Assorted

Why did the U.S. Housing go bust in 2006-07?;

There are essentially five theoretical models or frameworks that are used by economists to explain credit booms and busts. These are (1) changes in fundamentals over time; (2) irrational myopia as reflected in euphoric greed followed by fear or depressive panic; (3) implicit or explicit government subsidies and guarantees; (4) multiple equilibria or knife-edge problem; and (5) agency problems in assets management. Each of these frameworks is used to analyze the current housing problems, which triggered a U.S. financial meltdown and impacted a global economic crisis.

Banking and the Leverage Ratio

NIPFP-DEA Program on Capital Flows

India Financial Sector Self Assessment

FinancialStability.gov

Please torch my car

Structured Finance for Beginners

Credit Default Swaps, Herald of Doom (for Beginners)

Something to think about

"the IMF estimates that the balance of payments needs of low-income countries will be about $25 billion this year."

See
Appendix VI. Balance of Payments Financing Needs, The Impact of the Financial Crisis on Low-Income Countries.

Why Do People Do Bad Things?

Economic Gangsters talk

Assorted

What is up with the balance of payments?

The Fed's new balance sheet

A reporter’s budget mistake at the press conference

Now the Long Run Looks Riskier, Too as

Animal Spirits

In October 1989, I attended a conference at the National Bureau of Economic Research organized by Martin Feldstein, the Harvard economist, on “The Risk of Economic Crisis.” The conference still sticks in my mind because of a paper delivered there by Lawrence H. Summers, now the head of the president’s National Economic Council and the dominant economic intellectual at the White House. During the Clinton administration, Mr. Summers was Treasury secretary and backed legislation that helped deregulate financial markets; many analysts say the policies helped lay the foundation of the subsequent financial crisis. But back in 1989, because of his imaginative work, I came away with a recognition that a severe contraction, even a depression, could indeed come again....

Mr. Summers told a fictional but vivid story of a big financial crisis, complete with examples of specific events and how people might react to them. Seeing it concretized as an imaginary history, and placed in the near future — in just two years, in 1991 — made it seem more real and familiar.

He said that this crisis would be preceded by an enormous stock market boom, bringing the Dow to the unimagined high of 5,400 by October 1991. (The Dow was at 2,600 on the day of the conference; 5,400 would be 13,000 today if scaled up in proportion to gross domestic product.)

Euphoria gripped the investors of his fictional universe. “The notion that recessions were a thing of the past took hold,” Mr. Summers said. He added that over a 15-year period through 1990 — a time that included the 1987 crash — investors earned an average real return of 11 percent. The popular view was that “with a reduced cyclical element, the future would be even brighter.”

Furthermore, he said, “lawyers and dentists explained to one another that investing without margin was a mistake, since using margin enabled one to double one’s return, and the risks were small given that one could always sell out if it looked like the market would decline.”

Today, this sounds like a description of thinking that led to the 2000s boom, although the leveraging of investments tended to take a form other than that of traditional margin credit on stock purchases.

His fictional account went on to describe the early signs of the crisis, “In October 1991, problems began to surface,” he said, adding that a “major Wall Street firm was forced to merge with another after a poorly supervised trader lost $500 million by failing to properly hedge a complex position in the newly developed foreign-mortgage-backed-securities market.” He went on to describe how this provocation led to a change in psychology and a market crash and problems in banks and credit markets.

His fiction concluded, “The result was the worst recession since the Depression.”...

Ultimately, the record bubbles in the stock market after 1994 and the housing market after 2000 were responsible for the crisis we are in now. And these bubbles were in turn driven by a view of the world born of complacency about crises, driven by views about the real source of economic wealth, the efficiency of markets and the importance of speculation in our lives. It was these mental processes that pushed the economy beyond its limits, and that had to be understood to see the reasons for the crisis.

-It Pays to Understand the Mind-Set, Robert Schiller

The art of cutting budgets

Governor Corzine Discusses New Jersey State Budget Proposals (podcast)

Related;
The FY 2010 Budget Address;

The global recession took a further toll on our revenues, so we have cut almost $4 billion in baseline spending from this year's budget. But before we cut, we made a value-based judgment to take some things off the table...

Now, let's lay out the numbers in basic terms. This fiscal year, which runs through June, the state will take in about $30 billion - about $3 billion less than we originally planned. In the coming FY 2010, we're projecting base revenues of only $28.5 billion.

