## ANNEX I TRANSPARENCY IN GOVERNMENT OPERATIONS ## Source details **Canonical URL:** [ANNEX I TRANSPARENCY IN GOVERNMENT OPERATIONS](https://www.imf.org/-/media/websites/imf/imported-flagship-issues/external/pubs/ft/weo/weo0598/pdf/_0598annpdf.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-flagship-issues/external/pubs/ft/weo/weo0598/pdf/_0598annpdf.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-flagship-issues/external/pubs/ft/weo/weo0598/pdf/_0598annpdf.pdf.json) --- ### Institutions and Behavior - Clear demarcation of boundaries is required between the public and private sectors and, within the former, between different levels of government and the state enterprise sector. - Revenue bases for each level of government should be unambiguously defined; formula-based arrangements for revenue sharing and intragovernmental transfers may be appropriate. - Extrabudgetary operations can be efficient for tasks transcending annual budget appropriations (examples: public pension and commodity stabilization schemes) but have been used to avoid legislative scrutiny (example: military spending). - Dysfunction can arise when extrabudgetary funds are misused (examples: easy access to old-age and disability pensions used nontransparently to alleviate unemployment; reserves from commodity stabilization funds or sale of nonrenewable resources diverted to finance consumer subsidies or prestige projects). - Transparency requirements: - Provide adequate and timely information on extrabudgetary activities. - Maintain transparency in relations between government and the state-owned enterprise sector; activities properly carried out by the private sector should be documented in publicly available reports when performed by state-owned enterprises. - Disclose costs of quasi-fiscal activities by public financial institutions (multiple exchange rates, preferential credits, guarantees) preferably in annual budget documents. - Provide information on fiscal costs of restructuring state-owned financial institutions and nonfinancial enterprises. - Conduct privatization with openness consistent with sound marketing considerations. - When government mandates private sector activities on its behalf, a transparent understanding of the government's fiscal obligations toward the private sector is required. - Clear regulatory frameworks are needed in public health, consumer safety, environmental protection, labor protection, and competition policy to avoid hidden compliance costs. - Transparency in budget process, tax policy and administration, and debt-financing operations: - Draft budget documents should preferably incorporate broad fiscal targets and strategy in a multiyear context; legislative debate, approval, and outcomes should be open and published. - During execution, the government should periodically inform the public and legislature about budgetary outcomes and comparisons with objectives. - Open public procurement, contracting, and employment practices enhance transparency; financial and performance audits should be public. - Enforce conflict-of-interest legislation and consider freedom-of-information legislation to ensure access to public documents and justify nondisclosure. - Tax transparency entails a well-defined statutory basis for taxation and clear, simple administration; discretionary tax relief to particular individuals or enterprises impairs transparency. - Publish estimates of tax expenditures (revenue forgone because of tax preferences) to inform budget and tax reform debates. - Transparency in government financing operations is enhanced by market-based financing with adequate data on tenders, securities, coupons, prices, bids and offers accepted, and the magnitude, terms, and holders of public debt and on the government’s debt-service capacity. - Transparency in government lending requires clearly specified policy criteria, risk assessment, and disclosure of terms and conditions. ### Government Accounts - General government is intended to provide comprehensive coverage of the noncommercial public sector (budget plus social security and other extrabudgetary accounts, consolidated across levels of government), but may still exclude quasi-fiscal activities of state-owned financial institutions and nonfinancial enterprises. - Alternatives and expansions: - Some countries report the nonfinancial public sector; others include official financial institutions to encompass the entire public sector. - Preferable objective: capture costs of all government functions, including quasi-fiscal activities conducted outside general government; if quantification is impossible, list such activities. - Recording basis (cash or accrual) has important implications: - Cash-based recording is helpful for assessing first-order impacts on inflation and external balance but can misstate magnitude and timing of fiscal operations. - Major distortions under cash-based recording stem from exclusion of accruals such as accumulation of arrears (especially expenditure arrears), transactions in kind (issuance of government obligations to suppliers, tax refunds, or in connection with bank restructuring), and the cost of borrowing at a discount. - Accrual-based reporting is useful for gauging macroeconomic resource repercussions over medium to long term; many view monitoring on both accrual and cash bases as desirable. - Valuation and recognition of assets and liabilities are critical for transparency and consistency: - Investment expenditure may be treated as full expensing or depreciation depending on analytical purpose. - Difficulties valuing public assets often make gross (rather than net) measurement of public debt the only reliable option. - Estimates of government net worth are desirable but most countries are not yet in a position to prepare