# <u>Fiscal gap</u>

Under A1 and A2, the fiscal gap estimates the difference between the average primary balance, calculated over the period 2007-16, with the primary balance that is necessary to stabilize the PPG debt-to-GDP ratio over the period 2017-23. The fiscal gap is calculated as the difference between the historical average primary balance and the minimum of the debt-stabilizing primary balance under A1 and A2. This corresponds to the least demanding measure of fiscal adjustment. A positive fiscal gap would result in an increasing debt ratio if the fiscal stance is not modified. This is a crude measure, as countries in need of fiscal consolidation would also require the adoption of structural measures that would not undermine growth. Under _A1_ (A2) WEO projections would fully (not) reflect all (any) information related to BRI in the PPG debt, nominal growth, and primary balance.

The annual average primary balance needed to stabilize the PPG debt-to-GDP ratio over the period 201723 is defined as: With _pb_ the average primary balance; _d the_ PPG debt-to-GDP ratio at end-2016, as defined in the October 2018 WEO; _r_ is the country-specific average annual real interest rate; and _g_ the country-specific average real growth rate over the period 2017-2023. The derivation of the debt-stabilizing primary balance is reported in Annex IX.

Under _A1_ and A2, fiscal gap estimates use different assumptions for the nominal interest rate and the nominal growth rate: _A1 (WEO fully reflect BRI): r_ is calculated as the annual average real interest rate on PPG debt over the period 2007-16, as a proxy for the long-term rate.<sup>39</sup> Real growth is equivalent to the growth rate as reported in the October 2018 WEO.

_A2 (WEO does not reflect BRI):_ r is calculated as the weighted average of the long-term rate calculated in _A1_ and the average interest rate on Chinese loans recorded in the DRS, with weights equal to the share of non-BRI debt and BRI debt in total debt at end-2023. Real growth is equivalent to the real growth rate as reported in the October 2018 WEO plus the additional growth from BRI.<sup>40</sup> Most LIDCs with moderate or high risk of debt distress and EMs classified as high scrutiny would have to implement a growth-friendly fiscal consolidation to avoid a deterioration in debt-to-GDP ratios (Figure 14). In many BRI-recipient countries with already high level of debt, investment supported growth would not be sufficient to reduce the level of indebtedness. In addition, the possible materialization of fiscal risks,<sup>41</sup> a frequent occurrence in the case of large infrastructure projects (Flyvbjerg, 2017), or related to

> 39 The annual nominal interest rates _i_ are calculated as the debt service on PPG debt at year _t_ , divided by the stock of PPG debt at year _t-1._ The real interest rates _r_ deflate the nominal rates using the annual change in the GDP deflator π, according to the formula (1+ _i) = (1+r)(1+_ π).

> 40 Defined as the average of the marginal growth rate estimated with the LTGM and the GMM regression.

> 41 Beyond those represented by explicit government guarantees, which are, by definition included in PPG debt.

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