Even with important help from the federal government -- the declining revenue meant we had to make deep cuts in spending to balance the 2010 budget. With respect to budget cuts, there are two ways to compare the numbers: in absolute terms - as I just outlined - or in terms that reflect baseline growth. In absolute terms, we need to cut $3 billion to bring this budget into balance. In baseline growth, we need to find a "staggering" $7 billion in spending and revenue solutions. As you all can appreciate, baseline growth is a more practical measure of the state's budget gap.

Baseline numbers include increases that are mandated by statute, contract, and the courts - contractual wage increases, for instance. A baseline comparison also includes increases in health care and energy costs, supplemental school funding, debt service and court-mandated actions that increase child-welfare expenses.

A family sitting around the kitchen table understands the real pressures in baseline growth. Their health care costs are going up every year their energy costs soared in 2009 and the cost of nearly everything else - from food, to child care, to college tuition - continues to rise. The state budget is no different....

That still leaves a $5 billion gap in the budget, which we have attacked with $4 billion in cuts to programs, rebates, pension payments, and state worker salaries, In all, over 850 line items in the budget have been cut. The largest cuts will come from reductions in a scaling back of homestead rebates by $500 million, and reducing by another $500 million payments to the pension fund....

With the talent, the work ethic, and the strong character of our people, New Jersey will lead the way. I believe in our common desire to do what is right. I hope and expect to see that spirit reflected in the final budget, a budget that values children, seniors, and the most vulnerable, and asks a little more from the rest of us.

For Discussion: What do you think of the budget speech? What does he mean by baseline growth?

Animal Spirits come to IMF and World Bank

Some popular titles at IMF and World Bank;

Animal spirits : how human psychology drives the economy, and why it matters for global capitalism / George A. Akerlof and Robert J. Shiller.

Private sector investment in infrastructure : project finance, PPP projects and risks / by Jeffrey Delmon

Event history analysis with Stata
Blossfeld, Hans-Peter.

Wars, guns, and votes : democracy in dangerous places / Paul Collier.

Trade shocks in developing countries / [edited by] Paul Collier and Jan Willem Gunning and associates.

Value at risk : the new benchmark for managing financial risk / Philippe Jorion

Effective Habits from the Budget Man

A profile of Peter Orszag in NYT;

“He’s made nerdy sexy,” said Rahm Emanuel, the White House chief of staff.

Mr. Orszag, who grew up in Lexington, Mass., has always worked himself punishingly hard — a legacy, he says, from a math-professor father who glanced at test scores of 98 and asked about the 2 other points. “It was always, ‘When I was your age, I was a tenured professor,’ ” he said.

When he won a Marshall scholarship, his father congratulated him by admitting that the award was “not trivial.” Later he discovered that his father had once been turned down for the prize, which finances graduate study in Britain. (Mr. Orszag earned master’s and doctoral degrees at the London School of Economics.)

In classic political fashion, Mr. Orszag trained for Washington rivalry through family rivalry, not just with his father but also with his economist brothers. Peter, Michael and Jonathan Orszag have worked and written papers together and still compare electronic gadgets and their Princeton grade-point averages...

Friends say his dinner parties are notable for the meticulously chosen wines and the senators who attend. (Mr. Orszag, a divorced father of two, is so cozy with the Capitol Hill crowd that Senator Ron Wyden and his wife, Nancy Bass Wyden, found him a girlfriend.)...

So far, his main project has been the budget, drafted in meetings that began before the inauguration. For weeks after Mr. Obama took office, Mr. Orszag sat directly across the table from him in the Roosevelt Room. He began each session with a series of PowerPoint slides, defined the president’s options and constantly jotted down requests on notecards.

For someone with two BlackBerrys — work and personal — clipped to the small of his back, Mr. Orszag seems governed by little cards: the ones in his breast pocket for notes, another that lists his meetings, a tiny hand-lettered one that materializes to summon him to the Oval Office....

His own health care conversion occurred when a doctor told him several years ago that he was at risk for cardiovascular problems. Mr. Orszag changed his diet. Each day he eats the same egg whites for breakfast and salad topped with chicken for dinner, all from the White House mess.

He also began training for marathons, sometimes startling colleagues by appearing in their offices at day’s end in head-to-toe spandex.

Now he keeps two books on his desk: the teachings of Epictetus, a Greek Stoic philosopher who espoused dispassion and self-discipline, and “The Strenuous Life,” by Theodore Roosevelt, an ode to pushing oneself as hard as possible.

