This paper discusses appropriate methods for disclosing fiscal risks from exogenous shocks and the realization of explicit or implicit contingent obligations of the government. Expanding on previous guidance prepared prior to the crisis, the note focuses on fiscal risks emerging from recent public interventions in the financial sector. Information on fiscal risks and its public reporting leads to a better understanding of the true state of the public finances. Thus, it helps policymakers design and gets public support for, appropriate responses to the realization of various contingencies. More specifically, in the context of the unfolding global financial crisis, a wide range of public sector interventions have been in support of the financial system. Although these interventions have been necessary, they have generated further fiscal risks. Comprehensive reporting would help governments to define a management strategy of the assets and liabilities that they have taken on their balance sheet and to prepare exit strategies for reducing their presence in the financial sector and eventually withdrawing support.
. Such a “statement” is usually submitted to parliament alongside other budget documents—as mandated, in some cases, by fiscal responsibility laws.
A fiscal risk statement usually includes a discussion of past experiences with the materialization of risks; a presentation of policies to mitigate and manage risks; and forward-lookingriskestimates ( Box 1 ). Its format should reflect the key risks facing a particular country, and its evolving circumstances.
Statement of Fiscal Risks
A statement of fiscal risks can be structured by grouping similar risks
presentation of policies to mitigate and manage risks, and forward-lookingriskestimates, which, in the case of the U.A.E., could focus on fiscal risks posed by GREs. 22
Dubai: Public Sector Debt Sustainability Framework, 2007-2016
(Percent of Dubai GDP, unless otherwise indicated)
Baseline: Public sector debt 1/
Using the cyclically adjusted non-hydrocarbon primary balance, this paper investigates the evolution of the fiscal policy stance in the United Arab Emirates at consolidated and sub-national levels in the run-up and after the crisis. The empirical findings show that procyclical fiscal policies prior to the crisis reinforced the financial sector cycle, exacerbated the economic upswing, and thereby contributed to the build-up of macro-financial vulnerabilities. The paper also sets out policy lessons to develop a rule-based fiscal framework that would help strengthen fiscal policy coordination between the various layers of government and ensure long-term fiscal sustainability and a more equitable intergenerational distribution of wealth.
effective identification, assessment, monitoring, and reporting of contingent liabilities arising from GREs, and disclosure of these liabilities in government accounts. The authorities should also consider including a statement of fiscal risks as part of the annual budget documents including discussion of past experiences with the materialization of risks, a presentation of policies to mitigate risks, and forward-lookingriskestimates. The statement should focus on risks posed by GREs, and expand later to public-private partnerships (PPP) and other risks, as they arise
Aliona Cebotari, Jeffrey M. Davis, Ms. Lusine Lusinyan, Mr. Amine Mati, Mr. Paolo Mauro, Murray Petrie, and Ricardo Velloso
estimated. 5 Quantification is usually easier for macroeconomic risks and explicit guarantees (which include contractual terms and amounts) than for implicit guarantees. Sensitivity . Major fiscal risks are often related to areas where expectations of government policies need to be managed carefully, such as problems in the banking system or overvalued exchange rates. This needs to be recognized in designing disclosure modalities.
To gauge the importance of different sources of fiscal risks, this section draws on both realization of risks and forward-lookingrisk
A number of member countries have expressed interest in advice regarding disclosure and management of fiscal risks (defined as the possibility of deviations of fiscal outcomes from what was expected at the time of the budget or other forecast). This paper analyzes the main sources of fiscal risks and—building on an overview of existing practices in a wide range of countries—provides practical suggestions in this area, including a possible Statement of Fiscal Risks and a set of Guidelines for Fiscal Risk Disclosure and Management.
both realization of risks and forward-lookingriskestimates. It analyzes differences between projections and outcomes with respect to variables such as the debt/GDP ratio, fiscal deficits, and a residual term in the stock-flow reconciliation. This documents the macroeconomic relevance of fiscal risks, and highlights the importance of debt increases that are not captured in the deficit (examples include assumption of debts and other off-balance sheet items). Empirical evidence is then presented on the fiscal consequences of each type of shock, based on forward
The economic recovery in the U.A.E. is gaining strength, but subject to increased regional uncertainty. The government should undertake cost-benefit analysis and implement projects that have high economic return. In order to reduce government-related entities (GRE) risks, the authorities should complete restructuring of GRE debt and communicate their strategy by developing a GRE risk management framework. The central bank has taken steps in strengthening risk monitoring and the management system. The progress made by National Bureau of Statistics (NBS) in establishing macroeconomic statistics proved an important step toward developing statistical capacity.
Ms. Lusine Lusinyan, Aliona Cebotari, Ricardo Velloso, Mr. Jeffrey M. Davis, Mr. Amine Mati, Murray Petrie, and Mr. Paolo Mauro
This paper analyzes the main sources of fiscal risks, including from unexpected changes in macroeconomic variables and banking crises, which can have major consequences for countries fiscal and public debt sustainability. It builds on an overview of existing practices in a wide range of countries to provide practical suggestions on how to promote disclosure of such risks and on risk mitigation and management. The paper was written in response to requests from IMF member countries for advice on this subject. The paper also includes an example of a possible statement of fiscal risks.