Fiscal And Social Impact of A Nominal Exchange Rate Devaluation In Djibouti

Limited fiscal space limits Djibouti's ability to meet the Millennium Development Goals and improve the living conditions of its population. Djibouti's fiscal structure is unique in that almost 70 percent of government revenue is denominated in foreign currency (import taxes, foreign aid g...

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Main Author: Anos Casero, Paloma
Other Authors: Seshan, Ganesh
Format: eBook
Language:English
Published: Washington, D.C The World Bank 2006, 2006
Subjects:
Online Access:
Collection: World Bank E-Library Archive - Collection details see MPG.ReNa
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653 |a Accounting 
653 |a Bank Policy 
653 |a Currencies and Exchange Rates 
653 |a Currency Devaluation 
653 |a Debt Markets 
653 |a Devaluation 
653 |a Developing Countries 
653 |a Economic Development 
653 |a Economic Stabilization 
653 |a Economic Theory and Research 
653 |a Emerging Markets 
653 |a Exchange 
653 |a Exchange Rate 
653 |a Expenditures 
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653 |a Financial Literacy 
653 |a Fiscal and Monetary Policy 
653 |a Foreign Currency 
653 |a Goods 
653 |a Macroeconomics and Economic Growth 
653 |a Poverty Reduction 
653 |a Private Sector Development 
653 |a Public Sector Development 
653 |a Rural Development 
653 |a Rural Poverty Reduction 
700 1 |a Anos Casero, Paloma 
700 1 |a Seshan, Ganesh 
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520 |a Limited fiscal space limits Djibouti's ability to meet the Millennium Development Goals and improve the living conditions of its population. Djibouti's fiscal structure is unique in that almost 70 percent of government revenue is denominated in foreign currency (import taxes, foreign aid grants, and military revenue) while over 50 percent of government expenditure is denominated in local currency (wages, salaries, and social transfers). Djibouti's economic structure is also unusual in that merchandise exports of local origin are insignificant, and the country relies heavily on imported goods (food, medicines, consumer and capital goods). A currency devaluation, by reducing real wages, could potentially generate additional fiscal space that would help meet Djibouti's fundamental development goals. Using macroeconomic and household level data, the authors quantify the impact of a devaluation of the nominal exchange rate on fiscal savings, real public sector wages, real income, and poverty under various hypothetical scenarios of exchange-rate pass-through and magnitude of devaluation. They find that a currency devaluation could generate fiscal savings in the short-term, but it would have an adverse effect on poverty and income distribution. A 30 percent nominal exchange rate devaluation could generate fiscal savings amounting between 3 and 7 percent of GDP. At the same time, a 30 percent nominal devaluation could cause nearly a fifth of the poorest households to fall below the extreme poverty line and pull the same fraction of upper middle-income households below the national poverty line. The authors also find that currency devaluation could generate net fiscal savings even after accounting for the additional social transfers needed to compensate the poor for their real income loss. However, the absence of formal social safety nets limits the government's readiness to provide well-targeted and timely social transfers to the poor