Russian
Fiscal Monitor Update
As Downside Risks Rise, Fiscal Policy Has
To Walk a Narrow Path
January 24, 2012
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Deficits in many advanced economies fell significantly
during 2011, and most plan substantial adjustment this year.
Continued adjustment is necessary for medium-term debt
sustainability, but should ideally occur at a pace that supports
adequate growth in output and employment. Given the large
adjustment already in train this year, governments should avoid
responding to any unexpected downturn in growth by further
tightening policies, and should instead allow the automatic
stabilizers to operate, as long as financing is available and
sustainability concerns permit. Countries with enough fiscal
space, including some in the euro area, should reconsider the
pace of near-term adjustment. At the same time, some
countries—notably, the United States and Japan—need to clarify
their medium-term debt-reduction strategies. Adjustment should
be supported by the availability of adequate nonmarket financing
when, as in the euro area, market confidence is slow to respond
to reforms.Fiscal deficits fell significantly in 2011
in many advanced economies…
In advanced economies, fiscal deficits fell in 2011 by about
1 percent of GDP overall, and by only slightly less after taking
into account the narrowing output gap. The headline deficit fell
by 2 percent of GDP in the euro area, and by a still sizable 1¼
percent of GDP in cyclically adjusted terms (Table
1). However, a large share of the improvement within the
euro area is accounted for by Germany, where the cyclically
adjusted deficit fell by 2¼ percent of GDP, reflecting an
unusually strong response of revenues and employment to output.
The cyclically adjusted balance also strengthened substantially
in Spain, while France and Italy posted more modest
improvements, as measures announced or approved in these
countries will not take full effect until next year (see below).
Cyclically adjusted deficits also fell substantially in the
United Kingdom and the United States, but rose marginally in
Japan owing to reconstruction costs related to the natural
disaster.
Among European program countries, headline deficits were
larger than expected in Greece owing in part to a
weaker economic outturn. Slippages in the implementation of
revenue and spending measures and lower tax compliance suggest
that the cyclically adjusted deficit exceeded expectations as
well, notwithstanding an improvement of 3 percentage points of
GDP relative to 2010. In Portugal, the fiscal target was met
through a one-time partial transfer of banks’ pension fund
assets, implying that the underlying adjustment in 2011 was
smaller than expected there, although still very sizable
(4 percentage points of GDP in cyclically adjusted terms). In
