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...

Full description

Bibliographic Details
Main Authors:	Anós Casero, Paloma, Seshan, Ganesh
Format:	Policy Research Working Paper
Language:	English en_US
Published:	World Bank, Washington, DC 2012
Subjects:	ADEQUATE SAFETY NETS ADVERSE EFFECT AGGREGATE DEMAND AGGREGATE SUPPLY AGRICULTURAL SECTOR AGRICULTURE BASE YEAR BENCHMARK CASH TRANSFERS COMPETITIVENESS CONSUMERS CONSUMPTION BEHAVIOR CONSUMPTION INCREASES CROWDING OUT CURRENCY CURRENCY BOARD CURRENCY DEVALUATION DEBT DEMAND DECLINES DEVALUATION DEVELOPING COUNTRIES DISCRETIONARY FISCAL POLICY DOMESTIC PRICES EARNINGS ECONOMIC PERFORMANCE ECONOMIC POLICY ECONOMIC STRUCTURE ELASTICITY EMPIRICAL EVIDENCE EXCHANGE RATE DEVALUATION EXCHANGE RATE MANAGEMENT EXCHANGE RATE REGIME EXCHANGE RATES EXPORTS EXTERNAL DEBT EXTREME POVERTY EXTREME POVERTY LINE FISCAL ADJUSTMENT FISCAL BURDEN FISCAL COSTS FISCAL POLICY FIXED EXCHANGE RATE FOOD CONSUMPTION FOOD PRICE FOOD PRICES FOOD STAPLES FOREIGN CURRENCY FOREIGN EXCHANGE FOREIGN EXCHANGE EARNINGS FOREIGN INTEREST RATE FORMAL SAFETY NETS FORMAL SECTOR FORMAL SECTOR EMPLOYMENT GDP GDP DEFLATOR GOVERNMENT EXPENDITURES GOVERNMENT SPENDING GROSS DOMESTIC PRODUCT GROWTH RATE HOUSEHOLD BUDGET HOUSEHOLD CONSUMPTION HOUSEHOLD EXPENDITURE HOUSEHOLD INCOME HOUSEHOLD LEVEL HOUSEHOLD LEVEL DATA HOUSEHOLD SURVEY HOUSEHOLD SURVEYS IMPACT ON POVERTY IMPORT SUBSTITUTION INCIDENCE OF POVERTY INCOME DISTRIBUTION INCOME TAXES INDEXATION INFORMAL SECTOR INFORMAL TRANSFERS INSURANCE INTEREST RATE INTEREST RATES LABOR FORCE LABOR MARKET LABOR MARKETS LOCAL CURRENCY MARGINAL UTILITY MIDDLE EAST NATIONAL POVERTY NATIONAL POVERTY LINE NATURAL RESOURCES NOMINAL EXCHANGE RATE NORTH AFRICA PER CAPITA INCOME POLICY RESEARCH POOR POOR HOUSEHOLD POOR HOUSEHOLDS POVERTY INCIDENCE POVERTY LEVELS POVERTY POVERTY POVERTY REDUCTION PRIVATE CONSUMPTION PRIVATE INVESTMENT PRIVATE SECTOR PRODUCTION COSTS PUBLIC SECTOR PURCHASING POWER PURCHASING POWER PARITY REAL EXCHANGE REAL EXCHANGE RATE REAL GDP REAL GROWTH REAL INCOME REAL TERMS REAL WAGES RELATIVE PRICES RISING TREND RURAL RURAL AREA RURAL AREAS RURAL HOUSEHOLDS RURAL POOR RURAL POVERTY SAFETY NETS SAVINGS SCENARIOS SLOW GROWTH SOCIAL COSTS SOCIAL SAFETY NETS SOCIAL SECURITY SOCIAL SPENDING SOCIAL TRANSFERS STRONG APPRECIATION STRUCTURAL REFORMS SUB-SAHARAN AFRICA TAX REVENUES TELECOMMUNICATIONS TOTAL REVENUE TRADABLE GOODS UNEMPLOYMENT UNEMPLOYMENT RATE UTILITY FUNCTION WAGES WAR
Online Access:	http://documents.worldbank.org/curated/en/2006/10/7111985/fiscal-social-impact-nominal-exchange-rate-devaluation-djibouti http://hdl.handle.net/10986/9002

Description
Summary:	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.

Fiscal and Social Impact of a Nominal Exchange Rate Devaluation in Djibouti

Similar Items