such estimates. - Compile and disclose information on commitments and contingent liabilities (examples: guarantees for credits extended by financial institutions and for deposits), many of which are not quantifiable because they are contingent on insured occurrences. - Provide estimates of obligations to future beneficiaries of social insurance (old-age, unemployment, health care) that would not appear affordable at current tax and contribution rates to indicate the magnitude of policy changes required for fiscal sustainability. - Fiscal transparency requires classifying data on government operations, ownership, and liabilities into analytically useful categories of flows and stocks: - Revenue should be broken down into major tax and nontax categories and unrequited transfers; financing, including privatization receipts, should be shown below the line. - Expenditure must be classified into major functional and economic categories, with debt amortization separated from interest payments and amortization placed as a below-the-line negative financing item. - Financing flows and corresponding debt stock should be disaggregated by currency denomination, maturity, and source. ### Indicators and Projections - The most commonly available direct indicator of the fiscal balance—the overall balance of government operations—is transparent only if free of distortions in data coverage, recording, and classification. - Supplementary measures subject to the same transparency requirements include: - Current balance, as an indicator of the government’s contribution to national saving. - Primary balance, instrumental for determining fiscal policy effort needed to stabilize or reduce public debt. - Operational balance, for countries that have experienced high inflation and large levels of indebtedness. - Direct indicators of changes in stocks of assets and liabilities are compiled by most countries; absent satisfactory data on nonfinancial assets, reliance on gross debt measures is necessary. - Analytical indicators for short-run fiscal stance remove the effect of cyclical fluctuations or exogenous shocks (example: structural balance used predominantly in advanced economies). - Assessment of fiscal sustainability should be based on long-term scenarios: - Show evolution of fiscal balance over several decades in view of rapidly aging populations, rising health care costs, and rigidity of social entitlements. - Long-run debt sustainability can be determined by examining current indebtedness levels, the interest rate, the GDP growth rate, and the ratio of the primary budget balance to GDP. - Governments should provide periodic assessments of long-term financial viability of social insurance programs (pensions, health care, other social assistance). - Fiscal projections must be based on realistic and explicitly documented macroeconomic assumptions and parameters (examples: effective tax rates, tax bases). - Publication of short-run fiscal and macroeconomic forecasts should include baseline projections (assume unchanged policies) and alternative projections (incorporate impact of major policy changes). ### Overall Trends and Priorities - Recent progress toward fiscal transparency has been substantial in many IMF member countries. - Economies in transition have made the greatest leap toward transparency, although some still have non-transparent fiscal systems. - Distinguish between unintended nontransparency (due to slow technical and institutional development) and deliberate misrepresentation or suppression of information. - Priorities by group: - Advanced economies: publish comprehensive information to facilitate debate over fiscal discipline and long-term fiscal sustainability, particularly entitlement programs associated with population aging. Key needs include estimates of net unfunded liabilities and quasi-fiscal operations, costing of tax expenditures and regulation, and improved documentation of fiscal projections. - Developing economies: focus on institutional reforms to enhance transparency in the budget process, taxation, and quasi-fiscal activities of public nonfinancial enterprises and financial institutions, and on compilation and dissemination of essential fiscal data and projections. - Economies in transition: share many needs of developing countries; history of secrecy, widespread quasi-fiscal activities, and data systems oriented to planning rather than market needs may slow movement toward transparent fiscal practices. - Transparency efforts in developing and transition economies are particularly important for promoting good governance. ### Role of the IMF in Promoting Fiscal Transparency - Article IV consultations are the main vehicle for IMF surveillance over members’ fiscal policies; the IMF may urge increased transparency of fiscal data and practices in this context and in program conditionality. - The IMF enhances transparency in a multilateral context through the World Economic Outlook exercise, drawing on internationally comparable measures of fiscal stance and sustainability for major advanced economies. - The IMF’s Fiscal Affairs Department provides technical assistance across public finance issues, with many recommendations seeking to promote transparency in tax and budgetary matters. - The IMF’s Statistics Department assists in improving government statistics on the basis of well-established accounting conventions. - Development of Government Finance Statistics (GFS) methodology and publication of the GFS database facilitate internationally comparable cross-country comparisons. - Current revision of GFS guidelines, in line with the 1993 System of National Accounts (SNA) standards, furthers transparency and consistency of fiscal statistics. - The Special Data Dissemination Standard (SDDS) aims at countries