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Opening Remarks at the Conference on "Managing Fiscal Risks in Asia"|
By Agustín Carstens, Deputy Managing Director
International Monetary Fund
At the Singapore Training Institute
Singapore, June 15, 2005
As Prepared for Delivery
1. Good morning. It is a great pleasure to be here in Singapore and host this conference on managing fiscal risks in Asia. I'm glad that so many of you have been able to take time out of your busy schedule and join us.
2. I would like to thank the Singapore authorities for their hospitality and, in particular, Singapore's Ministry of Foreign Affairs which provided logistical support, and its Finance Ministry which contributed importantly to fund this event.
3. Today's conference takes place within the framework of the IMF-Singapore Regional Training Institute (STI), whose director, Mr. Henri Ghesquiere, is with us this morning. Seven years ago, the Government of Singapore and the IMF established the STI as a joint venture. It is part of the IMF's broader efforts to help its member countries build institutional capacity. The goal of the STI is to provide training for officials and a forum for exchange of views among economic and financial policy makers of 43 countries of the Asia-Pacific region.
4. This conference is aimed at providing an opportunity for senior officials in Asia to get together and share their experience of managing fiscal risks in their countries. We have held similar conferences for other member countries with positive results, such as for EU accession countries and the CIS countries. As you know, the IMF's country teams, in their bilateral interactions with member countries, offer advice on fiscal risks, and in so doing, bring their cross-country experience to bear. Still, any advice might be most persuasive if it comes directly from those who have dealt with fiscal risks themselves, while overcoming various difficulties including political ones.
5. As you can see from the program, this is precisely what we are hoping to achieve in this conference. Each of you has been asked to make a presentation or to be a lead speaker in today's sessions. You are asked to explain challenges you have encountered in managing fiscal risks, and to share with us which strategy did or didn't work, as well as any lessons you may have drawn from it. While we hope that you will find the sharing of experiences among yourselves useful, listening to your presentations is also a great opportunity for the IMF and World Bank staff present here today to better understand your fiscal situation, which in turn will help us better focus our fiscal work with you in the future. Staff's presentations tomorrow morning are also aimed in part to serve this purpose. We will explain what we do in the areas of fiscal risk and public investment management, and receive your comments on how we can improve on our service delivery. So please express your frank views on our work in these areas, and tell us what you want us to do more or differently.
6. Before I turn to the specific topics we will be discussing today and tomorrow, let me say a few words on the fiscal situation in Asia. Asia is very diverse, and it is difficult to find fiscal themes common to all countries in the region. For example, there are countries, such as India, the Philippines, and Sri Lanka, where the debt-to-GDP ratio is very high and there is an urgent need to improve debt sustainability. There are others, such as Hong Kong SAR and Singapore, whose fiscal position is very strong. Quasi-fiscal activities and contingent liabilities are deemed to be substantial in many countries, including China, India, Indonesia, the Philippines, Sri Lanka, and Vietnam, with their typical sources being the banking sector, the pension system, state-owned enterprises, and the power sector. However, some have been quite successful in keeping these activities and liabilities low, such as Hong Kong SAR, Malaysia, and Singapore. Building better infrastructure for sustaining robust growth in the future is an important task for many Asian countries, but approaches taken by individual countries differ. Some are initiating a large-scale public investment plan with private sector involvement, such as Indonesia, Korea and Thailand, while others seem to prefer a more low-key approach, partly because of pressing needs to keep public debt and deficits under control.
7. Given this diversity, I don't expect any clear consensus, or a one-size-fits-all approach, to emerge from our discussions on how to manage fiscal risks. Also, many of the technical issues are not fully resolved, so that different approaches may have to be tested for any particular fiscal risk a country may be facing. Nevertheless, I'm sure that we can find many useful ideas and strategies from your presentations that may be applicable to other countries under similar circumstances. We will see this in the course of the discussions today.
8. I just used the expression, "one size fits all". This is often used to criticize the IMF's approach toward member countries' policy adjustments. This and other criticisms made against the IMF after the Asian Crisis, led the IMF's Executive Board to establish an Independent Evaluation Office in 2001, whose mandate is to conduct objective and independent evaluation on issues related to the IMF. One of the very first issues chosen for the Office's evaluation was "fiscal adjustment in IMF-supported programs", and the report that came out in 2003 looked specifically into whether the IMF's fiscal targets were set on a "one-size-fits-all" basis.1 Contrary to the expectations held by many, the report concluded that the evidence did not support the commonly held view that the IMF's fiscal targets were uniformly austere, which was a bit of comfort for us at the IMF. Nevertheless, we will not be complacent and will continue to make efforts to tailor our policy advice to country-specific circumstances.
