Governments should disclose, analyze, and manage risks to the public finances and ensure effective coordination of fiscal decision making across the public sector.

Governments should disclose, analyze, and manage risks to the public finances and ensure effective coordination of fiscal decision making across the public sector.

186. Fiscal risks are factors that may cause fiscal outcomes to deviate from expectations or forecasts. These factors comprise potential shocks to government revenues, expenditures, assets, or liabilities, which are not reflected in the government’s fiscal forecasts or reports. Fiscal risks may arise from a range of different sources, which can be classified into two main categories:

  • Macroeconomic risks. These arise when outturns differ from forecasts for key macroeconomic variables, such as GDP, inflation, unemployment, interest rates, commodity prices, and exchange rates, which are themselves important determinants of fiscal performance. Notably, sharp deviations in nominal GDP growth may have large implications for government revenues as well as expenditures, and therefore for public debt.

  • Specific fiscal risks. These arise from the realization of contingent liabilities or other uncertain events, such as a natural disaster, the bailout of a troubled public corporation or subnational government by the central government, or the collapse of a bank. Each of these events can entail both immediate and/or ongoing costs to the government because of their explicit obligations (liabilities that have a legal or contractual basis) or implicit obligations (“insurer of the last resort”), which are not established by law or contract but are based on a moral obligation of the government that reflects public expectations and interest-group pressures.

187. A country’s vulnerability to fiscal risks depends on the structure of its economy, the organization of the public sector, and the interlinkages between the public and private sectors. The materialization of fiscal risks over the past quarter of a century indicates that fiscal shocks can be large, are typically adverse, and are highly correlated with each other (Bova and others, 2016; IMF, 2016b). Of the various fiscal risks that materialized over the period 1990–2014 (see Figure 4.1):101

  • Macroeconomic shocks have been relatively frequent and costly, with public finances typically hit by their occurrence once every 12 years, with an average fiscal cost equivalent to around 9 percent of GDP.

  • Specific fiscal risks have also been costly, with public finances affected by their realization once every 12 years, on average, with an average fiscal cost equivalent to around 6 percent of GDP, and as much as 30–60 percent of GDP in some cases.

Figure 4.1.
Figure 4.1.

Costs of Fiscal Risk Realizations

Sources: Bova and others (2016); and IMF (2016b).

188. A government’s ability to respond to fiscal risks partly depends on the quality of its information about the magnitude and likelihood of potential shocks to the public finances. A comprehensive disclosure and analysis of fiscal risks can help governments to ensure that fiscal policy settings can respond to a range of potential future economic and fiscal shocks, that specific risks are actively monitored and managed, and that abrupt and disruptive changes in policy are avoided when risks materialize. Beter understanding of fiscal risks, greater transparency, and effective risk management practices can reduce the magnitude of the negative effect on the fiscal balances and the economy and can help underpin credibility in the government’s management of public finances and boost market confidence (IMF, 2012a). Because of their uncertain or contingent nature, most fiscal risks are not reflected in statistical or accounting balance sheets or official forecasts of government revenue, expenditure, or borrowing. Fiscal risks are therefore typically presented in supplements to the government’s fiscal forecasts, budgets, fiscal statistics, or financial statements.

189. While the quality of fiscal risk disclosure and analysis has improved in recent years, existing practices tend to be incomplete, fragmented, and qualitative in nature (IMF, 2016b).

  • Only around one-third of countries publish any quantitative assessment of macro-fiscal risks, primarily in the form of sensitivity analysis, with only a small number undertaking model-based scenario analyses that explore the impact of shocks on several macroeconomic parameters simultaneously. Most macro- fiscal risk analyses tend to explore only modest-sized shocks, and assume risks are independent, symmetric, and linear. Very few countries produce stochastic projections of key fiscal aggregates (fan charts) to highlight the uncertainty surrounding central forecasts.

  • A growing number of countries disclose data on specific fiscal risks in their budget documents, but only one-fifth of countries publish a comprehensive and quantified fiscal risk statement. Disclosure generally tends to focus on the maximum cost of potential liabilities, with little analysis of the probability that risks will materialize, or their expected costs.

190. Once the key risks to the public finances have been identified and analyzed, it is important to develop appropriate strategies for their management and mitigation (Box 4.1). Risk management strategies can include policy actions to reduce potential fiscal exposures, such as including allocations in the budget, establishing buffer funds, setting limits on the exposure to specific types of risk, adopting regulations to discourage excessive risk-taking by individuals or specific sectors, and using market instruments to transfer and manage risk (see Brixi and Schick, 2002; IMF, 2008; and Petrie, 2013). Decisions on whether, and how, to mitigate risks will depend on the nature of risk exposures in individual countries, the cost trade-off between mitigating and accommodating risks, and institutional capacities. Some risks may be too large to provision for, too costly to mitigate, or simply not known with a sufficient degree of precision.

The Fiscal Risk Management Toolkit

The management of fiscal risks can be divided into four stages (Figure 4.1.1):

  • (i) Identifying the sources of fiscal risks and assessing their size and likelihood of realization. The objective should be to assess the maximum possible loss as well as the most likely fiscal impact. In cases where probabilities are difficult to assign, risks may be classified into categories (e.g., probable, possible, and remote) based on judgments to assess their likelihood of occurrence.

  • (ii) Assessing which mitigating measures could be taken to reduce fiscal exposure. Such measures could be broadly categorized as (i) those that impose a direct control aimed at limiting exposure (e.g., a ceiling on the issuance or stock of guarantees); (ii) regulation charges, incentives, and other indirect measures that would reduce risk-taking behavior (e.g., bank capital adequacy requirements, guarantee fees); (iii) risk sharing (e.g., partial guarantees) that also aims to discourage risk taking; and (iv) risk transfer to avoid or minimize impact (e.g., insurance, securitization).

  • (iii) Determining whether to budget for unmitigated risks. In general, three budgetary mechanisms are available to accommodate risks—appropriations for costs, rather than cash; contingency appropriations of an appropriate size that could be tapped as needed; and buffer funds built overtime by setting aside resources for meeting the costs of larger risks should they materialize.

  • (iv) Determining whether additional fiscal headroom is needed to accommodate some or all remaining fiscal risks, and take informed decisions on building a safety margin relative to their debt ceiling.

Figure 4.1.1.
Figure 4.1.1.

Four Stages of Fiscal Risks Management

Source: IMF (2016b).

191. Sound institutional arrangements are needed for an effective and integrated approach to risk analysis and management. For a fully informed conduct of fiscal policy, the entity that plays the key role in formulating and managing fiscal policy (typically the ministry of finance) should have access to all relevant information about fiscal risks and take these risks into account when formulating fiscal targets. It should also monitor the evolution of these risks in an active manner. To support this function, several countries have established central fiscal risk monitoring and management units within the ministry of finance or state treasury.102 Such units can play an important role in helping policymakers assess the range of risks to which public finances are exposed and can propose early corrective action where possible that takes account of any systemic relationships and interactions among varying risks (Cebotari, 2008).

192. The third pillar of the Code sets out the principles and practices of effective fiscal risk disclosure, analysis, and management. It is organized around the following three dimensions:

  • 3.1. Fiscal risk disclosure and analysis: Summary reporting of macroeconomic risks, risks emanating from specific sources, and the long-term sustainability of public finances.

  • 3.2. Fiscal risk management: Disclosure and management of risks arising from discrete sources, including the government’s asset and liability holdings, government guarantees, public-private partnerships (PPPs), the financial sector, the extractive industries sector, and the natural environment.

  • 3.3. Fiscal risk coordination: Oversight and management of fiscal relations among central government, sub-national governments, and public corporations.

Dimension 3.1. Fiscal Risk Disclosure and Analysis. Governments should publish regular summary reports on risks to their fiscal prospects.

193. Summary reporting of fiscal risks is important for a complete understanding of potential threats to a country’s fiscal position and an integrated approach to managing these risks. It allows for an assessment of aggregate risk exposures across government and for the identification of systematic relationships and inter actions among risks. It facilitates examination of whether risks emanating from various sources are offsetting or enhancing one another. It can also promote a better understanding of the true state of the public finances, build support for prudent fiscal policies, lead to better risk mitigation, strengthen accountability for risk management, and facilitate better policy responses. A growing number of countries have introduced risk disclosure requirements in their fiscal responsibility or budget system laws (see Box 4.2).

Budget Laws and Fiscal Risk Disclosure—Country Examples

Australia’s Charter of Budget Honesty Act 1998 requires the prudent management of fiscal risks (Article 5(1)(a)). It specifies that the budget documentation include information on the sensitivity of the fiscal estimates to changes in economic assumptions as well as a statement of the risks, including contingent liabilities, quantified where feasible, that may have a material effect on the fiscal outlook, and government policies that have been announced (or are still under preparation) but are not yet included in the fiscal forecasts (Article 12(1) subsections (c) and (e).

Brazil’s Fiscal Responsibility Law (2000) requires the government to publish a Fiscal Risk Appendix with the annual budget, which evaluates contingent liabilities and other fiscal risks that may affect the public finances, and details measures taken by the government to manage such risks (Article 4).

The Central African Economic and Monetary Community (CEMAC)’s Directive on Transparency and Good Governance (2011) requires that annual budgets be based on realistic revenue and expenditure forecasts and that the main fiscal risks be identified and evaluated in a report released to the legislature with the budget documents.

Sierra Leone’s Public Financial Management Act 2016 requires the minister of finance to monitor and manage fiscal risks that have a material impact on the fiscal outlook, and to prepare a fiscal risk statement, which is submitted to the legislature. The fiscal risk statement also includes results of sensitivity analysis based on different macroeconomic and fiscal assumptions, as well as data on contingent liabilities.

Cyprus’ Fiscal Responsibility and Budget Systems Law (2014) requires that the minister of finance be responsible for the supervision of fiscal risks that have a significant impact on the financial perspective, and that he or she publishes with the budget a statement of the country’s financial risk exposure (Article 58).

New Zealand’s Public Finance Act 1989 (Section 26G) sets out the principles of responsible fiscal management, including the principle of “managing prudently the fiscal risks facing the government.” Section 26Q requires the government to publish a statement of specific fiscal risks and disclose the rules that define and determine such risks. The Fiscal Responsibility Act 1994 (Sections 4(2)(d) and 10(3)(b)) further reiterates these principles and disclosure requirements.

Source: National authorities.

194. Fiscal risk reporting should cover both general macroeconomic risks and summary reporting of specific fiscal risks. Accordingly, the three principles under this dimension of the Code focus on several key aspects:

  • Analyzing and disclosing how the fiscal outcomes might differ from the forecasts, as a result of macroeconomic developments (3.1.1);

  • Preparing and publishing a summary report that discusses both macroeconomic risks and the main specific risks (3.1.2); and

  • Preparing and publishing projections of the long-term evolution of the public finances (3.1.3).

195. An increasing number of countries produce summary reports in the form of a fiscal risk statement as part of their budget documentation. Such a statement usually includes a discussion of past experience with the materialization of risks, forward-looking estimates for various types of risk, and a discussion of policies to mitigate and manage risks.103 A comprehensive fiscal risk statement helps to identify possible gaps and to ensure full coverage of risks (Box 4.3). Its content should reflect the key fiscal risks facing a country and their evolving circumstances. Several countries—including Australia, Brazil, Chile, Colombia, Georgia, Indonesia, Kenya, New Zealand, Pakistan, the Philippines, and South Africa—consolidate information on fiscal risks in a single published document.

Table 4.1 provides a list of relevant standards, norms, and guidance material related to dimension 3.1 of the Code.

Example of Outline of a Comprehensive Statement of Fiscal Risks

Macroeconomic Risks: Comparison of recent macroeconomic assumptions included in the budget against outcomes; sensitivity of aggregate revenues, expenditures, budget balance, and debt to variations in key economic assumptions; alternative macro-fiscal scenarios, or probabilistic fan charts.

Public Debt: Sensitivity of the stock of debt and debt-servicing costs to variations in key parameters (e.g., interest rates and exchange rates); discussion of debt management strategies; and summary results of debt-sustainability analysis.

Government Lending Programs: A policy framework for lending programs; the stock of outstanding loans in aggregate and by borrower, or borrower category; the purpose of loans; and details of loan performance (including disclosure of nonperforming loans, outstanding amounts, or any history of loan restructuring).

Government Guarantees: The policy purpose of guarantees and any guarantee programs; intended beneficiaries; total guaranteed amounts (gross exposure); the likelihood that guarantees will be called (where appropriate and feasible) and the associated costs; the history of guarantee calls (i.e., amount of government payments on servicing guaranteed loans); information on any recoveries; guarantee fees; and budget provisions.

