- Lusine Lusinyan, Aliona Cebotari, Ricardo Velloso, Jeffrey Davis, Amine Mati, Murray Petrie, and Paolo Mauro
- Published Date:
- January 2009
© 2009 International Monetary Fund
Production: IMF Multimedia Services Division
Typesetting: Alicia Etchebarne-Bourdin
Fiscal risks: sources, disclosure, and management/Fiscal Affairs Dept.; Aliona Cebotari … [et al.], editors—Washington, DC: International Monetary Fund, 2008.
Includes bibliographical references.
1. Fiscal policy. 2. Budget—Forecasting. 3. Risk management. 4. Disclosure of information. I. Cebotari, Aliona. II. International Monetary Fund. Fiscal Affairs Dept. HJ192 .F573 2008
Disclaimer: This publication should not be reported as representing the views or policies of the International Monetary Fund. The views expressed in this work are those of the authors and do not necessarily represent those of the IMF, its Executive Board, or its management.
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Fiscal Risks: Sources, Disclosure, and Management was prepared in response to the growing interest among International Monetary Fund (IMF) member countries in work on appropriate practices in fiscal risk disclosure and management. It was presented at an IMF Executive Board seminar in June 2008. The paper is the product of a team led by Paolo Mauro and Ricardo Velloso, and composed of Aliona Cebotari, Lusine Lusinyan, Amine Mati (all Fiscal Affairs Department (FAD), and Murray Petrie (FAD roster of fiscal experts). Jeffrey Davis (Deputy Director, FAD, at the time when the paper was written) provided overall direction for the project. Helpful inputs and comments were provided by many colleagues in FAD (in particular, Raphael Cabezon, Borja Gracia, Richard Hemming, Anna Ivanova, Abdul Khan, and Jon Shields), and other departments in the IMF.
The authors also benefited from excellent support by Sukhmani Bedi for research assistance and Elizabeth Estabrook for editorial assistance. Key inputs—for which the authors are most grateful—were the responses to a questionnaire on country practices in fiscal risk disclosure and management, provided by many colleagues in FAD and area departments, as well as country authorities.
This paper should not be reported as representing the views of the IMF. The opinions expressed are solely those of the authors and do not necessarily reflect the views of the IMF or its Executive Directors or IMF policy.
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.