FIlLE CQPY SP.I8 External Debt, Inflation, and the Public Sector: Toward Fiscal Policy for Sustainable Growth

Which tradeoffs are involved in formulating an external debt strategy? Should expenditure be cut to improve the current account, or will this reduce future output growth, thus undermining the benefits of any debt reduction? Are there alternatives that allow satisfactory output growth without jeopardizing creditworthiness? How can the necessary surplus of savings over investment be brought about at levels of investment high enough to sustain output growth? Should the government contribute to the internal adjustment by reducing its deficit? Macroeconomic targets for inflation and growth, and creditworthiness constraints on debt issue, impose restrictions on the extent to which deficits can be financed. Can the government cover the deficit within these targets and constraints? The absence of such consistency forebodes future policy change and so undermines the credibility of the adjustment program. The author uses empirical work on Turkey to illustrate the interactions between fiscal deficits and the macroeconomic variables upon which fiscal consistency hinges. The rise in interest rates and the collapse in commodity prices that followe