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PERFORMANCE AUDIT OF PUBLIC DEBT AN EXERCISE OF REFERENCE TERMS. 1. Introduction. June, 2003. June, 2004. PERFORMANCE AUDIT OF PUBLIC DEBT AN EXERCISE OF REFERENCE TERMS. 2. Map . 1. Introduction. Reference terms map . 3. Six lines of work. 1. Introduction.

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slide1

PERFORMANCE AUDIT OF

PUBLIC DEBT

AN EXERCISE OF REFERENCE TERMS

slide2

1. Introduction

June, 2003

June, 2004

PERFORMANCE AUDIT OF PUBLIC DEBT

AN EXERCISE OF REFERENCE TERMS

2

slide3

Map

1. Introduction

Reference terms map

3

slide4

Six lines of work

1. Introduction

  • 1. Conceptual framework
  • 2. Normative and legal framework
  • 3. Reference terms for debt management
  • Reference terms toevaluate vulnerability and sustainability
  • 5. Behavior of the actors
  • 6. Accountability

4

slide5

Future work agendas

1. Introduction

  • A. Evaluation of social and economic impacts
  • of public debt in indebted countries
      • Up to what point, has public debt contributed to
      • economic development in emerging countries?
      • Up to what point has the debt service impeded
      • their development?
      • What has been the purpose of indebtedness?
      • How different would the current conditions be if
      • the resources had not been available?

5

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Future work agendas

1. Introduction

  • B. Crowding out effect
      • Do the resources which are handed over by the
      • private investors to the government imply a
      • higher multiplicative effect in the capital
      • formation process?
      • Which is the allocation made by the
      • government and which would be the one made
      • by the private investors?
      • Who is more efficient at investing?

6

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2

Conceptual

framework

7

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Main requirements for a sound definition of debt

2. Conceptual framework

  • Precise
  • Clear
  • Consistent throughout the time
  • Suitable for the analysis
  • Comprehensive

8

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Debt definition must allow to assess

2. Conceptual framework

  • Debt management
  • Vulnerability
  • Sustainability
  • The actors’ competence
  • Accountability

9

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Conceptualization must embrace debt arising from

2. Conceptual framework

  • Central government
  • Organizations and firms
  • Governmental financial system
  • State and municipality governments
  • Monetary authority
  • Contingent liabilities
  • Potential existence of hidden liabilities

10

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3

Normative and legal framework

12

slide13

3. Normative and legal framework

Laws and administrative norms

Operations and activities regulation

Public debt management

Laws and administrative norms with a general scope

13

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3. Normative and legal framework

Coordination of mandates and functions

Faculties

Normative

and

legal

framework

Debt management entities

Accountability

Coordination

Information sharing

14

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3. Normative and legal framework

Responsibilities designation process

Congress

Debt approval

Executive

Branch

Debt contracting

management

accountability

15

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3. Normative and legal framework

The normative and legal framework should

establish at least, the following:

  • Formulation of policies and strategies on public debt
  • Explicit definition on objectives and debt allocation
  • Entity or federal agency designed to acquire credits on behalf of the nation and to look after debt payments
  • Entity responsible for the approval of debt contracts

16

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3. Normative and legal framework

The normative and legal framework should

establish at least, the following

  • Entities authorized to sign contracts for debt
  • Establishment of the entity in charge of recording and managing public debt
  • Cases and conditions in which the government acts as guarantor
  • Obligations regarding publication of reports on the debt status and, in general, on public access to information

17

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4

Reference Terms for Debt Management

18

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Debt management concept

4. Reference terms for debt management

Necessary operations to obtain financial resources, in the amount and time required, and to fulfill the debt service at the lowest possible cost

19

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4. Reference terms for debt management

Debt management

  • Medium and long-term plan design:
  • Debt structure in accordance to
  • currencies, holders, rates, terms,
  • instruments and contractor entities
  • Risk evaluation
  • Prudent management practices
  • Recording, control, monitoring processes

20

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Debt plan

4. Reference terms for debt management

  • Statement and execution of a strategy
  • to manage the debt in order to
  • determine:
    • Agreed financing
    • Risk and cost goals
    • Compliance of payments obligations
    • any other debt management goals

21

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Debt management plan must comprise

activities oriented

4. Reference terms for debt management

  • To guarantee liquidity of the
  • government’s treasury
  • To maintain equilibrium
  • between costs, rates, terms
  • and risks
  • To establish adequate
  • coordination with external
  • markets

22

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Debt management plan must comprise

activities oriented

4. Reference terms for debt management

  • To establish and maintain an
  • effective internal capital market
  • To have an adequate recording
  • system

23

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Debt structure assessment must consider

4.1 Debt structure

  • Currencies and holders
  • Interest rates
  • Terms
  • Instruments
  • Government entities

24

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Indicators

4.1 Debt structure

  • Share of short-term to long-
  • term debt
  • Profile of maturing debts
  • Portfolio diversification
  • Ratio of internal debt to
  • external debt

25

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Concept

4.2 Risk assessment

  • Process whereby situations and events that might prevent the debt management authorities from meeting their obligations are defined, as well as the probability of such contingencies occur

26

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Most frecuent risks

4.2 Risk assessment

  • Market risk
  • Rollover risk
  • Liquidity risk
  • Risk of not attaining desired
  • fiscal revenue goals

