Fiscal Transparency, ROSC Findings and Research. Taryn Parry Fiscal Transparency Unit December 4, 2006

Transcription

1 Fiscal Transparency, ROSC Findings and Research Taryn Parry Fiscal Transparency Unit December 4, 2006

2 TOPICS Part I Fiscal ROSC Findings Fiscal transparency (define/code) Fiscal ROSCs Experience of Asian countries Part II Research Credit ratings and transparency Budget results and transparency Corruption and transparency

3 Part I Definition of Fiscal Transparency Fiscal transparency broadly defined as institutions" which allow a clear assessment of: Past fiscal performance Current fiscal position Fiscal risks Future direction of fiscal policy

4 Why assess transparency? Improve internal decision-making Identify weaknesses in information flows Better, more comprehensive information, better policies Improve governance and accountability Wider awareness of government programs Better support and control International financial markets Ratings agencies paying increasing attention to fiscal ROSCs Lower borrowing costs Improve macroeconomic policy and outcomes

5 Reports on the Observance of Standards and Codes (ROSCs): Fiscal transparency is one of 12 standards and codes endorsed by the IMF ROSCs are voluntary and publication is voluntary Updates and reassessments demonstrate improvements Observance by international community and the market provides incentive for improvement

6 The Code of Good Practices I. Clarity of Roles and Responsibilities II. Public Availability of Information III.Open Budget Preparation, Execution and Reporting IV. Assurances of Integrity

7 The Code of Good Practices I. Clarity of Roles and Responsibilities 1.1 The government sector should be distinguished from the rest of the public sector and from the rest of the economy, and policy and management roles within the public sector should be clear and publicly discussed 1.2 There should be a clear legal and administrative framework for fiscal management

8 The Code of Good Practices II. Public availability of information: 2.1 The public should be provided with full information on the past, current and projected fiscal activity of government 2.2 A commitment should be made to the timely publication of fiscal information

9 The Code of Good Practices III. Open budget preparation, execution and reporting 3.1 The budget documentation should specify fiscal policy objectives, the macroeconomic framework, the policy basis for the budget, and identifiable fiscal risks 3.2 Budget information should be presented in a way that facilitates policy analysis and promotes accountability 3.3 Procedures for the execution and monitoring of approved expenditure and for collecting revenue should be clearly specified 3.4 There should be regular fiscal reporting to the legislature and the public

10 Good practice in budget information a summary Core Estimates Macroeconomic Framework Comprehensive all government funds Reliable Linked to policy detailed costs Clear assumptions Medium-term projection Long-term sustainability Risks and Offbudget Activity Accounts and Reports Sensitivity analysis Contingent liabilities Bank and enterprise subsidies Cost of tax exemptions Comprehensive, reliable monthly reports Timely, audited final accounts

11 The Code of Good Practices IV. Assurances of integrity: 4.1 Fiscal data should meet accepted data quality standards 4.2 Fiscal information should be subjected to independent scrutiny

12 Standards & Codes 81 countries have completed fiscal ROSCs representing all regions Many have done updates and 5 have done full reassessments Most are published 11 more countries have ROSCs in progress Includes all G7 and most Eastern European and CIS countries

13 Some general findings... Most ROSC participants are taking some steps to improve transparency Around 60 percent of market access countries are participating A range of common problems identified Poor fiscal data quality Off-budget activity Tax expenditures and discretionary tax administration Poor definition of intergovernmental relations

14 ROSC Participation in Asia Completed Bangladesh Fiji Hong Kong India Indonesia Japan Korea Mongolia Papua New Guinea Philippines Samoa Sri Lanka In Progress Thailand Nepal Planned Singapore Proposed Vietnam Malaysia Papua New Guinea (2)

15 Transition Economies: ROSC Participation Completed Armenia Azerbaijan Belarus Georgia Kazakhstan Kyrgyz Republic Moldova Mongolia Russia (2) Ukraine (2) In Progress Azerbaijan (2) Tajikistan Planned Kyrgyz Republic (2) All of Eastern Europe

16 Experience in Asia Extensive state ownership and Quasi-fiscal activities remain prevalent Interest in public-private partnerships (PPPs) raise contingent liabilities, but not reported Analysis and reporting on direct and implicit risks not well-developed Limited analysis of medium and long-term sustainability Weak oversight mechanisms Subnational government a significant issue for some countries Common perception that robust economic growth makes fiscal transparency unnecessary.