9. Now, let me turn to the main topics of the conference. The overarching theme is management of fiscal risks, but a number of specific elements of this deserve particular attention. I hope that discussing them upfront will give you a better sense of why we organized this conference.
10. In the note we sent you last month in which we made suggestions for your presentation, we put some emphasis on the questions of how each country is handling "off-budget" activity and what approach is being taken to disclosure of fiscal risks. These features of fiscal administration have an important bearing on the way countries deal with vulnerabilities to future risks and adjust to shocks when they occur. Government accounting and fiscal reporting are evolving to meet many of these challenges. A number of countries in Asia and elsewhere are introducing accrual accounting techniques to better capture "off-budget" activity and potential future fiscal risks, and are adopting some of the practices recommended in the IMF's fiscal transparency code. It will be interesting to discuss the extent to which such innovations have been adopted in your countries, and which ones have been found useful or problematic.
11. In our dialogue with member countries, we place particular emphasis on the dangers of quasi-fiscal activity, that is, attempts to achieve fiscal goals through the use of practices, institutions, or enterprises outside of the government. One example that is common in Asia and many other parts of the world is using price controls to protect the population from rising costs of living. As is well known, such a policy has adverse side-effects, distorting demand and exacerbating over time the underlying problem such as supply shortages. If goods and services under price control, or more generally, under the government's influence, are provided by public entities such as state-owned banks or enterprises, over time they will build up liabilities or run down assets on their balance sheets, and may thus give rise to substantial future demands on the budget. Countries are not always aware of the extent of quasi-fiscal activities, and as a result, often fail to understand their true costs. A proper balance needs to be struck between costs and benefits of these activities, together with a strategy of reducing the state's involvement in commercial activities over time.
12. Another important topic of this conference is public investment. The need for investment in emerging market countries, combined with limitations on the public investment budget, has led to a world-wide trend to foster public-private partnerships (PPPs) to finance infrastructure and other key social investments. Well-executed PPPs can bring efficiency gains as well as help overcome public budget constraints. But PPPs may also give rise to fiscal obligations, for instance to purchase project output or through government guarantees. It is vital that governments be fully aware of the liabilities and risks that are to be borne by the public budget before entering into such schemes. In tomorrow's program we will have a session outlining work done by the World Bank and the IMF in this area. The hope is that we can move toward a more standard approach to accounting for investments financed through PPPs. In the meantime, we would like to learn as much as possible about the practical experiences of the participant countries in planning or implementing such schemes.
13. Finally, I'd like to draw your attention to the role of fiscal transparency in promoting good practices and improving dialogue between the IMF and its member countries. Better disclosure of information, including on quasi-fiscal activities and other fiscal risks, improves the understanding of the nature of the fiscal issues being faced, which facilitates the process of finding the right solutions. Better information also reduces the risk of fiscal surprises, provides greater accountability for government actions, and ultimately leads to better fiscal decisions with positive consequences for the economy.
14. The IMF has used its fiscal transparency code as a way to encourage voluntary comprehensive disclosure of fiscal activities by all member countries. More than 75 member countries, particularly the emerging market countries of Europe and Latin America, have completed fiscal transparency ROSCs, or Reports on the Observance of Standards and Codes. Many have found ROSCs helpful in identifying problems and encouraging reforms. Among those represented around this table, four countries have had a fiscal transparency ROSC, namely, India, Korea, the Philippines, and Sri Lanka. We would like to hear from the representatives of these countries how they view their ROSC experience and how we can enhance its usefulness.
15. In concluding my remarks, let me once again emphasize that the key objectives of this conference are to exchange views on how best to meet fiscal challenges, and to find ways for us to contribute more to your efforts to manage fiscal risks. I hope that the sessions today and tomorrow will achieve these goals. Thank you very much.
1 Independent Evaluation Office, "Fiscal Adjustment in IMF-Supported Programs", 2003.
IMF EXTERNAL RELATIONS DEPARTMENT