Governments have many financial tools at their disposal for promoting development. Granting guarantees of another party’s borrowing can be an attractive option. It helps facilitate investment by reducing perceived risk without requiring governments to immediately increase their spending.
Making good decisions about such guarantees is difficult. The ultimate fiscal cost of the guarantees is typically very uncertain, making it more difficult than usual to weigh the costs and benefits of the decision. This pair of papers from the World Bank Group aims to establish a sound framework of rules and policies to govern the granting and monitoring of guarantees, to help governments quantify the extent to which guarantee payments may impact the budget, and to encourage sound decision-making.
The first paper, A Framework for Managing Government Guarantees, provides a checklist of ideas to consider when pursuing guarantees. This second paper, Scenario Analysis Tool for Assessment and Monitoring of Government Guarantees: A Guidance Note, describes the methodology, gives examples, and gives directions on using the accompanying Excel models. These models can be used as-is or used by government analysts as the basis for making their own customized models.
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