Borrowing by Subnational Governments: Issues and Selected International Experiences

IMF Policy Discussion Papers, April 1, 1996

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Borrowing by Subnational Governments: Issues and Selected International Experiences

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Bibliographic details

• Authors: Teresa Ter-Minassian
• Published: April 1, 1996
• Series: IMF Policy Discussion Papers
• DOI: https://doi.org/10.5089/9781451973280.003

Overview

• Presents various models of control over subnational government borrowing, outlining advantages and disadvantages of each model relative to country-specific circumstances.
• Emphasizes that as fiscal and macro imbalances improve or worsen, the preferable model of control may change over time.
• Argues that sole reliance on market discipline for government borrowing is unlikely to be appropriate in many circumstances because one or more conditions for its effective working frequently are not realized in each particular country.
• Notes the increasing worldwide trend toward devolution of spending and revenue-raising responsibilities to subnational governments and the potential conflict this trend creates with central government administrative controls on subnational borrowing.
• Concludes that rules-based approaches to debt control are preferable, in terms of transparency and certainty, to administrative controls and to statutory limits defined in the context of the annual budget process, which may be unduly influenced by short-term political bargaining.

Key findings

• Models of control have trade-offs; suitability depends on the country's evolving fiscal and macro circumstances.
• Market discipline alone is often insufficient because required conditions for its effectiveness are frequently absent.
• Devolution of responsibilities to subnational governments increases tension with central administrative controls on borrowing.
• Rules-based debt-control approaches outperform administrative controls and budget-process statutory limits on transparency and certainty.

Policy recommendations and implications

• Favor rules-based approaches to subnational debt control to enhance transparency and predictability.
• Recognize that the appropriate control model may need to change over time as fiscal and macro conditions evolve.
• Be cautious about relying solely on market discipline for subnational government borrowing given common structural limitations.
• Anticipate and manage conflicts between greater devolution to subnational governments and central government administrative controls on borrowing; consider legal and institutional adjustments to align incentives and oversight.

Publication and metadata

• Author: Teresa Ter-Minassian
• Publication date: April 1, 1996
• Series: Policy Discussion Paper No. 1996/004
• Issue: 004
• Volume: 1996
• Pages: 20
• DOI: https://doi.org/10.5089/9781451973280.003
• Stock No: PPIEA0041996
• ISBN: 9781451973280
• ISSN: 1564-5193

Source: Borrowing by Subnational Governments: Issues and Selected International Experiences, IMF Policy Discussion Papers, Teresa Ter-Minassian, April 1, 1996.