Ireland, headline fiscal outturns were on track, and the
cyclically adjusted balance improved by 2 percent of GDP.
|
|
Table 1. Fiscal Indicators, 2008–13 |
(Percent of GDP, except where otherwise noted) |
|
|
|
Est. |
Projections |
|
Difference from September 2011
Fiscal Monitor1 |
|
|
|
|
|
|
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
|
2011 |
2012 |
2013 |
|
|
|
Overall Fiscal Balance |
|
|
|
|
|
|
|
|
|
|
World |
-2.0 |
-6.7 |
-5.5 |
-4.5 |
-4.1 |
-3.4 |
|
0.0 |
-0.4 |
-0.5 |
|
|
|
|
|
|
|
|
|
|
|
Advanced
economies |
-3.8 |
-9.0 |
-7.6 |
-6.6 |
-5.7 |
-4.6 |
|
0.0 |
-0.4 |
-0.5 |
United
States |
-6.7 |
-13.0 |
-10.5 |
-9.5 |
-8.0 |
-6.4 |
|
0.1 |
-0.1 |
-0.2 |
Euro
Area |
-2.2 |
-6.5 |
-6.3 |
-4.3 |
-3.4 |
-2.9 |
|
-0.1 |
-0.3 |
-0.4 |
France |
-3.3 |
-7.6 |
-7.1 |
-5.7 |
-4.8 |
-4.4 |
|
0.1 |
-0.2 |
-0.5 |
Germany |
-0.1 |
-3.2 |
-4.3 |
-1.1 |
-0.7 |
-0.1 |
|
0.6 |
0.4 |
0.7 |
Italy |
-2.7 |
-5.3 |
-4.5 |
-3.9 |
-2.8 |
-2.3 |
|
0.2 |
-0.4 |
-1.1 |
Spain |
-4.2 |
-11.2 |
-9.3 |
-8.0 |
-6.8 |
-6.3 |
|
-1.8 |
-1.7 |
-1.9 |
Japan |
-4.7 |
-10.8 |
-9.3 |
-10.1 |
-10.2 |
-8.8 |
|
0.2 |
-1.0 |
-1.0 |
United
Kingdom |
-4.9 |
-10.4 |
-9.9 |
-8.6 |
-7.8 |
-6.5 |
|
-0.1 |
-0.8 |
-1.4 |
Canada |
0.1 |
-4.9 |
-5.6 |
-4.9 |
-4.4 |
-3.6 |
|
-0.6 |
-1.2 |
-1.7 |
|
|
|
|
|
|
|
|
|
|
|
Emerging
economies |
-0.4 |
-4.8 |
-3.6 |
-2.6 |
-2.7 |
-2.5 |
|
0.1 |
-0.4 |
-0.5 |
China |
-0.4 |
-3.1 |
-2.3 |
-2.0 |
-2.0 |
-1.4 |
|
-0.4 |
-1.2 |
-1.3 |
India |
-7.2 |
-9.7 |
-8.9 |
-8.5 |
-7.9 |
-7.6 |
|
-0.4 |
-0.4 |
-0.2 |
Russia |
4.9 |
-6.3 |
-3.5 |
0.5 |
-1.4 |
-1.7 |
|
1.6 |
0.7 |
0.6 |
Brazil |
-1.4 |
-3.1 |
-2.8 |
-2.6 |
-2.4 |
-2.3 |
|
-0.2 |
0.4 |
0.3 |
Mexico |
-1.1 |
-4.7 |
-4.3 |
-3.0 |
-2.7 |
-2.1 |
|
0.3 |
0.0 |
0.3 |
South
Africa |
-0.5 |
-5.3 |
-5.1 |
-4.9 |
-4.8 |
-4.2 |
|
-0.6 |
-0.9 |
-0.9 |
|
|
|
|
|
|
|
|
|
|
|
Low-income economies |
-1.3 |
-4.0 |
-3.1 |
-2.8 |
-2.8 |
-2.3 |
|
0.3 |
0.1 |
0.2 |
|
|
|
|
|
|
|
|
|
|
|
G-20
economies |
-2.7 |
-7.6 |
-6.2 |
-5.1 |
-4.7 |
-3.9 |
|
0.1 |
-0.4 |
-0.5 |
G-20
advanced |
-4.4 |
-9.6 |
-8.2 |
-7.2 |
-6.3 |
-5.1 |
|
0.1 |
-0.3 |
-0.5 |
G-20
emerging |
-0.2 |
-4.8 |
-3.5 |
-2.5 |
-2.7 |
-2.5 |
|
0.0 |
-0.5 |
-0.6 |
|
|
|
|
|
|
|
|
|
|
|
General Government Cyclically
Adjusted Balance
(Percent of Potential GDP) |
World |
-2.6 |
-4.6 |
-4.3 |
-3.6 |
-3.0 |
-2.4 |
|
0.0 |
-0.1 |
-0.2 |
|
|
|
|
|
|
|
|
|
|
|
Advanced
economies |
-3.7 |
-5.9 |
-5.9 |
-5.1 |
-4.2 |
-3.2 |
|
-0.3 |
-0.4 |
-0.4 |
United
States2 |
-5.0 |
-7.5 |
-7.8 |
-7.0 |
-5.6 |
-4.3 |
|
-0.6 |
-0.7 |
-0.6 |
Euro
Area |
-3.2 |
-4.8 |
-4.8 |
-3.5 |
-2.1 |
-1.6 |
|
-0.4 |
0.1 |
0.2 |
France |
-3.0 |
-5.3 |
-5.2 |
-4.4 |
-3.3 |
-3.1 |
|
-0.1 |
0.0 |
-0.1 |
Germany |
-1.3 |
-1.3 |
-3.5 |
-1.2 |
-0.4 |
0.1 |
|
0.3 |
0.5 |
0.8 |
Italy |
