Fiscal Risks

May 03, 2016

Dispelling Fiscal Illusions

Fiscal illusions

Posted by Tim Irwin[1]

There’s a lot talk these days about government balance sheets. You can find them mentioned, for instance, in the April 2016 editions of the Fiscal Monitor, the Global Financial Stability Report, and the World Economic Outlook. The issues discussed there include the sensitivity of government balance sheets to currency depreciation, their links to the balance sheets of banks, and the value of testing how they would stand up to severe economic shocks.

But how much progress have governments made in actually compiling and publishing their balance sheets?

Continue reading "Dispelling Fiscal Illusions" »

February 18, 2016

Fiscal Risk: What is Going on at the Leading Edge, and Where to Next?


Posted by Jason Harris[1]

Fiscal risks are big, bad and occur more frequently than commonly anticipated. FAD hosted a seminar of leading edge countries to identify ways of assessing and managing those risks to reduce their impact on public finances.

The global financial crisis demonstrated just how large, consequential and serious are the fiscal risks that sit outside of the normal budget forecasts. The huge increase in public indebtedness, unprecedented during peacetime, was driven by a combination of the sharp decline in macroeconomic activity, with its consequences for tax and benefits, as well as the realization of fiscal exposures to the banking sector, state-owned enterprises and local governments. 

Continue reading "Fiscal Risk: What is Going on at the Leading Edge, and Where to Next?" »

January 14, 2016

Managing Expenditure Arrears in East Africa

Afritac east

Posted by Amitabh Tripathi[1]

Accumulation of expenditure arrears is a persistent problem across some East AFRITAC (AFE) countries[2] where they range between 1-3% of GDP. These arrears distort the planned implementation of the budget and negatively impact on the government’s finances and ability to deliver essential public services. In addition, incomplete information on arrears presents a risk that the real size of the government’s deficit is concealed and the level of its liabilities understated.

In recent years, member countries have been focusing on establishing the level and sources of expenditure arrears and taking steps to prevent their recurrence. These initiatives have benefitted from enhanced provisions on commitment controls, multi-year commitments, and in-year changes to the budget, coupled with improvements in the disclosure of arrears and other liabilities. However, despite some improvements, there remain many gaps in the recognition, reporting, monitoring and prevention of arrears.

Continue reading "Managing Expenditure Arrears in East Africa" »

September 18, 2015

A Think Tank Amidst The Vast Blue Sea



Posted by Suhas Joshi, Benoit Wiest and Ali Abdul-Raheem[1]

The small island nation of Maldives was absolutely buzzing this July, as it celebrated its 50th year of independence, amid the bright lights, festive decorations, fireworks, parades and processions. The country’s transformation over the past half a century has been tremendous. From an economic backwater the country has become South Asia’s richest economy, with a per-capita income of US$ 8,625 in 2014. Growth has been driven by the Maldives’ now world-renowned tourism industry. Yet the country has experienced its fair share of development challenges: vast income inequalities, a chaotic political transformation, macroeconomic mismanagement, and the threat posed by climate change and rising sea levels, among others.

Continue reading "A Think Tank Amidst The Vast Blue Sea " »

July 23, 2015

How to Prepare for a Commodity Price Shock


 Posted by Andrew Bauer and David Mihalyi[1]

 Headlines about resource-rich economies faltering under crashing world commodity prices fill the news. "Venezuela in a bind as Nicolas Maduro faces default dilemma;" "Alberta premier considers sales tax to fix ailing, oil-based economy;" "Iran says it can no longer afford Ahmadinejad's cash handouts".

Since February 2013, the metals’ price index has dropped by over 30 percent, led by a 60 percent decline in iron ore prices and a nearly 22 percent decline in copper prices. Crude oil prices have dropped nearly 50 percent since June 2014. The resulting loss in fiscal revenues in resource-dependent countries has exposed severe vulnerabilities in some.

Continue reading " How to Prepare for a Commodity Price Shock" »

July 01, 2015

Fiscal Institutions in Latin America: Have They Worked?

