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Mr. Aleh Tsyvinski, Mr. Martin Petri, and Mr. Günther Taube

Front Matter Page Fiscal Affairs Department Authorized for distribution by Jeffrey M. Davis Contents I. Introduction II. Quasi-Fiscal Activities (QFAs): Conceptual Issues A. Why Do (Energy) QFAs Matter? B. Methodological and Measurement Issues C. Quasi-Fiscal Activities Versus Quasi-Fiscal Deficit III. Case Study: Ukraine A. Background B. Energy QFAs C. Gas Sector QFAs Mispricing Arrears D. Electricity Sector QFAs Mispricing Arrears E. Summary IV. Case Study: Azerbaijan A. Background B. Energy

Mr. Aleh Tsyvinski, Mr. Martin Petri, and Mr. Günther Taube

) and Rosenberg and de Zeeuw (2000) , analyzing QFAs related to the foreign exchange regime in Uzbekistan. 4 This is a common feature in resource-rich countries. For example, energy QFAs also tend to be large in the petroleum producing countries in the Middle East and elsewhere. See, for example, on Iran, Taube (2001) . 5 We are not aware of a case where QFAs were intended to correct market failures. 6 For detailed analyses of the nonpayment system in Russia and the electricity sectors in transition countries see Pinto et al. (2000) and

Mr. Martin Petri, Mr. Günther Taube, and Mr. Aleh Tsyvinski

mechanisms. It appears that, through energy sector operations, QFAs in the FSU have taken on new, important shapes, reaching large proportions with substantial macroeconomic implications. Energy sector QFAs in the FSU appear to be related primarily to mispricing and the toleration of arrears. Among the FSU countries, Azerbaijan clearly stands out with by far the largest energy QFAs, estimated at over 20 percent of GDP in recent years (see the case study below for details). Energy QFAs are also large in Turkmenistan (above 10 percent of GDP), while they tend to range

Mr. Aleh Tsyvinski, Mr. Martin Petri, and Mr. Günther Taube
A decade into the transition, many of the successor states of the former Soviet Union (FSU) continue to use energy sector quasi-fiscal activities (QFAs), especially low energy prices and the toleration of payment arrears, to provide large implicit and untargeted subsidies. These activities disguise the overall size of the government, cause overconsumption and waste, and contribute to macroeconomic imbalances. This paper analyses such activities in FSU countries, with particular emphasis on two case studies (Azerbaijan and Ukraine). The paper's policy conclusions point to the need to increase energy prices, combined with a strengthening of safety nets to protect the poor, better enforcement of payment discipline, and more efforts to achieve fiscal transparency.
International Monetary Fund

resource sectors, the main types of QFAs include the following: Energy QFAs: requirements for NRCs to provide products (particularly energy) at less than cost recovery or market price for domestic consumption; Public expenditure QFAs: requirements for NRCs or international companies to provide social services or other public goods normally provided by general government; Employment QFAs: provision of employment in NRCs or related activities that go beyond what would be done if companies were run on a purely commercial basis; and Borrowing QFAs

International Monetary Fund

concentrated. 46 With respect to resource sectors, the main types of QFAs include: Energy QFAs: requirements for NRCs to provide products (particularly energy) at less than cost recovery or market price for domestic consumption; Public expenditure QFAs: requirements for NRCs or international companies to provide social services or other public goods normally provided by general government; Employment QFAs: provision of employment in NRCs or related activities that go beyond what would be done if companies were run on a purely commercial basis; and Borrowing

International Monetary Fund

listed in government reports on debt (but separately identified as contingent debt). 111. As described in Chapter I , energy QFAs can be very large. These QFAs deserve more analytical attention than they have received in the past, because failure to report them masks the true extent of government activity in the resource sector and the economy as a whole. As far as public expenditure QFAs are concerned, governments of low-income countries should have a particular interest in presenting social service spending to the legislature and the public as a way to demonstrate

International Monetary Fund

distribution accounts was introduced in order to ensure payment discipline within the sector. However, transparency of the energy sector’s relations with the budget requires further strengthening. Progress has been made in reducing the breadth of energy QFAs since 1999 : Payment compliance improved considerably . In the electricity sector, cash collection ratios (payments to the wholesale market) have reportedly increased from less than 10 percent in 1999 to 91 percent in the first nine months of 2003. This was permitted by the restructuring of the electricity sector

International Monetary Fund
The Guide, which is a companion document to the IMF’s Code of Good Practices on Fiscal Transparency (2007), has been revised to reflect the new Code and to provide more recent examples of good practice by individual countries The Guide applies the good practices of the Code to the unique set of transparency issues faced by countries that derive a significant share of revenues from natural resources. It addresses issues arising both from the sheer size and volatility of such resources and the technical complexity of the transaction flows. The Guide supplements the Manual on Fiscal Transparency (2007).
International Monetary Fund

, untargeted subsidy that invites overconsumption and waste by households, enterprises, and other users, with a potentially large adverse environmental impact. Maintaining such subsidies also risks the creation of an unsustainable dependence on continuing low energy prices. Such QFAs are prevalent in many energy-rich countries. The consequences in terms of reducing managerial accountability for both commercial and noncommercial activities have been discussed above. 60. Energy QFAs come in various forms and may involve international companies as well as NRCs. Generally