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November 19, 2020

The case for clarity in reporting of debt and fiscal risks

Greg clarity
Posted by Greg Rosenberg[1]

Soaring global public-sector debt and widening fiscal distress highlight the need for greater transparency and clarity in debt and fiscal risk reporting.

Comprehensive debt reporting reduces sovereign risk premiums and financing costs, and broadens access to capital markets. Similarly, fiscal risk reporting helps governments to understand and manage risks, and reduce borrowing costs. Much work is under way to improve the quality and coverage of debt and fiscal risk reporting, particularly in low-income countries, where significant gaps remain. Yet technical reporting is not enough. Data need to be understood and interpreted, borrowing plans weighed and filtered, risk assessed and mitigated. Transparency involves move than disclosure: it also requires clarity.

Public policy and accountability, legislative oversight, and risk management are best served by lucid reporting that can be widely understood. Technical reporting on debt, for example, may be easily understood in capital markets, but is often lost in translation when it reaches other government departments, legislators, NGOs, journalists, and interested citizens. In many low- and middle-income countries, budget documents are long, jargon rich, process focused, and data heavy. In such cases, more is not always better – sometimes it’s just more.

In addition to comprehensiveness, debt and fiscal risk reporting would benefit from analysis that clearly sets out the implications for debt management and fiscal policy.  

COVID-19, transparency, and accountability

“The global economy has experienced four waves of debt accumulation over the past fifty years,” notes the World Bank’s Global Waves of Debt study, published in December 2019. “The first three ended with financial crises in many emerging market and developing economies. During the current wave, which started in 2010, the increase in debt in these economies has already been larger, faster, and more broad-based than in the previous three waves.”  

And that was before COVID-19. In the context of the global contraction triggered by the pandemic, the social and economic consequences of a large-scale debt crisis would be profound. Whatever the final extent of debt relief and restructuring now under consideration, the enormous amounts that governments are pouring into fiscal stimulus is reason enough for increased accountability to their own citizens.  

A recent IMF note on sovereign debt architecture makes the case for reforms in this area. It also argues for additional technical support to strengthen debt transparency and public debt management frameworks. This approach is aligned with the principles outlined in the IMF’s Fiscal Transparency Handbook

As World Bank chief economist Carmen Reinhart recently told the Financial Times, the lack of transparency in lending outside public bond markets increases the difficulty of assessing the scale of a potential debt crisis. Moreover, in a crisis, private debts can rapidly become public obligations.

This brings us to the iceberg problem: fiscal risks that are not seen or well understood. Such risks can include lending between governments with undisclosed terms; the borrowing of state-owned companies; subnational government debt; pension and social security fund liabilities; the undisclosed (or poorly understood) terms of public-private partnerships; and other contingent liabilities. 

 A tool for policy impact and communication

Improving transparency involves two interlinked approaches. First, it means expanding coverage of debt and fiscal risks, with an emphasis on technical capacity and comprehensiveness. The appetite for transparency may ebb and flow with political cycles, but the demand for openness is likely to increase in the years ahead. 

Second, it means seeing debt and fiscal risk reporting as a tool for policy impact and communication. While this may sound obvious, it is rarely put into effect. Reports should be drafted using language that can be understood by legislators, analysts, civil society, journalists, and interested citizens. A logical narrative thread should summarize how we got here, and where we’re going. From a policy standpoint, reporting should clarify the economic and fiscal tradeoffs involved in managing debt and fiscal risks. These are, after all, matters of public interest.

New Zealand sets a high standard for transparency and the lucidity of its budget documents. As an adjunct to its clear debt management reports, the finance ministry also publishes a document outlining government borrowing in plain language. Among middle-income countries, South Africa’s budget documentation is highly transparent and accessible, with extensive debt reporting, and clear and concise fiscal risk reports. Among low-income countries, Rwanda’s clear debt management reporting has been complemented by its inaugural fiscal risk statement, published in June 2020 amid the pandemic, and setting out the risks associated with COVID-19. 

The IMF’s Fiscal Transparency Code highlights the importance of comprehensiveness, clarity, reliability, timeliness and relevance in reporting on public finances. Of these considerations, clarity is often treated as a poor relation. Technical assistance that builds capacity for clear, transparent reporting can improve the coverage of debt and fiscal risks, clarify policy choices, reduce borrowing costs, and strengthen public accountability.


[1] The author is on the IMF’s Fiscal Affairs Department’s panel of experts, specializing in clear budget and fiscal communications, and is the Managing Director of Clarity Global Strategic Communications (Washington, DC and Cape Town).  

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.


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