Credit: IMF

IMF Staff Discussion Note: The State as Financier of Last Resort

Governments have increasingly been called upon to act as financier of last resort during the past 15 years in order to support their economies and protect productive capacity in the face of extreme crises. Financial support measures, such as broad-based government guarantees, sector or economy-wide loan programs, and equity injections have become a key part of the macroeconomic policy arsenal, that represent the first line of defense in the face of extreme shocks.

A  new IMF staff discussion note (SDN) analyzes this new role, examines how these financial support measures (FSMs) work, their macroeconomic benefits and fiscal costs, and sketches out the public financial management framework for managing their legacy and improving their design in preparation for future crises.

The scale of these FSMs can be very large. During the pandemic, announced measures in some countries were above 30 percent of GDP, dwarfing traditional measures. The SDN finds that these measures can be highly effective at preventing bankruptcies and boosting economic activity during extreme crises – even more so than traditional fiscal measures such as tax cuts and spending increases.

But they come at a cost.

They increase fiscal risks, shifting exposures from the private to the public sector balance sheet. Future write-downs on loans or calls on guarantees can have a major impact on the public finances, constraining the ability of government to act in the future. This is particularly worrisome, as the crystallization of these risks usually occur at the worst possible time, when other risks are materializing and when fiscal space is at a premium. Governments using FSMs owe it to their future selves to strengthen their fiscal risk analysis and management.

FSMs tend to be less transparent than traditional budget measures. Given the speed at which they are put in place and their unusual nature, they are often decided outside of the standard budget process. Their costs are much more uncertain, particularly during times of crisis, and their benefits are not well understood, leaving considerable room for underplaying their expected costs.

FSMs are also often delivered by entities outside the general government, such as central banks, off-budget vehicles or development banks, so may not picked up in standard budget, financial or statistical reporting. And since they are below-the-line operations, or create contingent liabilities, the full extent of their implications will often not be included in the cash-based revenue and expenditure reporting that is the primary focus of many governments. This places a greater emphasis on strengthening standard fiscal reporting (statistics, financial statements and budgets) when covering these activities, such as through full public sector balance sheets, as well as rigorous fiscal risk statements.

The SDN calls for governments to strengthen their policy frameworks for FSM decision making in anticipation of the next crisis. It argues that FSMs warrant similar scrutiny and budget procedure as traditional measures; that they should be costed and quantified – even in the face of extreme uncertainty – to clarify the policy tradeoffs; and that expected costs should be incorporated into budgets and medium-term fiscal plans, to ensure fiscal projections are credible and resources are available to meet potential costs.

The SDN also lays out the key policy questions that should be considered by governments before they make their decisions and provides guidance on the relative merits of different types of FSMs under different circumstances. It also points out that risk mitigation measures need to be considered at the design stage, when government’s ability to control risk is greatest. Finally, it points out the importance of ongoing monitoring and management of FSMs after they have taken effect, with fiscal cost estimates updated regularly.

The analytical work of the SDN is complemented by the IMF’s fiscal risk toolkit, which provides a wide range of practical tools that can help governments design, understand and manage their fiscal risks, including those from FSMs. This toolkit will shortly be updated to include specific tools on managing loans and guarantees, in addition to existing tools such as the health check and stress test tools for state owned enterprises that help manage risks from equity injections. 





Financial support measures have been extremely effective in boosting economic activity
Raphael Espinoza, Jason Harris ,  Fiscal Affairs Department, IMF