Download Fiscal Transparency and Public Banks

Fiscal Transparency
and Public Banks
Presentation by
Richard Hemming
Fiscal Affairs Department
International Monetary Fund
April 26, 2004
Introduction
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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
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Routine cash transactions.
 Tax
and dividend payments to government.
 Transfers, subsidies, loans, and equity
provided by government.
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Bank support operations.
 Recapitalization
bonds add to government
debt.
 Carrying costs.
 Debt operations.
 Cash accounting and an augmented balance.
Fiscal Risk
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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
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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.
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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
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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 quasifiscal activities (Code good practice 2.1.3)
Guarantees and Contingent
Liabilities
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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
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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
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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 onbudget 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
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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
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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.