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Debt & Fiscal Risks Toolkit

Fiscal Risk

The World Bank has developed a collection of resources to provide capacity-building to emerging and developing economies on assessing and managing their fiscal risks. An extensive program of on- and off-site technical assistance, in-person and virtual workshops, knowledge products, and analytical tools help deliver these advisory services. These resources are grounded in the following pillars:

  • Fiscal Risk Assessment (FRA): FRA is a framework to identify and assess the fiscal risks to which a country is exposed. This is a diagnostic tool to identify direct and contingent liabilities and map them into a fiscal risk matrix. Such mapping helps countries capture the big picture and develop a broad understanding of their exposure to fiscal risks. The FRA framework also assists the prioritization of risks by quantitative and qualitative assessment where possible, considering likelihood and impact. Ultimately, FRA findings allow for customized reform actions around building blocks (e.g., governance arrangements, coordination among government policies) and developing strategies to monitor and mitigate specific fiscal risks. Based on these strategies, countries can develop various policy measures that take into account the direct, contingent, explicit, and implicit nature of the exposure (e.g., whether to issue guarantees to state-owned enterprises instead of being exposed to the implicit contingent liabilities from them).
  • Technical assistance tailored to individual fiscal risks: For each fiscal risk arising from debt-related liability, risk-management strategies are developed to implement tools to mitigate and monitor risks. Such tools help to raise awareness about risks (e.g., risk disclosure and accounting); mitigate risks (e.g., through financial hedges, and insurance); and increase preparedness in case risks materialize (e.g., through fee revenues; contingency funds; and budgeting). The set of analytical tools used to monitor these risks includes:

A Framework for Managing Government Guaranteeswhich helps governments develop sound governance arrangements, establish the institutional and technical setup to evaluate the contingent liabilities from guarantees, and build tools to manage and monitor credit risk arising from guarantees. This framework and accompanying analytical tools also help address the implicit risks from state-owned enterprises (SOEs), public corporations, and subnational entities.

The Credit Rating Stylized Analytical Tool supports the evaluation of the credit risk that accrues to a central government when a public corporation’s non-performance of its financial obligations results in a cost to that government. The tool and the accompanying guidance note help the user undertake fundamental risk analysis of public corporations.

The Public-Private Partnerships Fiscal Risk Assessment (PFRAM) Model, developed by the IMF and the World Bank Group, is an analytical tool to assess fiscal costs and risks arising from public-private partnership (PPP) projects. It is designed to assist governments in assessing fiscal implications of PPPs, as well as in managing these projects in a proactive manner. PFRAM has been used by the World Bank's infrastructure and macroeconomics teams to advise governments on the  medium- to long-term fiscal implications of PPPs and can be used for an individual project or a set of projects.

A stochastic fiscal sustainability assessment, which incorporates the effects of uncertainty into the standard debt sustainability analysis and aggregates the fiscal risks in a probabilistic and endogenous analytical framework.  


Fiscal Risk Matrix

Fiscal risks are deviations from fiscal outcomes expected at the time of budget formulation. This deviation might create significant impact on government finances and impair the capacity of governments to use fiscal policy to stabilize economic activity and support long-term growth.

Experience has shown that governments often lack the capacity to understand their exposure to overall or individual fiscal risks well, and their means to mitigate risks can be limited. Following the global financial crisis, governments have increased efforts to holistically identify and manage fiscal risks. International financial institutions, rating agencies, and investors have also put more emphasis on improved fiscal risk management by governments.

To identify fiscal risks affecting a government's liabilities, the fiscal risk matrix below has proven to be a useful conceptual framework.

Sources of fiscal risk may be explicit or implicit, direct or contingent. Explicit liabilities pose a legal obligation to the government. Implicit liabilities, on the other hand, are based on expectations about government behavior (e.g., electoral promises related to benefit extension). While the government has no legal obligation to incur implicit liabilities, there may be a strong moral or political impetus to do so. Direct liabilities are predictable obligations that arise in any event, while contingent liabilities are obligations trigged by a discrete⁠—but uncertain⁠—event.

