Analysing the Sustainability of Fiscal Deficits in Developing Countries

This paper surveys the recent literature analysing fiscal deficit sustainability, most of which focuses on the U.S. and other industrial countries, in an attempt to assess its potential usefulness in the developing country context. Both the accounting approach and the present value constraint (PVC) approach are considered. Typically, sustainability analyses for developing countries involve issues that are not particularly important in the industrial country context. Reliance on seigniorage to finance deficits is often quantitatively much more important, although its use varies widely across LDCs. The distinction between domestic and foreign-currency borrowing is central; concessional lending and grants may also make an important contribution to fiscal finance. We consider generalizations of the PVC approach to situations where money-financing of deficits is used and concessional financing is available. The simultaneous presence of domestic and foreign debt, which characterizes a growing number of LDCs, are also discussed.