The African Department
Monitoring and Managing Fiscal Risks in the East African Community
Paolo Mauro, Hervé Joly, Ari Aisen, Emre Alper, Francois Boutin-Dufresne, Jemma Dridi, Nikoloz Gigineishvili, Tom Josephs, Clara Mira, Vimal Thakoor, Alun Thomas, and Fan Yang
Copyright © 2015
International Monetary Fund
Monitoring and Managing Fiscal Risks in the East African Community/prepared by Paolo
Mauro … [et al.]. – Washington, D.C. : International Monetary Fund, 2015.
pages ; cm – (African departmental paper)
“Approved by the African Department.”
Includes bibliographical references.
1. East African Community. 2. East African Monetary Union 3. Fiscal risks I. Mauro, Paolo II. International Monetary Fund. III. International Monetary Fund. African Department. IV. Title: Monitoring and Managing Fiscal Risks in the East African Community. V. African departmental paper.
ISBN: 978-1-51355-1-265 (paper)
ISBN: 978-1-51350-4-650 (Web PDF)
The African Departmental Paper Series presents research by IMF staff on issues of broad regional or cross-country interest. The views expressed in this paper are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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The paper was prepared by a staff team led by Paolo Mauro (who also initiated this project) and Hervé Joly. The main contributors to Chapter 1 are Emre Alper, Jemma Dridi, Nikoloz Gigineishvili, and Fan Yang. The main contributors to Chapter 2 are Ari Aisen, Francois Boutin-Dufresne, Vimal Thakoor, and Alun Thomas. The main contributors to Chapter 3 are Tom Josephs (FAD) and Clara Mira. The team wishes to thank Roger Nord for his encouragement and guidance at various stages of the project, IMF resident representatives in East African Community countries for their assistance in getting information, as well as other IMF colleagues who provided useful comments and advice along the way. The main conclusions of this paper were presented to Finance Ministers and Central Bank Governors or their representatives at a meeting of the Sectoral Council on Finance and Economic Affairs in November 2014; comments received from participants are gratefully acknowledged.
Monitoring and managing fiscal risks—defined as the possibility of deviations of fiscal outcomes from what was expected at the time of the budget or other forecast—are always key aspects of policymaking. Their importance in the East African Community (EAC, consisting of Burundi, Kenya, Rwanda, Tanzania and Uganda) is reinforced by the drive toward the East African Monetary Union (EAMU).1 Indeed, fiscal risks are unlikely to be fully captured by headline fiscal indicators—such as the deficit and debt of the government—that will serve as convergence criteria for the EAMU.
Common sources of fiscal risks include natural disasters or shocks to such macroeconomic variables as exchange rates and interest rates, but also the fiscal implications of bail-outs of banks, public enterprises, pension funds, and local governments, or other contingent liabilities, such as guarantees (including those embedded in public-private partnerships) and legal claims against the government. In addition, accuracy and transparency of the central government’s fiscal accounts reduce the likelihood that debts and deficits will be unexpectedly revised upward at a later stage. Indeed, lack of accurate information can be a source of risks.2
The euro area experience shows that fiscal problems in individual member countries may cause spillovers to other member countries and the monetary union as a whole. The same experience also reveals that fiscal vulnerabilities were not sufficiently captured by the headline deficit numbers tracked by the European institutions. Adverse fiscal surprises came from various sources. For Greece, the general government deficit turned out to be incompletely captured in the initially released official statistics (Figure 1). For Portugal, loss-making public enterprises and the realization of government guarantees on public-private partnerships (PPPs) imposed a heavy fiscal cost for the government (Figure 2). For Spain, and especially Ireland, problems in the banking system resulted in major fiscal consequences. In the EAC, recent history shows that debt accumulation can be faster than expected, too (Figure 3).
Figure 1.Greece: General Government Gross Debt
Sources: Authorities; and IMF staff projections.
Figure 2.Portugal: Contribution of Public Enterprises and PPPs to the General Government Debt during the Crisis
Note: SOE = state-owned enterprises; PPP = private-public partnership.
Figure 3.EAC Debt Ratio Projected for 2014: Latest Debt Sustainability Analysis versus Five Years Ago
Sources: Country authorities; and IMF staff estimates and projections.
Policymakers have paid increasing attention to the topic of fiscal risks, with a trend toward greater disclosure through statements of fiscal risks or other budgetary documents that several countries submit to parliament. In the EAC, Kenya has recently started producing a statement of fiscal risks in conformity with the Public Finance Management Act 2012, though the statement’s content could be enhanced significantly by including additional quantitative information on several risks. In Uganda, the 2015 Public Financial Management Act requires that a statement of fiscal risks be included in the National Budget Framework Papers. Such statement should list the main sources of risk to the fiscal objectives of government, quantify the impact of those risks, and provide an alternative fiscal framework based on more realistic assumptions of the key macroeconomic variables. Guidelines for the disclosure and management of fiscal risks have been discussed by the IMF’s Executive Board.3 The topic has also been given special attention in recent interactions between the IMF and the national and regional authorities, in the context of program work, surveillance, and technical assistance.4
This paper takes stock of the main fiscal risks facing the EAC partner countries. These include macroeconomic shocks (Chapter 1) and specific risks, such as the financial performance of the public enterprises, large infrastructure projects, PPPs, and pension funds (Chapter 2). In addition, weaknesses in the institutional framework are reviewed (Chapter 3). The last section concludes the paper. The objective was not to be fully comprehensive, as other significant sources of shocks (such as natural disasters and possible declines in foreign aid) are not analyzed;5 rather, it was to highlight some of the largest risks and to begin to give a sense of the potential magnitudes involved.