Annual Meetings Kicks Off with Talks on Fiscal Transparency
Posted by Rachel F. Wang
Many of the key players committed to promoting greater fiscal transparency met on Tuesday for one of the first events of the 2013 IMF-World Bank Annual Meetings.
The Joint IMF-World Bank Seminar entitled “Strengthening Fiscal Transparency and Government Accounting” brought together representatives from international organizations, national governments, think tanks, professional organizations, and civil society to discuss how to promote greater fiscal openness and improve the information base for fiscal decision-making.
The event was kicked off with a welcome address from Bertrand Badré, Managing Director and World Bank Group Chief Financial Officer, and included two panel discussions on
- Strengthening fiscal transparency standards and practices chaired by Richard Hughes, Division Chief in the IMF’s Fiscal Affairs Department), and
- Improving government accounting chaired by Chuck McDonough, Vice President and Controller at the World Bank).
Panelists included Moritz Kramer from Standard & Poor’s, Phil Sinnett from the PEFA Secretariat, Vivek Ramkumar from the International Budget Partnership, Jo Marie Griesgraber from New Rules for Global Finance Coalition, Devantri Kaur Santa Sigh from the Malaysian Ministry of Finance, Gerhard Steger from the Austrian Ministry of Finance, Fayez Choudhury from IFAC, and Ron Salole from IPSAS board.
Discussions ranged over a variety of areas, including the revision of the IMF’s fiscal transparency code and new fiscal transparency assessment; how fiscal transparency feeds into credit ratings and vice versa; the harmonization of different transparency-related norms and standards; the role that civil society has played in promoting greater fiscal openness by governments; and the opportunities and challenges in moving from cash to accrual accounting.
The keynote address, given by Gerd Schwartz, Deputy Director of the IMF Fiscal Affairs Department set the tone for the morning’s discussion. The text of his speech is provided below:
I would like to use this opportunity to talk about the importance of fiscal transparency for fiscal sustainability and discuss the work underway to improve both standards and practices. More specifically, there are four issues I would like to cover:
- First, I would like to highlight the progress made in promoting greater fiscal transparency over the past decade, thanks to collective efforts of many of the organizations represented in this room.
- Second, I would like to discuss some of the lessons of the economic crisis regarding the adequacy of existing fiscal transparency standards and practices.
- Third, I would like to provide you with an update of the IMF’s ongoing work on strengthening its evaluation tools in the fiscal transparency area; and
- Finally, I would like to review the broader agenda on fiscal transparency and government financial disclosure.
Progress to Date
First, let’s look at progress to date. The main message here that there have seen tremendous advances on fiscal transparency although progress has been at time been slow. Different tools have helped us to bring about progress. To name some key ones:
- Statistical standards regarding government reporting, particularly Europe’s ESA95 and the IMF’s Government Finance Statistics Manual (GFSM 2001);
- Accounting standards, particularly IFAC’s International Public Sector Accounting Standards (IPSAS);
- the Open Budget Index of the International Budget Partnership;
- the multilateral Public Expenditure and Financial Accountability (or PEFA) framework;
- the Extractive Industries Transparency Initiative Principles and Requirements to increase transparency around natural resources;
- and the IMF’s Fiscal Transparency Code and accompanying Transparency Manual.
Together, these various tools have helped to bring about real improvements in fiscal transparency; of course helped also by advances in IT systems and platforms. Two examples:
- Until the early 1990s, most countries’ fiscal data covered only the central government budget. Now, over 40 percent report fiscal statistics for the whole of the general government (that is, both central and sub-national governments).
- A decade ago, the vast majority of countries provided information only about the government’s cash inflows and outflows. Now, over 60 governments provide some accrual-based information and over 40 publish balance sheets of their financial assets and liabilities.