-3.6 |
-3.5 |
-3.4 |
-2.9 |
-0.8 |
0.0 |
|
-0.4 |
0.3 |
0.0 |
Spain |
-5.4 |
-9.8 |
-7.8 |
-6.6 |
-4.7 |
-4.1 |
|
-2.0 |
-0.5 |
-0.2 |
Japan |
-4.1 |
-7.7 |
-7.8 |
-8.0 |
-8.6 |
-7.8 |
|
0.1 |
-1.0 |
-0.9 |
United
Kingdom |
-6.5 |
-9.0 |
-7.8 |
-6.3 |
-5.1 |
-3.7 |
|
0.0 |
-0.4 |
-0.8 |
Canada |
-0.5 |
-2.5 |
-4.0 |
-3.8 |
-3.2 |
-2.5 |
|
-0.8 |
-1.3 |
-1.5 |
|
|
|
|
|
|
|
|
|
|
|
Emerging
economies |
-1.9 |
-4.1 |
-3.4 |
-2.6 |
-2.4 |
-2.1 |
|
0.5 |
0.2 |
0.1 |
China |
0.0 |
-2.4 |
-1.5 |
-0.7 |
-0.6 |
-0.2 |
|
1.1 |
0.3 |
-0.1 |
India |
-9.3 |
-10.7 |
-9.5 |
-8.9 |
-8.3 |
-8.0 |
|
-0.6 |
-0.3 |
-0.1 |
Russia |
3.8 |
-3.3 |
-1.9 |
1.0 |
-1.3 |
-1.7 |
|
1.3 |
0.5 |
0.5 |
Brazil |
-2.2 |
-2.2 |
-3.3 |
-2.8 |
-2.2 |
-2.2 |
|
-0.2 |
0.6 |
0.4 |
Mexico |
-1.3 |
-3.8 |
-3.8 |
-2.8 |
-2.7 |
-2.1 |
|
0.7 |
0.4 |
0.8 |
South
Africa |
-2.0 |
-4.9 |
-4.6 |
-4.4 |
-4.0 |
-3.6 |
|
-0.7 |
-0.6 |
-0.5 |
|
|
|
|
|
|
|
|
|
|
|
G-20
economies |
-3.0 |
-5.2 |
-5.0 |
-4.2 |
-3.6 |
-2.9 |
|
0.1 |
-0.2 |
-0.2 |
G-20
advanced |
-3.8 |
-6.0 |
-6.3 |
-5.4 |
-4.5 |
-3.5 |
|
-0.3 |
-0.5 |
-0.5 |
G-20
emerging |
-1.7 |
-4.1 |
-3.4 |
-2.6 |
-2.5 |
-2.2 |
|
0.5 |
0.2 |
0.0 |
|
|
|
|
|
|
|
|
|
|
|
General Government Gross Debt |
|
World |
59.5 |
65.9 |
70.0 |
70.1 |
70.9 |
70.9 |
|
0.6 |
1.5 |
2.2 |
|
|
|
|
|
|
|
|
|
|
|
Advanced
economies |
82.0 |
93.7 |
99.7 |
103.5 |
107.6 |
110.2 |
|
1.0 |
2.1 |
3.0 |
United
States |
76.1 |
89.9 |
98.5 |
102.0 |
107.6 |
112.0 |
|
2.0 |
2.6 |
3.1 |
Euro
Area |
69.8 |
79.4 |
85.3 |
88.4 |
91.1 |
92.5 |
|
0.0 |
1.2 |
2.4 |
France |
68.3 |
79.0 |
82.4 |
87.0 |
90.7 |
93.1 |
|
0.1 |
1.2 |
2.3 |
Germany |
66.7 |
74.4 |
83.2 |
81.5 |
81.6 |
79.8 |
|
-1.1 |
-0.3 |
-1.2 |
Italy |
105.8 |
115.5 |
118.4 |
121.4 |
125.3 |
126.6 |
|
0.4 |
3.9 |
6.5 |
Spain |
39.9 |
53.6 |
60.8 |
70.1 |
78.1 |
84.0 |
|
2.6 |
7.9 |
11.2 |
Japan |
196.2 |
216.3 |
219.0 |
233.4 |
241.0 |
246.8 |
|
0.3 |
2.5 |
3.8 |
United
Kingdom |
52.5 |
68.4 |
75.1 |
80.8 |
86.6 |
90.3 |
|
0.1 |
1.8 |
4.4 |
Canada |
71.1 |
83.6 |
85.1 |
85.5 |
86.7 |
84.7 |
|
1.4 |
2.6 |
2.4 |
|
|
|
|
|
|
|
|
|
|
|
Emerging
economies |
34.7 |
36.7 |
40.8 |
37.8 |
36.4 |
35.0 |
|
0.0 |
0.7 |
1.2 |
China |
17.0 |
17.7 |
33.5 |
26.6 |
23.3 |
20.9 |
|
-0.3 |
1.1 |
2.5 |
India |
74.7 |
74.3 |
67.4 |
65.8 |
65.3 |
64.4 |
|
0.9 |
1.1 |
1.2 |
Russia |
7.9 |
11.0 |
11.7 |
10.5 |
11.2 |
12.1 |
|
-1.1 |
-0.9 |
-0.5 |
Brazil |
63.5 |
66.9 |
65.2 |
66.0 |
64.2 |
62.0 |
|
1.0 |
0.2 |
-0.5 |
Mexico |
43.1 |
44.7 |
42.9 |
42.7 |
43.2 |
43.5 |
|
-0.2 |
-0.4 |
0.0 |
South
Africa |
27.4 |
31.5 |
35.3 |
37.9 |
40.0 |
41.5 |
|
1.1 |
1.5 |
2.0 |
|
|
|
|
|
|
|
|
|
|
|
Low-income economies |
39.2 |
42.4 |
40.8 |
40.0 |
40.3 |
40.2 |
|
-2.1 |
-1.3 |
-1.5 |
|
|
|
|
|
|
|
|
|
|
|
G-20
economies |
66.4 |
73.3 |
78.2 |
77.8 |
78.5 |
78.4 |
|
0.7 |