Latin America

Posted by Bogdan Lissovolik and Marcos Poplawski-Ribeiro[1]

Latin America’s countercyclical response to the 2008–09 global financial crisis (GFC) was the right medicine at the time, but resulted in a significant fiscal stimulus that it has yet to be fully withdrawn. Does this mean that the fiscal institutions established in the region before the crisis were not the Holy Grail to enshrine discipline? A recent study sheds light on this question by looking at the performance and design of fiscal institutions in six large Latin American countries (LA6: Brazil, Chile, Colombia, Mexico, Peru, and Uruguay). Overall, the crisis revealed both strengths and weaknesses in the fiscal frameworks in the LA6, underscoring the perils of making discretionary changes in fiscal policy without a medium-term anchor.

Continue reading " Fiscal Institutions in Latin America: Have They Worked?" »

June 25, 2015

Developing Fiscal Risk Statements in Central Asia and the Caucasus

Posted by John Zohrab[1]

The new fiscal risk[2] provisions of the IMF’s revised Fiscal Transparency Code (English, العربية , Español, Français, Português) are resonating in Central Asia and the Caucasus. They are stimulating increased efforts to improve and expand fiscal risk disclosure.

Armenia, Georgia, the Kyrgyz Republic and Tajikistan present fiscal risk statements to parliament in their annual budget documentation. These statements – which are typically published on the ministry of finance websites – are a substantial step forward in meeting international good practice (see table below).


To be specific:

Continue reading " Developing Fiscal Risk Statements in Central Asia and the Caucasus" »

January 30, 2015

Angels and Demons – the Political Economy of PFM Reform

 Angels and Demons
Posted by Richard Allen1

In a thought-provoking presentation during the IMF Fiscal Affairs Department’s (FAD) 50th Anniversary Conference on December 5, 2014, Professor Ravi Kanbur of Cornell University analyzed the intellectual origins and roots of FAD.  In his view, these roots derive not from the influence of Keynes, one of the founding fathers of the IMF, who was more concerned with issues of monetary policy and balance of payments stabilization than with fiscal policy. A much stronger influence on FAD’s development was one of Keynes’ illustrious colleagues at Cambridge University, Arthur Pigou. Professor Kanbur’s main thesis [Presentation_Available here (.ppt)], however, was that FAD, while responsible for many important applications of fiscal policy, had taken little advantage of important recent work on political economy analysis, and the application of behavioral economics to fiscal issues. These developments derive from the work of notable economists such as Knut Wicksell and 2002 Nobel Prize winner Daniel Kahneman. Another strong influence has been the work on public choice theory and the economics of state bureaucracy, a line running from Pareto, through the great Italian school of public finance to the work of scholars such as Buchanan, Tullock and Peacock.

Continue reading "Angels and Demons – the Political Economy of PFM Reform" »

May 31, 2012

The US Fiscal and Generational Gap

Posted by Nicoletta Batini, IMF Senior Economist

The day-to-day functions of the U.S. federal government—from running national parks to sending out tax refunds—risked paralysis on April 8 as both chambers of Congress and the White House struggled to hammer out an elusive budget deal before funding run out on Friday, triggering a partial government shutdown.

Yet a partial government shutdown this spring may not be the biggest and hardest-to-fix fiscal headache awaiting the U.S. fiscal authorities. Looking beyond the next few years, the United States is facing a most challenging fiscal situation due to the perfect storm created by high fiscal deficits, an ageing population and rapid growth in government-provided healthcare benefits. IMF and Congressional Budget Office forecasts imply that by the end of this century a repayment of U.S. debt stock could absorb up to 10 times or more today’s entire yearly U.S. gross domestic product.

How large is the U.S. fiscal problem? Clearly the answer depends on many factors: the natural ageing of the US population; the evolution of the cost of medical care relative to the general level of prices and wages; the growth rate of the economy.

Continue reading "The US Fiscal and Generational Gap" »

April 09, 2012

Going Broke? Why Pension Reforms Are Needed in Emerging Economies?

Previously published in iMFdirect (The International Monetary Fund's global economy forum), by Mauricio Soto

We’re all getting older, and there’s no doubt that pension reform is a hot topic in the advanced economies. But it’s also critical in emerging economies.

Our analysis here at the IMF shows that across emerging economies pension spending is projected to rise as the population ages. On average, these spending increases are not that large. But reforms are needed to increase coverage of the system without making pension systems financially unsustainable over the long term.