accessing international capital markets and represents an important effort to promote transparency in dissemination of macroeconomic data; fiscal data are included on a highly aggregated basis. ### Effects of the Asian Crisis (commodity prices context) - Since mid-1997—that is, just before the beginning of the crisis in Thailand’s financial and foreign exchange markets—prices of primary commodities as a group have fallen by more than 10 percent. - To a large degree these price declines are associated with the Asian crisis. - During the early and mid-1990s, consumption of primary commodities in most Asian developing countries increased at rates much higher than in the rest of the world: - Asian developing countries accounted for about two-thirds of the increase in world consumption of petroleum products over the period 1992–96. - Their share in world consumption increased from 12 percent to 15 percent. - Korea and the ASEAN-4 countries (Indonesia, Malaysia, the Philippines, and Thailand) accounted for about one-half of the increase in consumption of petroleum products in Asian developing countries, and the share of these five countries in world consumption rose from 5 percent to 6!/2percent. - A similar pattern of growth in consumption is observed for base metals, rubber, coarse grains, oilmeals, and fats and oils; China’s contribution to growth in markets for these commodities has tended to be much greater than that of Korea plus the ASEAN-4. - In countries most directly affected, the Asian crisis produced much reduced construction activity, much higher import costs in terms of national currencies, less available credit to finance imports, and at a minimum sharp reductions in demand. *Source: _0598annpdf - introduction of new taxes or subsidies, would weaken* ### ANNEX II — RECENT DEVELOPMENTS IN PRIMARY COMMODITY MARKETS ### Overview and broad findings - From June 1997 to January 1998 the IMF’s index of primary commodity prices fell by 11 percent in terms of SDRs and about 14 percent in terms of U.S. dollars. - Price declines over this period were roughly the same for the IMF’s indicator spot price for crude petroleum and its index of prices of nonfuel primary commodities. - For nearly one-third of the commodities included in the IMF’s commodity price index, price decreases in excess of 10 percent (prices in SDRs) over June 1997 through January 1998 were in some way associated with weaker demand from Asian countries. ### Effects of the Asian financial crisis on demand and supply - The crisis led to reductions in the rate of growth of demand in the ASEAN-4 countries and Korea and, through spillovers and contagion effects, in many other countries in Asia and elsewhere. - For some nonfuel commodities (timber, rice, natural rubber, and vegetable oils), large depreciations of southeast Asian currencies created incentives to increase exports from current inventories and to increase current and prospective production. - Several commodity markets that as recently as mid-1997 were expected to show high demand growth now face considerable uncertainty about demand prospects. ### Effects of weather and El Niño - Weather conditions generally favorable to crop production have tended to weaken prices of several agricultural commodities. - El Niño adverse consequences sufficiently large to affect world prices have been limited mainly to: (1) fish catches off the west coast of South America, and (2) palm oil production in southeast Asia. - Warmer than usual winter weather in the Northern Hemisphere reduced demand for heating oil and contributed to the downward trend in petroleum and other energy commodity prices. ### Developments in specific markets — summary - Commodity price declines mainly associated with the Asian crisis: copper, nickel, natural rubber, wool, and hides. - Commodities where the Asian crisis played an important but not predominant role: crude petroleum, timber, zinc, and lead. - Commodities where weaker Asian demand was offset by other factors: aluminum, iron ore, meat, maize, and soybean meal. - Selected markets reviewed in more detail: petroleum, copper, aluminum, timber, natural rubber. ### Petroleum - Stocks of crude petroleum and petroleum products were gradually built up beginning in March 1997 to levels considerably higher than comparable months in 1996. - Despite stock accumulation, a 13!/2percent price increase (in SDR terms) occurred over June to October 1997, mostly at the end of September and early October. - From October 1997 to late March 1998, petroleum prices fell by more than 25 percent. - The IMF’s indicator price for crude petroleum fell from $20 per barrel to about $14 per barrel. - In late February, after the United Nations agreement with Iraq to expand the oil-for-food program, the petroleum price dipped below $12 per barrel; this decline was later partially reversed following the March 21 announcement of plans by major oil producing countries to restrict production. - Contributing factors to the late-1997/early-1998 petroleum price decline: - (1) slowing of demand growth in countries affected by the Asian crisis; - (2) a warm Northern Hemisphere winter reducing heating oil demand; - (3) acceleration in production increases, particularly in OPEC members; and - (4) inventories of crude and oil products at all stages considerably greater than last year. - Twenty-five countries depend on petroleum for 20 percent or more of their foreign exchange earnings (Table 27), implying sustained lower petroleum prices could have substantial ripple effects on government expenditures and investment programs worldwide. - Futures market spreads noted in late March: quotations for December 1998 were $1.50 a barrel higher than quotations for May 1998; quotations for December 1999 were about $0.40 a barrel higher than for December 1998. ### Copper - Copper price declined 33 percent from June 1997 to January 1998, attributed mainly to reduced demand in Asian markets. - Korea and the ASEAN-4 accounted for about one-fourth of copper consumption growth in 1992–96; their share of world copper consumption rose from 5!