A Conversation with George Akerlof and Robert Shiller

Animals Spirits discussion at Zocalo.

A review of the book from The Economist;

NO TWO economic crises are identical. But the same questions recur. How did we get into this mess? How can we get out of it? How do we avoid another? Some answers repeat themselves too. You can be pretty sure that sooner or later someone, quite possibly an anguished economist, will declare that economics itself has gone astray. The wisdom of some past master, whether celebrated (John Maynard Keynes, for example) or neglected (Hyman Minsky, perhaps), has been forgotten, and the economy is paying the price.

A new book*, “Animal Spirits”, by George Akerlof of the University of California, Berkeley, and Robert Shiller of Yale, follows this rule to the letter. The authors seek to answer the first of those three old questions and thus to provide some pointers about the other two. They do indeed believe that economics has lost its way. And their chosen economist is Keynes.

The Right (And Wrong) Way to Spend $1 Trillion

The title is a bit misleading- from New America Foundation.

The Committee to Save the World

Inside Obama’s Economic Brain Trust

Development Podcast of the Day- Shanta Devarajan

With Shanta Devarajan and Sheila Page. Discussion of the impact of the economic crisis on developing countries, the food crisis, moves towards a new Free Trade Area for Africa, and the Mo Ibrahim Prize for good governance.

Listen to the podcast

For Discussion: Shanta mentioned that poor African countries can be provided with additional loans through the IBRD window, for infrastructure and productive investments.

Why Good Economics Works for Everyone

A View from the Outside; Why Good Economics Works for Everyone, by Minister P. Chidambaram

Back to Basics in SOE reform

Turnaround Of Indian Railways

Indian Railways is the worlds largest employer and one of the biggest and busiest rail networks in the world, carrying some 17 million people and more than one million tonnes of freight daily. It was, however, until very recently, a loss-making organisation heading for bankruptcy. Starting his term in 2004 with a budget of just $200 million with which to save the national institution, Indian Railways Minister, Lalu Prasad engineered a dramatic turnaround. In 2007, Indian Railways revenues amounted to $6 billion. This impressive success story has also been featured in the textbooks of prestigious academic institutes worldwide as a case study. Minister Lalu Prasad is a key ally of India's governing coalition led by the Congress party. He was also the former Chief Minister of the state of Bihar which his Rashtriya Janata Dal party governed for 13 years until 2005.

Special Announcement

I will be posting Financial Crisis stuff from now on the Tracking the Economy blog.

Macroeconomic Management in Small States

Interesting conference on Small States

Five Goats who contributed to the Crisis - Mundell

The Fed Screwed Up’: Five Goats who contributed to the Crisis (Ranieri, Clinton, Greenberg, Bernanke, and Paulson)

Development Blog of the Day

Caribbean Political Economy

Heavy Weight Podcasts on Financial Crisis

Taleb on the Financial Crisis

Eichengreen Sees Treasury `Overpaying' For Toxic Assets

Reinhart Sees Fed Running Out of Monetary Policy Options

McCraw Sees `No Quick Fix' for U.S. Financial System

Calomiris Says Bernanke to Have New Plan for Regulation

Goodfriend Sees Fiscal, Not Monetary Stimulus From Obama

Levitt Says Much Persuasion Needed for New Treasury Plan

Stanford's Taylor Says Fed Needs Clear Market Recovery Plan

Yergin Says Washington Is Now Global Financial, Energy Capital

Ben Shalom Bernanke

"You know, Mr. Chairman, there are so many people outside this building, across this country, who say, 'To hell with them. They made bad bets. The wages of failure on Wall Street should be failure,'" Pelley remarked.

"Let me give you an analogy, if I might," Bernanke said. "If you have a neighbor, who smokes in bed. And he's a risk to everybody. If suppose he sets fire to his house, and you might say to yourself, you know, 'I'm not gonna call the fire department. Let his house burn down. It's fine with me.' But then, of course, but what if your house is made of wood? And it's right next door to his house? What if the whole town is made of wood? Well, I think we'd all agree that the right thing to do is put out that fire first, and then say, 'What punishment is appropriate? How should we change the fire code? What needs to be done to make sure this doesn't happen in the future? How can we fire proof our houses?' That's where we are now. We have a fire going on." ...

Asked what the first signs of recovery will be, Bernanke told Pelley, "Well, I think that one sign would be that a large bank is successful in raising private equity. Right now, all the private money is sitting on the sidelines saying, 'We don't know what these banks are worth. We don't know that they're stable.' And they're not willing to put their money into the banks."

