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 2012 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 2012 paper also laid the groundwork for the new Fiscal Transparency Code and Evaluation that replaced the 2007 Code and the related fiscal module of the ROSC.
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.
Pillars I, II, and III have been issued and a draft of Pillar IV has been made available for public consultation and piloting in the field. It adapts 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 tool. 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. Thirteen FTEs have been conducted to date and nine of the evaluation reports have been finalized and published: for Bolivia, Costa Rica, Finland, Ireland, Mozambique, the Philippines, Portugal, Romania, and Russia.
Next steps in the IMF’s fiscal transparency initiative
- Complete Pillar IV of the new code, following the public consultation, and submit the full Fiscal Transparency Code to the IMF Board for approval.
- Finalize a two-volume Fiscal Transparency Manual, which will provide more detailed guidance on the implementation of the new Code’s principles and practices. Volume I of the Manual will cover Pillars I, II, and III, and Volume II will focus on Pillar IV and integrate the previously separate Guide on Resource Revenue Transparency.
- Carry out FTEs in priority countries on the basis of the new code.