1.7 |
2.4 |
G-20
advanced |
87.6 |
100.1 |
106.4 |
110.2 |
114.6 |
117.4 |
|
1.1 |
2.2 |
2.9 |
G-20
emerging |
34.8 |
35.9 |
40.8 |
37.1 |
35.3 |
33.8 |
|
0.1 |
0.8 |
1.5 |
|
|
|
|
|
|
|
|
|
|
|
Memorandum: |
|
|
|
|
|
|
|
|
|
|
World Growth (percent) |
2.8 |
-0.6 |
5.2 |
3.8 |
3.3 |
3.9 |
|
-0.1 |
-0.7 |
-0.5 |
|
Sources: IMF staff estimates and projections.
Note: All country averages are
PPP-GDP weighted using rolling weights. Projections
are based on IMF staff assessment of current
policies.
1
For overall fiscal balance and cyclically adjusted
balance, + indicates a smaller fiscal deficit; for
gross debt, + indicates a larger debt.
2
Excluding financial sector support. |
|
… and further substantial consolidation is in the pipeline
- In the United States, the cyclically adjusted
deficit is forecast to fall sharply this year, by around 1½
percent of GDP. These projections assume that Congress will
extend payroll tax relief and jobless benefits for the
long-term unemployed beyond their expiration date at the end
of February. Without these extensions, the cyclically
adjusted deficit would decline by over 2 percentage points
of GDP—the largest annual fall in at least four decades—with
negative repercussions for the still unsettled economic
outlook. The risk of too rapid short-term adjustment stands
in marked contrast to the continued lack of progress in
clarifying a medium-term consolidation strategy, including
the failure of the Joint Select Committee on Deficit
Reduction to reach agreement on a medium-term program to
strengthen public finances.
- Japan is projected to be the only large
advanced economy to implement a fiscal expansion in 2012,
reflecting in part reconstruction costs related to the
natural disaster. Total reconstruction costs are now
budgeted at about 4 percent of GDP over 2011–13, financed
initially through bond sales. These bonds are intended
eventually to be redeemed through sales of government-owned
stocks and a temporary increase in the corporate tax rate,
for 3 years, and in personal income tax rates, spread over
25 years to minimize its impact. As part of its medium-term
fiscal strategy, the government is to submit a tax reform
bill, including its proposal for doubling the consumption
tax rate to 10 percent by 2015, but this will not be
sufficient in itself to put the debt ratio on a downward
path.
- In the United Kingdom, actual and potential GDP
growth estimates have been revised down, weakening projected
headline and cyclically adjusted balances. To prevent a
further slowdown of the economy, the government has
indicated that it will accommodate the weakened cyclically
adjusted balance and let automatic stabilizers operate
freely over the next three years, with the composition of
adjustment being reshuffled to make it more growth-friendly.
