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

    Creator
    Casero, Paloma
    Seshan, Ganesh
    Abstract
    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.
    Permanent Link
    http://hdl.handle.net/10822/713221
    External Link
    DOI: https://doi.org/10.1596/1813-9450-4028
    Date Published
    2006
    Rights
    This item is currently unavailable in DigitalGeorgetown due to copyright restrictions by the publisher.
    Subject
    Accounting; Bank Policy; Currency Devaluation; Developing Countries; Exchange Rate; Government Expenditure;
    Type
    Article
    Is Part Of
    Policy Research Working Papers, October 2006
    Publisher
    World Bank
    Collections
    • Qatar Faculty Scholarship
    Metadata
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    Georgetown University Seal
    ©2009 - 2023 Georgetown University Library
    37th & O Streets NW
    Washington DC 20057-1174
    202.687.7385
    digitalscholarship@georgetown.edu
    Accessibility