Public-Private Partnerships (PPPs): Details of government obligations under PPPs, both direct commitments and any obligations related to contingent liabilities arising from the risks assumed by the government.

Public Corporations: Any explicit obligations to public corporations not disclosed elsewhere in the fiscal risk statement; the aggregate financial position of the sector; recent financial performance (including information on loss-making entities, and key financial risk indicators); transactions with the government; and quasi-fiscal activities.

Subnational Governments: A summary of the recent financial performance and position, and financial exposures of states and local governments, and any explicit obligations of the central government to subnational governments not disclosed elsewhere.

Financial System: Any explicit liabilities to the financial sector, not disclosed under guarantees; the size of the financial sector; an assessment of the soundness of the financial system and its regulation, drawing on a comprehensive, accurate, and systematic analysis of financial stability.

Natural Disasters: Discussion of the country’s exposure to natural disasters; the direct fiscal impact of natural disasters in recent years; allowance for natural disaster-related costs in the budget; a summary of the government’s disaster risk management strategy, including catastrophe risk insurance.

Legal Claims: Discussion of any legal claims pending against the state and, where feasible, estimates of gross exposure (such as plaintiff claims).

Other Material Fiscal Risks1: Such as geopolitical or security risks where relevant; the gross exposure of indemnities, warranties, uncalled capital, or a summary of obligations where they cannot be quantified; other fiscal commitments not included in the fiscal forecasts because their timing or magnitude is uncertain; and risks to tax and nontax revenues, for example, from tax base erosion, avoidance, and evasion.

1Some countries have imposed materiality thresholds for fiscal risk disclosure, based on the maximum gross exposure in any one year or over the medium-term forecast period. IPSAS also provides for a definition of materiality. See http://www.ifac.org/sites/default/fles/publications/fles/B12%20Glossary2013_0.pdf.Source: IMF staff.
Table 4.1.

Relevant Standards, Norms, and Guidance Material

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Principle 3.1.1. Macroeconomic Risks The government reports on how fiscal outcomes might differ from baseline forecasts as a result of different macroeconomic assumptions.

196. Macroeconomic shocks are typically the most common and one of the largest sources of fiscal risk for any country, and should be considered in fiscal policymaking. Sudden changes in fiscally relevant macroeconomic variables can result in sharp changes in government deficits and debts.104 Fiscal deficit targets may be missed because of macroeconomic shocks, such as a slowdown in economic activity, which in turn reduce revenue collections and increase unemployment benefits or other social safety net outlays. Government liabilities may increase rapidly if the exchange rate suddenly depreciates and debts are denominated in foreign currencies. Another very common shock relates to fluctuations in commodity prices, which can have a significant impact on the budget in countries that rely on internationally traded commodities for a large share of their exports and government revenue, or that subsidize imported goods such as fuel and food.

Levels of Practice for Principle 3.1.1

Basic Practice: Budget documentation includes a discussion of the sensitivity of fiscal forecasts to major macroeconomic assumptions.

197. A basic understanding of the scale and sources of macroeconomic risks can come from analyzing the sensitivity of fiscal forecasts to changes in macroeconomic assumptions. These include GDP growth, inflation, and interest rates (see Box 4.4 for Brazil example). Other parameters are more country-specific, such as exchange rates and key commodity prices and/or aid flows105 (particularly in aid-dependent countries). The simplest means of illustrating the sensitivity of the public finances to these changes is to present the impact of a 1 percent change in each macroeconomic aggregate on government borrowing for the year ahead. A more sophisticated approach is to base the change in the value of each macroeconomic aggregate on its historical volatility or forecast error, and show its impact not only on government borrowing but also on government expenditure, revenue, and debt over the medium term.

Brazil: Sensitivity Analysis in the Statement of Fiscal Risks

In Brazil, the statement of fiscal risks published every year provides some analysis of the sensitivity of revenues, expenditures, and debt to key macroeconomic indicators. Annex V of the Draft Budget Guidelines Law (PLDO) on fiscal risks devotes a few paragraphs to macroeconomic risks. It provides a series of sensitivity analyses (impact of a 1 percentage point change in GDP, inflation, the exchange rate, policy interest rate, and the wage bill) on total tax revenue and total social security revenue; and the impact of a 1 percent change in the exchange rate, inflation rate, and policy interest rate on expenditure and debt. Moreover, a new feature of the PLDO 2017 report (published in April 2016) is the presentation of an alternative macroeconomic scenario for the years 2016 and 2017, with the consequences for the projections of selected revenues and expenditures. This analysis, however, does not cover all key variables of interest in assessing fiscal policy—notably, the budget balance and gross financing needs.

Source: IMF (2017a).
Good Practice: Budget documentation includes both sensitivity analysis and alternative macroeconomic and fiscal forecast scenarios.

198. Good practice requires quantification of the impact of alternative macroeconomic scenarios on the fiscal aggregates. Scenario analysis assesses the impact on public finances of plausible shocks to several macroeconomic indicators simultaneously. The analysis typically includes an optimistic scenario (e.g., higher GDP growth, lower unemployment, and higher inflation) and a pessimistic scenario (e.g., lower GDP growth, higher unemployment, and lower inflation). These scenarios should be developed within a coherent macroeconomic framework or an integrated macroeconomic model. They should also be tailored to the types of macroeconomic shock to which a country is exposed. For example, countries with a high exposure to commodity prices or international trade should develop scenarios that involve shocks to commodity prices and global demand, in addition to changes in domestic demand. The budget documentation should disclose the various assumption underlying each of the scenarios and their impact on the main fiscal aggregates (revenue, expenses, deficit, and debt). In addition, the government might discuss how its fiscal strategy would change should the economic and fiscal outlook be different to the forecast.106 Examples from New Zealand and the Philippines are shown in Box 4.5.

New Zealand’s Macro-Fiscal Scenario Analysis and the Philippines’ Fiscal Risk Statement

New Zealand produces two alternative macro-fiscal scenarios, which are presented in the annual Budget Economic and Fiscal Update. The scenarios show how the economy might evolve if some of the key judgements in the main forecasts are altered. The underlying economic assumptions for the main forecast and two scenarios are disclosed for real and nominal GDP, inflation, and the unemployment rate, along with the impact on the net operating balance and government debt over the medium-term forecast period. The scenarios are based on plausible alternative outcomes. For example, the 2016 Budget presents one scenario that illustrates the economic and fiscal impact of weaker trading partner growth, which flows through to reduced demand for exports, and lower terms of trade, exchange rate, and inflation relative to the baseline forecast, as well as a lower nominal GDP forecast. A second scenario is presented that shows the impact of stronger net migration, which flows through to higher house price growth, consumption, and building investment, with consequent stronger inflation, employment, and nominal GDP growth relative to the baseline forecast. The impact on tax revenues, net operating balance, and government debt of these alternative macroeconomic parameters is also assessed and presented in the Economic and Fiscal Update.

The Philippines prepares a fiscal risk statement (FRS), which analyzes macroeconomic risks and evaluates the impact of a series of macroeconomic shocks on government revenue, spending, and the fiscal balance. The budget documentation includes a table to show how the accuracy of underlying macroeconomic assumptions used in projecting the annual budget affects fiscal outturns, and in particular the sensitivity of fiscal accounts to various macroeconomic variables. In this sensitivity analysis, macroeconomic shocks are standardized rather than calibrated to the actual risks faced by the Philippine economy. The report also simulates national government debt under two extreme growth scenarios. Finally, a fan chart presents a range of debt paths using the historical volatility of macro-financial data. The FRS includes other charts and tables showing the implications of macroeconomic volatility on fiscal outcomes.

Sources: The Treasury, Government of New Zealand (2016); and IMF (2015e).
Advanced Practice: Budget documentation includes sensitivity analysis, alternative scenarios, and probabilistic forecasts of fiscal outcomes.

199. The most sophisticated forms of macro-fiscal risk analysis present probabilistic fiscal forecasts that provide a set of confidence intervals around the government’s central fiscal forecast. These probabilistic forecasts typically take the form of “fan charts” to illustrate the degree of uncertainty inherent in the forecasting process as well as the distribution of risks above and below the government’s central prediction. Unlike a single or “point” forecast, which represents only one possible future outcome, different outcomes—with varying degrees of probability—are possible. A fan chart presents a range of different outcomes that have varying degrees of probability (based on past official forecast errors), as illustrated with an example from the United Kingdom in Box 4.6. The IMF’s Debt Sustainability Analysis (DSA) framework includes the generation of fan charts under a series of standard scenarios, which generally assume unchanged policies and nonpersistent shocks. Complementary approaches (based on country-specific vector autoregression models, for example) can go beyond DSA and capture the persistence of shocks over time and the correlation between different shocks, as well as the impact of the realization of contingent liabilities. As another development of advanced practice, some governments have begun to use fiscal stress tests to examine the impact of extreme shocks to public finances (IMF, 2016a).

United Kingdom: Fan Charts of Macro-Fiscal Aggregates

In the United Kingdom, the official forecasts produced by the Office of Budget Responsibility (OBR) include fan charts (Figure 4.6.1) of the main macroeconomic and fiscal aggregates. The fan charts display the probability distribution of possible future paths for each variable and are generated using the standard deviation of previous forecast errors. On the assumption that past forecast errors are a good guide to future forecasts errors, this approach offers a visually attractive way to demonstrate uncertainty around the baseline projections.

Figure 4.6.1.
Figure 4.6.1.

UK Public Sector Net Borrowing Fan Chart (2008/09–2020/21)

Source: United Kingdom authorities.

Principle 3.1.2. Specific Fiscal Risks The government provides a regular summary report on the main specific risks to its fiscal forecasts.

200. In addition to macroeconomic risks, public finances are also subject to specific risks generated from discrete sources and events. As illustrated in Box 4.7, specific risks can be large and may arise from a variety of sources such as the financial sector, legal claims, subnational governments, public corporations, PPPs, natural disasters, and variations in the valuation of government assets and liabilities. Some specific fiscal risks are also highly correlated both with one another and with macroeconomic shocks, which can amplify their impact on public finances. Macroeconomic downturns tend to trigger the realization of other shocks, such as the failure of financial institutions, severe financial stress on public corporations and subnational governments, the calling of guarantees, and other contingent liabilities. The inclusion of information on specific fiscal risks in the annual budget documents helps to ensure that these risks are understood, actively managed, and incorporated in the government’s macroeconomic and fiscal strategy.

Specific Fiscal Risks: Sources and Magnitude

A survey of specific fiscal risk materializations during the period 1990–2014, and across 80 advanced and emerging market economies, revealed that specific fiscal risks can have a large impact and are highly correlated with each other (see Table 4.7.1). On average, these specific fiscal risks occur every 12 years and have an average fiscal cost of around 6 percent of GDP. However, the distribution of fiscal costs has a long tail, with several episodes costing more than 10 percent of GDP, and in a few cases more than 20 percent of GDP.

Table 4.7.1.

Fiscal Cost of Specific Contingent Liability Realizations (1990–2014)

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Source: Bova and others (2016).

201. There are two broad categories of specific fiscal risks: explicit risks and implicit risks.107 Explicit risks are those where the government has a clear and firm obligation, or a declared policy, to provide fiscal support should a predefined event occur. Examples include explicit government guarantees, indemnities, public insurance schemes, or legal action against the government. Implicit risks, on the other hand, arise where there is no explicit (legal or contractual) obligation or policy to provide fiscal support, but there is an expectation that the government would do so should the risks materialize. Examples include bailouts of the financial sector to prevent systemic crises, support subnational governments or public corporations should they get into financial difficulty, and assistance to victims of natural disasters.

202. Governments should aim to disclose all explicit fiscal risks, as they represent a commitment of public resources, which must be provided for should the risks materialize. However, in the case of certain risks, the benefits associated with greater public awareness may need to be weighed against the potential costs. Specifically, disclosure of the magnitude or likelihood of certain risks could give rise to moral hazard, that is, behavioral responses by private agents that increase the likelihood of the risk materializing, or increase its potential cost. This is particularly pertinent for implicit risks but could also apply to certain explicit risks. For example, disclosure of the government’s expectations about the outcome of a pending court case may prejudice its legal position. For this reason, some governments (e.g., New Zealand) include in the disclosure of exposure to legal claims a disclaimer that reporting the gross amount of the legal claim does not indicate government’s acknowledgment of any liability.108 Similarly, disclosing the potential need to provide fiscal support to a bank could trigger a run on that institution. However, following the global financial crisis, the case for disclosing more information on implicit fiscal risks related to the financial sector (as opposed to an individual financial institution) is stronger—see the discussion on Principle 3.2.5.

