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Fiscal adjustment and contingent government liabilities : case studies of the Czech Republic and Macedonia

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  • Brixi, Hana Polackova
  • Ghanem, Hafez
  • Islam, Roumeen

Abstract

To control the expansion of government contingent liabilities and reduce fiscal vulnerability, one must be able to identify and measure them. The authors discuss how this may be done and demonstrate how the assessment of fiscal adjustment may change substantially when a broader picture of government liabilities is included. They base their analysis on experience in analyzing fiscal adjustment in the Czech Republic and Macedonia. Their work demonstrates the importance of including contingent liabilities when analyzing fiscal sustainability. To the extent that explicit expenditures are shifted off-budget or replaced by guarantees, the achieved improvement in fiscal balances is overstated. For the Czech Republic, adjustment may have been overstated by some 3 to 4 percent of annual GDP. A stabilization program accompanied by a build-up of contingent liabilities, particularly state guarantees and obligations to cover liabilities emerging from directed credit, may not be sustainable. In Macedonia, the present fiscal equilibrium may be temporary because the stock of existing contingent liabilities could add 2 to 4 percent of GDP to future deficits. And methods used to reduce the"traditional"deficit are unlikely to be sustainable without further modification. The authors conclude that governments: 1) must find better ways to identify and evaluate contingent liabilities arising from the banking system, nonbanking financial institutions, public enterprises, or the contingent and direct liabilities of subnational governments; 2) need to better manage their risks--for example, building adequate reserve funds and hedging risk, where possible; and 3) should examine the implications of the bias toward adding contingent liabilities and develop administrative reform as part of analyzing budget management.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 2177.

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Date of creation: 30 Sep 1999
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Handle: RePEc:wbk:wbrwps:2177

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Keywords: Banks&Banking Reform; Payment Systems&Infrastructure; International Terrorism&Counterterrorism; Insurance&Risk Mitigation; Environmental Economics&Policies; Banks&Banking Reform; Insurance&Risk Mitigation; National Governance; Environmental Economics&Policies; Financial Crisis Management&Restructuring;

References

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  1. Honohan, Patrick, 1999. "Fiscal contingency planning for banking crises," Policy Research Working Paper Series 2228, The World Bank.
  2. Easterly, William, 1999. "When is fiscal adjustment an illusion?," Policy Research Working Paper Series 2109, The World Bank.
  3. Blejer, Mario I & Cheasty, Adrienne, 1991. "The Measurement of Fiscal Deficits: Analytical and Methodological Issues," Journal of Economic Literature, American Economic Association, vol. 29(4), pages 1644-78, December.
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Cited by:
  1. World Bank, 2004. "The Road to Sustained Growth in Jamaica," World Bank Publications, The World Bank, number 15014.
  2. Fatih KARANFIL & Ata OZKAYA, 2013. "Indirect Taxes, Social Expenditures and Poverty:What Linkage?," Ege Academic Review, Ege University Faculty of Economics and Administrative Sciences, vol. 13(3), pages 337-350.
  3. Ozkaya, Ata, 2014. "Creative accounting practices and measurement methods: Evidence from Turkey," Economics Discussion Papers 2014-10, Kiel Institute for the World Economy.
  4. Richard Hemming & Axel Schimmelpfennig & Michael Kell, 2003. "Fiscal Vulnerability and Financial Crises in Emerging Market Economies," IMF Occasional Papers 218, International Monetary Fund.
  5. Lev Freinkman & Gohar Gyulumyan & Artak Kyurumyan, 2003. "Quasi-Fiscal Activities, Hidden Government Subsidies, and Fiscal Adjustment in Armenia," World Bank Publications, The World Bank, number 15074.
  6. World Bank, 2003. "Jamaica - The Road to Sustained Growth : Country Economic Memorandum," World Bank Other Operational Studies 14666, The World Bank.
  7. Ata Ozkaya, 2013. "The Effects of Debt Intolerance and Public Debt Sustainability on Credit Ratings: Evidence From European Economies," Working Papers 011, Bahcesehir University, Betam.
  8. Markus Baltzer & Lorenzo Cappiello & Roberto A. De Santis & Simone Manganelli, 2008. "Measuring financial integration in new EU member states," Occasional Paper Series 81, European Central Bank.

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