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This note is prepared by Manabu Nose (FAD).
Output gap is computed as the percentage GDP gap between actual GDP and potential GDP. Potential GDP is computed by applying the Hodrick-Prescott (HP) filter to annual series of nominal GDP for each country with the smoothing parameter of 100.
The decomposition analysis assumes a Cobb-Douglas aggregate production function which takes the stock of physical capital and human capital-augmented labor (unit of labor with different level of years of schooling) as inputs for production. Following Mankiw, Romer, and Weil (1992), Klenow and Rodriguez (1997), and Hall and Jones (1999), it decomposes differences in output per worker across countries into differences in capital-output ratio, educational attainment and productivity.
The initial reforms to gradually phase out fuel subsidies were implemented in late 2010-early 2011 by a transitional government, but the reform has lost momentum because it believed it had less legitimacy to embark on such a sensitive reform process.
In this regard, IMF’s fiscal affairs department provided a technical assistance which provides guidance on new fiscal frameworks (spending and saving options) and action plans to better manage natural resource revenues. For details on the new fiscal framework and policy recommendations, see IMF (2012).