Manual on Fiscal Transparency (2007)



Dawn Rehm, and Taryn Parry
Published Date:
October 2007
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1. In 1998, the International Monetary Fund (IMF) introduced a Code of Good Practices on Fiscal Transparency (hereafter, the Code), which led to a voluntary program of fiscal transparency assessments called fiscal transparency modules of Reports on the Observance of Standards and Codes (hereafter, fiscal ROSCs). These developments reflected a clear consensus that fiscal transparency is a key ingredient of good governance, which is of central importance to achieving macroeconomic stability and high-quality growth. To expand and explain the principles of the Code, and to help guide the conduct of fiscal ROSCs, the first version of this Manual on Fiscal Transparency (hereafter, the Manual) was issued the same year.1

2. The original objectives that guided the development of the fiscal transparency program remain valid today and underpin the 2007 revisions of the Code and Manual. First, fiscal transparency requires providing comprehensive and reliable information about past, present, and future activities of government, and the availability of this information informs and improves the quality of economic policy decisions. Fiscal transparency also helps to highlight potential risks to the fiscal outlook, resulting in an earlier and smoother fiscal policy response to changing economic conditions, thereby reducing the incidence and severity of crises. Second, fiscal transparency benefits citizens by giving them the information they need to hold their government accountable for its policy choices. Third, more transparent governments also benefit from improved access to international capital markets.2 The greater oversight by civil society and international markets further reinforces the first objective by encouraging governments to pursue sound economic policies and achieve greater financial stability.

3. Fiscal transparency is a relevant goal for all countries. The Code therefore denotes good practices that are potentially achievable by countries at all levels of economic development. The Code is one of 12 financial standards that have been recognized by the international community and for which ROSCs are prepared.3 In addition to fiscal transparency, the Fund has developed standards covering data, and monetary and financial policy transparency, as an integral part of its surveillance objectives. Member country compliance with the transparency standards is complementary to surveillance, which entails monitoring and consulting with country authorities on a wide range of economic policies to assess economic vulnerabilities.

Box 1.Selected Transparency Initiatives

IMF Fiscal Transparency Code

The Code, revised in 2007, is voluntary in nature. It provides a comprehensive framework for fiscal transparency and focuses on clear roles and responsibilities, transparent budget processes, public availability of information, and assurances of integrity.

OECD Best Practices for Budget Transparency

The OECD best practices were issued in 2001 and are to be used as a reference tool. They support the full disclosure of all relevant fiscal information in a timely and systematic manner and provide a series of best practices in the areas of principal budget reports, specific disclosures, quality, and integrity.

World Customs Organization (WCO) Arusha Declaration

The Arusha Declaration, revised in 2003, provides guidance on key elements needed to support effective national customs integrity programs. It has a specific section on transparency, which deals with customs laws, regulations, procedures, administration, review mechanisms, and performance standards.

Open Budget Initiative

The Open Budget Index (2005) provides ratings of the openness of budget material in 59 countries to their citizens. It is based on a detailed and systematic survey of current practice by local experts. The Index assesses the availability of key budget documents, the quantity of information they provide, and the timeliness of their dissemination to citizens in order to provide reliable information on each country’s commitment to budget transparency and accountability.

Extractive Industries Transparency Initiative (EITI)

The EITI is a multi-stakeholder initiative, launched in 2002, promoting the publication of regular reports of revenue received by the government and paid by the extractive industry sector with respect to specified natural resources. The EITI requires the involvement of civil society and a timetable for implementation of EITI requirements. Reports will be verified by an independent auditor, and a validation process will verify a country’s status. On fulfillment of the EITI criteria, candidate countries may be judged EITI compliant.

