Posted by Eivind Tandberg
A recent FAD paper (Download FAD fiscal risks paper) summarizes work FAD staff have been doing on fiscal risks over the last few years. Some of this work has already been reported on this blog, but this is the most recent comprehensive publication on the topic. The paper, by Aliona Cebotari, Jeffrey Davis, Lusine Lusinyan, Amine Mati, Paulo Mauro, Murray Petrie and Ricardo Velloso, discusses sources of fiscal risk and international experiences in disclosure and management of such risks, and draws lessons on the basis of these experiences and FAD analysis.
A number of IMF member countries have expressed interest in advice regarding disclosure and management of fiscal risks (defined as the possibility of deviations of fiscal outcomes from what was expected at the time of the budget or other forecast). This paper analyzes the main sources of fiscal risks and—building on an overview of existing practices in a wide range of countries—provides practical suggestions in this area, including a possible Statement of Fiscal Risks and a set of Guidelines for Fiscal Risk Disclosure and Management.
Empirical evidence presented in the paper highlights the macroeconomic significance of fiscal risks from various sources. Unexpected changes in macroeconomic variables, most notably in the case of exchange rate depreciations, often have major consequences for fiscal sustainability. A key role is also played by calls on contingent liabilities in the banking system,other parts of the public sector (state-owned enterprises and subnational levels of government), or the government’s interactions with private sector agents (e.g., PPPs). A number of broad messages emerge from the review of country experiences:
• Effective identification of fiscal risks requires a clear allocation of responsibilities for the various parts of the public sector in assessing and reporting fiscal risks and that procedures be in place to ensure that the entity that plays the main role in determining fiscal policy (typically, the ministry of finance) has access to relevant data.
• Comprehensive disclosure of fiscal risks is desirable to facilitate identification and management of risks. However, disclosure modalities in some areas should avoid engendering moral hazard from a perception of an implicit blanket guarantee (e.g., in the banking system) and ensure that the state’s economic interests are not prejudiced.
• Cost-effective risk mitigation begins with sound macroeconomic policies and public financial management practices. It also consists of practices that require justification for taking on fiscal risks, and that make it necessary for private sector agents to pay guarantee fees or to share in the risk. It may also involve using insurance instruments, though this remains an exception in light of limited market development to date.
Fiscal risk management is facilitated by a legal and administrative framework clarifying relationships among different levels of government and vis-à-vis the private sector. Moreover, for fiscal risks to be properly incorporated in decision making, suitable procedures are required in the budget and contingent liability approval process: contingent obligation proposals may need to be considered alongside competing instruments, and ceilings on total issuance of guarantees may need to be subjected to parliamentary approval during the budget process.