203. Ministries of finance should be responsible for coordinating the collection of data on fiscal risks. Some of these data should be readily available within the finance ministry (e.g., on the risks associated with public debt) or the revenue collection agencies. The collection of information from public corporations or subnational governments, however, can be a complex exercise, often involving line ministries and other agencies. The data collection process can be facilitated by the incorporation of disclosure requirements in accounting standards—for example, with respect to contingent liabilities and PPPs—and by stipulating that the required information (e.g., on guarantees and indemnities, or legal actions against the state) be published along with the budget documentation.

Levels of Practice for Principle 3.1.2

Basic Practice: The main specific risks to the fiscal forecasts are disclosed in a summary report and discussed in qualitative terms.

204. A basic level of practice is to list and discuss the main specific risks in qualitative terms, even if there is no estimation of their cost or the likelihood that they will materialize. The value of such disclosures is that they raise awareness among policymakers and the public regarding the existence and nature of the risks concerned. All the information on specific fiscal risks should be summarized in a single report, even if details are presented in a variety of other documents such as reports on public debt, financial stability, the public corporation sector, and local government finances. See Box 4.8 for the example of Tanzania and Côte d’Ivoire on the disclosure of fiscal risks.

Tanzania and Côte d’Ivoire: Disclosure of Fiscal Risks

Since 2015, Tanzania has produced a fiscal risk statement as part of the fiscal surveillance framework in the East African Community (EAC). The statement discusses the factors that expose the country to fiscal risks, including macroeconomic parameters and assumptions, unpredictable oversees development assistance, civil service pension liabilities, public corporations, PPPs, and public debt. See http://www.mof.go.tz/mofdocs/news/latest%20news/FISCAL_RISK_STATEMENT.pdf.

Since 2013, Côte d’Ivoire has produced a medium-term fiscal and budget planning document (Document de Programmation Budgétaire et Economique Pluriannuelle, DPBEP), which includes a qualitative assessment of fiscal risks. The assessment distinguishes between risks that could hamper revenue mobilization and those which could affect budget execution. Factors discussed include the political environment, macroeconomic parameters such as commodity prices, interest rates and exchange rates, tax fraud and evasion, natural disasters, and delays in investment projects. See http://budget.gouv.ci/sites/default/fles/Donnees-budgetaires/13-dpbep_2016_2018_mis_a_jour_apres_an30_dec_15.pdf.

Good Practice: The main specific risks to the fiscal forecast are disclosed in a summary report, along with estimates of their magnitude.

205. In addition to disclosing the main risks to the public finances, good practice requires some quantification of risks. At a minimum, these estimates could include the maximum exposure associated with the liabilities concerned (e.g., the face value of government loan guarantees, or the total bank deposits covered by a government deposit-guarantee scheme). Providing such data helps to inform the prioritization of actions to mitigate and manage risks. Collating the quantitative information into a single summary report also makes it possible to consider potential interactions among risks, as well as the government’s combined gross exposure. Regular publication of a quantitative fiscal risk statement enables policymakers and the public to track the evolution of risks over time, and the extent to which the risks identified have diminished, increased, or materialized (an example from the Philippines is in Box 4.9). In some cases, it may not be possible to quantify reliably risk exposures (e.g., fulfilment of indemnities). In these instances, governments should still disclose the nature of the risk in qualitative terms.

Philippines: Fiscal Risk Statement

The Philippines’ annual Fiscal Risk Statement provides a comprehensive view of the country’s exposure to macroeconomic risks and contingent liabilities associated with the financial sector, government-owned and/or controlled corporations, PPPs, local governments, and natural disasters. The report provides a quantification of many risks and summarizes the government’s policies to manage and mitigate them. See http://www.dbm.gov.ph/index.php/dbcc-matters/dbcc-publication/fiscal-risk-statement.

Source: Philippine authorities.
Advanced Practice: The main specific risks to the fiscal forecast are disclosed in a summary report, along with estimates of their magnitude and, where practicable, their likelihood.

206. Advanced practice requires disclosing the likelihood of risks materializing, in addition to quantifying the government’s gross exposure. This practice provides a more realistic picture of how risks might impact on the budget and a better estimate of the policy changes that might be required during the budget year to keep to the government’s announced fiscal target.109 In addition to the disclosure of fiscal risks, it is useful to provide an explanation of how these risks have been taken into consideration in setting the government’s overall fiscal stance, and what policies the government is pursuing to reduce and manage these risks. Publishing estimates of the expected costs of risks materializing (based on historical or a probabilistic analysis) could also be considered, as shown in the example from Chile in Box 4.10. In cases where estimates of the probability of realization are too difficult, risks may be classified into categories (e.g., probable, non-remote, and remote) based on judgements about their likelihood.

Chile: Reports on Contingent Liabilities

In Chile, an annual report on contingent liabilities, published since 2007, includes estimates of the present value of committed government payments under concession contracts for public works, as well as two measures of the risks associated with minimum-revenue guarantees—first, an estimate of maximum possible losses and, second, the present value of expected guarantee payments (which depend implicitly on probability estimates).

Source: Irwin and Mokdad (2010).

Principle 3.1.3. Long-Term Sustainability Analysis The government regularly publishes projections of the evolution of public finances over the longer term.

207. Social and economic trends and new policy commitments by the government can have significant effects on the public finances over the longer term. Increased transparency in this area will help improve the understanding of the future costs of current policy decisions, manage long-term risks and pressures on the public finances, and increase support for sound macroeconomic and fiscal policies.

208. Long-term projections can be particularly valuable in the following areas:

  • Public debt. Understanding how public debt dynamics are likely to evolve in the future can help identify unsustainable fiscal policies.

  • Demographics and social policy. Many advanced and emerging economies have ageing population profiles, which over the next few decades could create significant expenditure pressures in areas such as pensions, health, and long-term care (see Box 4.11), as well as reducing the tax base.

  • Natural resources. Countries with a reliance on finite natural resources need to plan for the long-term impact on the public finances of the depletion of these resources and the loss of associated revenues.

  • Economic growth. Some productivity and growth-enhancing reforms may have fiscal benefits that are relatively small in the short term but become critical to sustainability when viewed over a longer-term time horizon.

  • Environmental consideration. For some countries, costs related to climate change mitigation and adaptation can be substantial and put pressure on public finances.

Fiscal Implications of Demographic Changes

Demographic changes are anticipated to increase expenditure pressures significantly for most countries (see Figure 4.11.1). Increases in pension expenditures are projected to increase by around 2 percent of GDP by 2050, while health spending is projected to increase by around 3 percent of GDP. The increase is anticipated to be greatest for advanced economies, most of which have large and beneficial social security systems.

Figure 4.11.1.
Figure 4.11.1.

Increase in Health and Pension Costs (2015–50)

Source: IMF staff.

Levels of Practice for Principle 3.1.3

Basic Practice: The government regularly publishes projections of the sustainability of the main fiscal aggregates and any health and social security funds over at least the next 10 years.

209. At a basic level, countries should produce projections of the fiscal balance and public debt obligations over a decade into the future. These projections can take the form of a relatively simple DSA, where realistic assumptions about the primary fiscal balance, GDP growth rates, and interest rates are used to project how public debt110 will evolve. This analysis can be used to identify whether public debt is on a sustainable or increasing path and, by incorporating some sensitivity analysis, can also provide guidance on how public debt will evolve under less favorable conditions. Where a country has extrabudgetary funds that provide substantial health-related or social welfare benefits, projections of the expenditures, revenues, and balances of the funds for the next 10 years and more will help identify any funding gaps that may become a claim on the budget. These projections should ideally be based on actuarial projections, but at a minimum they should use macroeconomic assumptions consistent with the DSA, and use demographic projections to identify spending pressures.

Good Practice: The government regularly publishes multiple scenarios for the sustainability of the main fiscal aggregates and any health and social security funds over at least the next 30 years using a range of macroeconomic assumptions.

210. Extending the projections 30–50 years into the future usually requires significantly more sophisticated modeling approaches to capture the full impact of demographic factors. Such long-term projections should include information on the key fiscal aggregates—namely, revenues, expenditures, the fiscal balance, and public debt—and, where possible, some key balance sheet information.111 They should also explicitly present the results of demographic-related modeling and explain the methodology and assumptions underlying these projections. In addition, they should discuss the key implications of the projections for policy, such as identifying fiscal gaps, increases in public debt, and slowdowns in potential GDP growth rates.

211. Given the great uncertainty around projecting fiscal variables 30 years or more into the future, and the importance of the macroeconomic assumptions underlying them, long-term sustainability analysis should also include sensitivity analysis. Long-term projections are highly uncertain and sensitive to the underlying assumptions used, such as productivity, labor market participation, cost inflation, and population growth. It is thus important that these assumptions are explained transparently and supplemented with sensitivity analysis and alternative scenarios. For example, the impact on fiscal aggregates of different assumptions about GDP growth—through productivity, participation, or population growth—can be large and should be quantified and discussed. This gives not only a sense of the sensitivity of each variable but also a guide to whether favorable economic conditions would be enough to resolve any projected fiscal pressures or whether policy changes may be required.

Advanced Practice: The government regularly publishes multiple scenarios for the sustainability of the main fiscal aggregates and any health and social security funds over at least the next 30 years using a range of macroeconomic, demographic, natural resource, or other assumptions.

212. Advanced practice provides a greater range of sensitivity analyses, particularly tailored to a country’s economic structure. In addition to the macroeconomic assumptions, the projections should explore variations in demographic projections. Different assumptions about birth, mortality, and migration rates may have a large impact on the fiscal aggregates. Similarly, for natural-resource-producing countries, differences in commodity prices and extraction rates can have significant implications for the ability to fund future expenditures. The impact of different scenarios for nondemographic cost drivers can also be explored for certain spending categories, such as the impact of technological advances on the cost of healthcare services. As baseline projections usually assume that current policies are maintained into the future, scenarios can also be constructed to illustrate the impact of alternative policy changes on long-term sustainability. An example from Australia is provided in Box 4.12.

Australia: Intergenerational Reports

The Australian Federal Government publishes an intergenerational report, at least once every five years, assessing the long-term sustain-ability of public finances under current government policy settings.

Publication of this report is a requirement of the Charter of Budget Honesty Act, 1998. The report contains macroeconomic and fiscal projections (for both the budget balance and the key balance sheet aggregates) over a 40-year period. It includes analysis of the key drivers of economic growth and the demographic assumptions underpinning these projections. The report contains 40-year spending projections for each of the main areas of government spending, including health, education, pensions, other social benefits, and defense. It also includes a sensitivity analysis detailing how the long-term macroeconomic and fiscal projections change in response to alternative macroeconomic and demographic scenarios.

Source: Commonwealth of Australia (2015).https://treasury.gov.au/publication/2015-intergenerational-report/what-is-the-intergenerational-report.

Dimension 3.2. Fiscal Risk Management. Specific risks to the public finances should be regularly monitored, disclosed, and managed.

213. The seven principles under this dimension of the Code focus on several key aspects:

  • Making adequate allocations for contingencies that arise during budget execution (3.2.1);

  • Identifying and managing risks relating to major public assets and liabilities (3.2.2);

  • Regulating government guarantees and disclosing related risk exposure (3.2.3);

  • Regularly disclosing and controlling obligations under public-private partnerships (3.2.4);

  • Analyzing and managing the government’s fiscal exposure to the financial sector (3.2.5);

  • Valuing and managing the government’s ownership and exploitation of exhaustible natural resource as-sets and associated risks (3.2.6); and

  • Analyzing and managing fiscal exposure to natural disasters and major environmental risks (3.2.7).

214. In addition to their disclosure, specific fiscal risks should be regularly monitored and effectively managed. Regular monitoring enables policymakers to take measures that reduce risks before they materialize or to accommodate them in budget planning. A broad range of instruments is available to mitigate fiscal risks (Box 4.13).

215. To enhance transparency, governments should disclose their strategies for managing risks. Such strategies should specify the conditions under which the government is prepared to accept specific fiscal risks (e.g., to address market failures);112 define the level of risk it is willing to bear; specify the decision-making processes to be carried out by the government (e.g., a requirement for guarantees to be authorized by the finance minister, the cabinet, or the legislature); and define the instruments that can be used to manage risks.

Table 4.2 provides a list of relevant standards, norms, and guidance material related to dimension 3.2 of the Code.

