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. • 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.
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.
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.
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.
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)
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.
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.
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.
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.
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.