4. Interest in promoting fiscal transparency has grown considerably since the inception of the Code. A number of transparency initiatives in the fiscal area have been established, including the Organization for Economic Cooperation and Development (OECD) best practices for budget transparency, issued in 2001; the multi-stakeholder Extractive Industries Transparency Initiative (EITI), launched in 2002, to address resource revenue transparency issues in resource-rich countries; and publication by the Open Budget Initiative of assessments of the information provided to citizens in key budget documents in 59 countries in 2005 (see Box 1). In addition, for countries that receive official development assistance, assessments under the multi-donor Public Expenditure and Financial Accountability (PEFA) program include a series of performance indicators covering aspects of fiscal transparency, crucial for effective public financial management, which are derived in part from the Code. The Code has also been used by the private sector as a framework for evaluating fiscal transparency.4

5. Reflecting the unique set of problems faced by countries that derive a significant share of revenues from natural resources, the IMF issued a Guide on Resource Revenue Transparency (hereafter, the Guide) in 2005. The Guide provided a summary overview of generally recognized good or best practices for transparency of resource revenue management consistent with the principles of the Code. The Guide, which gives a framework for the consideration of resource-specific issues as part of a fiscal ROSC, has been updated in line with the revised Code and Manual.

Fiscal ROSCs (Fiscal Transparency Modules of Reports on the Observance of Standards and Codes)

6. The purpose of a fiscal ROSC is to identify a country’s fiscal strengths and vulnerabilities and to establish priorities for reinforcing its fiscal institutions in order to improve fiscal transparency.5 By identifying and raising awareness of important fiscal risks, fiscal ROSCs play a useful role in the surveillance process. The assessments and recommendations in fiscal ROSCs have proved helpful to governments in determining requirements for capacity building and have thus become an important resource for prioritizing possible technical assistance from the IMF and other providers. In some cases, countries may also seek technical assistance in public financial management, tax administration, or fiscal transparency, before undertaking a fiscal ROSC.

7. Fiscal ROSCs are carried out at the request of a country’s authorities. Both a decision to undertake a ROSC assessment and a decision to publish the report are completely voluntary. The publication of the fiscal ROSC represents a commitment by the country to make improvements in fiscal transparency. These improvements can be periodically noted in published updates or reassessments of fiscal transparency, and may be reinforced by positive responses to fiscal ROSCs by private markets and donors. It is generally accepted that public trust in fiscal management is thereby enhanced, and a better informed civil society is able to make and promote better fiscal decisions.

8. Preparation and publication of a fiscal ROSC adheres to a set format. Following confirmation by Fund staff of a written request from a country’s authorities, the participating country completes and returns a standard questionnaire on fiscal institutions.6 A Fund staff mission will then visit the country, normally for about two weeks, and prepare a draft report outlining observance of each of the good practices specified in the Code. In some cases, a resource revenue module is also completed by the IMF. A staff commentary in the draft ROSC will summarize achievements against the Code and provide recommendations for improving transparency. These recommendations are tailored for country-specific circumstances, with an indication of possible timelines and priorities. The draft report is discussed with country authorities and subject to internal IMF review before finalization.

9. By end-2006, about half the IMF membership had undertaken fiscal ROSCs and nearly all fiscal ROSCs had been published on the IMF external website. Participants represented all the major regions of the world and all levels of economic development. As countries strengthen their fiscal institutions and improve adherence to the Code’s good practices, it is becoming increasingly important to follow up fiscal ROSCs on a systematic basis, either by undertaking further full ROSC exercises (known as fiscal ROSC reassessments) or by issuing a ROSC update, often completed in the context of a Fund surveillance or technical assistance mission. Publication of ROSC reassessments or updates on the IMF external website helps ensure that information remains accurate and gives recognition to countries for improving fiscal transparency.

10. Evidence from the fiscal ROSCs that have been undertaken to date suggests that some good practices of fiscal transparency are generally well observed across all countries. For example, data on the annual budget outturn are normally reported in a timely fashion. Comprehensive data on public debt are also regularly reported. Many countries, including developing and transition economies, use a uniform budget classification that is consistent with the Government Finance Statistics Manual 2001 (GFSM 2001).