Instruments for Managing Specific Fiscal Risks

Direct controls, ceilings, or caps: These instruments are commonly used to limit governments’ total exposure to risk and are most effective where the risks are endogenous to the public sector. Examples of direct controls include annual or multi-annual limits on guarantees, quantitative limits on subnational borrowing and/or requiring subnational governments to comply with fiscal rules, limits on contingent liabilities from PPPs, or caps on the payments associated with government insurance schemes. Governments can also place controls on the creation of certain liabilities, by requiring their prior approval by the minister of finance, the cabinet, or the legislature.

Regulations, incentives, and other indirect measures: These instruments vary depending on the type of risk faced and are generally used where the risks are influenced by the behavior of private counterparts. They usually take the form of regulating individuals or entities that are a source of risk, or providing incentives that discourage excessive risk taking. Examples include requiring banks to hold certain amounts of capital, setting and enforcing performance targets on the boards of public corporations, requiring value-for-money assessments of PPPs, and imposing building requirements in areas prone to natural disasters.

Risk transfer, sharing, or insurance mechanisms: Examples of risk transfer instruments include hedging commodity price risk, insuring public assets against the impact of natural disasters, securitizing or insuring government guarantee schemes; or charging risk-related fees or insurance premiums to beneficiaries of government guarantees.

Budget provisions: Governments can provide for funds by expensing costs up front in the budget (e.g., the expected cost of guarantees), creating budget contingencies for specific risks (e.g., contingency funds for natural disasters, or incorporating buffers into expenditure and revenue projections), or creating stabilization funds that protect commodity exporters from the impact of lower prices.

Some risks may be too large to provision for in the budget, too costly to mitigate, or simply not known with a sufficient degree of precision. Governments should therefore assess whether sufficient fiscal headroom exists to accommodate these risks should they materialize. For example, governments can take account of risks in setting long-term targets for government debt or net worth (as in New Zealand), or at least ensure they have a sufficient safety margin relative to the debt ceilings defined in their fiscal rules.

Policymakers may elect to adopt a combination of mitigating measures to manage specific risks and to tailor the approach to prevailing country circumstances. For example, the use of buffer funds can be helpful for countries that do not have access to global capital markets, as they avoid the need for abrupt changes in fiscal policy.

Source: IMF (2016b).
Table 4.2.

Relevant Standards, Norms, and Guidance Material

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Principle 3.2.1. Budgetary Contingencies The budget has adequate and transparent allocations for contingencies that arise during budget execution.

216. Because budgets represent plans for the upcoming year, and some events are uncertain, governments should establish policies to deal with contingencies. Countries use a variety of procedures and mechanisms to address uncertainties during in-year budget execution. These mechanisms include unallocated contingency appropriations, virement (transfers) of spending authority within and between appropriations, and supplementary budgets (the later two are covered under Principle 2.4.2). The use of budgetary contingencies can help in managing in-year budget uncertainties. It is important, however, that the use of such mechanisms is limited so that they do not reduce budget credibility or restrict legislative and public accountability for the use of public resources. Therefore, contingency reserves should be presented clearly in the budget and there should be transparent criteria in place governing the circumstances under which they can be used. Further, all drawdowns of budgetary contingency reserves should be transparently reported in budget execution and year-end reports.

Levels of Practice for Principle 3.2.1

Basic Practice: The budget includes an allocation for contingencies.

217. At the level of basic practice, the budget should include an adequate provision for general contingencies. The benefit of such an appropriation is that urgent but unforeseen needs can be met without seeking additional appropriations or having to cut spending elsewhere, which may lead to the incurrence of arrears. The size of the contingency reserve113 should not be so large as to undermine budget discipline nor so small as to be consistently exhausted part way through the year. In most countries, this implies a contingency appropriation of between 1 percent and 3 percent of total budgeted expenditure (Figure 4.2). However, countries facing greater uncertainty may want to base the size of the reserve on past overspending against the annual budget. Any unused contingency appropriation should lapse at the end of the budget year and not be carried forward to the next financial year.

Figure 4.2.
Figure 4.2.

Size of Contingency Reserves in Selected Countries

(Percentage of Total Expenditure)

Sources: IMF Fiscal Transparency Evaluations; OECD Budget Practices; and country budget documentation.
Good Practice: The budget includes an allocation for contingencies with transparent access criteria.

218. Publishing a set of criteria that must be met before expenditure may be charged to the contingency reserve helps ensure that these funds are utilized only for genuine contingencies. The criteria may be set in the budget law or regulations (see Box 4.14 for an example on South Africa). Such criteria would require that, for an expenditure to be charged against the contingency appropriation, it:

  • must be urgent and cannot reasonably be held over for consideration in a supplementary budget or the next annual budget round;

  • must be unforeseeable;

  • must be unavoidable; and

  • cannot be absorbed from within existing budget appropriations.

South Africa: Contingency Reserve Access Criteria

It is sometimes easier for contingency spending to be defined by what it is not rather than what it is. In South Africa, for example, the guidelines state that unforeseen and unavoidable expenditures do not include (i) spending that was known when the main budget was prepared but could not be accommodated in the allocation at that time; (ii) spending increases due to tariff adjustments or price increases; or (iii) spending to extend existing services or create new services that are not foreseeable and avoidable. Spending made necessary by adverse weather conditions is an example of unforeseeable and unavoidable expenditure.

Source: National Treasury, Republic of South Africa (2014).
Advanced Practice: The budget includes an allocation for contingencies with transparent access criteria and regular in-year reporting on its utilization.

219. Reporting on the use of contingency appropriations ensures that these resources are ultimately spent as intended by the legislature. Monthly budget execution reports should show the allocation of the expenditures authorized through the contingency appropriation to the relevant budget head, in accordance with the government’s administrative, economic, and functional/program classification. Transfers from contingencies to specific lines of the budget should be notified to the legislature in these reports. In addition, the midyear report to the legislature on budget implementation should include information on the usage of contingency appropriations and their conformity with the access criteria discussed earlier. Spending from contingency appropriations should also be subject to external audit.

Principle 3.2.2. Asset and Liability Management Risks relating to major assets and liabilities are disclosed and managed.

220. A government’s assets and liabilities can be significant sources of fiscal risk.

  • On the liability side: The risks include uncertainty about future interest rates and the ability to refinance maturing bonds and, when debt is denominated in foreign currencies, uncertainty about future exchange rates. Pension liabilities are also subject to risks, including those related to changes in the projections of life expectancy and changes in contributions, entitlements, and indexation.114

  • On the asset side: Some governments have large portfolios of financial assets held, for example, in sovereign wealth funds. The value of these portfolios of bonds and equities tend to be volatile. As discussed in Principle 3.3.2, governments may also have large equity positions in public corporations, which require careful oversight and management, as well as loan portfolios, extended either directly or on-lent from international financial institutions to other public entities (public corporations, subnational governments) or third parties. These loans can give rise to fiscal risks because the central government is left bearing the debt or servicing charges should creditors fail to meet their repayment obligations. The value of nonfinancial assets may also be exposed to risks, such as from natural disasters, the property cycle, and a deterioration in the physical condition of the assets and the need for replacement.115

221. Analyzing, disclosing, and managing risks related to assets and liabilities requires full and reliable information on their market value. Nearly all governments maintain a register of the bonds they have issued and the loans they have contracted, which makes it possible to report on the risks related to these assets and liabilities. Sovereign wealth funds and other government asset managers typically also maintain information on their investment portfolios. Many governments have established state property registries that record and value their nonfinancial assets (e.g., buildings and motor vehicles), although these registers are not always comprehensive. Analysis of the overall risks to the government, however, requires the construction of a balance sheet, which is less common (see Dimension 1.2 discussed earlier), as well as estimates of the correlations among the values of major assets and liabilities—that is, the extent to which their values tend to move together.116

222. Governments should put in place strategies to manage risks associated with their assets and liabilities. These strategies should set out the government’s overall financial objectives and procedures for managing the cost/risk trade-offs within an integrated asset and liability management framework.117 Such a framework considers the various types of assets the government manages and explores whether the financial characteristics associated with those assets can provide insights for managing the cost and risk of the government’s liability portfolios. This analysis involves examining the financial characteristics of the asset cash flows, and selecting liabilities with matching characteristics to help smooth the budgetary impact of shocks on debt servicing costs. The analysis of cash flows also provides a basis for measuring the risks of the liability portfolio and measuring cost/risk trade-offs relevant for deciding the appropriate debt portfolio (IMF, 2014d).118 Many governments publish medium-term debt management strategies (see Box 4.15) that explicitly recognize the relative costs and risks associated with their debt portfolio, and describe how the government intends to meet its financing objectives at the lowest possible cost, consistent with a prudent degree of risk. Countries that have financial asset portfolios often publish investment strategies that set out the types of instruments the government can invest in, and their expected rate of return, having regard to the government’s risk tolerance.

Medium-Term Debt Management Strategy

A medium-term debt management strategy (MTDS) operationalizes country authorities’ debt management objectives—for example, to ensure that the government’s financing needs and payment obligations are met at the lowest possible cost, consistent with a prudent degree of risk. An MTDS has a strong focus on managing the risk exposure embedded in the debt portfolio—specifically, potential variations in the cost of debt servicing and its impact on the budget—and how cost and risk vary with the composition of the debt. While a sound MTDS can be developed without the use of a quantitative tool, the use of scenario analysis enables debt managers to quantify the potential risks to the budget of alternative debt management strategies.

In principle, the MTDS should cover total nonfinancial public-sector debt. This comprises the debt of the central government (budgetary, extrabudgetary, and social security funds), state and local governments, and nonfinancial public corporations. In practice, however, it is often useful to initially focus on central government debt, where in general data are more readily available. Extending the scope of the MTDS beyond the central government would require some element of central government control on the borrowing decisions of state and local governments and nonfinancial public corporations.

The focus of the MTDS is typically on actual direct liabilities of the government rather than contingent liabilities. Nevertheless, contingent liabilities may have an important bearing on the sustainability of debt and the robustness of the MTDS. Consequently, it would be prudent to consider the potential risk that contingent liabilities could materialize under specific scenarios.

Sources: IMF and World Bank (2009, 2017); and IMF (2014d).

Levels of Practice for Principle 3.2.2

Basic Practice: All borrowing is authorized by law and the risks surrounding the government’s debt holdings are analyzed and disclosed.

223. Basic practice requires a sound legal framework for the incurrence and management of public debt, which should

  • cover all debt transactions and debt guarantees, including by extrabudgetary funds, and any borrowing or collateralization against future resource revenues, including by a national resource company;

  • clearly assign authority to a single person, usually the minister of finance, to select the instruments necessary for borrowing and contract all debt on behalf of the government;

  • permit borrowing only for the purposes defined by law and up to the limits set by the legislature; and

  • establish and supervise the organization responsible for debt management and issue regulations covering its role and responsibilities.

224. Vulnerabilities in the government’s debt structure and risks associated with its debt holdings should be identified, analyzed, and disclosed. Key risks include those arising from changes in interest rates, exchange rates, and rollover risk.119 Relevant indicators for these risks include the share of variable rate debt issued, the maturity structure of the debt portfolio, the share of debt maturing in less than one year, and the share of foreign currency by denomination. In addition, sensitivity analysis can be used to show how the value of outstanding debt and debt servicing would change in response to changes in interest rates and exchange rates. One of the most used frameworks to analyze the risks surrounding the government’s debt holdings is the IMF’s DSA, which identifies vulnerabilities in the debt structure or the policy framework, and assesses a baseline projection for debt and its sensitivity to macroeconomic shocks (see Box 4.16 and Georgia example in Box 4.17).120

Debt Sustainability Analysis

The IMF has developed a formal framework for conducting public and external debt sustainability analyses (DSA) as a tool to better detect, prevent, and resolve potential crises. This framework, which became operational in 2002, consists of two complementary components: the analysis of the sustainability of total public debt and that of total external debt. Each component includes a baseline scenario, based on a set of macroeconomic projections that articulate the government’s intended policies, with the main assumptions and parameters clearly laid out, and a series of sensitivity tests applied to the baseline scenario, providing a probabilistic upper bound for the debt dynamics under various assumptions regarding policy variables, macroeconomic developments, and financing costs. The paths of debt indicators under the baseline scenario and the stress tests allow analysts to assess the vulnerability of a country to a payments crisis.

Sources: https://www.imf.org/external/pubs/ft/dsa/; and IMF (2018).

Georgia: Debt Sustainability Analysis

The government produces a biannual debt bulletin detailing the composition of its debt portfolio, and an annual DSA, which explores the exposure of public debt to interest, growth, and exchange rate shocks. The analysis indicates the biggest exposures related to growth where a one standard deviation shock would increase debt by 6 percent of GDP by 2019, and the exchange rate, where a US$1 recovery would reduce the debt by 30 percent of GDP.