The cyclically adjusted deficit is still expected to fall
markedly this year, however. To maintain the government’s
commitment to balance the current cyclically adjusted budget
within five years, further spending cuts in 2015–17 have
been announced.
- In Germany, fiscal targets for 2012 are
expected to be slightly stronger than envisaged earlier,
locking in over-performance from last year.
- Many advanced economies have introduced new measures to
support the achievement of their deficit targets. The new
government in Spain has announced a first package
of measures of 1.1 percent of GDP, including spending cuts
and temporary tax increases on income, capital, and
high-value homes. The package also includes a limited
increase in social spending and tax expenditures (mortgage
deduction). A draft budget for 2012 will be submitted to
Parliament by end-March. In Italy, the adjustment
package approved in December will augment by 1¼ percent of
GDP the fiscal consolidation envisaged over 2012–14,
following the July and September packages (resulting in a
fiscal effort of 3¼ percent and 1¼ percent of GDP this year
and next, respectively), enough to bring the budget into
balance in cyclically adjusted terms next year. Key elements
of the package include the reintroduction of real estate
taxes on primary residences and pension reforms (tightening
eligibility for early retirement, reducing pension
indexation and accelerating the increase in retirement
ages). Thanks to these and previous reforms, annual pension
spending is forecast to fall over the next twenty years by
1¾ percentage points of GDP. This is the best performance
among advanced economies (where average spending is forecast
to rise by 1¼ percentage point of GDP), although the initial
level of pension spending is among the highest.1
Following a first set of measures adopted in September, the
government of France announced an additional fiscal
package for 2012–16, amounting to 1 percent of GDP, of which
measures equal to 0.3 percent of GDP will be enacted this
year. Revenue measures, including the end of incentives to
invest in property markets, are front-loaded and make up
more than half the adjustment. Pension reform has been
accelerated modestly, with the retirement age of 62 now
taking effect one year earlier, in 2017, and the health care
spending growth norm has been tightened. In Greece,
the authorities are to enact new revenue and expenditure
measures to correct policy slippages. In Portugal,
new adjustment measures were incorporated in the 2012
budget, including spending cuts, a broadening of the VAT tax
base under the standard rate, and a reduction in tax
expenditures. In Ireland, the overall balance
target for 2012 remains broadly unchanged, notwithstanding a
sizeable downward revision to growth. The cyclically
adjusted balance is expected to strengthen by 0.7 percent of
GDP.
Nevertheless, market interest rates in some advanced euro
area economies remain at very high levels, although they have
moderated somewhat in recent weeks (Figure
1). By contrast, some large advanced economies thus far
remain immune from market pressures, with interest rates that
are well below historical levels (Figure
2). See the January 2012 Global Financial Stability
Report Update for details.
Too rapid consolidation during 2012 could exacerbate
downside risks
While deficits and debt in many advanced economies are high,
the pace of consolidation projected in 2012 is considerable
given the weak economic environment (see the January 2012
World Economic Outlook Update). Moreover, fiscal policy in
many countries is already tighter with respect to the cycle than
had been projected in the September 2011 Fiscal Monitor
(Figure
3), partly because a lack of affordable additional financing
is compelling some euro area economies to introduce new measures
to attain existing headline deficit targets, rather than
allowing the automatic stabilizers to operate.
Further declines in cyclically adjusted deficits could be
undesirable not only from a growth perspective, but possibly
from a market perspective as well. While smaller
deficits and debt ratios do lead to lower borrowing costs, other
things equal, advanced economies with faster output growth are
also currently benefiting from lower spreads (Figure
4). This likely reflects in part concerns about the
feasibility of fiscal consolidation and solvency in an
environment of very weak growth.2
Thus, further tightening during a downturn could exacerbate
rather than alleviate market tensions through its negative
impact on growth.
Countries should watch the speed of short-term adjustment,
but medium-term consolidation remains a priority
In the near term, sufficient fiscal adjustment is in train in
most advanced economies, and they should allow the automatic
stabilizers to operate freely, so long as solvency concerns
allow and financing for higher deficits can be realized. Among
those countries, those with very low interest rates or other
factors that create adequate fiscal space, including some in the
euro area, should reconsider the pace of near-term fiscal
consolidation. However, implementation of credible medium-term
debt reduction plans remains a priority, as high debt levels
make these countries vulnerable should interest rates increase.
