Fiscal transparency is a critical element of fiscal management and accountability. It ensures that governments have an accurate picture of their fiscal position and prospects, the long-term costs and benefits of any policy changes, and the potential risks that may blow them off course. It also provides legislatures, markets, and citizens with the information they need to hold governments accountable. The IMF’s new Fiscal Transparency Code and Evaluation, described in the Update on the Fiscal Transparency Initiative, are part of its efforts to strengthen fiscal surveillance, support policymaking, and improve fiscal accountability.
Why is increased fiscal transparency desirable?
Fiscal transparency allows for a better informed debate by both policymakers and the public about the design and results of fiscal policy, and helps establish accountability for its implementation. It helps to highlight risks to the fiscal outlook, allowing an earlier and smoother fiscal policy response to changing economic conditions and thereby reducing the incidence and severity of crises. The degree of fiscal transparency can also help provide a sense of a country’s fiscal credibility and plays a role in how financial markets view the country’s fiscal track record. The loss of market confidence in governments with underestimated or hidden deficits in the wake of the recent crisis underscored the importance of fiscal transparency to global financial and economic stability.
The IMF’s work on fiscal transparency
First published in 1998 and last updated in 2007, the IMF’s Code of Good Practices on Fiscal Transparencyand accompanying Manual and Guide are the centerpieces of global fiscal transparency standards. Over the years, the Code provided the framework for conducting assessments of countries’ fiscal transparency, as part of the IMF’s Reports on the Observance of Standards and Codes (ROSC) initiative. In these assessments, IMF staff analyzed countries’ adherence to the principles and practices in the Code, with 93 countries publishing their results on the Standards and Codes web page.
In a recent paper on fiscal transparency, accountability, and risk, the IMF reviewed the state of fiscal transparency in the wake of the recent financial crisis and proposed a series of improvements to existing international fiscal transparency standards and monitoring arrangements.
The new fiscal transparency code and evaluation
The new Code, described in the Update on the Fiscal Transparency Initiative, covers four key elements of fiscal transparency:
- Pillar I: Fiscal Reporting, which should offer relevant, comprehensive, timely, and reliable information on the government’s financial position and performance.
- Pillar II: Fiscal Forecasting and Budgeting, which should provide a clear statement of the government’s budgetary objectives and policy intentions, together with comprehensive, timely, and credible projections of the evolution of the public finances.
- Pillar III: Fiscal Risk Analysis and Management, which should ensure risks to the public finances are disclosed, analyzed and managed, and fiscal decision-making across the public sector is effectively coordinated.
- Pillar IV: Resource Revenue Management, which should provide a transparent framework for the ownership, contracting, taxation, and utilization of natural resource endowments.
While Pillars I, II, and III have been finalized, Pillar IV will be completed later this year, and requires adapting the principles of the first three pillars to the particular circumstances of resource-rich countries.
Fiscal Transparency Evaluations (FTEs) are the IMF’s principal fiscal transparency diagnostic. FTEs provide quantified analyses of the scale and sources of fiscal vulnerability based on a set of fiscal transparency indicators, a summary of country fiscal transparency strengths and reform priorities through a set of heat maps, and the option of a sequenced fiscal transparency action plan to help countries address those reform priorities. FTEs also allow for modular assessments focused on the new Code’s individual pillars for addressing the most pressing transparency issues. To ensure the relevance and applicability of FTEs to the full range of IMF member countries, nine evaluations have been conducted to date, covering four geographic regions, and four of these reports have been published.
The new Code and FTE build on the previous framework by focusing on fiscal risks. They are designed to ensure that policymakers, legislators, citizens, and markets have a complete picture of the state of public finances, covering the entire public sector, incorporating accurate and comprehensive fiscal forecasts, and recognizing all major fiscal risks. They also reflect feedback from governments, civil society, academics, market participants, and the public that was received through two rounds of consultation in December 2012 and July 2013.
To enhance consistency and complementarity, the new Code and FTE have been harmonized with other standards and diagnostic tools in the fiscal area, including the revised Public Expenditure and Financial Accountability (PEFA) framework.
Next steps in the IMF’s fiscal transparency initiative
- Finalize, by mid-2015, Pillar IV of the new code, following a public consultation later this year.
- Release, in the course of 2015, a two-volume Fiscal Transparency Manual, which will provide more detailed guidance on the implementation of new Code’s principles and practices. Volume I of the Manual will cover Pillars I, II, and III, while Volume II will focus on Pillar IV, and integrate the previously separate “Guide on Resource Revenue Transparency.”
- On the basis of the new Code, carry out a number of Fiscal Transparency Evaluations in priority countries.