Sources: https://www.imf.org/external/pubs/ft/dsa/lic.aspx?cty=GEO&fm=-1&fy=-1&tm=-1&ty=-1&__VIEWSTATEGENERATOR=C685C5F9; and IMF (2017b).
Good Practice: All borrowing is authorized by law, and the risks surrounding the government’s financial assets and liabilities are analyzed and disclosed.

225. Good practice extends the scope of analysis of the government’s balance sheet to encompass risks that relate to nondebt liabilities and financial assets. Disclosure of nondebt liabilities, such as civil servant pensions and PPPs, and financial assets and the risks around them, can contribute to their improved management. The approach adopted to assessing and disclosing risks will depend on the nature of asset and liability components, but at a minimum it should include discussion of the key risk factors and how these have impacted the balance sheet. In addition, governments could disclose quantitative analysis demonstrating the sensitivity of the value of financial assets and liabilities to changes in key risk factors.121

Advanced Practice: All liabilities and significant asset acquisitions or disposals are authorized by law, and the risks surrounding the balance sheet are disclosed and managed according to a published strategy.

226. Sound management of the government’s balance sheet ultimately needs to take account of all financial and nonfinancial assets and the government’s long-term financial objectives. The strategy may involve specifying the different objectives of each portfolio, setting a general policy for managing the trade-off between risk and return, establishing portfolio benchmarks, taking actions to shift the actual portfolio toward the desired portfolio over time, and ensuring good reporting and accountability arrangements. Adopting an integrated balance sheet approach makes it possible to consider interactions between risks in different portfolios, thus avoiding a suboptimal approach in which risks are managed in isolation from one another.122

227. There should be a clear legal framework regulating the acquisition and disposal of assets. Financial assets are often traded actively to improve their expected returns, and the regulatory framework should cover the need for a published investment strategy (see New Zealand example in Box 4.18), the allocation of authority for investment and divestment decisions, and the reporting and auditing arrangements. For nonfinancial assets, acquisition and divestment decisions are infrequent and discrete, and the legal framework should cover the authority to make decisions, the processes to be followed, and the disclosure requirements.

New Zealand’s Investment Statement

The Public Finance Act (1989) of New Zealand requires the Treasury to report to Parliament with an Investment Statement at least every four years. The statement’s purpose is to increase transparency and accountability over the investment taxpayers have made in the central government’s balance sheet. The Investment Statement must describe and state the current value of the central government’s assets and liabilities, as well as changes in the last four years and foreseeable changes in the coming four years.

With the objective of better supporting decisions on the future investment strategy and capital allocation, the 2018 Investment Statement explores the link between effective government investment and well-being outcomes. To appraise performance at a government agency, sector, and system level, the Treasury analyses six investment performance dimensions: effectiveness; efficiency; sustainability; resilience; adaptability; and for social assets, distribution.

Source: New Zealand authorities.For more information, see http://www.treasury.govt.nz/government/investmentstatements/2014.

Principle 3.2.3. Guarantees The government’s guarantee exposure is regularly disclosed and authorized by law.

228. Government guarantees are one of the most common sources of fiscal risk for governments (Saxena S., 2017). The size and composition of these guarantees vary considerably from country to country (Figure 4.3). Guarantees can provide an attractive means of providing support to businesses and households as—unlike direct subsidies, grants, or lending—they are typically not included in measures of the government deficit or debt unless and until they are called. Excessive reliance on guarantees, however, can complicate fiscal management, because they tend to be called when macroeconomic conditions and the fiscal position are already deteriorating.

Figure 4.3.
Figure 4.3.

Stock of Government Guarantees in European Countries (2016)

Source: Eurostat (2018).

229. For the purposes of reporting and management, a distinction can be made between two different classes of guarantees:

  • One-off guarantees: The most common form of a one-off guarantee is a loan guarantee covering the risk of nonpayment (default risk) by a borrower. Other forms include exchange rate guarantees, guarantees related to PPP contracts, and letters of credit.

  • Standardized guarantees (or guarantee schemes): These include umbrella guarantees to financial institutions for specific types of loans—for example, mortgages, student loans, small- and medium-enterprise loans, and export credits. Other examples are government insurance schemes (e.g., covering bank deposits, agricultural crops, and natural disasters) and pension guarantees (e.g., a minimum annual return on a defined-contribution scheme, or a minimum pension payment irrespective of the fund balance in a participant’s account).

Levels of Practice for Principle 3.2.3

Basic Practice: All government guarantees, their beneficiaries, and the gross exposure created by them are published at least annually.

230. Basic practice requires that governments publish the gross exposure of their outstanding stock of guarantees and the related beneficiaries. The information can be disclosed in the annual budget documents and/or the final accounts and should set out both new guarantees issued during the reporting period and the stock of existing guarantees. Although not required under the basic practice, it would also be beneficial if for each guarantee or group of guarantees, the government provided information on the date of issuance, the intended purpose, the expected duration of the guarantee, any guarantee fees or other revenue received during the reporting period, and any payments made, recoveries, or financial claims established with respect to called guarantees. Governments that disclose guarantees and other contingent liabilities often report them in two categories: quantifiable and unquantifiable. Guarantees frequently contain a maximum gross exposure—for example, the amount of a guaranteed loan. Other guarantees are unquantifiable—for example, a government indemnity against environmental damage.

Good Practice: All government guarantees, their beneficiaries, and the gross exposure created by them are published at least annually. The maximum value of new guarantees or their stock is authorized by law.

231. Because guarantees provide an alternative mechanism for pledging public resources to third parties, good practice requires governments to place a limit on their exposure. This means that the issuance of guarantees during the fiscal year should be authorized by the legislature and subject to a ceiling or other restrictions. The ceiling may apply to the total stock of guarantees (as in Colombia) or to the annual issuance of new guarantees (as in Canada and Hungary). The total guarantee limit may then be allocated among various agencies, or it may be held centrally (e.g., by the minister of finance) and allocated during the budget year. Implementing this practice requires a sound base of information on the stock and recent flows of new guarantee issuance, and some analysis of the extent to which new guarantees could pose unacceptable risks to fiscal sustainability. The policy of the federal government of Brazil is shown in Box 4.19.

Brazil: Policy on Federal Guarantees

Brazil’s Fiscal Responsibility Law permits the federal government, states, federal districts, and municipalities to grant guarantees for internal or external credit operations. For the federal government, the stock of guarantees is currently limited to 60 percent of net current revenues (Senate Resolution No. 48 [2007]). For states, guarantees are limited to 22 percent of their net current revenue. New guarantees, their beneficiaries, the stock of outstanding guarantees, and guarantee calls are disclosed in the Annual Accounts of the President. Information on the guarantees is also available in quarterly reports on fiscal management issued by the Treasury.

Source: IMF (2017a).
Advanced Practice: All government guarantees, their beneficiaries, the gross exposure created by them, and their probability of being called are published at least annually. The maximum value of new guarantees or their stock is authorized by law.

232. Advanced practice requires the government to provide, where feasible, estimates of the probability of guarantees being called. Reliable estimation of these probabilities can be technically challenging, but countries such as Australia, Chile, Colombia, Indonesia, Sweden, and Turkey have developed quantitative methods modeled on standard credit-risk evaluation techniques to estimate default probability and the associated losses. These countries typically make use of one or more of three main approaches: (i) a credit rating-based risk assessment, (ii) statistical modeling, and (iii) scenario analyses based on stochastic simulations. For standardized guarantee schemes, historical loss data on the actual pool of guarantees or a similar pool of guarantees can provide a reasonable estimate of the expected loss due to guarantees being called. In the absence of historical data, market information, credit rating assessments, or credit scores derived from composite financial indicators can be used to estimate the probability of default. Where data allow, governments can also publish estimates of the present values of guarantees, which explicitly or implicitly incorporate estimates of call probabilities. The approach followed in the United States is shown in Box 4.20.

United States: Disclosure on Guarantees

Following the Federal Credit Reforms in the early 1990s, the U.S. government introduced a cost-based recognition of direct and guaranteed loans in the budget. Agencies are required to include an estimate of the present value of the expected costs of loans and guarantees in their budgets. Expected costs are essentially discounted cash outflows, that is, loan disbursements and payments on default of a guaranteed loan, adjusted for inflows (origination fees, repayments, interest receipts, and recoveries). The present value is calculated using a discount rate equal to the rate the government pays on its borrowings of a similar maturity. The part of the cost not covered by fees is treated as a subsidy. Appropriations are obtained for the subsidized cost of each loan program. The unsubsidized portion is budgeted below the line as a financing transaction. Subsidy costs are included in the computation of total budget expenditure and the budget balance. The subsidy cost is reestimated annually. An automatic appropriation covers any overruns.

Source: Government of the United States, Congressional Budget Office (2004).

Principle 3.2.4. Public-Private Partnerships Obligations under public-private partnerships are regularly disclosed and actively managed.

233. Public-private partnerships (PPPs) can create debt-like and/or guaranteed obligations for government and, therefore, can be a major source of fiscal risk.123 There are several types of PPP instrument. In a typical PPP, the private partner agrees to finance the construction of an asset and to operate and maintain the asset over a period (typically) between 10 and 30 years. In return, the government may commit itself to paying for the services provided by the asset over the life of the PPP contract. Alternatively, the government may allow the private partner to recoup its costs by charging users of the service a fee but at the same time provide guarantees or similar commitments that reduce the private partner’s risks (e.g., a guarantee of a minimum level of traffic or revenue, or a commitment to compensate lenders if the contract is terminated before its scheduled end). Frequently, these debt-like guarantee obligations are excluded from the government’s estimates of its debt and guarantees, notwithstanding guidance in both IPSAS and GFSM 2014 that most PPPs should be treated as creating assets and liabilities on the government’s balance sheet. Although PPPs may sometimes be a useful way of providing public services, they can also be used to circumvent rules that limit direct and guaranteed debt and therefore exacerbate fiscal risks.

234. There are two complementary ways of ensuring transparency regarding the use of PPPs: putting them on the government’s balance sheet and disclosing information on their fiscal implications. The first approach treats PPPs as public investments for accounting purposes even though, from a legal point of view, they are financed and maintained by a private company. This approach is taken by IPSAS and GFSM 2014 when certain criteria are met that relate to the control of the project and the allocation of its risks and rewards.124 A second approach (which can be used in addition to the first) is to disclose information on the rights and obligations that each project creates for the government, and to publish projections of the government’s receipts and payments over the life of each contract. When projects are not recorded on the balance sheet, the risks they create can be controlled, to some extent, by imposing limits on the obligations that the government can incur in PPPs. The IMF has developed a standardized tool (P-FRAM) to assess the fiscal risks associated with PPPs (see Box 4.21).

PPP Fiscal Risk Assessment Model

There is a widespread consensus on the need to improve project evaluation techniques for PPPs to ensure that only the right projects are procured. However, better project evaluation techniques cannot, by themselves, ensure the budget affordability of a project. Typically, financing and funding conditions for projects are managed by separate processes. Governments may end up procuring projects that either cannot be funded within the existing budgetary envelope or expose the public finances to excessive fiscal risks. To address these concerns, the PPP Fiscal Risk Assessment Model (P-FRAM) has been developed as an analytical tool to quantify the macro-fiscal implications of PPP projects.

The tool uses a simple, user-friendly, Excel-based platform and follows a four-step decision tree:

  • Who initiates the project? The impact of main fiscal indicators (i.e., deficit and debt) varies depending on the public entity ultimately responsible for the project (e.g., central or local governments, state-owned enterprises).

  • Who controls the asset? Simple standardized questions assist the user in making an informed decision about the government’s ability to control a PPP-related asset—through ownership, beneficial entitlement, or other means. If the government is regarded as controlling the asset, this typically impacts the main fiscal indicators.

  • Who ultimately pays for the asset? P-FRAM allows for three funding alternatives: (i) the government pays for the asset using public funds (e.g., periodic payments); (ii) the government allows the private sector to collect fees directly from the asset’s users (e.g., tolls); or (iii) a combination of methods (i) and (ii).

  • Does the government provide additional support to the private partner? Governments may not only fund PPP projects directly but can also support private partners by providing guarantees (e.g., debt and minimum revenues), equity injections, and tax amnesties, among other methods.

Once project-specific and macroeconomic data are introduced, P-FRAM automatically generates standardized outputs: (i) project cash flows over the whole life cycle; (ii) fiscal tables and charts, both on a cash and accrual basis—that is, government’s cash statement, income statement, and balance sheet; (iii) debt sustainability analyses with and without the PPP project; and (iv) sensitivity analyses of the main fiscal aggregates to changes in the macroeconomic and project-specific parameters. These outputs can be compared to the country-specific reporting standards of PPP transactions to evaluate how closely they conform to best practices.

