Public Information Notice: IMF Executive Board Holds Board Seminar on Fiscal Risks-Sources, Disclosure, and Management

June 23, 2008

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) is also available.

Public Information Notice (PIN) No. 08/73
June 23, 2008

On June 16, 2008, the Executive Board of the International Monetary Fund (IMF) held a seminar on Fiscal Risks—Sources, Disclosure, and Management. The staff paper on which the discussions were based is posted on the IMF's website at

Executive Board Assessment

An improved understanding of fiscal risks is essential to support the efforts of policymakers worldwide to promote fiscal sustainability and transparency. Today's seminar has provided Executive Directors with an opportunity to review the international experience with fiscal risks, and to express preliminary views on broad guidelines, drawing on existing practices in a wide range of countries, that can serve as a tool for policymakers for fiscal risk disclosure and management. Effective identification of sources of fiscal risks and application of an appropriate framework for managing and disclosing them should help mitigate a build-up of additional government obligations and larger public debts, and reduce the risk of refinancing difficulties or crises. Today's discussion has underscored that sound macroeconomic and public expenditure management policies are the first line of defense against fiscal risks. At the same time, the discussion has confirmed that the challenges posed by contingent liabilities and off-balance sheet items warrant attention from policymakers. It was acknowledged that, for many countries, building the technical and institutional capacity to manage fiscal risks will be a medium-term challenge.

Fiscal risks can be defined as deviations of fiscal outcomes from what was expected at the time of the budget or other forecast. Directors noted that the sources of fiscal risks—and their nature and relative importance—can differ significantly, depending on the economic structure and level of development of each country. One type of fiscal risk can arise from unexpected changes in macroeconomic variables, such as exchange rate depreciations and changes in commodity prices, even though, depending on the circumstances, these could be considered elements of uncertainty in the budget forecast. Another type arises from the realization of contingent liabilities in the banking system, state-owned enterprises, or subnational governments. Government guarantees, especially those linked to public-private partnerships, can become another source of potential fiscal risks. For low-income countries, aid shortfalls and volatility, as well as natural disasters and external shocks that require emergency assistance for the poor, can have significant fiscal consequences. Forward-looking estimates of risks and assessments of their macroeconomic implications can not only contribute to the prudent conduct of fiscal policy, but can also ensure sound risk disclosure and management practices.

Directors acknowledged that a broad range of lessons can be drawn from country experiences. Certain procedures may be especially helpful for the effective identification of fiscal risks. First, the entity playing the key role in determining fiscal policy—typically the ministry of finance—should have access to all relevant information needed for monitoring and managing fiscal risks. Second, it is most helpful if responsibilities for assessing and reporting fiscal risks incurred are allocated clearly among various parts of the public sector. And third, the appropriate degree of decentralization in risk management will depend on country characteristics and the extent of institutional development.

Directors considered the benefits and limits of comprehensive disclosure of information on fiscal risks. Broadly speaking, disclosure can strengthen risk management, enhance the cost-effectiveness of risk mitigation, and improve governance more generally. Directors noted the staff's finding that good fiscal transparency practices may facilitate market access and lead to lower borrowing costs in the long run. In addition, the increased public scrutiny that comes with improved disclosure can be helpful for governments to ensure proper assessment and recognition of risks. At the same time, it was noted that quantification of risks may not always be feasible or desirable. In particular, disclosure of certain risks may engender moral hazard—for example, an implicit blanket guarantee in the banking system—or harm the state's economic interests—for instance, with respect to legal claims against the state. The point was made, in this context, that it could be helpful to develop clearly-defined criteria for considering which cases fall within this category. To the extent possible, it would be advisable to incorporate into fiscal analysis and budget policy all fiscal risks, including those not disclosed or explicitly quantified. In addition, fiscal risks should, if feasible, be reported in a single document, such as a Statement of Fiscal Risks to be presented with the annual budget.

Directors noted that, beyond sound macroeconomic and public financial management policies, fiscal risks could be mitigated by risk-sharing arrangements with the private sector, or by a combination of insurance and mechanisms providing for governments to commit to contingent expenditures only when there is sufficient justification. The use of insurance instruments, while limited thus far, may increase as markets for innovative instruments develop further.

Directors recognized that effective risk management should be backed by a legal and administrative framework that establishes clear relationships between different levels of government and vis-à-vis the private sector. Such a framework should also specify clearly the institutions that authorize government borrowing and the issuance of contingent obligations, and estimate their potential fiscal costs. For fiscal risks to be properly incorporated in fiscal policy decision making, contingent obligation proposals would need to be integrated with the budget cycle, and procedures should be in place to reduce the bias in favor of guarantees over conventional expenditures. Directors underscored the importance of ensuring adequate flexibility in managing risks that materialize during the budget year while preserving the integrity of the original budget. Some Directors noted that the materialization of upside risks also represents a significant policy challenge.

Directors generally viewed the proposed Guidelines for Fiscal Risk Disclosure and Management as a valuable tool to help policymakers identify potential improvements to existing frameworks and to inform the staff's analysis of fiscal risks. They underscored, however, that the proposed guidelines are a work in progress, and that feedback from fiscal agencies and outside experts will no doubt help to refine them. Most Directors considered that, once finalized, the guidelines will be a helpful complement to the IMF's Code and Manual of Good Practices on Fiscal Transparency and the Government Finance Statistics Manual. In applying the guidelines, specific measures will need to be designed to suit individual country circumstances, political processes, and constraints. Directors looked forward to the Fund playing a role in helping member countries improve their technical and institutional capacities over the medium term, based on a clear demarcation of responsibilities with the World Bank and taking account of resource constraints and the institutional priorities shaped by the refocusing exercise.


Public Affairs    Media Relations
E-mail: E-mail:
Fax: 202-623-6220 Phone: 202-623-7100