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Thursday, May 21, 2009

Government Fiscal Risks: Sources, Disclosure and Management

Ricardo Velloso of the International Monetary Fund says that countries were growing so fast that risk was not analyzed as it should. Mr. Velloso described the sources, discloure and management for fiscal risks at the 23rd Annual ICGFM Conference in Miami.

Mr. Velloso mentioned that the current financial crisis has brought more interest in managing risks. Many countries were experiencing such high growth that there was not a signficant effort to manage risk.

Mr. Velloso said that fiscal risks could be defined as deviations of fiscal outturns (deficits, debt/GDP) from expectations at the time of the budget and/or other fiscal forecasts.

The IMF World Economic Outlook has shown a broad deviation in debt to GDP ratios. Deviations are larger in emerging economies. Mr. Velloso suggests that there are two categories of major risks: macroencomic shocks and contingent liabilities. Sources of macroeconomic shocks include real GDP growth, inflation, commodity prices, and interest and exchange rates. Contingent liabilities are obligations triggered by uncertain events and can be:

  • Explicit: defined by law or contract, such as debt guarantees.
  • Implicit: arising from government ownership of SOEs, expectations that the government will provide assistance such as depositors in event of bank failures.

Mr. Velloso says there there is often more incentive in government to hide risk. Yet there are many important benefits to dsiclose this rick. This can increase confidence and reduce uncertainty for investors and taxpayers. He conclused that there is a trend, internationally, toward greater disclosure.

Mr. Velloso warned that governments must recognize that a narrow definition of the budget does not cover other affects. The IMF is advocating that governments accumulate risks in a single document or statement. He warned that Public Private Partnerships, State-Owned Enterprises and Sub-national governments tend to provide additional risk profiles.

Additional material on this subject is available from Mr. Velloso's posting on the IMF PFM blog.

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