For access to the Excel-based tool and the user manual, visit: http://www.imf.org/external/np/fad/publicinvestment/index.htm.

Levels of Practice for Principle 3.2.4

Basic Practice: The government at least annually publishes its total rights, obligations, and other exposures under public-private partnership contracts.

235. Basic practice involves the disclosure of the government’s rights and obligations and other exposures under PPPs (see Box 4.22 for an example from Uganda). For each PPP project (or group of similar projects), budget documents and year-end financial statements should provide information on:

  • total future service payments and receipts (e.g., concessions and operating lease fees) for the following 20-30 years, as relevant; and

  • details of contract provisions that give rise to direct or contingent payment obligations or receipts (e.g., concessions and operating lease fees, guarantees, shadow tolls, profit-sharing arrangements, or events triggering contract renegotiation).

In addition, it is desirable for governments to provide information on the amount and terms of financing and other support for PPPs provided through government on-lending or via publicly owned or controlled financial institutions.

Uganda: Annual Disclosure of Contingent Liabilities Related to Public-Private Partnership Contracts

In Uganda, there is a well-defined legal and institutional framework for PPPs, adopted in the PPP ACT 2015, and estimates of contingent liabilities related to PPP contracts are published annually. The PPP Act requires a high-level PPP committee to validate PPP projects and provide overall guidance on PPP policy, and a PPP unit at the Ministry of Finance that is expected to monitor and report on PPPs, including PPP-related contingent liabilities. For example, the Public Debt, Guarantees, and Grants report contains estimates of contingent liabilities over the period 2016–2019 for seven ongoing PPP projects, based on the explicit guarantees provided by the government. But these estimates do not cover the lifetime of the projects, which often extends far beyond 2020.

Source: IMF (2017e).
Good Practice: The government at least annually publishes its total rights, obligations, and other exposures under public-private partnership contracts and the expected annual receipts and payments over the life of the contracts.

236. Good practice requires, in addition to the above, that forecasts of the government’s payments and receipts over the life of the PPP contracts be published. This practice is particularly important, and relatively straightforward, for PPPs in which the government pays for the service provided by the private partner. It can also be done for other PPP contracts by estimating/forecasting the expected annual receipts and payments over the life of the contracts. The published information should cover

  • the annual service payments and receipts (e.g., concessions and operating lease fees) over the life of the PPP contracts;

  • details of contract provisions (e.g., guarantees, shadow tolls, profit-sharing arrangements, and events triggering contract renegotiation) that give rise to contingent payments or receipts annually; and

  • the amount and terms of financing and other support for PPPs that the government expects to provide annually through on-lending or publicly owned or controlled financial institutions.

Chile: Framework for Managing Public-Private Partnerships

Disclosure of PPP information: The PPP management framework in Chile relies heavily on quantitative analysis. PPPs are subject to cost-benefit analysis and generally must have an expected annual social rate of return exceeding a specified threshold. The Ministry of Finance uses a spreadsheet-based model to estimate the cost of possible guarantees, to set fees, and to report information on the costs and risks of guarantees. The government has also initiated a long-term planning system for all PPP commitments, which includes an assessment of the budget affordability of new projects, provisions for future contract modifications and disputes, and an assessment of long-term sustainability. All PPP contracts are published.

Legal requirements and limits: The Ministry of Public Works must obtain approval from the Ministry of Finance at several stages of the contract preparation, including when the bidding documents are issued and at the end of the procurement process. The Ministry of Finance requires that all risks associated with the project be identified and that a project’s economic and social benefits be evaluated. Projects must be approved by both the Minister of Finance and the Minister of Public Works, as well as by the Comptroller and Auditor-General and the President. Most project risks are borne by a special-purpose vehicle (SPV) or transferred to third parties through insurance. Where the government provides minimum revenue guarantees, it charges a fee for bearing this risk. An annual appropriation is also included in the budget to cover the potential loss from contingent liabilities created by PPPs.

Source: Irwin and Mokdad (2010).
Advanced Practice: The government at least annually publishes its total rights, obligations, and other exposures under public-private partnership contracts and the expected annual receipts and payments over the life of the contracts. A legal limit is also placed on accumulated obligations.

237. Advanced practice, in addition, requires that the government places a legal limit on accumulated PPP obligations. When PPPs are treated as “on balance sheet”, the government’s obligations will be constrained by fiscal rules that limit debt. Where PPP liabilities are not included in the definition of debt, it is also possible to impose PPP-specific limits on the incurrence of PPP obligations. These limits can take several forms, such as quantitative ceilings on overall fiscal exposure to PPPs, including direct service payments and contingent liabilities (e.g., Brazil, El Salvador, Hungary, Peru). There should also be an appropriate gatekeeping role for the ministry of finance in assessing the risks related to PPPs and fiscal sustainability (see Chile example in Box 4.23).

Principle 3.2.5. Financial Sector Exposure The government’s potential fiscal exposure to the financial sector is analyzed, disclosed, and managed.

238. Financial crises have been historically the single most important specific risk to the public finances. Governments are often exposed to both explicit and implicit risks from the financial sector. These can include explicit risks emanating from government guarantees of bank deposits, and implicit risk exposures associated with securing liquidity and the flow of credit when financial institutions are severely stressed. As was evident during the global financial crisis, governments may elect to bail out troubled banks and other deposit-taking institutions, as well as other non-deposit-taking institutions, such as insurance companies, to prevent major defaults and further contagion.125 In the event of a sovereign debt crisis, the weakening of banks’ balance sheets can create additional demands for financial support. Government bailouts (or rescues) of a financial corporation may take various forms.126 For example, the government might provide recapitalization through a capital injection, assume a failed corporation’s liabilities, provide loans or acquire equity in financial corporations, guarantee borrowing by a bank, or purchase assets from a corporation at prices greater than their true market value.

239. Governments have traditionally shied away from publicly discussing their implicit exposures to the financial sector. This has partly been for fear of exacerbating potential moral hazard and increasing the risk to government. In the run-up to the global financial crisis, even the few governments that published a statement of fiscal risks typically did not mention the potential risks arising from the financial sector. Some information on these risks was often available, however, from other sources, such as central banks’ reports on financial stability and Financial Sector Assessment Programs (FSAPs), which are comprehensive and in-depth assessments of the stability of the financial system prepared by the IMF and World Bank. Each FSAP concludes with the preparation of a Financial System Stability Assessment, publication of which is voluntary but presumed.127

240. In the wake of the global financial crisis, some governments have become more open to disclosing fiscal risks emanating from the financial sector. While governments should be very cautious about disclosing problems of individual financial institutions, there are some standard indicators of the financial sector risks that could be reported. For example, the government’s maximum theoretically possible loss could be indicated by the total consolidated liabilities of the financial sector (net of reserves). The government could also publish indicators of the liabilities covered by explicit government guarantee schemes, the level and recent growth of credit and asset prices, and indicators of the creditworthiness and liquidity of banks.128 Finally, governments could discuss the steps they have taken, or are planning to take, to mitigate these risks. Such strategies can include strengthening prudential regulation and supervision, removing blanket guarantees to protect depositors or to support loss-making or failing financial institutions, redesigning deposit insurance schemes, and strengthening the regulatory framework for and oversight of government-owned financial corporations.

Levels of Practice for Principle 3.2.5

Basic Practice: The authorities quantify and disclose their explicit support to the financial sector at least annually.

241. Basic practice requires annual publication of information on the government’s explicit support to the financial sector, such as government-provided or government-backed deposit insurance schemes. Information on such schemes should include their objectives and type, how they are financed, the definition of eligible depositors and covered institutions, the ceiling on covered deposits, and the percentage of the total deposits and depositors that are covered. In addition to deposit insurance, governments may guarantee certain other bank liabilities, which should also be disclosed. Finally, details of the government’s ownership interest in the financial sector should be published.

Good Practice: The authorities quantify and disclose their explicit support to the financial sector at least annually and regularly undertake an assessment of financial sector stability.

242. Good practice requires, in addition, that the authorities publish an assessment of the stability of the financial sector. Such reports are often prepared by central banks or other financial supervisory agencies. These reports discuss various factors that affect the soundness of the financial sectors, such as the state of the macroeconomy. They also typically disclose a variety of indicators for the risks posed by the financial sector, including whether financial and nonfinancial assets are fairly valued, the extent of banks’ nonperforming loans, the capital that banks have accumulated to absorb losses, and their ability to withstand temporary liquidity shocks.

Advanced Practice: The authorities quantify and disclose their explicit support to the financial sector at least annually and regularly undertake an assessment of financial sector stability, based on a plausible range of macroeconomic and financial market scenarios.

243. Advanced practice requires, in addition, that financial sector stability be assessed against a range of scenarios. Such analysis can help to identify the main vulnerabilities that could trigger a financial crisis, and increase the prospect that remedial actions will be taken to reduce exposures. An assessment should stress test the financial sector against solvency and liquidity risks by considering an alternative economic scenario in which GDP grows at a lower rate than the central forecast rate over a specified period.129 Stress tests can also assess exposures under alternative scenarios for market risks (e.g., interest rates or exchange rates), as well as analyze linkages among financial institutions within a country and across borders. An example of financial sector risk disclosure in Finland is shown in Box 4.24.

244. Although implicit guarantees to the financial sector are not disclosed on government balance sheets, it is important to understand their size, and the likelihood that they are realized. There are various approaches to assessing and valuing such guarantees, one of which is the contingent claims analysis (CCA) described in Box 4.25.

Finland: Reports on Financial Stability

The Bank of Finland, the Financial Supervisory Authority, and the European Central Bank (ECB) all publish comprehensive reports on financial-sector risks. The Bank of Finland’s reports on financial stability, for example, provide a detailed description of the risks faced by banks, drawing on many different indicators. The ECB’s October 2014 report on the results of a stress test and an asset-quality review presents further information on the risks faced by the three largest Finnish banks under an adverse economic scenario. In addition, the government includes a discussion of financial-sector risks and financial soundness indicators in its annual statement of fiscal risks.

Source: IMF (2015a).

Contingent Claims Analysis

Contingent claims analysis (CCA) involves observing the different market pricing of debt and equities, exploiting the fact that in the event of default, equity holders will be wiped out, but debt holders still carry some expectation of receiving government support. Equity prices and balance sheet data can be used in a CCA framework to estimate expected losses and associated credit spreads (“fair-value CDS”). These spreads are frequently higher than observed bank CDS spreads since equity holders do not benefit from implicit guarantees but debt holders do. The difference in the observed and fair-value CDS spreads indicates the size of the implicit government guarantee. This implicit subsidy can be applied to the stock of outstanding debt liabilities, or more specifically the expected value of the loss upon default, to determine a market-based estimate of the expected value of the contingent liability at any given time.

While useful, CCA carries some caveats. CDS markets can be thin or nonexistent for many banks, especially in smaller markets. During financial crises, CDS spreads become highly volatile and unreliable, and the calculations assume that equity holders are wiped out in full, whereas in the global financial crisis they were bailed out to some extent. Recent regulatory changes are designed to ensure that more creditors are bailed in than during the global financial crisis.

Source: Jobst and Gray (2013).

Principle 3.2.6. Natural Resources130 The government’s interest in exhaustible natural resource assets and their exploitation is valued, disclosed, and managed.

245. For natural resource–rich countries, uncertainty concerning the volume and value of their resource endowments can be one of the most significant fiscal risks. There are over 50 countries that are classified as rich in hydrocarbons and minerals.131 Some countries with significant natural resource assets have developed a comprehensive framework for reporting these assets, revenues, and risks. An example from Norway is provided in Box 4.26. Thirty-one countries are currently compliant with the Extractive Industry Transparency Initiative (EITI) standards, by which information on the oil, gas, and mining industries is published.132 However, few countries, even among advanced economies, systematically include statements of the value of natural resources in their budget documents or financial statements. This reflects in part the difficulty of measuring these assets and forecasting the volume and value of production.

Levels of Practice for Principle 3.2.6

Basic Practice: The government publishes annual estimates of the volume and value of major natural resource assets, as well as the volume and value of the previous year’s sales and fiscal revenue.

246. Governments with significant natural resource holdings should publish estimates of the stock of these assets and the volume and value of the previous year’s sales and fiscal revenue. Estimating the total stock of a natural resource requires the aggregation of field-by-field production and reserve estimates. This requires a clear definition of the point in the exploration and development cycle at which an asset is recognized. An appropriate revenue classification is also required, as well as accounting and reporting systems that separately capture natural resource revenues in fiscal reports. Countries are encouraged to comply with the EITI standard, which calls for regular reporting by governments of their natural resource revenues, and by companies of the payments they make. EITI requires that these data be published and made subject to independent validation, a process that involves participation by civil society. There may be confidentiality clauses in the government’s contracts with individual resource companies that present an obstacle to publicly disclosing information on field-by-field extraction rates and company-by-company sales revenues. Where possible, governments may consider avoiding such constraints in future contracts so that the information can be disclosed.