11. Other strengths and weaknesses in fiscal transparency tend to vary by region and by level of economic development.7 There is some indication that countries are learning from the fiscal reform initiatives of their neighbors. Countries involved in the European Union (EU) accession process showed an early interest in undertaking ROSCs and made considerable progress, which is documented in numerous updates for these countries.8 Interest has also been strong in Latin America and the countries of the Commonwealth of Independent States. For the latter, the area requiring most improvement is in defining the role of government and identifying and reducing quasi-fiscal activities (QFAs) of public corporations. Countries in all regions could improve fiscal transparency by improving budget realism, simplifying the tax system, and reducing discretion in tax administration. Many emerging market countries also need to improve reporting of contingent liabilities and quasifiscal activities, broaden coverage of the general government, and develop medium-term frameworks that fully inform the annual budget process. Low-income countries have more basic problems in producing quality data and developing stronger internal and external audit functions. Finally, those countries that are more decentralized tend to need to improve the transparency of intergovernmental relations.

The Revised Code (2007)

12. The revised Code (2007) is an updated version of the 2001 Code. It reflects several recent developments. In July 2005, the Executive Boards of the IMF and the World Bank evaluated the Standards and Codes Initiative, including fiscal ROSCs.9 IMF Directors noted that the Standards and Codes Initiative had been particularly successful in identifying vulnerabilities and establishing priorities for strengthening domestic institutions, but had not yet had a large impact on the actual implementation of reforms. At the same time, in assessing experience to date with fiscal ROSCs, Fund staff had observed that several improvements to the structure and content of the Code might facilitate ROSC assessments. For example, a different ordering of the pillars of fiscal transparency (with budget processes addressed before provision of information to the public) could reduce duplication of material during ROSC assessments. Also, making explicit in the Code certain material that was previously only in the Manual would enhance the transparency of the process. The Code could in addition be revised to support more explicitly the Guide, which contains good practices related to the particularly complex transparency issues faced by countries with substantial resource-related revenues, and to reflect developments in public sector accounting and audit standards and emerging issues in public financial management.

13. A draft of the revised Code was issued for public consultation in October 2006 and a questionnaire was sent to country authorities, development agencies, academics, public and private sector users of fiscal ROSCs, and nongovernmental organizations working in the area of budget transparency. All the material was made available on the Fund website.10 The Code was then further revised in light of the extensive comments received. Suggestions made during the public consultation process were also reflected in the revised versions of the Manual and Guide.

14. Public comments on the revised Code covered a broad range of issues. Respondents generally expressed substantial support for the enhanced references in the circulated draft Code to resource revenue, transparency of government contracts, and disclosure of the costs of government guarantees and other contingent obligations. In addition, suggestions were received during the consultation process that led to further revisions in the Code. These revisions included the need for a widely available summary, or “citizen’s guide,” to the budget, the broadening of long-term analysis beyond a focus on demographic change, and the inclusion in the Code of taxpayer rights. Other suggestions that were reflected in revisions to the Code were to provide estimates of the broader economic impact of new policies, to clarify the importance of accessibility to information and the actual implementation of policies, and to reinforce the role of the national audit office, including monitoring the response to audit findings. Some further topics raised in the public consultation process led to more extensive treatment of specific issues in the revised Manual, including problems related to giving notice of tax policy changes, increased coverage of tax administration, the importance of public-private partnerships, and the need to address fiscal transparency at the subnational level of government.

How Has the Code Changed?

15. The original definition of fiscal transparency—which emphasizes being open to the public about the structure and functions of government, fiscal policy intentions, public sector accounts, and fiscal projections (Kopits and Craig, 1998)—continues to form the basis of the Code. The four pillars11 of the Code also remain unchanged; the only difference is the order in which they are presented, and some reorganization to improve the overall coherence of the Code.

16. The first pillar of the Code—Clarity of Roles and Responsibilities—contains two core practices, on the clear distinction between government and commercial activities and on a clear legal framework governing fiscal administration. Supporting practices with respect to a clear legal framework have been extended or strengthened and treat more explicitly transparency issues regarding natural-resource-related activities and similar issues regarding contractual arrangements between the government and either public or private operators. The practice on extrabudgetary funds has been moved to the second pillar of the code.

