The consistency of government deficits with macroeconomic adjustment : an application to Kenya and Ghana

Abstract

Sustainable medium-term debt strategies are essential to adjustment programs committed to high growth and should be integrated into a consistent macroeconomic framework that encompasses debt, growth and strategies. This paper develops an analytical model that takes 2 steps. Its purpose is to analyze the relationship between the fiscal deficit, the real interest rate, the real growth rate and the real exchange rate - and to indicate what conditions would be necessary to stabilize a country's debt-to-GDP ratio in the long run. The authors analyze three fundamental concepts of deficit: cash (or observed), primary and operational. Applying the model to the empirical data for Kenya and Ghana, the author's reach the following conclusions. First, the fiscal effort in Kenya should have been somewhat stronger between 1980 and 1987. For the period 1988-91, the projected fiscal balance is broadly consistent with stabilization, and the same goal can be achieved with a lower inflation or growth rate. Secondly, in Ghana the average fiscal performance between 1980 and 1987 was only slightly weaker than it should have been. Projections for 1988-91 suggest that the government has substantial room to maneuver in its stabilization.Economic Stabilization,Economic Theory&Research,Environmental Economics&Policies,Macroeconomic Management,Banks&Banking Reform