Lessons of the Economic Crisis
However, the recent economic crisis has reminded us that the fiscal transparency agenda remains unfinished. Last year the IMF published a policy paper entitled “Fiscal Transparency, Accountability, and Risk” in which we reviewed the state of fiscal transparency in the wake of the economic crisis. We found that, despite significant gains since the late 1990s, the information about the state of public finances remains inadequate. Let me give three examples:
- First, past fiscal information is often still unreliable. For example, in Greece in 2010, reported debt and deficit data turned out to be poor indicators of the underlying health of the public finances. We have made similar experiences elsewhere. In part this may just be to poor data, and in part this may reflect a tendency to shift spending and borrowing to government-controlled companies that are not consolidated in the fiscal accounts.
- Second, budgets and fiscal forecasts often fail to provide good information about future fiscal developments. Sometimes they aren’t even presented on the same basis as the data that will be used to judge the government’s performance at the end of the year. In Europe, in particular, accrual-based statistics for combined central and local government are used to determine whether EU debt and deficit targets have been met. But central government budgets usually forecast revenue and spending on a cash basis. That has hindered both national and regional efforts to monitor country performance against EU-wide fiscal rules.
- Third, few governments publish information on the fiscal risks they face. In countries with large banking sectors, like Iceland, Ireland, and the UK, the biggest shock to the public finances came from the realization of large, mainly implicit, contingent liabilities to the financial sector—a risk that had not previously been discussed, let alone managed or provisioned for, in government budgets and/or fiscal reports.
The economic crisis has also highlighted shortcomings in the available array of tools for evaluating government fiscal transparency practices. At the IMF, in our 2012 paper, we also looked back at the fiscal transparency assessments we had prepared for some of the countries hit hardest by the crisis. On the plus side, many of the assessments identified some of the gaps or weaknesses in reporting that contributed to problems during the crisis. However, overall, we concluded that the assessments were not as helpful as we hoped in highlighting the size of problems and spurring countries to address them. For example, our 2003 Portugal assessment mentioned that fiscal accounts did not capture the obligations created by public-private partnerships, but, also for lack of data, did not estimate how much greater the government’s debt would have been if it had included those obligations.
Fiscal Transparency Code and Assessment
At the Fund, we concluded that addressing these various issues required revisions to both our existing fiscal transparency standards and evaluation tools. We have since been busy revising both our Fiscal Transparency Code and the way we assess country practices against that Code. In July, we released a first draft of a new Code for public consultation. The revised Code differs from the latest, 2007, version in a number of important respects:
- First, the new Code is focused on the content and quality of published fiscal data, rather than clarity of reporting procedures.
- Second, the new Code takes a more comprehensive view of government finances, including the production of fiscal data that consolidate the entire public sector (i.e., also including government-controlled companies), and the production of full balance sheets (i.e., including both financial and non-financial assets).
- Third, instead of setting a single standard, the new Code differentiates for each of its various principles between a basic, good and advanced practice so as to provide countries with milestones toward full compliance with best international standards.
- Fourth, the new Code places much greater emphasis on fiscal risks analysis and management, which now constitutes one of the three pillars of the new Code.
The feedback we have received through two rounds of public consultation has been very supportive of the new structure and approach, and we are continuing to fine-tune principles and practices based on the feedback. The response to the public consultations also showed particular interest in transparency arrangements for extractive industries, which forms a part of the new code, but will be further elaborated in the Guide on Resource Revenue Transparency, which we are in the process of revising.
We are also overhauling our approach to assessing country compliance with the New Code. Over the last six months we have been piloting a new Fiscal Transparency Evaluation in Bolivia, Costa Rica, and Ireland. The first of these evaluation reports, for Ireland, has now been published and copies are available at the back of the room. If you compare these new Fiscal Transparency Evaluations with the IMF’s old transparency assessment, you will notice a number of changes:
- First, there is a more substantive analysis of the comprehensiveness and quality of a country’s reported fiscal data and the magnitude of data gaps.
- Second, the reports offer a set of “heat maps” that provide a straightforward summary of a country’s strengths and weaknesses regarding fiscal transparency.
