This post is a summary of a report published in September 2007, with the complete title of, "The role of fiscal transparency in sustaining growth and stability in Latin America." Published at https://www.imf.org/external/pubs/ft/wp/2007/wp07220.pdf
Latin America has experienced a resurgence in growth in recent years. However, maintaining a strong and stable macroeconomic performance in Latin America will depend on further cuts in public debt, identification and reduction of fiscal vulnerabilities and improvements in the quality of public spending. Good fiscal management and improvements in fiscal transparency enhance the prospect for sound fiscal performance and a more favorable investment environment. This would be an important step toward stable and higher growth in the region. Lack of transparency, including inadequate data, hidden liabilities, and a lack of clarity about government policies, contributed to loss of confidence and fed global instability in the late 1990s. Particularly in Latin America, weaknesses were related to poor monitoring of off-budget fiscal activities that eventually had large fiscal consequences. Not only were these consequences not anticipated, but the lack of transparency may have contributed to the growth of these activites. Improvements in the quality and timeliness of fiscal data should improve the analysis of fiscal data and the quality of fiscal decisions. Fiscal transparency is more than improved monitoring of fiscal risks. Making information available to the public provide for greater accountability of government and indirectly should strengthen governance and reduce corruption. Better information can also enhance public understanding and lead to stronger support for important fiscal reforms needed to reduce public debt. Greater fiscal transparency, by simplifying tax and business regulations and curbing discretion, can positively impact the business environment and thus attract investment. Improvements in the fiscal stance and a significant decline in debt-to-GDP ratios have been recognized as important factors contributing to the resurgence of economic growth in Latin America. However, public debt remains high, if Latin America is to avoid a repetition of previous economic crises, more fundamental improvements in fiscal management are needed. The susceptibility to debt crises in Latin America points to the need for more explicit analysis of fiscal sustainability, as well as continued succesful fiscal consolidation. Fiscal crises in Latin America in the past were often rooted in the emergence of "fiscal skeletons" resulting from poor monitoring of contingent liabilities and, in particular, a lack of recognition of the fiscal impact of off-budget fiscal activities related to public financial institutions. Some of the most costly hidden liabilities in Latin America were related to implicit guarantees in the banking and corporate sector. Quasi-fiscal activities of development banks and public enterprises were often an important source of losses in these sectors. In Latin America, much of the information that citizens should have in the course of the budget year to hold governments accountable for their policies is not publicly available. Information should be available on policy intentions, revenue, debt, spending and results. Administrators appears to have more discretions, which may be an important factor contributing to corruption and unequal application of rules and regulations. Good practices in expenditure monitoring and audit are especially important to ensure effective government expenditure and prevent misuse of public funds. Certain institutional weaknesses may have contributed to lax fiscal policy and growing debt in Latin america. According to the literature on budget institutions, centalization of budget powers is an important ingredient for achieving sound fiscal policies. The ability to fully evaluate the impact of fiscal policy on the economy requires, first, identifying all government activities so that government is clearly defined, second, routinely consolidating data to produce regular reports on the consolidated operations of general government, and third, ensuring that the accounting system produces timely, accurate data. Minimizing corruption or the misuse use of public resources requires developing strong internal control and internal and external audit functions. Latin America lack of information on proposed and final budget obscured responsibility for fiscal policy making. A number of countries in Latin America have adopted Fiscal Responsibility Laws to try to overcome institutional weaknesses and achieve sounder fiscal outcomes. In addition, Paraguay, for example, adopted a "golden rule" (current expenditures can not be financed by credit). A number of countries have reacted to the possible threat of over-indebted subnational governments by passing fiscal responsibility laws that limit the ability of governments to borrow. In Brazil, for example, fiscal responsibility law prohibited credit ot rescheduling operations between different levels of governments to avoid the risk of intragovernmental bailouts. These countries could be setting the standards for fiscal data quality for emerging countries in others regions, however, theu fall short of this potential. Internal reports produced for fiscal management should be made available to the public in the government website. This would be a simple and cost effective way to inform and enhance the ability of civil society yo monitor and evaluate fiscal policies. Efforts also should be made to expand the content of published fiscal reports, particularly analyses of fiscal risks and sustainability. Greater transparency in the budget formulation process may help to harden the budget constraint and make both executive and legislature more accountable to the public. This would require the timely publication of the draft executive budget sent to the legislature, open legislative debate, and publication of the final approved budget. Countries in Latin America could strengthen governance by extending coverage of institutions subject to regular audits, and by publishing both internal and external audit reports to promote accountability to the public. Many countries could also develop more effective follow-up mechanisms to ensure the recommendations are implemented. Countries that have pursued decentralization need to give relatively high priority to promoting fiscal transparency in intergornmental relations. Without strong local oversight to hold officials accountable, such a set up can be an open invitation to inefficiency and/or corruption. Promoting fiscal transparency at the local level through higher quality fiscal reporting, off-budget transactions. Well designed decentralization policies include a clear assignment of responsibilities, and transfers based on staple and transparent criteria. Predictable sources of financing will enable governments to be more effective in carrying out their assigned responsibilities. For example, transfers can be made contingent on meeting reporting requirements or earmarked for debt reduction ot debt servicing when legal debt limits have been exceeded.