17. The second pillar of the Code has been reordered and renamed—Open Budget Processes—and covers core practices on transparent budget preparation, execution, and monitoring. New elements in the second pillar include the requirement of adequate time for legislative consultation, and an increased emphasis on the importance for transparency of the quality of the assumptions and realism of the overall budget, as well as on the presentation of final audited accounts to the legislature. A few practices have been shifted to the third or fourth pillars of the Code.

18. The third pillar—Public Availability of Information—continues to emphasize the importance of publishing comprehensive fiscal information. This pillar now contains a more complete list of information requirements that may be found in either budget documentation or other fiscal reports, and encompasses a number of practices related largely to the provision of information that were previously covered under Open Budget Process. Good practices in fiscal reporting have been clarified or strengthened, and a new practice has been added to cover long-term assessments.

19. The fourth pillar—Assurances of Integrity—deals with the quality of fiscal data and the need for independent scrutiny of fiscal information. A number of practices from other areas in the original Code have been relocated to this pillar and grouped under a new core principle on internal oversight and safeguards for added emphasis.

20. The Code has been strengthened by the addition of some new good practices and the enhancement of others. Many of these changes to the Code were designed to permit a fuller treatment of resource revenue transparency (1.2.4, 1.2.5, 3.1.4) and transparent revenue administration (1.2.1, 1.2.2, 1.2.3, 4.2.6). New practices include

  • a period of time for public consultation on proposed policy or regulatory changes (1.2.3);

  • contractual arrangements between the government and public or private entities that are clear and publicly accessible (1.2.4);

  • a legal basis for liability and asset management practices, including rights to use or exploit public assets (1.2.5);

  • a calendar for budget preparation that is followed in practice, allowing sufficient time for legislative review (2.1.1);

  • supplemental revenue or expenditure proposals that are classified in a manner consistent with the original budget (2.2.3);

  • separate identification of major revenue receipts, including from resource-related activities and foreign assistance, in budget documents (3.1.4);

  • publication of a periodic report on long-term public finances (3.1.7);

  • wide distribution of a clear and simple summary of the annual budget (3.2.1); and

  • purchases and sales of public assets to be conducted in an open manner with major transactions separately identified (4.2.4).

21. Other revisions to the Code broaden some practices to incorporate additional requirements, such as presenting the budget within a medium-term fiscal framework (2.1.2); requiring an audit of the final accounts (2.2.4); specifying reporting on “significant nondebt liabilities,” including government guarantees and unfunded pensions (3.1.5); explaining historical data revisions or changes in classification (4.1.3); and a monitoring mechanism to ensure that recommendations of external audit reports are addressed (4.3.2).

The Role of the Manual

22. The Manual seeks to expand and explain the pillars and principles of the Code and to provide richer and more in-depth coverage of each good practice. Improvements in public financial management and tax administration usually enhance fiscal transparency, and in recognition of this positive relationship, the Manual contains relevant references to these important matters. However, it is not intended as a guide to good financial management. Similarly, the Manual avoids making general fiscal policy recommendations, while providing guidance on how to make certain activities more transparent. In a number of areas, such as public-private partnerships, extrabudgetary funds, and fiscal responsibility laws, the inclusion of transparency requirements should not be taken as an endorsement of the practices themselves. Although some good practices are relatively straightforward, others require more explanation. Therefore, the length of discussion in the Manual regarding each practice should not be interpreted as an indication of greater or lesser importance.

23. The Manual aims to inform a range of different audiences. First of all, country authorities with an interest in promoting fiscal transparency can review the detailed descriptions, country examples, and research, and use them to guide the development of more robust fiscal transparency practices.12 Second, the Manual is a comprehensive tool for the IMF itself, and assists staff in undertaking fiscal ROSC assessments and other country surveillance work. Third, civil society organizations have used the Manual to support and complement their efforts in promoting fiscal transparency. Complementary transparency initiatives are also referenced in the Manual. Fourth, it serves as a useful reference document for academia. Finally, and importantly, the Manual is a helpful tool to assist legislatures in holding the executive accountable for more transparent practices.