- Third, the reports include a sequenced, medium-term action plan setting out the concrete steps that a country would need to take to address the key weaknesses.
Initial reactions on the first three pilot assessments have been positive, and we have been surprised by the strong initial demand. As a result, we have already scheduled five additional pilots over the next six months, that is, before we plan to finalize the New Code and evaluation tool in the spring of 2014.
The Broader Agenda
Let me use the remaining few minutes to talk about the broader agenda that we all face in strengthening fiscal transparency. The range of organizations represented on today’s panels is testament to the breadth of interest and depth of commitment to the principle of fiscal transparency. I would briefly like to set out what I see as the three key elements of an effective international partnership on fiscal transparency.
Harmonization of standards
The first element is a more comprehensive, coherent, and consistent set of fiscal transparency standards. We now have a number of international norms in the fiscal transparency area—the Fiscal Transparency Code, the PEFA framework, the Open Budget Index, GFSM 2001, and IPSAS—but we still have some work to do on harmonizing our tool kits. For example, different terms and definitions are used for even basic concepts like expenditure, revenue, liabilities, and even government itself. We are fortunate, however, that most standards and codes—like the IMF’s Transparency Code and the PEFA framework are currently under review. This presents us with a unique opportunity to three things:
- Establish more firmly what we take to be the basic information needed for effective fiscal policymaking and accountability;
- Define the frontier of advanced practice, based on the innovations we have seen in the areas of fiscal forecasting, budgeting, accounting, and risk management;
- Align more closely the concepts used and stages of development defined by our standards, so as to send clear and consistent messages to countries.
There are limits, of course, to how far we can or should go in harmonizing our respective standards as they serve different purposes. But bringing our various norms closer together, including in terminology, will not only provide a more coherent suite of financial reporting standards for government, but also make it easier for governments to adopt and implement those standards simultaneously.
Implementation of standards
Implementation is the key toward progress. There is little point in investing time and energy in redefining and harmonizing our respective frameworks if they are not implemented. I am therefore very pleased that we have government representatives here today to talk about their experiences with implementation.
We are very encouraged that work on implementation is moving ahead fast. An example is the work underway in Europe to move towards EPSAS – the European Public Sector Accounting Standards. We have already seen the powerful role that European institutions can play in improving fiscal transparency through the adoption of ESA95, which delivered a step change in the coverage and consistency of statistical reporting among EU Member States. We are sure that the adoption of EPSAS will have similarly beneficial results for government accounting systems which, after all, are the backbone of fiscal statistics, forecasts, and budgets.
At the IMF, we are supporting the various implementation initiatives by providing practical support to governments, including, for example, by setting out sequences of practical steps for moving from cash to accrual accounting.
Continued information campaigns
While implementation is crucial, we also have to continue our information campaigns, that is working with policymakers, legislators, markets, and citizens and emphasize the benefits of the various tools in bringing about better decision making and accountability. There is still a lot of work ahead in changing mindsets. Let me give you a few examples:
- Many countries now own almost as much in financial assets as they owe in liabilities. There is a need to start thinking more in terms of balance sheets and net worth, and not just in terms of flows, i.e., revenue, expenditure, and deficits.
- Most countries need to understand and manage better the fiscal risks that can accompany large capital inflows, credit expansion, and rapid economic growth, so that any slowdown or reversal does not result in unsustainable fiscal positions.
- Countries that have recently discovered large natural resource endowments need to use the available analytical tools to ensure that they are used sustainably and for the benefit of current and future generations.
This shift in mindsets will not happen overnight, but it is for all of us to make the case for why it is needed and to show how it can be achieved.
In conclusion, I believe that a revitalized fiscal transparency effort is essential to address the problems revealed by the economic crisis, inform government policy responses, and make progress in making fiscal policies more sustainable and crisis resistant in the future.
I am sure you will use today’s seminar to discuss how we can work together to build a more coherent global architecture of transparency standards and promote their implementation around the world.
I wish you good luck and look forward to working with you in the years ahead.
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