Good Practice: The government publishes annual estimates of the volume and value of major natural resource assets under varying price scenarios, as well as the volume and value of the previous year’s sales and fiscal revenue.

247. Good practice, in addition, requires that governments disclose the estimated value of natural resource assets under different price scenarios. Because of the volatility of natural resource prices, such analysis adds an important dimension to the assessment of fiscal sustainability, especially in countries that are substantial producers of natural resources (see Box 4.26 for the Norway example).

Norway: Reporting on Natural Resources

Norway provides comprehensive information on natural resource assets and respective revenues and risks in several reports. These include the following:

“Resource Accounts” are published annually by the Petroleum Directorate and provide an estimation of the proven and unproven petroleum resources by type of resource (e.g., oil, gas, condensate) and by sea area in cubic meters. They also disclose reserves, contingent resources, and undiscovered resources and compares them to the previous year’s values. The report is based on the UN Framework Classification System 2009, which ensures comparability of resource estimates across various classification systems.

The “Petroleum Resources on the Norwegian Continental Shelf” provides an analysis of the exploration developments and presents an updated estimate of undiscovered resources. It also advises on exploration activities.

The “National Budget” presents the different sources of fiscal revenues and a projected path for petroleum prices, which is updated at least annually. There is also an indication of how gross revenues would change if prices were lower or higher.

The “Medium-Term Macroeconomic Program” contains a discussion of the potential impact of lower petroleum prices.

Source: Norwegian authorities.
Advanced Practice: The government publishes annual estimates of the volume and value of major natural resource assets under varying price and extraction scenarios, as well as the volume and value of the previous year’s sales and fiscal revenue.

248. Advanced practice requires, in addition, the analysis of varying extraction scenarios. Long-term price and extraction scenarios illustrate the fiscal impact of faster rates compared to slower rates of resource extraction, requiring a further layer of analysis. Because the resources are finite, it is important to address alternative options concerning possible exploitation rates, paying attention to the intergenerational distribution of income flows, as well as the distribution of spending and the immediate social impact of resource industries. Such analysis helps to inform and illuminate public deliberation and debate over the complex efficiency, sustain-ability, and intergenerational equity issues involved.

Principle 3.2.7. Environmental Risks

The potential fiscal exposure to natural disasters and other major environmental risks is analyzed, disclosed, and managed.

249. Natural disasters can be a major source of fiscal risk in some countries. Between 1994 and 2013, total economic losses globally from natural disasters were estimated to be at US$2.6 trillion, equivalent to 4 percent of world GDP (Guha-Sapir, Below, and Hoyois, 2016; IMF, 2016b). Natural disasters may affect countries at different income levels.133 Financial costs can be significant for low-income countries as most of the vulnerable population lack adequate insurance mechanisms. Disasters often result in direct fiscal costs as governments provide support and face the cost of repairing or replacing public infrastructure. Governments are also exposed to potential fiscal costs from climate change—costs related to adaptation and mitigation—and other environmental hazards, such as pollution or site degradation associated with natural resource extraction or nuclear power production, the storage or transportation of hazardous substances, and pandemics. The government’s exposure may be explicit—for example, greenhouse gas reduction obligations in international treaties, indemnities against environmental risks, or the costs of repairing state assets—or implicit, such as public expectations or political pressure to provide assistance and relief to the victims of natural disasters.

250. Countries that publish a fiscal risk statement, and are prone to natural disasters, typically include a discussion of the risks from such disasters. This assessment should provide, where feasible, quantitative estimates of the potential fiscal impact of natural disasters, based on historical experiences, and the government’s strategies for preventing, mitigating, and managing them. Such strategies could include putting in place an early warning system and disaster preparedness and response mechanisms; transferring risks to third parties through disaster insurance, or mandating insurance for individuals, businesses, or public entities; and creating budget provisions or buffer funds to meet the costs of natural disasters, should they occur. The World Bank has developed a comprehensive approach to disaster risk reduction focused, among other things, on protecting the government’s financial position (Ghesquierre and Mahul, 2010).

251. The UN Sendai Framework for Disaster Risk Reduction 2015–2030 sets out four priority action areas for disaster risk management.134 These areas comprise: (i) understanding disaster risk in all its dimensions of vulnerability, capacity, exposure of persons and assets, hazard characteristics, and the environment; (ii) strengthening disaster risk governance—at the national, regional, and global levels—for better prevention, mitigation, preparedness, response, recovery, and rehabilitation; (iii) investing public as well as private resources in disaster risk reduction; and (iv) enhancing disaster preparedness for effective responses and to “Build Back Better” in recovery, rehabilitation, and reconstruction.

Levels of Practice for Principle 3.2.7

Basic Practice: The government identifies and discloses the main fiscal risks from natural disasters in qualitative terms.

252. Governments should disclose the main natural disasters to which they are exposed, based on historical experience. Natural disasters can be broken down into three subcategories—sudden impact disasters (foods, earthquakes, tidal waves, tropical storms, volcanic eruptions, and landslides); slow-onset disasters (droughts, famine, environmental degradation, deforestation, pest infestation, and desertification); and epidemic diseases, which often break out following a disaster.

Good Practice: The government identifies and discloses the main fiscal risks from natural disasters, quantifying them on the basis of historical experiences.

253. Governments should, where feasible, publish quantitative estimates of the potential fiscal impact of natural disasters based on their past incidence. Such information could be based on historical experiences and be coordinated by a central agency, drawing together data from line ministries and agencies, revenue authorities, subnational governments, and external donors, as required. The assessment of historical experiences of fiscal impacts should take into account the following:

  • Supplementary budget allocations for disaster relief and reconstruction;

  • Expenditure on disaster relief and reconstruction financed by virement, charges against the budget contingencies reserve, or a disaster fund;

  • International disaster relief financing, which should be scored on a net basis, after deducting any relief provided directly by the government through the budget or other means;

  • Any disaster-related insurance receipts or other favorable fiscal impacts (e.g., lower debt servicing costs on catastrophe bonds); and

  • Estimated indirect revenue losses due to the negative impact of natural disasters on economic activity and tax bases.

Advanced Practice: The government identifies and discloses the main fiscal risks from natural disasters, quantifying them on the basis of historical experiences, and managing them according to a published strategy.

254. Advanced practice, in addition, requires the development and publication of a strategy for managing the fiscal risks from natural disasters. Such a strategy could include putting in place an early warning system and disaster preparedness and response mechanisms, as well as transferring risks to third parties through disaster insurance; mandating insurance for individuals, businesses, or public entities; or directly reducing fiscal exposure by creating budget provisions or buffer funds. The strategy could also cover the possibility of new or increased sources of exposure, for instance, from increased climate variability. The development of a national strategy requires coordination across government—both national and subnational—improving the availability of data, and increased specialist technical capacity. Box 4.27 provides examples of Colombia and Turkey.

Colombia and Turkey: The Management of Risks from Natural Disasters

Colombia is exposed to significant fiscal risks from natural disasters. The government discloses extensive information on the fiscal impact of past disasters and has taken a range of measures to manage associated risks. These measures aim at securing financing, including through taxation, and enhancing institutional coordination and international cooperation. They include the establishment of a National Disaster Fund (1984), enactment of a National Plan for Disaster Prevention and Assistance (1998), adoption of constitutional laws to direct resources to disaster prevention and response (2001), establishment of an external credit line to reduce fiscal vulnerability to natural disasters (2004), and participation in a World Bank Catastrophe Drawdown Option—a contingent credit line—that provides immediate liquidity in the aftermath of a natural disaster. In 2012, a financial strategy to reduce the state’s fiscal vulnerability when faced with a natural disaster was introduced. The strategy adopts a layered approach that involves use of contingency reserves for high-frequency low-impact risks; borrowing and contingent credit for intermediate risks; and risk transfer for high risks.

The Turkish government published a National Disaster Management Strategy in its 10th Development Plan 2014–2018, which included a discussion of risks related to natural disasters and strategies for their mitigation. Turkey has established a Disaster and Emergency Management Administration Presidency (AFAD), which is responsible for preparing the National Disaster and Emergency Response Plan and the National Earthquake Strategy and Action Plan (2012–2023). AFAD is also responsible for coordinating disaster management efforts, which include risk preparedness at the national, provincial, and local levels. Finally, the government has established compulsory earthquake insurance coverage, which is administered by the Treasury through the Turkish Catastrophe Insurance Pool (TCIP). This pool is kept outside the government budget and is funded by premiums collected from policy holders based on the expected insurance costs of future earthquakes.

Sources: Government of Colombia; and IMF (2017d).

Dimension 3.3. Fiscal Coordination. Fiscal relations and performance across the public sector should be analyzed, disclosed, and coordinated.

255. Effective fiscal policymaking and fiscal risk management require appropriate coordination of decision making between central government and other parts of the public sector. This dimension of the Code includes two principles relating to:

  • Identifying and monitoring risks emanating from subnational governments (3.3.1); and

  • Identifying and monitoring risks emanating from public corporations (3.3.2).

256. In many countries these entities enjoy a substantial degree of autonomy in decision making (including on fiscal issues) which can have a large macroeconomic and fiscal impact, especially when the entities have significant own resources and/or have access to borrowing domestically and internationally. Subnational governments and public corporations can also pose significant fiscal risks if the central government provides them with explicit or implicit guarantees. Where constitutionally and institutionally feasible, monitoring and controlling the level of fiscal risks to which these entities are exposed are therefore important.

Table 4.3 provides a list of relevant standards, norms, and guidance material related to dimension 3.3 of the Code.

Table 4.3.

Relevant Standards, Norms, and Guidance Material

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Principle 3.3.1. Subnational Governments Comprehensive information on the financial condition and performance of subnational governments, individually and as a consolidated sector, is collected and published.

257. The subnational government sector can account for a substantial share of general government financial activity. In some countries, subnational government borrowing, off-budget activities, and associated contingent liabilities can also be significant (Figure 4.4). Subnational liabilities may benefit from explicit guarantees from the central government, and/or from strong expectations that the central government will step in to support entities that are in financial difficulties even in the absence of any explicit guarantee. Expectations of bailouts can weaken market discipline and lead to excessive risk taking by subnational authorities (Ahmad and Brosio, 2006). The materialization of risks from subnational governments can be costly, with the fiscal costs of a subnational bailout averaging about 3.5 percent of GDP over the period 1990–2014 (Bova and others, 2016).

Figure 4.4.
Figure 4.4.

Liabilities of Subnational Governments in OECD Countries (2016)

(Percentage of GDP)

Source: OECD Fiscal Decentralization database.Note: Data labels use International Organization for Standardization (ISO) country codes.

258. International and regional statistical standards have recently focused on expanding the scope of fiscal reporting to encompass the general government. The consolidation of fiscal data from subnational governments and the central government is particularly informative when subnational governments have significant tax powers, expenditure responsibilities, and borrowing capacity or receive sizable transfers from central government. Subnational governments should also publish fiscal data themselves to demonstrate accountability to their legislative bodies and citizens.

259. Approaches to managing subnational fiscal risks need to take account of a country’s political and institutional structures. For example, the authority of the central government to impose direct limits on subnational borrowing, and to enforce these limits, will depend on the subnational government’s degree of constitutional independence. Table 4.4 sets out some common approaches to managing fiscal risks from subnational governments and the conditions that underpin these different approaches.

Table 4.4.

Different Approaches to Managing Subnational Fiscal Risks

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Source: Ter-Minassian, 1997, updated by IMF staff.

Levels of Practice for Principle 3.3.1

Basic Practice: The financial condition and performance of subnational governments are published annually.

260. All countries should report on the financial position of their subnational governments at least annually. This report should provide a summary of the fiscal operations of the subnational government sector, as well as the financial position and performance of individual entities.135 Reports should include indicators of the financial health of subnational governments such as their overall balance, the operating balance, accounts payable, the level of and changes in debt, and the debt service to revenue ratio.

Good Practice: The financial condition and performance of subnational governments are published annually, and there is a limit on their liabilities or borrowing.