/2percent in 1992 to 8!/4percent in 1996. - The price decline occurred despite increased demand for refined copper in 1997 in the United States (about 4 percent increase) and western Europe (3!/2percent increase). - Three countries—Chile, Mongolia, and Zambia—are dependent on copper for 20 percent or more of their foreign exchange earnings; copper provides more than 10 percent of earnings for four additional countries. - Recent copper price decline is more serious for producers than the 1993 downturn because mining companies recently have had less of their production covered by forward sales. ### Aluminum - Aluminum prices showed little decline despite poorer Asian demand prospects. - Korea and the ASEAN-4 had growth rates in aluminum consumption similar to copper, but their share in world aluminum consumption remains lower than their share in world copper consumption. - Major aluminum producers have been able to agree on “memoranda of understanding” to idle production capacity and reduce stocks. - Aluminum stocks at the end of 1997 were about one-third lower than one year earlier. - Growth in aluminum consumption outside Asia was strong, particularly in Europe where the European Aluminum Association estimated a 6 percent increase in 1997. ### Timber - Timber price decline from June 1997 to January 1998 was in the order of 25 percent. - Decline uneven across types and geographic markets: - Asian-grown (meranti) hardwood experienced the greatest decline, attributable to persistent weak demand in Japan and depreciations of Malaysian, Indonesian, and Thai currencies stimulating exports. - African-grown (sapele) hardwood prices in European markets changed little. - Softwood market weakness reflected oversupply in U.S. and Canadian lumber markets and weak demand in Korea and Japan. - European consumption of sawn softwood is estimated to have increased in 1997 by about 4 percent. ### Natural rubber - Natural rubber price declined by 37 percent over June 1997 to January 1998 — the largest decline among commodities in this period. - Downward trend began as early as 1996 when world rubber production began to exceed consumption and inventories accumulated. - Thailand, the world’s leading producer with about 30 percent of world production, was central to recent developments; the large depreciation of the Thai currency intensified market effects. - Important market considerations included the Thai government stockpile of about 122 thousand tons of natural rubber and purchase operations of the Thai Rubber Estate Organization. - The possibility of purchases by the buffer stock operating under the 1995 International Natural Rubber Agreement also influenced market behavior. ### Table of notable price declines and countries most affected (June 1997 to January 1998; prices in SDRs) - Natural rubber: 37 percent decline. - Copper: 33 percent decline. - Timber: 24 percent decline. - Wool: 23 percent decline. - Nickel: 20 percent decline. - Zinc: 16 percent decline. - Hides: 15 percent decline. - Crude petroleum: 13 percent decline. - Lead: 11 percent decline. - Soybean meal: 11 percent decline. - Countries listed as depending on commodity exports for foreign exchange earnings (as reported in the table) include, for example: - Copper (50 percent or more of earnings; 20–49 percent; 10–19 percent): Zambia, Chile, Congo, Dem. Rep. of, Mongolia, Kazakhstan, Papua New Guinea, Peru. - Timber (50 percent or more; 20–49 percent; 10–19 percent): Equatorial Guinea, Cambodia, Lao P.D.R., Central African Rep., Solomon Islands, Gabon, Ghana, Indonesia, Latvia, Myanmar, New Zealand, Papua New Guinea, Swaziland. - Crude petroleum (examples among many listed): Angola, Azerbaijan, Algeria, Bahrain, Brunei Darussalam, Colombia, Congo, Rep. of, Cameroon, Congo, Dem. Rep. of, Gabon, Ecuador, Egypt, Iraq, Equatorial Guinea, Indonesia, Iran, Islamic Rep. of, Norway, Kazakhstan, Kuwait, Papua New Guinea, Mexico, Libya, Russia, Vietnam, Nigeria, Syrian Arab Rep., Oman, Trinidad and Tobago, Qatar, United Arab Emirates, Saudi Arabia, Venezuela, Yemen, Rep. of. - (Earnings from exports of goods and services.) ### Near-term outlook and scenarios - Near-term outlook for commodity prices is difficult to assess; uncertainty remains over whether some markets have stabilized. - Petroleum: Uncertainty about the supply response to lower early-1998 prices; futures show contango (later-month higher prices). - Indicators suggesting nonfuel price decline may have been arrested: - (1) Weekly data show the nonfuel commodity price index remained almost unchanged since the beginning of January (after falling each week in December). - (2) Current futures and forward delivery quotations show higher prices for later months of 1998 than for near months (a change from December). - (3) February showed some turnaround in prices of hides, natural rubber, and timber. - Offsetting pessimism: Trade and press reports increasingly pessimistic about demand for meat, cereals, and feedstuffs from traditional exporters. - Based on futures and forward market prices and other information, the projected level of nonfuel commodity prices for calendar year 1998 is about 2 percent above the current level; little change is indicated for 1999, partly because substantially lower prices expected for some commodities (especially arabica coffee) may offset increases in other nonfuel commodity prices. - In this scenario, commodity prices in real terms would not be far removed from the level that has