Continue reading "Going Broke? Why Pension Reforms Are Needed in Emerging Economies?" »

January 18, 2012

A Toolkit to Assessing Fiscal Vulnerabilities and Risks in Advanced Economies

Posted by Andrea Schaechter

Working paper logo
Recent developments in international financial markets have reaffirmed that concerns over fiscal sustainability can precipitate a crisis in advanced as well as emerging economies. Assessing fiscal vulnerabilities and risks with a view to formulate early policy responses, is no simple feat, however. A number of short- and medium-term factors can be at play, such as the level of financing needs or the susceptibility of public finances to economic shocks. A new IMF Working Paper
 (WP/12/11)[1] presents a range of indicators and analytical tools for assessing fiscal vulnerabilities and risks for advanced economies.

While linked to the issue of debt sustainability, the paper does not analyze if a country’s fiscal policy stance and its public debt trajectory are sustainable. It focuses instead on underlying vulnerabilities and risks that could ultimately impinge on sustainability and which, as recent developments in international financial markets have reaffirmed, can precipitate a crisis in advanced as well as emerging economies. As these are complex and evolving issues, there is no single methodology that can summarize all aspects; rather a broad toolkit is needed.

Continue reading "A Toolkit to Assessing Fiscal Vulnerabilities and Risks in Advanced Economies " »

October 03, 2011

Budget Institutions Supporting Fiscal Consolidation

Posted by David Nummy

Countries around the world are struggling to devise the policies that will best address the challenges resulting from the financial crisis. In a book to be issued by the Fiscal Affairs Department of the International Monetary Fund, the case is made that key budget institutions will be necessary to both devise and execute those policies.

Previewing the book that will be issued later this year, Marco Cangiano kicked off the International Consortium on Governmental Financial Management (ICGFM) fall season by presenting on Budget Institutions for the 21st Century at the monthly DC Forum held at the Carnegie Endowment for Peace in Washington, DC on September 7, 2011. Mr. Cangiano, an Assistant Director of the IMF Fiscal Affairs Department, outlined ten budget institutions that will be key to countries around the world in addressing the challenges of dealing with the post-financial crisis environment in the three typical phases of a fiscal consolidation (but the same would apply in designing a stimulus package): understanding the fiscal challenge; developing a strategy; and implementation of the strategy though the budget process.

Continue reading "Budget Institutions Supporting Fiscal Consolidation" »

September 24, 2011

Carlo Cottarelli, Director of the International Monetary Fund's Fiscal Affairs Department, Speaks about U.S. Fiscal Policy and the European Sovereign-Debt Crisis.


On Friday September 23, Carlo Cottarelli, the Director of the International Monetary Fund's Fiscal Affairs Department, spoke with Tom Keene on Bloomberg Television's "Surveillance Midday" about U.S. fiscal policy and the European sovereign-debt crisis.

To watch this 8-minute video, please click on this link.

August 19, 2011

Brazil: Raising the Bar on Fiscal Transparency

Posted by Jorge Hage, Comptroller General of Brazil

In November 2004 the Brazilian Office of the Comptroller General created the Transparency Portal of the Federal Public Administration ( to provide free access to the federal budget data. The Portal can be accessed by anyone without the need of a username or password. This is intended to facilitate citizen oversight of the federal budget. The Portal is a webpage in which the budget execution of the federal government is disclosed using a user-friendly presentation with language less technical than used in the accounting system. The Portal is very comprehensive and provides information on all transfers to states, municipalities, and the Federal District; transfers to citizens benefiting from social programs; and direct spending of the federal government agencies through tender processes or direct contracts. Among others, it includes spending of each agency on per diem remuneration of staff, office supplies, equipment, projects and services; as well as spending through credit cards used by federal government officials.

Continue reading "Brazil: Raising the Bar on Fiscal Transparency" »

June 17, 2011

How Can Development Partners Decrease Fiduciary Risk in the Caribbean?

Posted by Mark Silins

Most agree that moving towards a treasury single account makes sense.[1]  It means countries need to reconcile only one or a small number of accounts, cash balances are consolidated allowing idol positive balances to offset any overdraft, controls are enhanced (as all receipts are collected in a common way), and payments are paid only when consistent with appropriation and warrant authority.