"If you had a message for the American People in this interview, what would it be?" Pelley asked.

"Scott, I'd say three things. I'd say, first of all, that the Federal Reserve is here, and is gonna do everything possible to support this recovery. The second thing I would say is that we have to understand, though, that recovery is not gonna happen until the financial markets and the banks are stabilized. And we do have a plan, we have a program for that. But it's gonna take some patience," Bernanke said.

"But the third and final thing I'd just like to say to the American People is that I have every confidence that this economy will recover, and recover in a strong and sustained way. The American people are among the most productive in the world. We have the best technologies. We have great universities. We have entrepreneurs. I just have every confidence that as we get through this crisis, that our economy will begin to grow again, and it will remain the most powerful and dynamic economy in the world."

Imagining India

The Daily Show With Jon Stewart	M - Th 11p / 10c
Nandan Nilekani
comedycentral.com
Daily Show Full Episodes Important Things w/ Demetri Martin Political Humor

Simon Johnson on Colbert

The Colbert Report	Mon - Thurs 11:30pm / 10:30c
It Could Be Worse - Simon Johnson
comedycentral.com
Colbert Report Full Episodes Political Humor Mark Sanford

Global Crisis Orientation

Bernie Madoff- an American Hero?

Bernie Madoff- an American Hero?

Dear Mister Madoff:

Before it's too late, I wanted to thank you for all that you've done for America. It's been reported that you have pleaded guilty to 11 criminal charges, meaning you will spend the rest of your life in jail. A legacy like yours should not go unmarked as you fade into history.

And so I'm writing you this letter to honour your contributions to American society. I'm not speaking about the thousands of people you've defrauded. Nor am I referring to the (less than) $50bn you made evaporate overnight. And those two people you caused to commit suicide? Disgraceful, of course, but not all that you should be remembered for.

I, unlike the rest of our compatriots, will choose to exalt your gifts, not just your sins. Like the way you single-handedly forced Congress to acknowledge just how crappy the SEC is at doing its job. Like when your downfall helped unearth a dozen other Ponzi schemes, proactively saving millions of dollars. And I, for one, do not think you're only the basest kind of American – a man driven by greed, power and an unchecked case of OCD. No, you, sir, are an American patriot. Your selfless sacrifice is overlooked by the hate-first-think-second mass media. You gave the American people somebody to despise when they needed it most. In our economic era, you may not have been the villain we wanted, but you were the one we needed.

Bernie – may I call you Bernie? – you arrived at just the right time. In December, when you admitted your fraud, we Americans were spewing anger, but it wasn't directed at anyone in particular. President Bush? He was on his way out of office, and we had already vented our frustrations at the polls. The CEOs of sub-prime lenders? Countrywide was absorbed by Bank of America; Fannie Mae and Freddie Mac belonged to us, the very people they helped ruin. Wall Street? Too many CEOs, all of whom you could call greedy only if you understood what in God's name a credit-default swap was....

Obama's 'revolutionary Chinese budget'?

The Daily Show With Jon StewartM - Th 11p / 10c

Clusterf#@k to the Poor House - Obama's Revolutionary Budget

Daily Show Full Episodes
Important Things w/ Demetri Martin

Political Humor
Jim Cramer

Assorted Fiscal

Fiscal Reforms That Work

Public Investment and Public-Private Partnerships

Guidelines for Fiscal Adjustment

Fiscal Adjustment for Stability and Growth

Unproductive Public Expenditures: A Pragmatic Approach to Policy Analysis

Rodrikian Humor

The failures of contemporary macro theory remind me of the time we were interviewing a highly touted graduate student on the academic job market (I believe he was from the University of Minnesota, but I am not totally sure). We asked him how he would teach macro to public policy students at the Kennedy School. He thought for a while, and said: "I guess I would do it all using the overlapping-generations model, and since this is an introductory course, I wouldn't bring money in at all."

-The sorry state of (macro)economics

Assorted

Singapore's Stimulus Package

The Fed Didn't Cause the Housing Bubble

Fed Paper: Currency Crashes Can Have Good Economic Effects

Assessing the Trade Finance Situation

Antonio Fatas and Ilian Mihov on the Global Economy

The Ideal Stimulus Package

Understanding well-being

Why You Need Devaluation - An Open Letter To The People Of Estonia

The Looting of America’s Coffers

They Tried to Outsmart Wall Street

Revenge of the nerds

Vodka is stronger than Tequila

Dealing with an International Credit Crunch: Policy Responses to Sudden Stops in Latin America;

A new study by the Inter-American Development Bank shows that recessions are far less severe in countries with room to adopt more flexible monetary and fiscal policies. However, this is not something for all nations, as success depends on economic initial conditions at the time of the crisis.

