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IMF’s New Fiscal Transparency Code and Evaluation

IMF’s New Fiscal Transparency Code and Evaluation. Peter Murphy Fiscal Affairs Department Presentation at the Regional Workshop on Financial Reporting and Management of Fiscal Risks in Astana, Republic of Kazakhstan, May 21-23, 2014.

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IMF’s New Fiscal Transparency Code and Evaluation

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  1. IMF’s New Fiscal Transparency Code and Evaluation Peter Murphy Fiscal Affairs Department Presentation at the Regional Workshop on Financial Reporting and Management of Fiscal Risks in Astana, Republic of Kazakhstan, May 21-23, 2014

  2. New Draft Fiscal Transparency Code & Evaluation:Outline of the Presentation Japan IMF Sub Acc • Background and Context • Revising the Fiscal Transparency Code • The New Fiscal Transparency Evaluation

  3. I. Background : Lessons from the Crisisa. Progress in Adoption of Fiscal Reporting Standards Institutional coverage has expanded… …and the shift from cash to accrual is underway… …but few countries prepare full balance sheets … …and timeliness of reporting is still a problem.

  4. I. Background: Lessons from the Crisisb. Lack of Transparency Exacerbated Problems Sources of Unexpected Increase in General Government Debt (percent of GDP, 2007-2010) Issues Revealed by the Crisis Unreported Deficits SoEs & PPPs Arrears Macroeconomic Risks Contingent Liabilities Stimulus / Consolidation

  5. I. Background: Lessons from the Crisis c. Example: General Government Debt in Portugal 120 120 Arrears General Government gross debt 100 100 SOE & PPP reclassifications SOE & PPP debt outside the General Government Non-SOE & PPP General Government debt 80 80 60 60 40 40 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 *Only includes Central Government SOE debt pre 2007

  6. I. Fiscal Transparency : Lessons from the Crisis d. Addressing Weaknesses in Forecasting/Reporting Standards Recommendation Weakness in Current Standards Problem Monthly operational fiscal reports Infrequent fiscal reporting Revisions to Deficits Publication of fiscal data for public sector Exclusive focus on general government Quasi-fiscal Activity by SoEs Recognition of doubtful debts in summary aggregates Losses on asset & liability holdings not recognized Unreported Flows Alternative macro-fiscal scenario analysis Bias in macroeconomic forecasting Macroeconomic Shocks Recognition of quantifiable contingent liabilities Exposure to Financial Sector No recognition of contingent liabilities

  7. I. Background and Context:e. Origins of the Global Fiscal Transparency Effort • A concerted effort to improve fiscal transparency since the late 1990s • Asian crisis highlighted weakness in public and private financial reporting • Also underscored the risks associated with undisclosed linkages between the two • New fiscal reporting standards were developed • General: IMF’s Code & Manual on Fiscal Transparency • Budgeting: OECD Best Practices for Budget Transparency • Statistics: EU’s ESA 95, IMF’s GFSM 2001, & UN’s SNA 08 • Accounting: IFAC’s International Public Sector Accounting Standards (IPSAS) • New tools for monitoring compliance with standards were introduced • Multilateral: Fiscal and Data ROSCs, GDDS/SDDS, & PEFA • Regional: Eurostat, WAEMU & CEMAC harmonization of fiscal reporting • Civil Society: Open Budget Survey and Index, GIFT Principles

  8. I. Background and Context: b. Weaknesses of the Existing Code & ROSC • Code & ROSC evaluate clarity of reporting procedures not quality of reports • Code’s 4 “Pillars” reinforce focus on formal laws, institutions, and processes • Clarity of Roles and Responsibility • Open Budget Processes • Public Availability of Information • Assurances of integrity • ROSCs pay too little attention to the content of fiscal reports themselves • Code & ROSC adopt a “one-size-fits-all” approach to evaluating countries • Do not take into account different levels of institutional capacity • Do not provide milestones to full compliance with international standards • Make it difficult to benchmark against comparator countries • ROSC assessments tended to be exhaustive rather than risk-based • Place equal weight on all elements of the Code • Difficult to judge relative seriousness of different fiscal reporting gaps • Include a large number of unprioritized recommendations

  9. II. Revising the Fiscal Transparency Code: a. Objectives of the Revisions • Emphasize the quality and reliability of published information rather than clarity of reporting procedures • Update the principles and practices to reflect the lessons of the recent crisis • Align the principles and practices with relevant international standards (GFSM 2001, IPSAS, OECD Principles, PEFA) • Provide countries with a set of achievable milestones on the way towards full compliance with international standards

  10. II. Revising the Fiscal Transparency Code: b. Architecture of the New Code Three Pillars of the Revised Fiscal Transparency Code & Evaluation Construction

  11. II. Revising the Fiscal Transparency Code: c. More Graduated Set of Practices

  12. III. New Fiscal Transparency Evaluationa. Objectives of the New Evaluation • Distinguish between more and less serious deficiencies in countries’ fiscal transparency practices • Provide countries with a clear picture of where their fiscal reporting practices stand relative to comparator countries and international standards • Provide countries with a more targeted and sequenced action plan for addressing the main transparency weaknesses identified

  13. III. New Fiscal Transparency Evaluation:b. Summary Heatmap Costa Rica: Assessment Against Fiscal Transparency Practices

  14. III. New Fiscal Transparency Evaluation: c. Fiscal Transparency Indicators: Fiscal Reporting Coverage of Public Sector Entities (percent of expenditure) Reporting of Assets and Liabilities (percent of GDP) Ireland: Fiscal Transparency Indicators Public corporations remain outside fiscal reporting Only a quarter of public sector liabilities reported

  15. III. New Fiscal Transparency Evaluation:d. Fiscal Transparency Indicators: Fiscal Forecasting and Budgeting Bolivia: Source of Budget Forecast Errors Revenue Forecast Errors (Percentage point Contribution) Expenditure Forecast Errors (Percentage point Contribution) Means budgeted expenditure bears little relation to actual outcomes Massive underestimation of revenue in the budget

  16. III. New Fiscal Transparency Evaluation: e. Fiscal Transparency Indicators: Fiscal Risk Analysis and Management African Country: Contingent Liabilities (percent of GDP) Ireland: Uncertainty around forecast deficits (percent of GDP) Ireland: Govt Guarantees related to financial crisis (percent of GDP) Costa Rica: Distribution of Municipal Debt (percent of total) Selected Countries: Fiscal Risk Indicators Contingent Liabilities are large and diverse Significant macro and fiscal forecast uncertainty Large exposure to the financial sector Sub-national risks are small but relatively concentrated

  17. III. New Fiscal Transparency Evaluation: f. Targeted Recommendations Ireland: Summary Assessment of Fiscal Reporting Practices

  18. III. New Fiscal Transparency Evaluation: g. Sequenced Action Plan Ireland Fiscal Transparency Action Plan

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