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5. Credit Constraints and Investment Finance: Some Evidence from Greece

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5. Credit Constraints and Investment Finance: Some Evidence from Greece n 0 3 3 ro � Fund. Not for Redistribution Table 3. Financing of the Public Sector Deficit: Nominal flows Annual Rate of lnflatiofl o percent so percent 100 percent Last Month Year as Last Mooth Year as Last Month Year as Economic Indicator of Year a Whole of Year a Whole of Year a Whole Tolal ftnandng needs -o.0/330 -1.000 1.057 9.775 2.499 20.729 External debt Domestic liability Non-Interest-bearing 0.432 4.41 3 0.793 7.466 Interes t-bearing 0.097 10.000 2.245 20.000 Changes In reserves 0.08.30 1.000 0.332 ©International Monetary 4.538 0.539 5..736 Memorandum items: Changes Inresewes (in foreign currency! O.OB30 1.000 0.248 3.755 0.269 4.724 Note: Figures are arbitrary, reflecting approxrmarions to cases such as Mexrco and BraziL The figures were selectedso that 1 00 = GOP bef()(e inflation. 144 Ricardo Arriazu shown under the same inflationaryassumptions. This table should be interpreted in the following way. The country's financing needs, which are shown in the first line of the table, were obtained from the flows in Table 1. Since inflation also influences the nominal demand of economic agents for different financialassets, this element should be reflected in the economic policy assumptions. The assumptions used here reflect the desire of economic agents to maintain a constant real stock of interest-bearing debt instruments and a declining real stock of non-interest -bearing debt instruments. Under a fixed exchange rate, any difference between the financial needs of the public sector and the flow demand for financial assets of the private sector is adjusted through changes in reserves. In Table 3, accumulation of reserves is shown to increase with inflation, a result that seems incompatible with the absorption identity. A careful evaluation of the data, however, shows that this is not the case, as can be seen in Table 4. Table 4. Fiscal Imbalance, Inflationary Taxes, and Reserve Changes IEnd-of-penod nominal stocksl Annual Rate of Inflation Fund. Not for Redistribution Economic Indicator o percent so percent 100 percent Assets 1000 5.633 9.446 Reserves 1.000 5.633 9.446 Liabilities 80.000 119.413 157.466 Domestic Non-interest-bearing 10.000 14.413 17.466 Interest-bearing 20.000 30.000 40.000 External 50.000 75.000 100.000 Nominal net financial wealth -79.000 -113.780 -148.018 Inflation-adjusted net financial wealth -79.000 -75.853 -74.009 Changes In net financial wealth ©International Monetary At old prices 1.000 4.147 5.991 At new prices 1.000 6.220 11.982 Note: Figures are arbitrary, reflecting approximations to cases such as Mexico and Brazil. The figures were seleaed so that 100 = GOP before Inflation. Table 4 depicts the country's financial structure after the fiscal flows of the period and the changes in net financial wealth measured in terms of the new prices and the old prices have been taken into account. As this table shows, net financial wealth has improved somewhat during the period, a result that can only be consistent with a fiscal surplus. This improvement is consistent with the Comment 145 reserve accumulation shown in Table 2, and also exhibits the same tendency to increase with inflation. This apparent contradiction arises because Table 2, which is based exclusively on flows, does not take into account the decline in the real value of the domestic debt derived from inflation (the so-called inflationary tax). A brief analysis of these figures allows us to draw the following conclusions. There are several definitions of fiscal imbalances, and each has its particular usefulness. The most useful definitions are: (1) nominal flow imbalances (Table 2), which are a counterpart of the financing needs of the public sector; (2) total nominal deficit, which is the counterpart of the nominal changes in net financial wealth; (3) inflation-adjusted deficit, which is the counterpart of the "real" changes in net financial wealth (that is, the correct measurement of imbalances from a net wealth point of view; (4) dollar-adjusted deficit, which is a counterpart of variations in net financialwealth measured in dollar terms and is useful in the measurement of imbalances leading to current and balance of payments dis­ equilibria; and (5) zero-inflation deficit. This last concept, which measures the size of fiscal imbalances under the assumption of price stability, is perhaps the most important measurement for assessing the characteristics of a disequi­ librium for adjustment purposes. It should not be used in combination with the inflation-adjusted concept, which attempts to measure the size of the imbalance Fund. Not for Redistribution after allthe distortions in troducedby inflation have been eliminated, whereas the zero-inflation deficit includes all these di stortions and, in addition, includes under revenues the amount of inflationary tax collected. In a sense, the zero­ inflation deficit is an ex-ante concept that measures the magnitude of the adjustment required to eliminate inflationary and external sector pressures, whereas the inflation-adjusted deficitis an ex-post concept that incorporates the real resource transfers originating in inflation. Inflation tends to increase the nominal flow deficit. These increases tend to be large; the larger the interest-bearing domestic debt, the larger the fiscal lag. Inflation also tends to be higher, the larger the size of the zero-inflation deficit, the smaller the non-interest-bearing debt, the larger the fiscal lags, and the ©International Monetary faster the run out of a currency. Reconciliation of nominal flow figures with the changes in nominal net financial wealth is feasible, but it requires elaborate measurements of the inflationary tax and other inflation-induced distortions. Table 5 shows, as an example, these calculations for the year as a whole, under the assumption of a 50percent rate of inflation. Inthis table, the gross inflationary tax was measured not only in relation to the original stock of non-interest-bearing domestic debt (10 x 0.5), but also in terms of the monthly flow demand for this asset. The effects of inflation on taxation (fiscal lags) were measured by comparing the amount of perceived taxes in the 146 Ricardo Arriazu Table 5. Changes In Net Financial Wealth, Inflationary Taxes, and Nominal Flow component Change Changes In net financial wealth at new prices 6.220 Zero-inflation surplus at new prices 1.500 Gross inflationary tax 5.870 Fiscal lags -1.137 Cross effects and interest compounding -0.010 Note: Figures are arbitrary, reflecting approximations to cases such as Mexico and Brazil. The figures were selected so that 100 = GOP before 1nflat10n. case of fullindexation with the fl.ows shown in Ta ble 2. The zero-inflation surplus corresponds to the financial needs figure under the heading "zero inflation," measured at the new prices. The last item ("cross effects") originates in the compounded effects of real interest rates and inflation. Gross, Net, and Effective Net Inflationary Taxes The analysis in the previous paragraphs shows that there are at least three Fund. Not for Redistribution relevant concepts associated with inflationary taxation. Gross inflationary tax corresponds to the concept traditionally used in the literature. It measures the decline in the real value of public sector non-interest­ bearing debt It is normally measured in terms of liquid monetary assets (Ml), but from a fiscal point of view should be measured in terms of the public sector debt. It should include not only the initial stock but also the effects of inflation on the real value of the fl.ow demand of this instrument. In circumstances when negative real interest rates prevail, the measurements should also include these effects. Net inflationary tax is defined as the difference between the gross inflationary tax and the other effects of inflation on the public sector budget (fiscal lags, all ©International Monetary effects on real interest rates, etc.). It should be clear that changes in net financial wealth equal zero-inflation budget plus net inflationary tax. Net effective inflationary taxmeasures the effects of inflation on the financing possibilities of the public sector. It is equal to the net inflationary taxminus the "runout of domestic debt instruments." As economic agents try to avoid paying the inflationary tax, the decline in the real demand for domestic debt instruments reduces the financing possibilities of the public sector. In the extreme case when the net effective inflationary taxturns negative, even though inflation will tend to improve the net financial wealth of a country, the improvement will beof no help in satisfying the financial needs of the public sector. In these circumstances, Comment 147 inflation is a very inefficient adjustment mechanism, since the financing needs will grow faster than the financing sources and will be initially reflected in reserves losses and eventually in hyperinflation. Negative net effective inflationary taxes wi ll tend to be present in countries with persistent inflationary pressures where the stock demand for public sector debt instruments is very low and fiscal lags tend to be very large. Fund. Not for Redistribution ©International Monetary Comment Richard Portes As in so much of recent macroeconomics, the stock-flow distinction lies at the heart of this excellent treatment of the macroeconomic basis of International Monetary Fund (IMF) adjustment programs for indebted less-developed coun­ tries. In particular, the relations between fiscal deficits, domestic public debt, external debt, and debt service must be elucidated. This requires a clear intertemporal perspective as well as an understanding of the complexities of actual adjustment programs. The precise characteristics of adjustment will determine whether a current flow imbalance translates over time into a stock maladjustment, carrying its own consequences for flows.
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