Analyzing and Managing Fiscal Risks - Best Practices
Policy Papers, May 4, 2016
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Bibliographic details
- Published: May 4, 2016
- Series: Policy Papers
Key findings
- Over the past quarter century, governments experienced on average an adverse fiscal shock of 6 percent of GDP once every 12 years, with some of the largest stemming from financial crises.
- Existing fiscal risk disclosure and analysis practices tend to be incomplete, fragmented, and qualitative in nature.
- Comprehensive, reliable, and timely fiscal data covering all public entities, stocks, and flows are a necessary foundation for credible fiscal risk analysis.
Fiscal stress testing and analysis
- A comprehensive and integrated assessment of potential shocks—implemented as a fiscal stress test—can help policymakers simulate:
- effects of shocks to their central forecasts;
- implications for government solvency;
- implications for government liquidity; and
- implications for government financing needs.
- Fiscal stress tests combined with probabilistic tools can provide information on the probabilities that a country will stay within debt ceilings embedded in fiscal rules.
Data, institutions, and capacity
- Countries need a more complete understanding of potential threats to their fiscal position.
- The Fund supports technical assistance in:
- constructing public sector balance sheets;
- developing institutions and capacity to identify specific fiscal risks and to quantify their potential impact;
- undertaking fiscal stress tests; and
- integrating risks into the design of medium-term fiscal targets.
Fiscal risk management tools and strategies
- Current fiscal risk management practices are often blunt, ad hoc, and too focused on imposing limits on the creation of exposures.
- Countries should expand their toolkits for fiscal risk management and adopt instruments to:
- transfer risks;
- share risks; and
- provision for risks.
- Policymakers need to weigh the benefits of reducing exposure to shocks against the financial and other costs of the policies used to do so.
Probabilistic forecasting and fiscal targets
- Greater use of probabilistic forecasting methods is recommended when setting long-run objectives and medium-term targets for fiscal policy.
- Simple probabilistic tools can be used to map the uncertainty around medium-term trajectories for public debt and, in combination with fiscal stress tests, inform the likelihood of remaining within debt ceilings.
Analyzing and Managing Fiscal Risks - Best Practices (May 4, 2016).
Content in this bundle
- Analyzing and Managing Fiscal Risks Best Practices; IMF Policy Paper; May 4, 2016