tended to prevail since 1986. *International Monetary Fund — Annex II, “Recent Developments in Primary Commodity Markets”* ### introduction of new taxes or subsidies, would weaken ### ANNEX I TRANSPARENCY IN GOVERNMENT OPERATIONS ### Institutions and Behavior - Clear demarcation of boundaries is required between the public and private sectors and, within the former, between different levels of government and the state enterprise sector. - Revenue bases for each level of government should be unambiguously defined; formula-based arrangements for revenue sharing and intragovernmental transfers may be appropriate. - Extrabudgetary operations can be efficient for tasks transcending annual budget appropriations (examples: public pension and commodity stabilization schemes) but have been used to avoid legislative scrutiny (example: military spending). - Dysfunction can arise when extrabudgetary funds are misused (examples: easy access to old-age and disability pensions used nontransparently to alleviate unemployment; reserves from commodity stabilization funds or sale of nonrenewable resources diverted to finance consumer subsidies or prestige projects). - Transparency requirements: - Provide adequate and timely information on extrabudgetary activities. - Maintain transparency in relations between government and the state-owned enterprise sector; activities properly carried out by the private sector should be documented in publicly available reports when performed by state-owned enterprises. - Disclose costs of quasi-fiscal activities by public financial institutions (multiple exchange rates, preferential credits, guarantees) preferably in annual budget documents. - Provide information on fiscal costs of restructuring state-owned financial institutions and nonfinancial enterprises. - Conduct privatization with openness consistent with sound marketing considerations. - When government mandates private sector activities on its behalf, a transparent understanding of the government's fiscal obligations toward the private sector is required. - Clear regulatory frameworks are needed in public health, consumer safety, environmental protection, labor protection, and competition policy to avoid hidden compliance costs. - Transparency in budget process, tax policy and administration, and debt-financing operations: - Draft budget documents should preferably incorporate broad fiscal targets and strategy in a multiyear context; legislative debate, approval, and outcomes should be open and published. - During execution, the government should periodically inform the public and legislature about budgetary outcomes and comparisons with objectives. - Open public procurement, contracting, and employment practices enhance transparency; financial and performance audits should be public. - Enforce conflict-of-interest legislation and consider freedom-of-information legislation to ensure access to public documents and justify nondisclosure. - Tax transparency entails a well-defined statutory basis for taxation and clear, simple administration; discretionary tax relief to particular individuals or enterprises impairs transparency. - Publish estimates of tax expenditures (revenue forgone because of tax preferences) to inform budget and tax reform debates. - Transparency in government financing operations is enhanced by market-based financing with adequate data on tenders, securities, coupons, prices, bids and offers accepted, and the magnitude, terms, and holders of public debt and on the government’s debt-service capacity. - Transparency in government lending requires clearly specified policy criteria, risk assessment, and disclosure of terms and conditions. ### Government Accounts - General government is intended to provide comprehensive coverage of the noncommercial public sector (budget plus social security and other extrabudgetary accounts, consolidated across levels of government), but may still exclude quasi-fiscal activities of state-owned financial institutions and nonfinancial enterprises. - Alternatives and expansions: - Some countries report the nonfinancial public sector; others include official financial institutions to encompass the entire public sector. - Preferable objective: capture costs of all government functions, including quasi-fiscal activities conducted outside general government; if quantification is impossible, list such activities. - Recording basis (cash or accrual) has important implications: - Cash-based recording is helpful for assessing first-order impacts on inflation and external balance but can misstate magnitude and timing of fiscal operations. - Major distortions under cash-based recording stem from exclusion of accruals such as accumulation of arrears (especially expenditure arrears), transactions in kind (issuance of government obligations to suppliers, tax refunds, or in connection with bank restructuring), and the cost of borrowing at a discount. - Accrual-based reporting is useful for gauging macroeconomic resource repercussions over medium to long term; many view monitoring on both accrual and cash bases as desirable. - Valuation and recognition of assets and liabilities are critical for transparency and consistency: - Investment expenditure may be treated as full expensing or depreciation depending on analytical purpose. - Difficulties valuing public assets often make gross (rather than net) measurement of public debt the only reliable option. - Estimates of government net worth are desirable but most countries are not yet in a position to prepare such estimates. - Compile and disclose information on commitments and contingent liabilities (examples: guarantees for credits extended by financial institutions and for deposits), many of which are not quantifiable because they are contingent on insured