17 Table 1. Observance of Selected Fiscal Transparency Practices by Region 1/ Sub-Saharan Africa Asia and Pacific Europe Middle East- Northern Africa- Central Asia Latin America and Caribbean Observance Ratios 2/ Open Budget Processes Independent review of budget forecasts Realism of the budget 3/ Effective accounting system that can monitor arrears Fiscal data available according to advance release calendars Mid year report on budget developments is published 3/ Final accounts submitted to legislature and published within a year 3/ Data Quality and Assurances of Integrity Uniform budget classification consistent with Government Finance Statistics 3/ Broad coverage of fiscal activities in the budget Effective internal audit Independent and sound external audit Reporting on Fiscal Risks Contingent liabilities are published or minimal Comprehensive data on debt is published regularly Financial quasi-fiscal activity is reported or minimal Quasi-fiscal activity of nonfinancial public enterprises are reported or minimal 5/ Major fiscal risks are analyzed and reported in the budget Tax expenditures are reported in the budget Medium-term Budgeting Forward estimates for at least 2 out-years reported in the budget Budget estimates guided by a medium-term economic framework (MTEF) New policy costs distinguished from existing programs 3/ Medium-term policy objectives are stated in the budget Number of ROSCs included / The table is based on information derived from 71 published ROSCs as of Jan 31, The table excludes unpublished ROSCS, experimental ROSCs, and ROSC replaced by reassessments resulting in exclusing of 10 ROSCs. As of Jan 31, 2006, 83 ROSCs have been completed. This table also excludes Canada nd U.S. Regional divisions reflect IMF area departments (with the exception of the Western Hemisphere Department since Canada and the U.S. are omitted from this table). 2/ Data in the table shows the number of countries where the practice is Observed or Largely Observed as a ratio of the total number in each group which had sufficient information to assess observance/non-observance. 3/ Indicates practices for which more than 10 percent of the ROSCs in the study did not have sufficient information to assess observance/non-observance.

18 Table 2. Observance of Selected Fiscal Transparency Practices by Level of Economic Development 1/ Advanced Economies EU Accession Other Emerging Markets Other Transition Economies Developing Economies Observance Ratios 2/ Open Budget Processes Independent review of budget forecasts Realism of the budget 3/ Effective accounting system that can monitor arrears Fiscal data available according to advance release calendars Mid year report on budget development is published 3/ Final accounts submitted to legislature and published within a year 3/ Data Quality and Assurances of Integrity Uniform budget classification consistent with Government Finance Statistics 3/ Broad coverage of fiscal activities in the budget Effective internal audit Independent and sound external audit Reporting on Fiscal Risks Contingent liabilities are published or minimal Comprehensive data on debt is published regularly Financial quasi-fiscal activity is reported or minimal Quasi-fiscal activity of nonfinancial public enterprises are reported or minimal 5/ Major fiscal risks are analyzed and reported in the budget Tax expenditures are reported in the budget Medium-term Budgeting Forward estimates for at least 2 outyears reported in the budget Budget estimates guided by a medium-term economic framework (MTEF) New policy costs distinguished from existing programs 3/ Medium-term policy objectives are stated in the budget Number of ROSCs included

19 Part II Empirical Research Empirical evidence that greater transparency: Improves the business environment, and attractivness to FDI (WDR, 2004 Drabek and Payne, 2001); Lowers government borrowing costs (Hameed; Glennerster and Shin, 2003) Attracts portfolio investment; and reduces herding behavior (Gelos and Wei, 2002)

20 Core Model for Credit Ratings Based on the model by Cantor and Packer: GDP per capita in U.S. dollars Inflation Default index Growth External debt in percent of exports The advanced economies were excluded in estimation.

21 Fiscal Transparency and Credit Ratings

22 Results for Sovereign Ratings All but one of the transparency variables significant The only exception was budget execution index which is surprising since much of the information on actual outcomes is covered by this sub-index The highest coefficient is on fiscal risk component of fiscal transparency If countries in the lowest fifth quintile of transparency rise to the average transparency index for the highest fifth quintile in sample (0.68), the average rating changes from 8.1 to This is an increase of 3.5 notches. If they further improve transparency to 1 the predicted credit rating increases to 14.1, which is investment grade.

23 Average Primary Balances Primary balance should be positively related to transparency: If the government produces quality budget execution data and takes stock of its fiscal risks, there a lower probability of a surprise deficit. If the government sets its budget in the medium-term and publishes its plans in a way that can be monitored then a more disciplined fiscal policy is likely to result. Exclude developed economies and HIPCs

24 Core Model for Primary Balances Percent of Working Population Percent of population over 65 Population Openness Log PPP GDP per capita External debt (in percent of GDP)

25 Fiscal Transparency and Primary Balance

26 Results for Primary Balances Fiscal transparency, MTBF, and Fiscal Risk are related to fiscal balance. If the lowest fifth quintile by transparency (0.26) improves transparency up to the highest fifth quintile (0.73), the average primary balance changes from -1.2 percent of GDP to 1.0 percent of GDP. Similarly, if the highest fifth quintile (0.73) is able to improve its transparency to 1 the predicted primary balance changes from 1.0 to 2.2 percent of GDP. The relationship between transparency and fiscal discipline is likely to be stronger than suggested by the results.

27 Corruption Corruption and transparency maybe related because: Increased accountability Reporting of tax expenditures may reduce tax discretion Effective audit institutions can control misuse of public funds

28 Core Model for Corruption Control of Corruption index as developed by Kaufmann et al at the World Bank, which defines corruption as exercise of public power for private gain. Legal origin Openness Fractionalization Geographic dummy Education Income dummy

29 Fiscal Transparency and Corruption

30 Results for Control of Corruption FT and MTBF indices related to corruption. Audit function do not seem to matter These results are robust to using the TI measure of perception of corruption If countries in the lowest 10th percentile of transparency (0.20) improve their transparency up to the highest 10 th percentile average (0.91), they would see a change in control of corruption index from to This is no where close to the control of corruption index value in the most transparent countries, which have an average index value of 1.49.

31 Conclusion and Future Direction Controlling for other factors: A positive relationship between fiscal transparency and higher credit ratings, Fiscal transparency is positively related to fiscal consolidation, and Fiscal transparency is negatively related to corruption.