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Fiscal Transparency and Public Banks

Fiscal Transparency and Public Banks. Presentation by Richard Hemming Fiscal Affairs Department International Monetary Fund April 26, 2004. Introduction. Background paper written with Manal Fouad, Davide Lombardo, and Wojciech Maliszewski.

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Fiscal Transparency and Public Banks

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  1. Fiscal Transparency and Public Banks Presentation by Richard Hemming Fiscal Affairs Department International Monetary Fund April 26, 2004

  2. Introduction • Background paper written with Manal Fouad, Davide Lombardo, and Wojciech Maliszewski. • Reflects a long-standing interest in fiscal transparency, including work on the IMF Code of Good Practices on Fiscal Transparency. • Relatively little attention has been paid to public banks and other public financial institutions. • Aim is to draw on IMF work on transparency in the operations of government and nonfinancial public enterprises to inform a discussion of disclosure practices for public banks.

  3. Current Disclosure Practices • Routine cash transactions. • Tax and dividend payments to government. • Transfers, subsidies, loans, and equity provided by government. • Bank support operations. • Recapitalization bonds add to government debt. • Carrying costs. • Debt operations. • Cash accounting and an augmented balance.

  4. Fiscal Risk • Routine cash transactions are not a good guide to the risk that a government may have to provide support to weak public banks. • This will depend more on the operations undertaken by public banks that are a potential source of fiscal risk. • In this connection, the focus is on quasi-fiscal activities and contingent liabilities.

  5. Fiscal Costs of Bank Restructuring • Fiscal costs of bank restructuring have been large, especially in crisis countries. • Romania—10 percent of GDP. • Other CECs—6-18 percent of GDP. • Turkey—15 ½ percent of GDP. • These costs have compounded debt sustainability problems in crisis countries. • Thus they provide a mechanism for turning a banking crisis into a fiscal crisis.

  6. Quasi-Fiscal Activities • Fiscal operations undertaken by nongovernment agencies—subsidized lending and directed credit are QFAs undertaken by public banks. • Transparency requires that QFAs are identified, quantified, and disclosed by the government. • However, quantification raises complex issues. • The emphasis is therefore on being transparent about the nature and fiscal significance of quasi-fiscal activities (Code good practice 2.1.3)

  7. Guarantees and Contingent Liabilities • Transparency requires that explicit contingent liabilities, and especially those deriving from government guarantees, are identified, quantified, and disclosed by the government. • Again, quantification raises complex issues. • However, fiscal risks posed by public banks derive mainly from implicit contingent liabilities, which are impossible to quantify. • QFAs can signal potential implicit contingent liabilities.

  8. Coverage and Consolidation • Nonfinancial public enterprises undertake QFAs and are a source of contingent liabilities. • Where enterprise operations are largely noncommercial, fiscal statistics, indicators, and targets should cover the operations of such enterprises. • Should this approach be extended to public banks and other public financial institutions? • Need to look at ownership, control, and market orientation.

  9. Impact of Transparency • Transparency is not an end in itself. • QFAs undertaken by public banks, and guarantees provided to them, may be legitimate policy instruments, but they will be subject to the same scrutiny as on-budget activities. • This should lead the government to reconsider the way it uses public banks. • It should also facilitate other policies, such as privatization. • However, it is too early to tell whether transparency has a significant impact.

  10. The Role of Financial Markets • Rating agencies are clearly interested in fiscal transparency, and ROSCs are being used increasingly to inform sovereign ratings. • In particular, more attention is being paid to fiscal accounting and reporting, in the aftermath of corporate accounting problems. • New fiscal accounting challenges involve links between the government and the financial sector.

  11. Conclusions • This is the right time to highlight the fiscal transparency issues raised by public banks and public financial institutions. • They should be paid more attention in fiscal transparency assessments (i.e., ROSCs). • More analytical work is needed on assessing, disclosing, and controlling fiscal risks in general. • Finally, it is important to know whether transparency promotes good policies and sound institutions.

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