Why then do many development partners insist on new bank accounts for each project?  It is clear that development partners are concerned, particularly in the current cash-challenged times, that their earmarked grants or loans are only used for the purpose prescribed. However, in my opinion, requiring a separate bank account for each project is not the best solution. In fact, in many cases this approach reduces internal controls.

Continue reading "How Can Development Partners Decrease Fiduciary Risk in the Caribbean?" »

May 23, 2011

Risk-seeking and the Management of Fiscal Risk

Posted by Tim Irwin

It is common to assume that people are risk-averse—that they are willing to accept a risk only if it brings the reward of a greater expected return. But psychologists have found that people are sometimes risk-seeking—that they are willing to pay to assume a risk. Such behavior creates a problem for the management of fiscal risk, since it involves the government’s paying an expected cost and increasing its exposure to risk. So it’s worth thinking about when governments might be vulnerable to risk-seeking behavior.

According to the psychologists’ research, there are circumstances in which we conform to the assumption of risk-aversion. One is when we are faced with a high probability of winning something. Specifically, an experiment found that, on average, people considered that a 95 percent chance of winning $100, which has an expected value of $95 (the prize times the probability), was worth only $78 (see table). We also tend to be risk-averse when faced with a small probability of a loss. We might be willing, for example, to pay an insurance premium of $8 to avoid a 5 percent chance of losing $100, which has an expected cost of only $5.

Continue reading "Risk-seeking and the Management of Fiscal Risk" »

January 28, 2011

IMF's Fiscal Monitor Update: Strengthening Fiscal Credibility


 On January 27, 2011, the IMF released an update to its flagship publication on fiscal issues: The Fiscal Monitor. We are posting here the beginning of the text of this update titled "Strengthening Fiscal Credibility". We provide at the end of this post, a pdf copy of the full text (and corresponding data tables), as well as a link to the relevant IMF web page.


Despite the improving global outlook, the pace of fiscal consolidation this year is slowing in some key countries. The United States and Japan are adopting new stimulus measures and delaying consolidation relative to the pace envisaged in the November 2010 Fiscal Monitor. The underlying fiscal outlook has also weakened in some emerging markets—among them are several that need to build larger fiscal buffers, particularly in the face of surging capital inflows, overheating, and possible contagion from advanced countries. By contrast, advanced economies in Europe are projected to continue tightening policies amid heightened market scrutiny in several countries. Altogether, sovereign risks remain elevated and in some cases have increased since November, underlining the need for more robust and specific medium-term consolidation plans.

Fiscal outturns in 2010 were slightly better than projected, but some large emerging economies underperformed

While advanced economies maintained expansionary fiscal policies on average in 2010, outturns were generally slightly better than projected in the November 2010 Fiscal Monitor. Revenue collection exceeded expectations across most major economies—both output growth and, in some countries, the responsiveness of revenues to output were larger than expected—and spending was lower (Table 1). Overall, the average deficit of advanced economies fell compared with 2009 by about 1 percentage point, to about 8 percent of GDP (0.3 percent better than projected). Excluding the impact of growth and financial sector support, the cyclically adjusted balance widened slightly. Deficits in Germany and the United States were lower than in the November Monitor, reflecting good revenue performance and lower spending—due in Germany to the strong labor market and in the United States to some legislative delays in approving spending and lower financial sector support. Euro-area countries that had targeted large fiscal consolidations generally succeeded in posting marked deficit reductions. Meanwhile, advanced economy gross general government debt continued to rise rapidly in 2010, topping 96 percent of GDP.

Continue reading "IMF's Fiscal Monitor Update: Strengthening Fiscal Credibility" »

December 15, 2010

Fanning Out The Risk: Assessing Fiscal Sustainability Under Uncertainty in Indonesia

Posted by Nina Budina

Indonesia’s public debt outlook is stronger than in many advanced and emerging economies. Nevertheless, Indonesia, like many other emerging economies with relatively low debt levels, is still exposed to shocks. Increased volatility in macroeconomic variables has the potential to increase uncertainty around projected public debt paths. For example, recent econometric evidence suggest that higher debt levels in advanced countries are likely to be accompanied by higher long˗term real interest rates, which could adversely affect emerging markets financing conditions.[1] In Indonesia, like in many oil exporting countries, volatile natural resource revenue can further add to vulnerabilities and risks. Finally, with rising fuel consumption, volatile oil prices, and oil production uncertainties, delaying subsidy reforms could also increase fiscal risks in the future. The attached paper presents considerations for a medium-term fiscal strategy in Indonesia, aimed at maintaining sustainability, while managing uncertainties and risks.