occurrences. - Provide estimates of obligations to future beneficiaries of social insurance (old-age, unemployment, health care) that would not appear affordable at current tax and contribution rates to indicate the magnitude of policy changes required for fiscal sustainability. - Fiscal transparency requires classifying data on government operations, ownership, and liabilities into analytically useful categories of flows and stocks: - Revenue should be broken down into major tax and nontax categories and unrequited transfers; financing, including privatization receipts, should be shown below the line. - Expenditure must be classified into major functional and economic categories, with debt amortization separated from interest payments and amortization placed as a below-the-line negative financing item. - Financing flows and corresponding debt stock should be disaggregated by currency denomination, maturity, and source. ### Indicators and Projections - The most commonly available direct indicator of the fiscal balance—the overall balance of government operations—is transparent only if free of distortions in data coverage, recording, and classification. - Supplementary measures subject to the same transparency requirements include: - Current balance, as an indicator of the government’s contribution to national saving. - Primary balance, instrumental for determining fiscal policy effort needed to stabilize or reduce public debt. - Operational balance, for countries that have experienced high inflation and large levels of indebtedness. - Direct indicators of changes in stocks of assets and liabilities are compiled by most countries; absent satisfactory data on nonfinancial assets, reliance on gross debt measures is necessary. - Analytical indicators for short-run fiscal stance remove the effect of cyclical fluctuations or exogenous shocks (example: structural balance used predominantly in advanced economies). - Assessment of fiscal sustainability should be based on long-term scenarios: - Show evolution of fiscal balance over several decades in view of rapidly aging populations, rising health care costs, and rigidity of social entitlements. - Long-run debt sustainability can be determined by examining current indebtedness levels, the interest rate, the GDP growth rate, and the ratio of the primary budget balance to GDP. - Governments should provide periodic assessments of long-term financial viability of social insurance programs (pensions, health care, other social assistance). - Fiscal projections must be based on realistic and explicitly documented macroeconomic assumptions and parameters (examples: effective tax rates, tax bases). - Publication of short-run fiscal and macroeconomic forecasts should include baseline projections (assume unchanged policies) and alternative projections (incorporate impact of major policy changes). ### Overall Trends and Priorities - Recent progress toward fiscal transparency has been substantial in many IMF member countries. - Economies in transition have made the greatest leap toward transparency, although some still have non-transparent fiscal systems. - Distinguish between unintended nontransparency (due to slow technical and institutional development) and deliberate misrepresentation or suppression of information. - Priorities by group: - Advanced economies: publish comprehensive information to facilitate debate over fiscal discipline and long-term fiscal sustainability, particularly entitlement programs associated with population aging. Key needs include estimates of net unfunded liabilities and quasi-fiscal operations, costing of tax expenditures and regulation, and improved documentation of fiscal projections. - Developing economies: focus on institutional reforms to enhance transparency in the budget process, taxation, and quasi-fiscal activities of public nonfinancial enterprises and financial institutions, and on compilation and dissemination of essential fiscal data and projections. - Economies in transition: share many needs of developing countries; history of secrecy, widespread quasi-fiscal activities, and data systems oriented to planning rather than market needs may slow movement toward transparent fiscal practices. - Transparency efforts in developing and transition economies are particularly important for promoting good governance. ### Role of the IMF in Promoting Fiscal Transparency - Article IV consultations are the main vehicle for IMF surveillance over members’ fiscal policies; the IMF may urge increased transparency of fiscal data and practices in this context and in program conditionality. - The IMF enhances transparency in a multilateral context through the World Economic Outlook exercise, drawing on internationally comparable measures of fiscal stance and sustainability for major advanced economies. - The IMF’s Fiscal Affairs Department provides technical assistance across public finance issues, with many recommendations seeking to promote transparency in tax and budgetary matters. - The IMF’s Statistics Department assists in improving government statistics on the basis of well-established accounting conventions. - Development of Government Finance Statistics (GFS) methodology and publication of the GFS database facilitate internationally comparable cross-country comparisons. - Current revision of GFS guidelines, in line with the 1993 System of National Accounts (SNA) standards, furthers transparency and consistency of fiscal statistics. - The Special Data Dissemination Standard (SDDS) aims at countries accessing international capital markets and represents an important effort to promote transparency in dissemination of macroeconomic data; fiscal data are included on a highly aggregated basis. ### Effects of the Asian Crisis (commodity prices context) - Since