IMF’s New Fiscal Transparency Code and Evaluation

Peter MurphyFiscal Affairs Department

Presentation at the Regional Workshopon Financial Reporting and Management of Fiscal Risks

in Astana, Republic of Kazakhstan, May 21-23, 2014

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New Draft Fiscal Transparency Code & Evaluation:Outline of the Presentation

I. Background and Context

II. Revising the Fiscal Transparency Code

III. The New Fiscal Transparency Evaluation

Japan IMF Sub Acc

I. Background : Lessons from the Crisisa. Progress in Adoption of Fiscal Reporting Standards

2004 20110

50

100

150

200

9863

16

33

22

10

4878

Coverage of Institutions(Number of countries)

General Government

Central Government

Budgetary Central Government

No Data Reported

2004 20110

50

100

150

200

146120

2952

9 12

Basis for Reporting Flows(Number of Countries)

Full AccrualPartial AccrualCash

2004 20110

50

100

150

200

136 126

2717

1227

9 14

Coverage of Assets & Liabilities(Number of Countries)

Financial & Non-Financial Assets

Financial Assets Only

Liabilities Only

No Balance Sheet Monthly96

Quarterly32

Semi-annually3

Annually37

Unknown16

Timeliness of Reporting in 2011(Number of Countries)

3

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.

I. Background: Lessons from the Crisisb. Lack of Transparency Exacerbated Problems

Sources of Unexpected Increase in General Government Debt(percent of GDP, 2007-2010)

FRA DEU NLD ESP PRT GBR USA GRC IRL ISL AVE*

Underlying fiscal position 1.7 3.2 -2.4 1.8 11.3 3.7 8.1 16.3 1.3 10.9 6.0

Revisions to 2007 deficit & debt 1.7 1.8 -0.9 -0.1 0.1 1.5 7.1 2.5 1.6 4.0 4.7

Changes to government boundary -0.7 1.4 -0.2 0.6 9.4 1.9 0.9 11.2 -0.1 2.5 1.1

Cash-accrual adjustments 0.7 0.0 -1.3 1.3 1.7 0.3 0.0 2.6 -0.2 4.5 0.2

Exogenous shocks 8.4 12.8 14.2 15.4 8.1 17.0 6.3 40.0 60.2 39.5 9.8

Macroeconomic shocks 8.3 4.7 5.2 13.0 4.4 8.9 3.8 38.4 35.7 -3.3 6.0

Financial sector interventions 0.0 8.1 9.0 2.5 3.6 8.1 2.5 1.6 24.5 42.8 3.8

Policy changes 2.3 3.8 1.9 4.9 4.7 1.1 6.4 -8.0 -9.9 -4.3 4.7

Other factors 2.1 -0.3 6.5 1.9 3.7 6.2 8.3 -6.7 7.5 21.6 5.9

Total Unforecast Increase in Debt 14.4 19.5 20.2 24.0 27.8 28.0 29.1 41.7 59.1 67.7 26.4

* GDP-weighted average 4

Unreported Deficits

SoEs & PPPs

Arrears

Macroeconomic Risks

Contingent Liabilities

Stimulus / Consolidation

Issues Revealed by the Crisis

*Only includes Central Government SOE debt pre 2007

40

60

80

100

120

40

60

80

100

120

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

SOE & PPP reclassifications

Non-SOE & PPP General Government debt

SOE & PPP debt outside the General Government

General Government gross debt

Arrears

I. Background: Lessons from the Crisis c. Example: General Government Debt in Portugal

Quasi-fiscal Activity by SoEs

Revisions to Deficits

Macroeconomic Shocks

Unreported Flows

Exposure to Financial Sector

Exclusive focus on general government

Infrequent fiscal reporting

Bias in macroeconomic

forecasting

Losses on asset & liability holdings not

recognized

No recognition of contingent liabilities

Problem Weakness in Current Standards

I. Fiscal Transparency : Lessons from the Crisis d. Addressing Weaknesses in Forecasting/Reporting Standards

Publication of fiscal data for public sector

Monthly operational fiscal reports

Alternative macro-fiscal scenario

analysis

Recognition of doubtful debts in

summary aggregates

Recognition of quantifiable

contingent liabilities

Recommendation

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

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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

i. Clarity of Roles and Responsibilityii. Open Budget Processesiii. Public Availability of Informationiv. 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