Fiscal Risk Matrix for Liabilities⁠—Central Government

 Direct liabilitiesIndirect liabilities

Explicit liabilities

(Legal obligation—no choice)

  • Foreign and domestic sovereign debt
  • Budget expenditures—both in the current fiscal year and those legally binding over the long term (civil servant salaries and pensions)
  • Guarantees for borrowing and obligations of sub-national governments and SOEs
  • Guarantees for trade and exchange rate risks
  • Guarantees for private investments (PPPs)
  • State insurance schemes (deposit insurance, private pension funds, crop insurance, flood insurance, war-risk insurance)
  • Unexpected compensation in legal cases related to disparate claims
  • Reconstruction of public assets

Implicit liabilities

(Expectations—political decision)

  • Future public pensions, if not required by law
  • Social security schemes, if not required by law
  • Future health care financing, if not required by law
  • Future recurrent cost of public investments
  • Defaults of sub-national governments and SOEs on nonguaranteed debt and other obligations
  • Liability clean-up in entities being privatized
  • Bank failures (support beyond state insurance)
  • Failures of nonguaranteed pension funds, or other social security funds
  • Environmental recovery, natural disaster relief

Source: Polackova-Brixi, Hana and Alan Schick (1998), Government at Risk, World Bank.


Contingent Liabilities Management Strategy

A stylized risk management framework for fiscal risks from contingent liabilities starts with setting economic policy. The government formulates policy—such as electrifying rural areas—and may decide to assume contingent liabilities, like government guarantees to electricity utilities, to achieve its objective. The management of contingent liability risks should be embedded in sound governance arrangements, including the legal framework and institutional setup.

Contingent Liabilities Risk-Management Framework

A stylized risk-management framework for any type of fiscal risk from contingent liabilities

The objective of a risk management strategy is to implement tools to mitigate and monitor risks in line with the policy framework. Such tools help to raise awareness about risks (e.g., risk disclosure and accounting); mitigate risks (e.g., through financial hedges1 and (re-)insurance); and raise preparedness in case risks materialize (e.g., through fee revenues; contingency funds; and budgeting).

Implementing such tools depends on an understanding of the fundamental risks to which the government is exposed. The types of risks and risk exposure need to be identified, analyzed, and ideally quantified to allow for better comparison among alternative policy measures and the potential impact on government finances. To undertake such analysis as a basis for evidence-based policymaking requires smooth information flows within the government. Formal information sharing channels between ministries of finance and line ministries, in particular, are essential.

This stylized framework is agnostic to the type of contingent liability a government is exposed to. However, different types of contingent liabilities call for different risk assessment, quantification, and management approaches.

1Including catastrophe bonds and oil hedges, both of which are instruments governments have used to hedge risks, with facilitation by the World Bank


Fiscal Risk Management Advisory Services

The World Bank provides customized support for addressing fiscal risks arising from debt-related contingent liabilities. This support is delivered in several categories: strengthening institutions, capacity-building, and management of internal operations. In each category, there are areas along which the technical assistance can be customized to fit the circumstances of the country.

Each country's engagement starts with a diagnostic assessment. Depending on the main risks identified and mapped in the fiscal risk matrix, action plans for risk-specific strategies can be developed and implemented through downstream support, according to the areas described below:

Institutional Strengthening

  • Governance: Focuses on the legal framework, institutional arrangements, risk management tools, and accountability and transparency mechanisms that shape the operations of government fiscal risk managers concerning (1) overall fiscal risks and (2) country-specific risks
  • Policy coordination: Focuses on the establishment of efficient coordination mechanisms between fiscal risk management and other relevant policies, including monetary policy, budget planning processes, debt and cash management, public investment policies, territorial plans, etc.
  • Capacity and management of internal operations: Includes analysis of organizational structures, development of strategies for recruiting and training staff, and evaluation of information technology systems for portfolio level and individual fiscal risk management activities

Technical Capacity Development

  • Fiscal risk management strategy development: Covers formulation of fiscal risk management strategies to develop mitigation and monitoring tools and is subject to the country's macroeconomic framework and various development policies
  • Fiscal risk evaluation methodologies: Focuses on developing models to identify, measure, and manage specific fiscal risks to support the development of strategies. Credit risk assessment models will help to evaluate the exposure from guaranteed and non-guaranteed debt of SOEs, subnational governments, and non-financial private sector entities, as well as guarantees issued to public-private partnerships.

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