mid-1997—that is, just before the beginning of the crisis in Thailand’s financial and foreign exchange markets—prices of primary commodities as a group have fallen by more than 10 percent. - To a large degree these price declines are associated with the Asian crisis. - During the early and mid-1990s, consumption of primary commodities in most Asian developing countries increased at rates much higher than in the rest of the world: - Asian developing countries accounted for about two-thirds of the increase in world consumption of petroleum products over the period 1992–96. - Their share in world consumption increased from 12 percent to 15 percent. - Korea and the ASEAN-4 countries (Indonesia, Malaysia, the Philippines, and Thailand) accounted for about one-half of the increase in consumption of petroleum products in Asian developing countries, and the share of these five countries in world consumption rose from 5 percent to 6!/2percent. - A similar pattern of growth in consumption is observed for base metals, rubber, coarse grains, oilmeals, and fats and oils; China’s contribution to growth in markets for these commodities has tended to be much greater than that of Korea plus the ASEAN-4. - In countries most directly affected, the Asian crisis produced much reduced construction activity, much higher import costs in terms of national currencies, less available credit to finance imports, and at a minimum sharp reductions in demand. *Source: _0598annpdf - introduction of new taxes or subsidies, would weaken* ### Annex II ### Annex II — Recent Developments in Primary Commodity Markets ### Overview and broad findings - From June 1997 to January 1998 the IMF’s index of primary commodity prices fell by 11 percent in terms of SDRs and about 14 percent in terms of U.S. dollars. - Price declines over this period were roughly the same for the IMF’s indicator spot price for crude petroleum and its index of prices of nonfuel primary commodities. - For nearly one-third of the commodities included in the IMF’s commodity price index, price decreases in excess of 10 percent (prices in SDRs) over June 1997 through January 1998 were in some way associated with weaker demand from Asian countries. ### Effects of the Asian financial crisis on demand and supply - The crisis led to reductions in the rate of growth of demand in the ASEAN-4 countries and Korea and, through spillovers and contagion effects, in many other countries in Asia and elsewhere. - For some nonfuel commodities (timber, rice, natural rubber, and vegetable oils), large depreciations of southeast Asian currencies created incentives to increase exports from current inventories and to increase current and prospective production. - Several commodity markets that as recently as mid-1997 were expected to show high demand growth now face considerable uncertainty about demand prospects. ### Effects of weather and El Niño - Weather conditions generally favorable to crop production have tended to weaken prices of several agricultural commodities. - El Niño adverse consequences sufficiently large to affect world prices have been limited mainly to: (1) fish catches off the west coast of South America, and (2) palm oil production in southeast Asia. - Warmer than usual winter weather in the Northern Hemisphere reduced demand for heating oil and contributed to the downward trend in petroleum and other energy commodity prices. ### Developments in specific markets — summary - Commodity price declines mainly associated with the Asian crisis: copper, nickel, natural rubber, wool, and hides. - Commodities where the Asian crisis played an important but not predominant role: crude petroleum, timber, zinc, and lead. - Commodities where weaker Asian demand was offset by other factors: aluminum, iron ore, meat, maize, and soybean meal. - Selected markets reviewed in more detail: petroleum, copper, aluminum, timber, natural rubber. ### Petroleum - Stocks of crude petroleum and petroleum products were gradually built up beginning in March 1997 to levels considerably higher than comparable months in 1996. - Despite stock accumulation, a 13!/2percent price increase (in SDR terms) occurred over June to October 1997, mostly at the end of September and early October. - From October 1997 to late March 1998, petroleum prices fell by more than 25 percent. - The IMF’s indicator price for crude petroleum fell from $20 per barrel to about $14 per barrel. - In late February, after the United Nations agreement with Iraq to expand the oil-for-food program, the petroleum price dipped below $12 per barrel; this decline was later partially reversed following the March 21 announcement of plans by major oil producing countries to restrict production. - Contributing factors to the late-1997/early-1998 petroleum price decline: - (1) slowing of demand growth in countries affected by the Asian crisis; - (2) a warm Northern Hemisphere winter reducing heating oil demand; - (3) acceleration in production increases, particularly in OPEC members; and - (4) inventories of crude and oil products at all stages considerably greater than last year. - Twenty-five countries depend on petroleum for 20 percent or more of their foreign exchange earnings (Table 27), implying sustained lower petroleum prices could have substantial ripple effects on government expenditures and investment programs worldwide. - Futures market spreads noted in late March: quotations for December 1998 were $1.50 a barrel higher than quotations for May 1998; quotations for December 1999 were about $0.40 a barrel higher than for December 1998. ### Copper - Copper price declined 33 percent from June 1997 to January 1998, attributed mainly to reduced demand in Asian markets. - Korea and the ASEAN-4 accounted for about one-fourth of copper consumption growth in 1992–96; their share of world copper consumption rose from 5!