24. Fiscal transparency is important for all levels of government. Most of the Code can be equally applied to subnational governments, and their compliance with good practices should be encouraged. Similarly, many good practices also apply to public corporations, which should, in particular, operate in an open manner, publish annual reports, and be subject to an annual external audit. Although the Code is primarily focused on transparency practices for central government, it requires that reports on subnational governments and public corporations be available to the central government so that it can monitor general government and public sector finances. It is recognized that this could be a challenge for some countries, especially for those where the subnational levels of government have weak financial management systems. Therefore, the application of some elements of the Code may, in certain cases, be limited, at least in the first instance, to the central government. It is also recognized that the constitutional relationship between central and subnational governments in a few countries constrains the reporting by central government of general government activities and finances.

25. Implementation of all the good practices of the Code may be challenging for many countries because of weak capacity in public financial management. To assist such countries in setting priorities, the Manual sets out some basic requirements of fiscal transparency, which should help them build a sound foundation for fiscal transparency. These basic requirements should not be considered minimum standards, but rather a starting point toward fulfilling all Code practices. A number of complementary best practices are also highlighted in the Manual for countries that already meet good practice and are interested in improving fiscal transparency even further.13 Countries that have implemented many or most good practices are encouraged to view best practices as their ultimate goal for fiscal transparency.

Revisions to the Manual

26. While the structure and much of the core contents remain intact, extensive changes have been made within various sections of the Manual. In part, these are the consequence of reorganizing and deepening some material to be consistent with the revised Code. But there have also been detailed revisions to the text to expand content, document additional country examples from ROSC findings, and add references. As before, the Code and the Manual draw on the work of other standard setters, including the International Accounting Standards Board, the International Federation of Accountants, the International Organization of Supreme Audit Institutions (INTOSAI), and the work of international organizations, such as the United Nations, the World Bank, the European Union, the World Trade Organization, and the Organization for Economic Cooperation and Development. The Manual has been expanded to include links to the Guide and to address more specifically the unique set of challenges faced by countries that derive a significant share of revenues from natural resources.

27. The practical examples in the Manual of good and best practices in fiscal transparency to be shared with member countries have been updated to incorporate more recent information. The identification of basic requirements of fiscal transparency has also been simplified (Appendix): the aim now is to indicate broad principles that need to be observed, rather than to list specific good practices.

28. As before, the first chapter of the Manual discusses roles and responsibilities and sets out clear definitions of the public sector and its parts and other terms used throughout the Code and Manual. However, the discussion and definition of government has been expanded and is consistent with general government as defined in the IMF Government Finance Statistics Manual 2001. Additional material and boxes include nonmarket nonprofit institutions, intergovernmental relations, public-private partnerships, transparent debt and asset management, and issues related to resource revenue transparency.

29. The second chapter, which now focuses on the budget process, begins with new material on budget calendar requirements, the need for budget realism, and transparency of supplemental budgets. New boxes have been added covering topics on fiscal responsibility and transparency laws, poverty and social impact analysis, extrabudgetary activities, performance-based budgeting, and international public sector accounting standards.

30. The third chapter, which now discusses publication and reporting content requirements, includes new material on the separate identification of major revenue receipts, a citizens’ guide to the budget, types of nondebt liabilities, transparency of natural resource assets, periodic reporting on long-term public finances, government guarantees, and freedom of information acts.

31. The fourth chapter continues to cover issues related to data quality and assurances of integrity, but now includes new information on accounting standards, transparency in revisions of historical data or reclassification, transparency requirements in the sale of public assets including privatization, the INTOSAI Lima Declaration, and INTOSAI guidelines for internal control standards.

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