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International Monetary Fund. Fiscal Affairs Dept.
This Note prepared for the G20 Infrastructure Working Group summarizes the main finding of the IMF flagships regarding the role of environmentally sustainable investment for the recovery. It emphasizes that environmentally sustainable investment is an important enabler for a resilient greener, and inclusive recovery—it creates jobs, spurs economic growth, addresses climate change, and improves the quality of life. It can also stimulate much needed private sector greener and resilient investment.
Mr. Jose L. Torres
Over the last two decades, the Peruvian government has made great efforts to improve access to health care by significantly augmenting the coverage of the non-contributory public health care system Seguro Integral de Salud (SIS). This expansion has a positive impact on welfare and public health indicators, as it limits the risk of catastrophic health-related costs for previously uninsured individuals and allows for the appropriate treatment of illnesses. However, it also entails some unintended consequences for informality, tax revenues, and GDP, since a few formal agents are paying for a service that the majority of (informal) agents receive for free. In this paper, we use a general equilibrium model calibrated for Peru to simulate the expansion of SIS to quantify the unintended effects. We find that overall welfare increases, but informality rises by 2.7 percent, while tax revenues and output decrease by roughly 0.1 percent. Given the extent of the expansion in eligibility, the economic relevance of these results seems negligible. However, this occurs because the expansion of coverage was mostly funded by reducing the spending per-insured person. In fact, we find larger costs if public spending is increased to improve the quality of service given universal coverage.
Mr. Luca A Ricci, Mr. Jorge Roldos, and Alejandro M. Werner
The fiscal policy response to the COVID-19 shock in most LAC countries was much larger than during the GFC, suggesting fiscal space was not as tight as expected. We argue that it is feasible and desirable, though not without risks, to embark in a more gradual consolidation path than currently envisaged by several countries in the region. Avoiding an early withdrawal of support in 2021 and 2022 is important given that countries are still facing high rates of contagion and deaths, vaccination will take place very slowly, the economic recovery is partial, uncertain and not strong enough to help those most affected by the twin public health and economic crisis. At the center of this discussion is our conviction that fiscal space is not set in stone and it is endogenous to the medium-term targets and commitments undertaken by governments and congresses throughout the region. Also, revisions to fiscal responsibility frameworks should help anchor fiscal sustainability, as well as improve their effectiveness and flexibility. In this context, low-for-long interest rates and easy market access is generating a situation that, in spite of higher debt levels, interest cost on public debt will remain contained in the foreseeable future. Especially if, as argued in this paper, a more gradual fiscal consolidation path is accompanied with stronger commitments and institutional frameworks that ensure debt is put on a credible downward trajectory once the pandemic is under control. Catalyzing these changes, as well as initiating the debate to design other fiscal reforms to strengthen social protection and increase the progressivity of public finances, would require a broad social consensus and political cohesion around several crucial dimensions of public finances: a fiscal pact. On the other hand, if this agenda is neglected the continuation of low growth, social discontent, and political polarization could drive Latin America towards a very dangerous path of institutional and economic decay.


This booklet summarizes the presentations in the conference titled “Enhancing Chile’s Fiscal Framework: Lessons from Domestic and International Experience,” organized by Chile’s Ministry of Finance and the International Monetary Fund in January of 2019. The conference’s objective was to explore challenges and possible opportunities to improve Chile’s fiscal framework, including the fiscal rule, by looking at the Chilean and international experience. The conference had the valuable participation of current and former senior policymakers from Chile, including former Ministers of Finance ranging across the political spectrum and central bank presidents, which provided an insightful perspective in areas for improvement in the realm of fiscal policy. These views were complemented by representatives from the IMF and the Inter-American Development Bank, academics, and country officials from New Zealand and Peru, which provided lessons from the international experience.

Christoph Freudenberg and Mr. Frederik G Toscani
Past reforms have put the Peruvian pension system on a largely fiscally sustainable path, but the system faces important challenges in providing adequate pension levels for a large share of the population. Using administrative microdata at the affiliate level, we project replacement rates in the defined benefit (DB) and defined contribution (DC) pillars over the next 30 years and simulate the impact of various reform scenarios on the average level and distribution of pensions. In the DB pillar, the regressive minimum contribution period should be re-thought, while in the DC pillar a broadening of the contribution base and/or an increase in contribution rates would help increase replacement rates relative to the baseline forecast of 25-33 percent. A higher net real rate of return than assumed in the baseline would also have a significant positive impact. In the medium-term, labor market reform to tackle informality, and a broad pension reform to restructure the system and avoid competition between the DB and DC pillars should be a priority. Given low pension coverage, having a strong non-contributory pillar will remain important for the foreseeable future.
Mr. Antonio Spilimbergo and Mr. Krishna Srinivasan


Brazil is at crossroads, emerging slowly from a historic recession that was preceded by a huge economic boom. Reasons for the historic bust following a boom are manifold. Policy mistakes were an important contributory factor, and included the pursuit of countercyclical policies, introduced to deal with the effects of the global financial crisis, beyond the point where they were helpful. More fundamentally, it reflects longstanding structural weaknesses plaguing the economy, that also help explain Brazil’s uninspiring growth performance over the past four decades.