Posted by Aliona Cebotari
On June 16, 2008, the Executive Board of the International Monetary Fund (IMF) held a seminar on “Fiscal Risks—Sources, Disclosure, and Management”. The topic has gained importance in many IMF member countries, as interest in promoting fiscal sustainability and transparency grows. The staff paper on which the discussion was based reviews the experience with fiscal risks in a wide range of countries and provides practical advice on risk identification, disclosure and management. This includes a set of Guidelines for Fiscal Risk Disclosure and Management, and a possible Statement of Fiscal Risks.
The staff paper defines fiscal risks as deviations of fiscal outcomes from what was expected at the time of the budget or other forecast. On this basis, it explores the sources of fiscal risks—their nature and relative importance—which vary with country economic structure and level of development.
The most significant sources of risk include unexpected changes in macroeconomic variables (such as exchange rate depreciations or changes in commodity prices) and the realization of contingent liabilities (such as government guarantees, especially those linked to public-private partnerships, and liabilities in the banking system, state-owned enterprises, or subnational governments). While acknowledging that sound macroeconomic and public financial management policies are the first line of defense against fiscal risks, the paper focuses on the appropriate framework for identifying, managing and disclosing risks. Lessons drawn from the review of the international experience in these areas include:
Effective identification of all fiscal risks is a prerequisite for their disclosure and management, and contributes to a fully informed conduct of fiscal policy. It requires a clear allocation of responsibilities among various parts of the public sector in assessing and reporting fiscal risks, as well as putting in place procedures to ensure that the entity playing the key role in determining fiscal policy (typically, the ministry of finance) has access to all relevant data.- Comprehensive disclosure of all fiscal risks helps facilitate identification and management of risks, and reduce borrowing costs in the long run. However, disclosure practices should be designed in ways that avoid engendering moral hazard from the perception of an implicit guarantee (e.g., in the banking system) or harming the state’s economic interests (e.g., with respect to legal claims against the state), which in some cases might imply that quantification of risks may not be feasible or desirable. In such cases, governments could disclose the nature of the risks without quantification. The paper also argues that there is merit in reporting fiscal risks in a single document, such as a Statement of Fiscal Risks to be presented with the annual budget, and provides advice on its possible content.
- Fiscal risk mitigation includes—in addition to sound macroeconomic and public financial management policies—practices that require justification for taking on fiscal risks and risk-sharing with the private sector. It may also involve use of insurance and hedging instruments, which so far remains limited but may increase as markets for innovative instruments develop further.
- Effective risk management is facilitated by a legal and administrative framework that clarifies the relationship between different levels of government and vis-à-vis the private sector. Such a framework would involve, for instance, clearly spelling out who can authorize government borrowing and issuance of contingent obligations. However, for fiscal risks to be properly incorporated in fiscal policy decision-making, contingent obligation proposals would need to be integrated with the budget cycle and considered alongside competing instruments.
Finally, the paper proposes Guidelines for Fiscal Risk Disclosure and Management as a tool to help policymakers identify potential improvements to existing frameworks and to inform the IMF staff’s analysis of fiscal risks. The proposed guidelines are a work in progress and feedback from fiscal agencies and outside experts will no doubt help refine them. Once finalized, the guidelines could be a helpful complement to the IMF’s Code and Manual of Good Practices on Fiscal Transparency and the Government Finance Statistics Manual. In applying the guidelines, specific measures will need to be designed to suit individual country circumstances, priorities and constraints.
