Fiscal solvency and sustainability
            in economic management
Fiscal policy is central to a
            country's economic and social objectives, from
            macroeconomic stability to sustainable growth and poverty
            reduction. But evaluations of a country's fiscal
            performance, over time or relative to other countries, are
            often conducted independent of other development objectives,
            disregarding the links between fiscal, monetary, and
            exchange rate policies. A budget deficit of 4 percent of
            GDP, for example, may be acceptable in one country but not
            in another, because of different initial conditions and
            policy priorities. In the same country, a level of fiscal
            deficit may be acceptable one year but not the next,
            depending on developments and changes in policy objectives.
            The author argues for assessing fiscal performance (1) as
            part of the entire framework of economic policy, (2) against
            a policy objective, (3) by taking into account both short-
            and long-term considerations, and (4) with an eye to the
            quality of adjustment (whether there are income inequalities
            or other social issues, for example) as well as its
            magnitude. The approach he proposes for assessing country
            fiscal performance requires a minimum of data and takes into
            account flow and stock variables on internal and external
            debt. The approach addresses the shortcomings of
            conventional analysis by incorporating the debt dynamics and
            other macroeconomic targets of growth, inflation, and
            external and internal debt. While its theoretical foundation
            is well known in the literature, this approach has not been
            adapted for assessing fiscal performance either over time or
            across countries, and he discusses practical issues arising
            from this adaptation. The author proposes two indicators to
            measure fiscal adjustment efforts: Fiscal solvency
            adjustment, which measures how far additional fiscal efforts
            must be taken to restore solvency to the fiscal sector.
            Fiscal sustainability adjustment, which measures how far
            additional fiscal efforts must be taken to maintain the
            ratios of internal and external debt to output. The author
            applies the proposed framework to evaluate recent fiscal
            performance in three countries-Argentina, India, and
            Zambia-each with a different income level and located on a
            different continent. The countries were selected on the
            basis of recent World Bank economic work using the proposed
            approach or an equivalent. The author finds the proposed
            approach useful for identifying key fiscal issues, for
            assessing the adequacy and pace of fiscal adjustment
            consistent with the overall economic and social objectives,
            and for highlighting the tradeoffs between policy
            initiatives. Sound fiscal policy is crucial for
            macroeconomic stability. When fiscal issues are under
            control, it is easier to coordinate other policies. When
            fiscal issues are part of the problem, the tradeoffs between
            policy outcomes become pronounced, and economic management,
            including the management of capital flows, becomes much more difficult.