The study alerts that countries in which governments have saved little during the commodity boom years will have limited scope to increase spending to alleviate the upcoming recession stemming from the current crisis. Any attempt to boost spending dramatically could erode confidence in the country’s ability to repay its debts in the future.

The IDB study “Dealing with an International Credit Crunch: Policy Responses to Sudden Stops in Latin America” looks into successful policy responses during past global financial crises and draws some important lessons that can shed some light to the policy options countries in the region are facing today.

”Without good initial economic conditions, countries have limited scope to act,” Said Eduardo Cavallo, one of the IDB economists that participated in the study said. “Still, initial conditions are not destiny. Adequate policy decisions and support from multilateral organizations can help alleviate some of such constraints.’’

Impact of the Financial Crisis in the Emerging Market

According to a new study commissioned by the Asian Development Bank (ADB) entitled Global Financial Turmoil and Emerging Market Economies: Major Contagion and a Shocking Loss of Wealth?, losses on financial assets in developing Asia in 2008 totaled $9.6 trillion, or just over one year's worth of gross domestic product (GDP).

Asia was hit harder than other parts of the developing world because the region's markets have expanded much more rapidly. The value of financial assets to GDP rose to 370% of GDP in developing Asia in 2007 from 250% of GDP in 2003. In Latin America, the ratio only rose by 30%, with the result that estimated losses on financial assets were a much lower $2.1 trillion, or 57% of GDP.

ADB President Haruhiko Kuroda and other experts will discuss the study at the 'South Asia Forum on Impact of the Global Economic and Financial Crisis', a two-day conference being held at ADB headquarters in Manila starting today.

-Global Financial Market Losses Reach $50 Trillion, Says Study

Assorted on Financial Crisis and developing countries

Crisis Reveals Growing Finance Gaps for Developing Countries;

In remarks prepared for delivery at the same conference in London on Monday, World Bank Chief Economist and Senior Vice President Justin Yifu Lin said developed countries should spend some of their fiscal stimulus in developing countries as the economic effect could be significant.

“Clearly, fiscal resources do have to be injected in rich countries that are at the epicenter of the crisis, but channeling infrastructure investment to the developing world where it can release bottlenecks to growth and quickly restore demand can have an even bigger bang for the buck and should be a key element to recovery,” Lin said in his prepared remarks.

What the World Bank Is Doing

Impact of the Global Financial Crisis on Sub-Saharan Africa

A fiscal stimulus for Africa?

Amid Crisis, Africa Calls for Stronger Partnership With IMF

Poor Countries Need Extra Help to Get Through Global Crisis

Economic Crisis Starts to Hit World's Poorest Countries

The Implications of the Global Financial Crisis for Low-Income Countries

Blogs to watch out for

offsetting behaviour

On the Origins of the Financial Crisis - one more time

Assorted

A deceitful deal for Lloyds Banking Group

The Fourth Deadly Sin

The Sardonic Memoirs of a Private Equity Professional

Happy Square Root Day!

QE takes us into a new era

The letter from the Governor to the Chancellor of the Exchequer

Is there any such thing as macro-prudential risk?

The Global Integrity Impact Challenge

The Global Integrity Impact Challenge is seeking proposals for projects that use Global Integrity’s diagnostic tools to fight corruption. The best proposals get a US$1,000 prize and a chance to pitch the Partnership for Transparency Fund (PTF) for funding to implement their ideas.

See also Grand Corruption Watch List.

Book Recommendations

House of Cards: A Tale of Hubris and Wretched Excess on Wall Street
By William D. Cohan

The Life and Times of Raúl Prebisch, 1901-1986
By Edgar J. Dosman

Schumpeter quote of the day

On his own, he performed daily exercises in calculus and tried to master advanced techniques such as matrix algebra. He even raised the question of a new type of math that would capture the dynamic changes he saw as the heart of capitalism. One diary entry of 1948 mentions, with a question mark "Evolutionary math?" - a tool that could do for his own system what conventional math had done for Walras's static equilibrium. But there was no evolutionary math at that time in sense that Schumpeter meant, and there is still not enough today to "operationalize" his system thoroughly. Schumpeter knew that he had little talent in mathmenatics, but he continued to challenge himself and enjoy the chase. "Whatever other advantages math may have," he wrote in his diary, "it is certainly the purest of human pleasures."