/2percent in 1992 to 8!/4percent in 1996. - The price decline occurred despite increased demand for refined copper in 1997 in the United States (about 4 percent increase) and western Europe (3!/2percent increase). - Three countries—Chile, Mongolia, and Zambia—are dependent on copper for 20 percent or more of their foreign exchange earnings; copper provides more than 10 percent of earnings for four additional countries. - Recent copper price decline is more serious for producers than the 1993 downturn because mining companies recently have had less of their production covered by forward sales. ### Aluminum - Aluminum prices showed little decline despite poorer Asian demand prospects. - Korea and the ASEAN-4 had growth rates in aluminum consumption similar to copper, but their share in world aluminum consumption remains lower than their share in world copper consumption. - Major aluminum producers have been able to agree on “memoranda of understanding” to idle production capacity and reduce stocks. - Aluminum stocks at the end of 1997 were about one-third lower than one year earlier. - Growth in aluminum consumption outside Asia was strong, particularly in Europe where the European Aluminum Association estimated a 6 percent increase in 1997. ### Timber - Timber price decline from June 1997 to January 1998 was in the order of 25 percent. - Decline uneven across types and geographic markets: - Asian-grown (meranti) hardwood experienced the greatest decline, attributable to persistent weak demand in Japan and depreciations of Malaysian, Indonesian, and Thai currencies stimulating exports. - African-grown (sapele) hardwood prices in European markets changed little. - Softwood market weakness reflected oversupply in U.S. and Canadian lumber markets and weak demand in Korea and Japan. - European consumption of sawn softwood is estimated to have increased in 1997 by about 4 percent. ### Natural rubber - Natural rubber price declined by 37 percent over June 1997 to January 1998 — the largest decline among commodities in this period. - Downward trend began as early as 1996 when world rubber production began to exceed consumption and inventories accumulated. - Thailand, the world’s leading producer with about 30 percent of world production, was central to recent developments; the large depreciation of the Thai currency intensified market effects. - Important market considerations included the Thai government stockpile of about 122 thousand tons of natural rubber and purchase operations of the Thai Rubber Estate Organization. - The possibility of purchases by the buffer stock operating under the 1995 International Natural Rubber Agreement also influenced market behavior. ### Table of notable price declines and countries most affected (June 1997 to January 1998; prices in SDRs) - Natural rubber: 37 percent decline. - Copper: 33 percent decline. - Timber: 24 percent decline. - Wool: 23 percent decline. - Nickel: 20 percent decline. - Zinc: 16 percent decline. - Hides: 15 percent decline. - Crude petroleum: 13 percent decline. - Lead: 11 percent decline. - Soybean meal: 11 percent decline. - Countries listed as depending on commodity exports for foreign exchange earnings (as reported in the table) include, for example: - Copper (50 percent or more of earnings; 20–49 percent; 10–19 percent): Zambia, Chile, Congo, Dem. Rep. of, Mongolia, Kazakhstan, Papua New Guinea, Peru. - Timber (50 percent or more; 20–49 percent; 10–19 percent): Equatorial Guinea, Cambodia, Lao P.D.R., Central African Rep., Solomon Islands, Gabon, Ghana, Indonesia, Latvia, Myanmar, New Zealand, Papua New Guinea, Swaziland. - Crude petroleum (examples among many listed): Angola, Azerbaijan, Algeria, Bahrain, Brunei Darussalam, Colombia, Congo, Rep. of, Cameroon, Congo, Dem. Rep. of, Gabon, Ecuador, Egypt, Iraq, Equatorial Guinea, Indonesia, Iran, Islamic Rep. of, Norway, Kazakhstan, Kuwait, Papua New Guinea, Mexico, Libya, Russia, Vietnam, Nigeria, Syrian Arab Rep., Oman, Trinidad and Tobago, Qatar, United Arab Emirates, Saudi Arabia, Venezuela, Yemen, Rep. of. - (Earnings from exports of goods and services.) ### Near-term outlook and scenarios - Near-term outlook for commodity prices is difficult to assess; uncertainty remains over whether some markets have stabilized. - Petroleum: Uncertainty about the supply response to lower early-1998 prices; futures show contango (later-month higher prices). - Indicators suggesting nonfuel price decline may have been arrested: - (1) Weekly data show the nonfuel commodity price index remained almost unchanged since the beginning of January (after falling each week in December). - (2) Current futures and forward delivery quotations show higher prices for later months of 1998 than for near months (a change from December). - (3) February showed some turnaround in prices of hides, natural rubber, and timber. - Offsetting pessimism: Trade and press reports increasingly pessimistic about demand for meat, cereals, and feedstuffs from traditional exporters. - Based on futures and forward market prices and other information, the projected level of nonfuel commodity prices for calendar year 1998 is about 2 percent above the current level; little change is indicated for 1999, partly because substantially lower prices expected for some commodities (especially arabica coffee) may offset increases in other nonfuel commodity prices. - In this scenario, commodity prices in real terms would not be far removed from the level that has tended to prevail since 1986. *International Monetary Fund — Annex II, “Recent Developments in Primary Commodity Markets”* --- _Source: https://www.imf.org/-/media/websites/imf/imported-flagship-issues/external/pubs/ft/weo/weo0598/pdf/_0598annpdf.pdf_