For the United States, such a plan should feature
measures that contain entitlement spending and raise revenues.
In Japan, an adjustment path that allows debt ratios to
begin declining by the middle of this decade is called for.
In some countries, however, market interest rates remain very
high despite the significant fiscal consolidation that has been
implemented or is in the pipeline. For countries that are
adjusting at a rate that is appropriate from a medium-term
perspective, the availability of adequate financing—through the
European Financial Stability Facility (EFSF) and the European
Stability Mechanism (ESM)—along with credible mechanisms to
ensure that these countries remain committed to fiscal
discipline over the medium and longer term, could provide an
important confidence boost while market perceptions gradually
adjust to strengthened fundamentals.
In this context, the new European fiscal compact agreed to by
a majority of EU countries in early December is a welcome step
toward deeper fiscal integration, although further action is
needed. Measures include a new fiscal rule (capping the
structural deficit at ½ percent of GDP) with an automatic
correction mechanism in case of deviations, to be enshrined in
each country’s national legal system; stronger monitoring and
assessment of budgetary plans by the European Commission; and ex
ante reporting of national debt issuance plans to the European
Commission.
Countries need to ratify the new measures quickly to ensure
the effectiveness of these agreements. Furthermore, over time,
stronger fiscal integration and governance will have to be
complemented by some fiscal risk sharing across the euro area.
Fiscal policy in EMs should reflect the different conditions
and risks they face
Deficits in emerging economies fell by about 1 percent of GDP
in headline terms and about ¾ percent in cyclically adjusted
terms in 2011. Higher oil revenues led to a dramatic increase in
the cyclically adjusted balance in Russia, and to a lesser
extent Mexico, but declines in cyclically adjusted deficits were
recorded in all other major emerging economies last year, as
well.
A looser-than-expected fiscal stance is accompanying the
weakening economic environment in some emerging economies this
year, but others are tightening policy instead (Figure
5). Some emerging economies with rapidly widening output
gaps and declining inflation have room to make policy more
supportive of economic activity, given relatively low debt
levels. In others, however, high debt and lingering large
deficits mean there is little space for more than the operation
of automatic stabilizers should growth slow further. Emerging
economies highly dependent on commodity revenues and external
inflows also need to assess cautiously risks of a large and
protracted decline in such financing sources.3
- In China, where policy is expected to be
broadly neutral this year, fiscal support could continue by
deferring consolidation plans, through lower social
contributions and consumption taxes. There is also scope to
accelerate investment in social housing. Unlike in 2008,
fiscal support should be through on-budget measures that
promote transparency and accountability.
- With economic activity slowing, Brazil has
adopted a policy mix of maintaining fiscal discipline to
support easing monetary policy as the main countercyclical
tool. As such, a primary surplus target of 3.1 percent of
GDP has been set for 2012, implying a ½ percentage point
adjustment of the cyclically adjusted balance. Some targeted
fiscal steps to support demand have been announced, worth
around 0.2 percent of GDP in 2011–12, and it will be
important to stand ready to take offsetting fiscal measures
as needed to achieve the authorities’ overall fiscal targets
and policy objectives.
- In India, the cyclically adjusted deficit is
projected to fall by about ½ percent of GDP this year.
However, the space for loosening fiscal policy in response
to a growth slowdown is limited by still-high deficits and
debt. In case of a substantial fall in output, any
prospective expansion should be small, and focused on
high-multiplier items such as indirect taxes and backlogged
capital projects, rather than additional subsidies.
1 See “The Challenge of Public Pension Reform in
Advanced and Emerging Economies” (http://www.imf.org/external/pp/longres.aspx?id=4626).
2 In principle, the temporary deceleration of growth
that normally accompanies a fiscal tightening should not affect
long-term solvency risks (for which potential growth matters).
However, after four years of high volatility markets seem to be
focusing at present on short-term developments and therefore
seem to react negatively to even temporary decelerations in
growth.
3 Fiscal policy is only one element of the policy
response to the slowdown. The Update of the World Economic
Outlook discusses the overall policy framework for emerging
economies.
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