Fixing fiscal risks begins

Assessing potential financial risks in achieving excellence in Bangladesh government's fiscal management attuned with international best practices begins with IMF tips, officials said.

The Ministry of Finance (MoF) has started the arduous exercise with the International Monetary Fund (IMF) extending technical assistance and also supplying template for conducting the financial-risk assessment and analysis aimed at lessening their impacts, they added.

Five groups of finance-division officials are working for preparation of a financial-risk-assessment report, supervised by the macroeconomics wing.

The groups are working on assessment of macroeconomic variables risks, the risks arising from debt and contingent liabilities, risks generating from state-owned enterprises, risks from public-private-partnership projects, and fiscal risks stemming from climate change and disastrous events.

A senior finance official told the FE Sunday no such risk assessment was conducted in the past in Bangladesh but most countries in the world carry out such evaluations.

They conduct such assessments as part of international best practice and aiming to take precautionary measures to lessen potential financial risks, he said.

"We are conducting the risk assessment which will also help in preparing financial forecasts appropriately," said the official, preferring not to be named.

According to another finance-division official, the Medium Term Macroeconomic Policy Statement (MTMPS) for fiscal year 2023-24 to 2025-26 has mentioned some potential financial risks but the procedure of assessment of the risks needs to be learned.

An IMF mission recently gave necessary guidelines to the finance officials on the methods of assessing the financial risks and they are now doing so, he said.

The MTMPS mentioned that disclosing fiscal risks and enhancing transparency more generally invite additional scrutiny of fiscal activities and their implications.

In turn, improved quality of information on fiscal risks builds support for prudent fiscal policies, leads to better risk mitigation, and promotes better policy responses.

"Policies can be adjusted more quickly when risks increase, and better strategies can be established for how fiscal policy should react to shocks," it says.

The MTMPS says if the risks are assessed properly, appropriate procedures can be put in place to limit risks, like parliament can set and approve yearly ceilings on the guarantees to be issued.

And the policymakers can weigh increased exposure to risks against other expenditure proposals, thereby improving the prioritisation of budget decisions, it notes.

"Hence, identifying the fiscal risks can be considered one of the most important tasks of the finance authority of a country," it adds.

The ministry document says the overall fiscal risks can be classified into two categories: expenditure-side risks and revenue-side risks.

Contacted Sunday, Dr Zahid Hussain, a former lead economist of World Bank's Dhaka office, told the FE the global economy is now facing heightened risks arising from Covid-19 pandemic and one-after-another wars.

Bangladesh's economy is also facing the similar ups and downs as contingent liability has increased and so a regular risk assessment is necessary, he said.

"After assessing the risks, measures also have to be taken for their mitigation," said Mr Hussain in his suggestion.

He said the risk assessment has to be completed before work for budget preparation begins, as it is being prepared to inform the policymakers.

"We have two defining moments-one is budget and another monetary policy, which are the main tools for mitigating risks," he said, adding that the inputs have to be given before the next monetary policy and budget will have been prepared.

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