent of GDP. As the degree of pass-through rises, the level of net fiscal savings falls rapidly and turns negative due to the expansion in the cost of social transfers. With a 100 percent exchange rate pass-through, the amount of fiscal savings needed to cover social transfers fall short of DF 8.8 billion or 7.2 percent of GDP.

**Table 7 Djibouti: Real Fiscal Savings Net of Social Transfers Scenarios (DF bnl/percent of GDP)**

|**Devaluation**<br>**Rate**|**0%**<br>**Indexation**<br>**50% pas**|**30%**<br>**Indexation**<br>**s-through**|**0%**<br>**Indexation**<br>**60% pass**|**30%**<br>**Indexation**<br> **-through**|**0%**<br>**Indexation**<br>**70% pas**|**30%**<br>**Indexation**<br>**s-through**|**0%**<br>**Indexation**<br>**100% pas**|**30%**<br>**Indexation**<br>**s-through**|
|---|---|---|---|---|---|---|---|---|
|**30.0%**|4.65|4.50|3.56|3.39|2.40|2.24|-1.29|-1.42|
|**% of GDP'05**|3.80%|3.67%|2.91%|2.77%|1.96%|1.83%|-1.05%|-1.16%|
|**60.0%**|6.99|6.86|4.35|4.25|1.48|1.45|-8.76|-8.25|
|**% of GDP'05**|5.71%|5.60%|3.55%|3.47%|1.21%|1.19%|-7.16%|-6.74%|
|**100.0%**|8.26|8.41|2.27|2.78|-4.23|-3.30|-25.02|-23.24|
|**% of GDP'05**|6.75%|6.87%|1.86%|2.27%|-3.46%|-2.70%|-20.44%|-18.98%|

_Note: Values are in constant Djibouti Franc terms with the base year of 2004. Source: Authors' calculation based on EDAM 1996_

**_Holding all else constant, the higher the pass-through elasticity, the higher the amount of social transfers needed to compensate the poor, and the lower the anticipated share of net fiscal savings_** . Figure 11 shows the trade-off between net of transfers, fiscal savings as a share of GDP and the degree of nominal devaluation with 0% and 30% (dashed lines) wage indexation. Introducing wage indexation slightly raises the expected net fiscal savings due to higher income tax revenues. At lower pass through, a higher devaluation rate initially increases net fiscal savings though it eventually falls as the devaluation rate rises. As the degree of pass-through overpass 70%, fiscal savings falls at an increasing rate with rising magnitudes of devaluation. The concave pattern describing the relationship between fiscal savings net of transfer and the devaluation rate for a given pass-through elasticity is due to the increasing rate of real income loss to the poor population with higher devaluation rates.

Figure 11 Djibouti: Relationship between Magnitude of Nominal. Devaluation and Real Fiscal Savings Net of Social Transfers (% of GDP) <!-- Start of picture text --> 10<br>5<br>50% Pass-Through<br>0<br>30 % 60% 100%60% Pass-Through<br>Degree of Devaluation<br>-5<br>70% Pass-Through<br>-10<br>-15<br>-20<br>100% Pass-Through<br>-25 Dashed Lines indicate outcome with 30% public wage indexation.<br><!-- End of picture text --> _Source: Authors’ calculation based on WEO, 2004_ 24