261. Good practice, in addition, requires that some limits be imposed on subnational borrowing or liabilities to cap the overall exposure. Such limits might comprise a prohibition on certain forms of borrowing (e.g., from external sources), on the purpose of borrowing (e.g., only to finance public investment), or, on the total stock of debt or the debt service to revenue ratio. The central government, ideally a unit in the finance ministry or treasury, should maintain sufficient capacity to monitor subnational governments’ compliance with these limits through timely and reliable reporting systems. Depending on the political and institutional autonomy of subnational governments, the central government may also require legal authority to intervene and to impose remedial actions in the case of breach of the limits (see Box 4.28 for examples from Colombia and Iceland). In countries where the central government does not have the authority to impose limits on subnational borrowing, the subnational governments may themselves adopt rules limiting their borrowing.

Colombia and Iceland: Monitoring Regime for Subnational Governments

Colombia, following the excessive growth in subnational government’s expenditure and debt during the 1990s, took several measures to ensure sustainability of subnational finances. The central government closely monitors financial performance of subnational governments using a variety of indicators, controls subnational borrowing where necessary, and regularly submits to Congress a report on the financial viability of subnational governments. At the heart of the monitoring and control system is the so-called Traffic Lights Law, adopted in 1997, which mandates that each subnational government is assigned a rating based on its debt to payment capacity ratio. Only those countries assigned a favorable rating (green zone) can borrow within their debt sustainability limits. Among other things, the legal framework has provisions for dealing with financial insolvency, including provisions for the adoption of a national government–provided fiscal-rescue package to regain viability. The central government is not authorized to guarantee subnational domestic debt. Subnational governments’ external borrowing proposals are subjected to a rigorous approval process and are rare. A unified fiscal responsibility law imposes constraints and strict sanctions for noncompliance with national legislation.

In Iceland, under the 2011 Local Government Act of 2011, fiscal rules were imposed on municipalities, along with enhanced oversight arrangements and enforcement mechanisms for noncompliers. These rules include:

  • i. a three-year rolling balanced budget rule for municipalities and a limit on the ratio of debt and other balance sheet liabilities to revenue of 150 percent;

  • ii. a three-tier system for monitoring municipal finances based on the principle of earned autonomy, in which municipalities breaching fiscal rules are subject to increasing monitoring; and

  • iii. a Municipal Fiscal Oversight Committee (MFOC), an independent body with the power to impose sanctions on municipalities that breached the rules.

Municipalities are classified into one of three categories depending on the extent to which they comply with the two fiscal rules, with those in higher risk categories subject to increased monitoring and reduced autonomy: (i) municipalities that comply with both fiscal rules are subject to minimal reporting and have full autonomy within the limits of the rules; (ii) municipalities in breach of one of the two fiscal rules are subject to increased monitoring, need to agree a 5- to 10-year fiscal adjustment strategy with the MFOC, and are restricted to borrowing in local currency; and (iii) municipalities with excessive debt (more than 250 percent of revenues), in addition to the restrictions of municipalities in category (ii), must also obtain approval for all major revenue, expenditure (including investment), and borrowing decisions from the MFOC. Further sanctions are available for the MFOC to enforce compliance, including “naming and shaming” noncomplying municipalities, withholding transfers, and recommending to the minister of local government to vest fiscal powers of a municipality in a financial management board.

Sources: Government of Colombia; and IMF (2016b).
Advanced Practice: The financial condition and performance of subnational governments is published quarterly, and there is a limit on their liabilities or borrowing.

262. Advanced practice requires quarterly reporting on the financial condition and performance of sub-national governments. Annual fiscal data on subnational governments are not sufficiently frequent for fiscal management purposes, especially during a fiscal crisis. Quarterly data can be used as an early warning system, preventing the accumulation of risks. Key fiscal indicators that can be monitored include borrowing levels, debt outstanding as a ratio of revenues, and the ratio of salaries to total operating expenditure (Ahmad and Brosio, 2006). Aside from potential legal mandate issues, particularly in federal systems of government, the main challenge in publishing quarterly data is for accounting and reporting systems to generate sufficiently accurate and timely information. To enable uniform reporting and comparisons across subnational governments, it is helpful for financial reporting standards at the central and subnational level to be harmonized. An example is Finland where each municipality and joint municipal board publishes accrual accounts on a quarterly basis, with summary information published on the website of Statistics Finland.

Principle 3.3.2. Public Corporations

The government regularly publishes comprehensive information on the financial performance of public corporations, including any quasi-fiscal activity undertaken by them.

263. Public corporations account for a substantial share of public-sector financial activity and can pose significant fiscal risks to the government. Despite large-scale privatizations since the 1980s, the value of public corporations still accounts for over 11 percent of the market capitalization of all listed companies worldwide and is even higher in many emerging market economies—for example, Brazil (18 percent), India (22 percent), China (44 percent) (Allen and Alves, 2016; Kowalski and others, 2013136). Liabilities of public corporations can comprise a substantial share of total public sector liabilities and vary widely among countries (Figure 4.5).

Figure 4.5.
Figure 4.5.

Liabilities of Financial and Nonfinancial Public Corporations (2015)

(Percentage of GDP)

Sources: Eurostat; country authorities; and IMF staff estimates.Note: Data labels use International Organization for Standardization (ISO) country codes.

264. Public corporations may expose the government to a range of fiscal risks, particularly if their debts are implicitly or explicitly guaranteed by the government. Risks can originate from the variability in the value of these debts, and in the taxes, royalties, and dividends paid by profitable corporations. Loss-making corporations may require periodic or ongoing fiscal support in the form of direct budget subsidies or capital injections. Risks can also originate from loans provided to corporations and contingent fiscal risks associated with explicit government guarantees on their debt. Finally, the ability to shift fiscal activity from the government to public corporations can itself create fiscal risks by blurring transparency and accountability. Many countries have established a regime of financial oversight to mitigate and manage such risks (Allen and Alves, 2016).

Levels of Practice for Principle 3.3.2

Basic Practice: All transfers between the government and public corporations are disclosed on at least an annual basis.

265. Governments should disclose all transfers between the government and public corporations on a regular basis. This basic level of transparency facilitates some scrutiny of the main types of flows between government and its public corporations, including the following:

  • Taxes and royalties paid by public corporations (including tax arrears). Because of their size and the opportunities for corruption and irregularities, there is often particular public interest in the transparency of tax and royalty payments made by government-owned natural resource companies (see Principle 3.2.6);

  • Dividends paid by corporations to the government, and profit transfers from the central bank;

  • Capital transfers or injections to corporations, write-offs of debt, and pension liabilities that exceed the pension scheme’s assets;

  • Operating subsidies paid by the government for the costs of specific activities conducted by corporations or to compensate for operating losses;

  • Payments by the government for services provided by corporations or the central bank; and

  • Loans or on-lending by the government to corporations.

While the aim should be to disclose information pertaining to each corporation, if a government decides to disclose this information at an aggregate level, at a minimum all material items should be disclosed separately to enable an assessment of the fiscal risks associated with individual corporations.

Good Practice: All transfers between the government and public corporations are disclosed and, based on a published ownership policy, a report on the overall financial performance of the public corporations sector is published on at least an annual basis.

266. Governments should regularly report on the financial performance of the public corporate sector. These reports should include information on key financial aggregates (e.g., revenues, expenses, net profits, assets, and liabilities) as well as data on the largest corporations. Ideally, the government should also present summary tables that consolidate information from the main companies’ audited financial statements (e.g., income statements, statements of cash flow, and balance sheets).

267. Reports on, and analysis of, the financial performance of public corporations should include a range of indicators of the companies’ profitability, risks, and financial relations with the government. The choice of specific indicators depends on country circumstances, including the type of industry a corporation is representing, the level of risk, and comparisons with the private sector (Allen and Alves, 2016), but typically focuses on the following:

  • Financial performance: As measured by indicators such as the profit margin (earnings/revenue ratios), return on equity (earnings/equity), and return on assets (earnings/assets);

  • Financial risk: As measured by indicators such as liquidity (current assets to current liabilities ratio), lever-age (assets/equity), and solvency (liabilities/revenue); and

  • Transactions with the government: In the form of dividend payments, grants, and other subsidies; changes in the government’s equity holdings in a company; and guarantees given or called.

268. Good practice also requires that the government publish a report that explains its ownership policy for its corporations. The ownership policy should provide a clear statement of the government’s policy and financial objectives as shareholder of public corporations, the mandate given to the government in exercising these ownership rights, the main functions carried out by the government, and its commercial and noncommercial policy objectives. It should also explain the main principles and policies that have been set by the government in its governance framework for public corporations—namely, reporting requirements, dividend policy, and principles of financial assistance from the state (see OECD, 2010). An example from Norway is shown in Box 4.29.

Norway: State Ownership Strategy

The State Ownership Policy—which also requires the government to prepare annual reports on the implementation of the policy and the performance of the corporations—includes:

  • a list of the corporations in which the state has a shareholding, and the ministries with which the companies are affiliated;

  • a statement of the government’s objectives, setting out the key goals of state ownership;

  • mandatory requirements of public corporations, including the need for a positive rate of return for commercial companies and efficient operation of social companies; a rational, predictable, and flexible dividend policy; and reporting requirements;

  • the state’s expectations of the companies, including objectives for the ownership of individual companies, and social responsibility considerations;

  • policy on the remuneration of senior managers of public corporations, which must be competitive but not market leading;

  • the division of responsibilities for supervising the companies between the central ownership entity, line ministries, and other government bodies;

  • the legal framework for the ownership of public corporations, as well as laws relating to state subsidies, equal access to information, good governance, transparency, and financial management; and

  • the relationship between the board of directors, the management, and the shareholders, which specifies the obligations of the board and management, execution of the shareholders’ role through annual general meetings, and remuneration arrangements for board members.

Source: Norwegian Ministry of Trade, Industry and Fisheries, 2014.https://www.regjeringen.no/en/topics/business-and-industry/state-ownership/statens-eierberetning-2013/the-state-ownership-report/id2395364/
Advanced Practice: All direct and indirect support between the government and public corporations is disclosed and, based on a published ownership policy, a report on the overall financial performance of the public corporations sector, including estimates of any quasi-fiscal activities undertaken, is published on at least an annual basis.

269. In addition to disclosing direct transfers and support, advanced practice requires that the government disclose all forms of indirect support provided to public corporations (see Box 4.30 for Lithuania example). Such support may include:

  • government guarantees of public corporation borrowing;

  • any reduced rates of tax, customs duties, or royalties imposed on public corporations compared to the rates and allowances that apply to private sector companies;

  • interest rate subsidies;

  • any departure from normal economy-wide regulatory requirements for public corporations;

  • any preferential treatment accorded in public procurement; and

  • any implicit guarantees provided by the government to public corporations, which may reduce their borrowing costs.

270. Many public corporations carry out quasi-fiscal activities (QFAs), which are operations undertaken in pursuit of a public policy objective that remain partially or fully uncompensated, and worsen the corporations’ financial position relative to the strictly commercial profit maximizing level. QFAs can take a range of forms, such as public service obligations, when the company charges less than commercial (cost recovering) prices for the provision of goods and services, such as energy or water, thus providing an implicit subsidy to consumers; and subsidized purchases, when the company pays above commercial prices to specified suppliers (e.g., agricultural supplies purchased from domestic farmers).137

271. QFAs should be clearly distinguished in reports on public corporations prepared by the government as well as in the annual reports of individual companies. Disclosure of such information should describe the type of QFA, the rationale for performing the activity through the corporation rather than directly through the state budget, the opportunity cost of the activity, and the mechanism designed to compensate the public corporation for any negative impact on its financial position. Quantification of indirect transfers—particularly in the form of policy measures, such as preferential procurement policies or tax concessions—and QFAs can be challenging. More often, the data required for quantification will need to be acquired from the concerned corporations. An estimate in the form of an order of magnitude—for example, as a percentage of GDP, or as a range of fiscal impact rather than a point estimate—can also be useful.

Lithuania: Annual Reports of Public Corporations

The government of Lithuania requires public corporations to present annual reports (and interim reports every six months), which include information on their business strategy, financial and nonfinancial targets, assessment of performance relative to targets, dividend policy, financial position, investment plans, and social initiatives.

In addition, an annual performance monitoring report includes a summary of the Lithuanian state ownership policy; sets financial performance objectives for public corporations and obliges them to prepare strategies to comply with these targets; and specifies the governance arrangements for the companies, including the establishment of independent boards and the criteria for selecting members of these boards.

The annual report also includes consolidated financial information for public corporations and for individual companies, including income and balance sheet statements, summary financial ratios, dividends and taxes paid to the state budget, and details of QFAs and their fiscal impact. Public corporations account for and disclose information on QFAs, reflecting the associated revenues and costs as well as any residual losses.

Source: OECD (2015b).
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