Continue reading "Fanning Out The Risk: Assessing Fiscal Sustainability Under Uncertainty in Indonesia" »

October 06, 2010

Will Fiscal Risk Analysis Cause the Next Global Crisis?

Posted by Timothy Irwin

In the wake of the financial crisis, the models that banks use to estimate their exposure to risk have come in for a lot of criticism. Nassim Taleb has said that one “put the world at risk”, while Felix Salmon described another “as instrumental in causing the unfathomable losses that brought the world financial system to its knees.” [1] Underlying these claims are at least three concerns—first that it’s next to impossible to accurately estimate the probabilities of very unlikely events because, inevitably, there is little data on them; second, that financial models often assume for simplicity that price changes are normally distributed, while their true distribution has fatter tails—making extreme price moves more common than the models imply; and third that people naively assume that the models are more accurate than they are, creating a false sense of security.

What are the implications of this critique for the estimation of fiscal risks? Will fiscal risk analysis cause the next global crisis?

Continue reading "Will Fiscal Risk Analysis Cause the Next Global Crisis?" »

May 14, 2010

IMF Fiscal Monitor: Navigating the Fiscal Challenges Ahead

Posted by Michel Lazare  


Today, the IMF's Fiscal Affairs Department published the third issue of the "Fiscal Monitor" -- a twice yearly publication launched in July 2009.

The Fiscal Monitor's goal is to provide enhanced coverage of critical fiscal issues from a global and cross-country perspective. It is aimed at government and central bank policymakers, opinion leaders in business and economics journalism, researchers, and financial sector analysts and decision makers.

The format of this current issue has been changed to provide a more comprehensive analysis of fiscal developments and policies in advanced, emerging, and low-income economies.  From now on, the Fiscal Monitor will be part of the IMF's series of World Economic and Financial Surveys, along with the World Economic Outlook and the Global Financial Stability Report. This change signals the importance that the Fund gives to timely, comprehensive, and high-quality cross-country analysis of fiscal trends and issues.

Continue reading "IMF Fiscal Monitor: Navigating the Fiscal Challenges Ahead" »

March 01, 2010

Overview of the Italian Law on Fiscal Federalism

Posted by Maria Gabriella Briotti and Maria Cristina Mercuri1 

Last May, the Italian Parliament approved a framework law on fiscal federalism. The law represents a crucial step towards the implementation of the reformed Title V of the Italian Constitution, which transfers increasing legislative authorities and administrative functions to sub-national governments. As such, the law has to be seen as the continuation of a long process of fiscal devolution started in the mid-1990s aimed at correcting gradually the existing vertical imbalance across levels of governments. The next step will be the adoption, by May 2011, of several legislative decrees that will have to define the operational content and practical application of the principles stated in the law.


In May 2009, eight years after the reform of Title V of the Constitution (Constitutional Law n. 3/2001), the Italian Parliament approved the framework law on fiscal federalism (Legge Delega n. 42/2009)2. The scope is to enhance tax autonomy and fiscal responsibilities of sub-national governments (Regions, Provinces, Municipalities, and selected Metropolitan area), notwithstanding a full guarantee of solidarity and cohesion principles, while also promoting public administration efficiency and budget consolidation processes.

Operational content and practical application of the principles established by the frame law will have to be defined by subsequent legislative decrees to be adopted by parliament within a 24-month period from the approval of the law (a 12-month deadline is instead set to harmonize the accounting systems across regions). As building blocks of the entire fiscal system, the executing legislative decrees will have to define in detail spending competencies and taxes to be devolved to local administrations, which services will be provided uniformly on the territory, how to finance equalization funds, and the amount of local expenditure to be financed through the equalization funds. The reform must be completed and enter into effect in five years since the frame law approval, although a somewhat longer period might be allowed to individual regions, to take into account special circumstances.

Continue reading "Overview of the Italian Law on Fiscal Federalism" »

Back to top of page
©2007 IMF. All Rights Reserved. About Us | Terms of Use