# **2.  Measuring fiscal space: Concepts and data**

Measuring fiscal space is not trivial. It involves a series of dimensions that range from aspects of sustainability, risks associated to contingent liabilities, maturity and currency risks, share of debt in foreign currency and held by non-residents, solvency, and borrowing costs. To capture all the aspects mentioned above, the analysis undertaken in this paper relies on the novel and comprehensive fiscal space database recently developed by Kose, Kurlat, Ohnsorge and Sugawara (2017).<sup>2</sup> This database gathers annual information of 200 countries—of which 48 are in SSA— from 1990-2016. It includes 28 indicators of fiscal space classified in four (4) categories:<sup>3</sup>

- (1) _Fiscal sustainability indicators_ . These variables help capture the longer-term capacity of government to repay its obligations. Fiscal sustainability is gauged by examining the general government gross debt (as percentage of GDP), measures of primary, cyclically adjusted and overall fiscal balance (as percentage of GDP). In countries with weak tax administration, the government’s capacity to repay/service its debt might be better captured by the magnitude of the tax base rather than the overall level of economic activity. The final two indicators in this group are the debt and fiscal balance as percentage of the permanent component of government tax revenues.

- (2) _Balance sheet vulnerability._ The composition of the balance sheet of the public sector provides information on the exposure to different types of risks (e.g., currency, interest rate, and refinancing, among others).  The vulnerability of the public sector’s balance sheet is captured by the share of general government debt in foreign currency, the percentage of debt securities held by non-residents, concessional external debt stocks as a percentage of general government gross debt, the average maturity of sovereign debt (in years), and the amount of central government debt maturing in less than a year (as a percentage of GDP).

- (3) _External and private sector debt._ It includes a wide array of indicators that capture the size and composition of the country’s total external debt as well as its relationship to international reserves and private sector liabilities. Among the indicators in this category, we have: the total external debt stock (as a percentage of GDP and in relation to international reserves), the share of external debt in foreign currency in total external debt, private external debt stocks (as a percentage of GDP), and short-term external debt stocks (normalized by either total external debt stocks or international reserves—including and excluding reserves).

- (4) _Market perception._ This category includes indicators on the market perception of the ability of governments to roll over or issue debt, and the borrowing costs facing countries in global capital markets. Kose et al. (2017) consider these indicators as high-frequency proxies for

> 2 The database can be downloaded at <u>http://www.worldbank.org/en/research/brief/fiscal-space.</u>

> 3 Note that the description of the different groups of indicators draws heavily from Kose et al. (2017).

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