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II. Revising the Fiscal Transparency Code: a. Objectives of the Revisions

1. Emphasize the quality and reliability of published information rather than clarity of reporting procedures

2. Update the principles and practices to reflect the lessons of the recent crisis

3. Align the principles and practices with relevant international standards (GFSM 2001, IPSAS, OECD Principles, PEFA)

4. Provide countries with a set of achievable milestones on the way towards full compliance with international standards

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II. Revising the Fiscal Transparency Code: b. Architecture of the New Code

Pillar(Type of Report))

Fiscal Transparency

Indicators

Quality of Fiscal Reporting

Openness of Fiscal Decision-

making

I. Fiscal Reports

Size of unreported flows

Size of unreported liabilities

Average revisions to deficit

Institutional coverageAccounting for flowsValuation of assets &

liabilities

Timeliness of reportingIndependence of statistics agencyAudit of annual

accounts

II. Fiscal Forecasts

Average forecast error Source of forecast errorTiming of forecast error

Time horizonClarity of fiscal

objectivesSeparation of baseline

& new policies

Timeliness of budget submission

Independent scrutiny of forecasts

Supplementary budgets

III. Fiscal Risk Analysis

Size of contingent liabilities

Impact of exogenous shocks

Average stock-flow adjustment

Fiscal sensitivity analysis

Reporting of contingent liabilities

Long-term fiscal projections

Approval of contingent liabilities

Oversight of local governments

Surveillance of public corporations

Three Pillars of the Revised Fiscal Transparency Code & EvaluationConstruction

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

# DIMENSION PRINCIPLE PRACTICESBASIC GOOD ADVANCED

1 FISCAL REPORTING

Fiscal reports should provide a comprehensive, relevant, timely, and reliable overview of the government’s financial position and performance

1.1 Coverage Fiscal reports should provide a comprehensive overview of the fiscal activities of the public sector

1.1.1

Fiscal reports cover all entities engaged in public activity according to international standards.

Fiscal reports cover all entities engaged in public activity according to international standards.

Fiscal reports consolidate all central government entities.

Fiscal reports consolidate all general government entities and report on each subsector.

Fiscal reports consolidate all public sector entities and report on each subsector.

1.1.2 Coverage of Flows

Fiscal reports cover all public revenues, expenditures, and financing.

Fiscal reports cover cash revenues, expenditures and financing.

Fiscal reports cover cash flows and accrued revenues and expenditures.

Fiscal reports cover cash flows and accrued revenues and expenditures and other economic flows.

1.1.3 Coverage of Stocks

Fiscal reports include a balance sheet of government assets, liabilities, and net worth.

Fiscal reports cover cash and all debt

Fiscal reports cover all financial assets and liabilities.

Fiscal reports cover all financial and non-financial assets and liabilities, and net worth.

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III. New Fiscal Transparency Evaluationa. Objectives of the New Evaluation

1. Distinguish between more and less serious deficiencies in countries’ fiscal transparency practices

2. Provide countries with a clear picture of where their fiscal reporting practices stand relative to comparator countries and international standards

3. Provide countries with a more targeted and sequenced action plan for addressing the main transparency weaknesses identified

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PracticesAdvanced

GoodBasic

Not Met

Costa Rica: Assessment Against Fiscal Transparency Practices

III. New Fiscal Transparency Evaluation:b. Summary Heatmap

1. Fiscal Reporting 2. Fiscal Forecasting & Budgets

3. Fiscal Risk Analysis & Management

Coverage of Institutions Unity Macroeconomic Risks

Coverage of Flows Gross Budgeting Specific Fiscal Risks

Coverage of Stocks Macroeconomic Forecasts Contingency Reserves

Tax Expenditures Medium-term Budget Framework

Asset and Liability Management

Frequency of In-year Fiscal Reports

Fiscal Strategy Report Guarantees

Timeliness of Annual Financial Statements

Budget Submission Financial Sector Exposure

Classification Budget Approval Long-Term Contracts

Internal Consistency Fiscal Policy Objectives Financial Derivatives

Historical Consistency Separation of Existing and New Policies

Sub-National Governments

Comparability of Forecasts & Outturns

Performance Information Public Corporations

Statistical Independence Distributional Analysis

External Audit Fiscal Sustainability Analysis

Reliability Independent Evaluation

Supplementary Budget

Forecast Reconciliation

-400 -300 -200 -100 0 100 200 300 400

Net Worth

Public Sector

Consolidation

Central Bank

Financial Public Corp

Non-Fin Public Corp

General Government

Reported

Unreported

Liabilities Assets

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

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)

