Calibration and Baseline Solution

We calibrated the model for 2003, the most recent year for which we were able to construct a complete set of macro accounts. Data on national accounts, fiscal accounts, balance of payments (based on IMF estimates), and OECD data were combined to produce a consistent set of estimates.21 _{Significant discrepancies}

appeared in the aid data between national sources, the OECD’s DAC database, and the fiscal and balance-of-payments accounts provided by the IMF; we chose to use the OECD data, which are the most comprehensive, and adjusted the other information accordingly while keeping intact major equilibrium relationships. Capital stock data (both public and private) were derived using the perpetual inventory method, using the depreciation rates indicated earlier. In solving the model, we use the nominal exchange rate as the numéraire, and therefore keep its value fixed in all the experiments that are reported below.

Conducting policy experiments with the model requires building a baseline scenario. Given that the model uses 2003 as its base period, this requires in turn making a series of assumptions for the policy and other exogenous variables, over the period 2004-2015. The stock of land is assumed constant and normalized to unity. Population and the supply of raw labor are assumed to grow at the constant rate of 3.1 percent, in line with recent estimates of demographic trends in Niger. The quantity of educated labor employed by the public sector in the education system is assumed to remain equal, as a share of total educated labor, to the value observed in 2003. The shares of public investment in infrastructure, health, education, and other spending are also kept constant at their base period values (about 37 percent, for instance, for infrastructure). Domestic borrowing is projected as a constant share

20 _{We checked the sensitivity of results to changes in the value of the congestion parameters such as}

0.25, 0.5, 0.75, and 1. We found that the results are robust to changes in the parameters.

21_{These estimates, as well as the adjustments that we made, are described in an unpublished}

of GDP. Given its financing constraint, we assume (as noted earlier) that Niger borrows externally (at concessional terms) to close its budget gap. Thus, public foreign borrowing is determined residually to balance the government budget, given the assumption of a constant domestic borrowing-GDP ratio. Current, non-interest public spending is also kept constant as a share of GDP.

Foreign interest rates on private foreign borrowing and on domestic and foreign debt are all taken to be fixed at the average level observed in 2003. Foreign aid (measured in domestic-currency terms) is kept constant in proportion of GDP at the 2003 level (about 10.7 percent). Private capital inflows and private unrequited transfers (both measured in foreign-currency terms) are kept constant in per capita terms. Prices of imports and exports are assumed to grow at a constant annual rate, taken to be equal to 3 percent for the price exports and 0 for the price of imports. Thus, we expect Niger’s terms of trade to improve significantly over time. Finally, the average effective wage in the public sector is assumed to grow at the rate of change of the after-tax composite market price, reflecting full indexation on the cost of living.

Solution of the model, which is performed with Eviews, requires normalization of each equation on one left-hand side variable. In most cases, the normalization is straightforward and based on the way the equations are presented in Appendix A. The order of solution for X, DOM, PD, PY, M and ∆NFA is somewhat more involved and proceeds as follows. Identity (5) is used to determine the price of domestic goods, PD, whereas equation (21) is used to determine the quantity of domestically- produced goods, DOM. Given the production function (equation (4)), the allocation function between exports and domestic sales (equation (6)) is used to determine X, and equation (43) is used to determine PY. Imports, M, are determined from equation (20). Finally, the change in net foreign assets of the central bank, ∆NFA, is residually determined by the balance of payment equation (equation (34)). Thus, the implicit assumption is that, given the closure rule of the government budget, Niger faces no external payments constraint. While this assumption may be viewed as optimistic and somewhat extreme (given management rules of foreign exchange reserves in the

CFA franc Zone), it provides a convenient medium-term “benchmark” in the current international environment.

The baseline projections for the period 2004-2015 are shown in Table 3. The results indicated that, given our assumptions (which are essentially extrapolations based on recent trends), income per capita rises and poverty drops in Niger. The estimated poverty rate decreases in the best case (a consumption growth elasticity of -1.5) by 8 percentage points down to 55.4 percent in 2015 from an estimated 63 percent in 2003. In the worst case (a consumption growth elasticity of -0.5), the poverty rate drops by about 3 percentage points over the same period, down to 60.4 percent compared to 63 percent in 2003. Obviously if the current trends were to be maintained, the prospects of reducing poverty would be rather bleak and the MDG of halving poverty by 2015 would prove elusive. Indeed, under the baseline projections and in the best case, it would take 47 years to reduce poverty by half in Niger. The rate of increase in composite prices is relatively low, but given the fixed nominal exchange rate and the constancy of import prices, the real exchange rate (defined as the ratio of the domestic-currency price of imports to the price of the domestic composite good) appreciates almost continuously. As a result, exports tend to fall over time. Imports decreases as well. The fall in tax revenue (as a share of GDP) leads to a fall in total public investment (also as a share of GDP) over time. Given the assumption of constant shares, all components of public investment fall over time, dampening the growth rate of output. The resulting fall in the public capital stock (measured in proportion of GDP) and the low growth rate of output combine to reduce private investment as a share of GDP from 5.6 percent of GDP in 2003 to 3.9 percent in 2015. The overall fiscal balance improves from -3.5 percent of GDP in 2003 to -2.6 percent in 2015; as a result, borrowing needs fall over time and (given the assumption of a constant ratio of domestic financing to GDP) so does the ratio of external debt to GDP.