via Twenty Cent Paradigms

Assorted

Someone Take Away Thomas Friedman's Computer Before He Types Another Sentence

Dueling forecasts

Non sequitur on democracy

A Budget Riddle

Initial Lessons of the Financial Crisis- IMF

• Not all booms are alikeWhat may matter is not so much the asset price boom in itself, but who holds the assets and the risk, how the boom is financed, and how an eventual bust may affect financial institutions. The degree of leverage associated with the funding of a boom and the degree of involvement of banks and other financial intermediaries will determine the magnitude of balance sheet effects and the dangers to the supply of credit in a bust.

• The case for policy intervention depends on how a boom is financed and how risk is held. Asset price booms supported through leveraged financing and involving financial intermediaries should be dealt with, since they entail risks for the supply of credit to the economy; other booms could more likely be left to themselves.

• The mandate of monetary policy should include macro-financial stability, not just price stability. To the extent that the build up of systemic risk can portend a sharp economic downturn, and to the extent that regulation cannot fully prevent such a buildup, it is now clear that policy makers cannot neglect asset-price and credit booms. That said, prudential measures provide a more targeted and less costly policy solution than interest rate changes and should be a central element of an integrated policy response

• The crisis also highlights two important lessons for fiscal policy. The first is that, in many countries, budget deficits were not reduced sufficiently during the boom years when revenues were high, which limits the fiscal space needed to fight the crisis. The second has to do with the structure of taxation. In most countries, the tax system is biased toward debt financing through deductibility of interest payments. This bias to higher leverage increases the vulnerability of the private sector to shocks, and should be eliminated.

-IMF Executive Board Discusses "Initial Lessons of the Crisis"


Initial Lessons of the Crisis
Initial Lessons of the Crisis for the Global Architecture and the IMF
Lessons of the Global Crisis for Macroeconomic Policy

Lessons of the Financial Crisis for Future Regulation of Financial Institutions and Markets and for Liquidity Management

Video
Press Briefing on Lessons of the Financial Crisis, IMF

Assorted

G.R.E. testing showed a slight decrease in 2008 from 2007

Housing Prices Heat Map

What Do Fishermen and Investment Bankers Have in Common?

Michael Lewis‘ absolutely must-read article takes the story from there, riffing on–among many other things–a classic paper on the economics of fishing to tell the tale of Iceland’s rise and fall in global finance, and how it fits into the bigger picture

Wall Street on the Tundra

Why So Scared of “Free Markets”?

Text book recommendation from Mankiw

Mankiw recommends Ball’s Money, Banking, and Financial Markets

Which country needs economic reference letters?

Togo - IMF's Assessment Letter for the World Bank;

Reforms implemented during the preceding Staff Monitored Program and the first year of the PRGF-arrangement are showing positive results in terms of public financial management governance and effectiveness, and going forward the focus of the PRGF arrangement will broaden to include reforms to restore the conditions for faster growth and poverty reduction. To achieve this, strong actions are needed to reform the ailing state-owned banks and enterprises and to improve the overall business environment, consistent with the country’s Poverty Reduction Strategy.

With the implementation of planned growth-enhancing reforms, the economy could achieve real GDP growth of about 4 percent annually by 2011, with a gradually improving fiscal position. The fiscal stance in 2009 will not harm long-term debt indicators, given its temporary nature and pro-growth focus. Assuming full HIPC debt relief in 2010, the primary domestic balance is projected to revert to a sustainable 1 percent of GDP surplus by 2011. Inflationary pressures are projected to be moderate over the medium term. The medium-term reform strategy to support this scenario would have two central elements: (i) fiscal reforms to make room for growth-oriented spending and strengthen fiscal and external sustainability; and (ii) economic reforms aimed at raising growth potential and external competitiveness, particularly steps to reform state-owned banks and enterprises. As highlighted in the LIC DSA conducted for HIPC decision point (November 2008), positive debt dynamics depend on this acceleration in growth and fiscal strengthening, even with full HIPC relief. Satisfactory performance under the PRGF will be an essential element in reaching the HIPC completion point. We therefore believe that the PRGF supported program will provide a sound macroeconomic framework to guide the reform efforts. Staff will continue to conduct biannual missions to monitor performance and maintain close coordination with donors.