How to Manage Fiscal Risks from Subnational Governments

IMF How To Notes, September 1, 2022

Source details

Subnational governments can create sizable fiscal risks for central governments.
Unsustainable subnational finances impact service delivery at the grassroots level and can be a continuous drain on central resources.
The note provides a framework for central governments to assess and manage fiscal risks stemming from weak subnational finances.
Emphasis on the need for stronger public financial management systems and capacities to analyze and manage risks at the subnational level.
Lessons are drawn from international experience and are particularly useful for developing economies.

Sources of subnational finance vulnerabilities are analyzed.
Central governments need sound institutional mechanisms to systematically monitor the health of subnational finances to proactively manage associated risks.
The How to Note argues that effective risk management requires a combination of regulatory, reporting, and oversight measures.

Subnational fiscal distress can undermine central government finances and service delivery.
Strengthened public financial management systems at the subnational level are essential to contain fiscal risks.
International experience provides practical lessons for improving management of subnational fiscal risks, especially in developing economies.

Implement a stronger regulatory framework for subnational borrowing and fiscal behavior.
Improve fiscal reporting from subnational governments to the center to enhance transparency and risk detection.
Enhance central oversight over subnational finances to enable timely intervention and risk mitigation.

How to Manage Fiscal Risks from Subnational Governments
- How to Manage Fiscal Risks from Subnational Governments (Markdown version)
- How to Manage Fiscal Risks from Subnational Governments (PDF)