FISCAL STRESS TEST (FST)

Source details

Assesses the resilience of public finance to large, extreme, and correlated shocks to assess their impact on public finances.
Assesses the impact of a macro-fiscal and contingent liability shock on general government fiscal and balance sheet aggregates, over a medium-term horizon.
Assesses the impact on three summary outputs for government solvency, liquidity and financing burden under the baseline and stress scenarios.
Can consider implications for long-term fiscal sustainability by producing projections for long-term fiscal aggregates under the baseline and stress scenario, taking into consideration trend growth drivers, ageing-related expenditure, and the lingering impact of the shock in the stress scenario.
Can assess implications of shock scenarios for the government's comprehensive public sector balance sheet, considering all of the assets and liabilities of the public sector as well as the net present value of future revenues and payments under current policies.

Large macroeconomic shocks can produce substantial and long-lasting effects on the financial position of the public sector, with sizeable increases in net liabilities and a lower probability of compliance with long-term solvency constraints.
Such shocks are often considered tail events because fluctuations they induce are very pronounced compared with historical volatility of macroeconomic aggregates.
The global financial crisis and the COVID-19 pandemic illustrate that tail macroeconomic events are possible and their legacy can seriously constrain fiscal policy.
The FST, developed by FAD in 2016, aims to assess the possible impact of this kind of macroeconomic shocks on the finances of the main public sector players — including general government and state-owned enterprises — as well as their interactions and consolidated effects for the public sector as a whole.

Helps governments understand main financial transmission channels of macroeconomic shocks within the public sector and between the public and private sector.
Helps governments understand how resilient public finances are to extreme, correlated shocks; this information can inform the size of required fiscal buffers and prudent debt limits.
Helps policymakers identify exposures and vulnerabilities in balance sheets of public sector agents and the consolidated public sector balance sheet, and enhance asset-liability management accordingly.
Supports reinforcement of fiscal risks monitoring in areas highly exposed to macroeconomic shocks, such as ailing SOEs or systemically critical financial institutions.

The FST can integrate analysis and outputs from other IMF Fiscal Risk Tools to identify potential contingent liability realizations.
The FRAT can help identify the main risks that may be catalyzed by a large macroeconomic shock.
The SOEs Stress Test Tool can calculate evolution of SOE assets and liabilities, and liquidity needs, under different scenarios.
The IMF's loan and guarantee tools provide a sense of the probability of crystallization of guarantees under adverse scenarios.
Information on long-term government obligations from PPP contracts can be obtained from the PPP Fiscal Risk Assessment Model and used in calculation of comprehensive net worth of the public sector.
The FST's output can be used to enrich debt sustainability analysis results from a longer-term and more granular perspective.