0

5

10

15

20

25

30

35

40

45

50

Wages and Salaries

Goods and Services

Misc Current Capex Total Error

30%

120%

17%

10%

Percent forecast error

23%

0

10

20

30

40

50

Tax Revenue Operating Revenue

Other Revenue Capital Revenue

Total Error

32%

111% 99%

31%

Percent forecast error 41%

Massive underestimation of

revenue in the budget

Means budgeted expenditure bears

little relation to actual outcomes

0

20

40

60

80

100

III. New Fiscal Transparency Evaluation: e. Fiscal Transparency Indicators: Fiscal Risk Analysis and Management

Selected Countries: Fiscal Risk IndicatorsAfrican Country: Contingent Liabilities

(percent of GDP)

Large exposure to the financial

sector

Contingent Liabilities are

large and diverse

Ireland: Uncertainty around forecast deficits(percent of GDP)

Significant macro and fiscal forecast

uncertainty6.1

16.3

15.3

37.6

0

10

20

30

40

50

60

70

80

Guarantees (Public)

Gurantees (Private)

Central Bank Liabilities of Finanical PCs

Ireland: Govt Guarantees related to financial crisis(percent of GDP)

0

5

10

15

20

25

Sub-national risks are small but relatively concentrated

Costa Rica: Distribution of Municipal Debt(percent of total)

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III. New Fiscal Transparency Evaluation: f. Targeted Recommendations

Principle Assessment Importance Rec

1.1 Coverage of Institutions

Good: Fiscal statistics consolidate all general government institutions

High: Publicly-controlled entities with net expenditure of 12% of GDP outside fiscal statistics.

1

1.2 Coverage of Stocks

Good: Fiscal reports cover all financial assets and liabilities

High: Public liabilities of 279% of GDP outside fiscal reports 2

1.3 Coverage of FlowsBasic: Fiscal reports cover all cash revenues and expenditures

High: Accrued general government expenses of 1.1% of GDP outside fiscal statistics

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1.4 Tax ExpendituresBasic: Estimated revenue loss from income tax expenditures is published at least annually

Medium: Some of the estimated 6% of GDP in revenue lost through tax expenditures not reported. Tax expenditures contributed to pre-crisis property boom.

3

1.5Frequency of In-

year Fiscal Reports

Advanced: In-year fiscal reports are published on a monthly basis

Low: Fiscal reports are published within 2 days

1.9 Historical Consistency

Basic: Material revisions to historical fiscal data are reported

Low: Revisions to historical debt data are -0.5% of GDP on average

Ireland: Summary Assessment of Fiscal Reporting Practices

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

Ireland Fiscal Transparency Action PlanAction 2013 2014 2015 2016 2017

1. Expand Institutional Coverage of Budgets, Statistics, and Accounts

a. Present all gross revenues and expenditures of central government entities in budget documentation

Incorporate NPRF into budget

documentation

Incorporate Non-Commercial Semi-State Bodies into

budget documentation

Incorporate all central government entities in budget documentation

Integrate non-commercial semi-state bodies into

departmental votes

b. Combine Finance and Appropriation Accounts into a consolidated Central Government Financial Statement

Combine the information in the

notes to the Appropriation Accounts to produce a

summary report

Combine Finance and Appropriation Accounts into a partial Central Government

Financial Statement based on existing

accounting policies

Incorporate SIF and NPRF into partial

Central Government Financial Statement

Incorporate Non-Commercial Semi-State Bodies into

consolidated provisional Central

Government Financial Statement

Prepare comprehensive

consolidated Central

Government Financial Statement for audit by C&AG

c. Provide an overview of the gross revenues and expenditures of the general government and its subsectors

Reconcile gross revenues and

expenditures of Exchequer and

general government in

budget

Provide summary of gross revenues and

expenditures of central government

in budget

Provide summary of gross revenues and

expenditures of central, local, and

general government in budget

Publish quarterly statistics on gross

revenues and expenditures of

central, local, and general

government sectors

Publish monthly statistics on gross

revenues and expenditures of

central, local, and general

government sectors