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Mr. Giovanni Melina and Yi Xiong
Mozambique has great potential in natural gas reserves and if liquefied/commercialized the sum of taxes and other fiscal revenue from natural gas will, at its peak, reach roughly one third of total fiscal revenue. Recent developments in the natural resource sector have triggered a fresh round of much needed infrastructure investment. This paper uses the DIGNAR model to simulate alternative public investment scaling-up plans in alternative LNG market scenarios. Results show that while a conservative approach, which simply awaits LNG revenues, would miss significant current growth opportunities, an aggressive approach would likely meet absorptive capacity constraints and imply a much bigger (and, in an adverse scenario, unsustainable) build-up of public debt. A gradual scaling up approach represents indeed a desirable path, as it allows anticipating some, though not all, of the LNG revenue and, even in an adverse scenario, keeping public debt at sustainable levels. Structural reforms affecting selection, governance and execution of public investment projects would significantly enhance the extent to which public capital is accumulated and impact non-resource growth and, ultimately, debt sustainability.
Mr. Giovanni Melina and Marika Santoro

given. When this borrowing is not enough to cover the public investment scaling-up plan, a fiscal gap arises. Scenarios can be built also allowing external commercial and domestic borrowing help finance the public investment surge, with taxes and transfers responding to stabilize debt levels over time. Absent any additional financing sources, the government adjusts taxes and transfers to close the gap. While the path of public investment is set exogenously by the user to produce alternative policy scenarios, the model incorporates fiscal rules for tax instruments

Daniel Gurara, Mr. Giovanni Melina, and Luis-Felipe Zanna
Over the past seven years, the DIG and DIGNAR models have complemented the IMF and World Bank debt sustainability framework (DSF) analysis, over 65 country applications. They have provided useful insights in the context of program and surveillance work, based on qualitative and quantitative analysis of the macroeconomic effects of public investment scaling-ups. This paper takes stock of the model applications and extensions, and extract five common policy lessons from the universe of country cases. First, improving public investment efficiency and/or raising the rate of return of public projects raises growth and lowers the risks associated with debt sustainability. Second, prudent and gradual investment scaling-ups are preferable to aggressive front-loaded ones, in terms of private sector crowding-out effects, absorptive capacity constraints, and debt sustainability risks. Third, domestic revenue mobilization helps create fiscal space for investment scaling-ups, by effectively containing public debt surges and their later-on repayments. Fourth, aid smoothens fiscal adjustments associated with public investment increases and may lower the risks of unsustainable debt. Fifth, external savings mitigate Dutch disease macroeconomic effects and serve as fiscal buffers. The paper also discusses how these models were used to estimate the quantitative macro economic effects associated with these lessons.
Ms. Malangu Kabedi-Mbuyi, Mame Astou Diouf, and Mr. Constant A Lonkeng Ngouana
This paper analyzes the macroeconomics of scaling up public investment in Burkina Faso under alternative financing options, including through foreign aid and a combination of tax adjustment and borrowing. Our findings are twofold: (1) raising official development assistance in line with the Gleneagles agreement provides scope for financing public investment at low cost and would have positive, but somewhat moderate, effects on aggregate output—the growth dividends in the nontradables sector would be partially offset by the Dutch disease in the tradables sector; and (2) the massive investment scaling-up contemplated under Burkina Faso’s “accelerated growth” strategy, while boosting medium- and long-term growth, would lead to unsustainable debt dynamics under a plausible tax adjustment and realistic concessional financing. A more gradual approach to closing Burkina Faso’s infrastructure gap is therefore desirable because it would take into account the needed time for the country to address its capacity constraints and to further improve investment efficiency.
Mr. Giovanni Melina and Yi Xiong

size typically observable in oil and gas market crises as well as an earlier exhaustion of gas reserves. Hence, this scenario features negative shocks both to production and prices. In this scenario LNG revenues reach a peak of 20 percent of fiscal revenues. C. Simulation results In this section, we simulate the effects of alternative public investment scaling-up plans in Mozambique. These plans represent alternative policy decisions that government may take and are set exogenously to the model. DIGNAR represents a tool to assess the macro

International Monetary Fund. African Dept.

Climate 7. Sub-Saharan Africa: Indicators of Corruption, Regulatory Quality, and Judicial Independence 8. Madagascar and Fragile SSA Countries: Broad Money (M3) 9. Sub-Saharan Africa (SSA): Transparency and Control of Corruption 10. Fiscal Transfers to SOEs in 2016 TABLE 1. Effects of a One-Unit Increase in the Index of Perceived Corruption MACROECONOMIC IMPLICATIONS OF SCALING UP PUBLIC INVESTMENT IN MADAGASCAR A. Introduction: The Case for Scaling Up B. Scaling Up Plans C. Absorptive Capacity: Investment Capacity D. Macroeconomic

International Monetary Fund. African Dept.