27

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Most frecuent risks

4.2 Risk assessment

  • Credit risk
  • Settlement risk
  • Risk of natural disasters or
  • adversities and anomies
  • Country risk
  • Operational risks

28

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Operational risks

4.2 Risk assessment

  • Lack of clarity on the functions
  • and responsibilities
  • Staff with not enough training
  • Risks related to procedures
  • Documentation risks
  • Fraud risks

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The auditor must prove the existence of sensible practices on debt management

4.3 Sensible practices on debt management

  • A legal and normative framework
  • that clearly establishes
  • attributions of those who are
  • allowed to contract debt
  • Debt managers should be able to
  • identify and weigh tradeoffs between
  • costs and risks

30

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The auditor must prove the existence of sensible practices on debt management

4.3 Sensible practices on debt management

  • Debt management must be
  • linked to a clear
  • macroeconomic framework
  • Authorities must pay attention to
  • the elaboration of a strategy that
  • includes prudential debt
  • management practices

31

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Basic quality criteria

4.4 Recording, control and monitoring

  • Data provided to the legislative branch and the citizenry must be:
      • Accurate
      • timely

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INTOSAI, IMF, IADB and WB have promoted:

4.4 Recording, control and monitoring

    • Creating manuals of
    • procedures
    • Issuing of norms
  • Looking forward to guarantee data’s high quality

33

slide34

Recommendations

4.4 Recording, control and monitoring

  • Crossed verifications
  • Periodic conciliation of data
  • coming from different sources
  • Independent evaluation

34

slide35

Sound debt management practices

4.4 Recording, control and monitoring

  • Uniform accounting system
  • Integrated database
  • Clear-cut forms and reports
  • (in content and shape)

35

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Main objective of inner control activities

4.4 Recording, control and monitoring

  • To provide reliable reports to those in charge of debt management for the decision-making process regarding:
    • Financing contracts
    • Budget
    • Cash flow

36

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Main objective of inner control activities

4.4 Recording, control and monitoring

  • Verify the existence of record, control and supervision manuals in order to clarify every operation as well as to show the fiscal contingencies that might become obligations for the government

37

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5

Reference terms to assess debt vulnerability and sustainability

38

slide39

Two groups of indicators to verify the status of the public debt

  • Reference terms to evaluate debt
  • vulnerability and sustainability

Vulnerability

Static indicators

Risk that current conditions might disturb the debt status

Dynamic indicators

They measure the government’s capacity to face negative situations in future scenarios

Sustainability

39

slide40

5.1

Vulnerability

indicators

40

slide41

Vulnerability analysis

5.1 Vulnerability indicators

Vulnerability analysis demands the construction of indicators that measure and prevent any situation that might compromise a government regarding its debt payment

41

slide42

Vulnerability (Static) indicators

5.1 Vulnerability indicators

  • Can the government meet its
  • obligations given the actual
  • conditions?
  • Are there elements or
  • phenomena that might disturb
  • the prevailing situation?

42

slide43

Vulnerability (Static) indicators

5.1 Vulnerability indicators

  • Total debt indicators -foreign and domestic debt:
    • Maturityprofiles
    • Payment Schedules
    • Sensitivity to interest rate
    • Debt composition in foreign currency

43

slide44

Vulnerability (Static) indicators

5.1 Vulnerability indicators

  • Total debt indicators -foreign and domestic debt:
  • These are useful indicators to define
  • debt evolution and payment
  • capacity
  • They provide signs on the decline of
  • economic conditions that government
  • and economy may face

44

slide45

Vulnerability (Static) indicators

5.1 Vulnerability indicators

  • Total debt indicators:
      • Ratio of debt to GDP
      • Ratio of deficit to GDP
      • Ratio of financial coststo GDP
      • Ratio of tax revenue to debt
      • Ratio of total revenue to debt

45

slide46

Vulnerability (Static) indicators

5.1 Vulnerability indicators

  • Total debt indicators
      • Rate of growth of total debt as

compared to that of GDP

      • Quality of assets and out of

balance positions

46

slide47

Vulnerability (Static) indicators

5.1 Vulnerability indicators

  • Total debt indicators
      • Profitability and liquidity
      • Rhythm and quality of credit growth

47

slide48

Vulnerability (Static) indicators

5.1 Vulnerability indicators

  • Total debt indicators
      • Averager maturity
      • Duration

48

slide49

Vulnerability (Static) indicators

5.1 Vulnerability indicators

  • Total debt indicators:
      • Foreign currency denominated
      • debt / total debt
      • Indexed Interest rate debt /
      • total debt

49

slide50

Vulnerability (Static) indicators

5.1 Vulnerability indicators

  • External debt indicators
      • External debt / GDP
      • External public debt service /

income from exports

      • Foreign currency denominated

debt / total debt

50

slide51

Vulnerability (Static) indicators

5.1 Vulnerability indicators

  • External debt indicators
      • International reserves / short-

term debt

      • Weighted average interest rate

51

slide52

Vulnerability (Static) indicators

5.1 Vulnerability indicators

  • Structure indicators
      • Ratio of market debt to external debt
      • Ratio of non-market debt to external debt
      • Structure according to instruments
      • Structure according to terms

52

slide53

Vulnerability (Static) indicators

5.1 Vulnerability indicators

  • Domestic debt indicators
      • Domestic debt/GDP
      • Foreign-held debt/ internal debt
      • Indexed debt / internal debt
      • Foreign currency denominated

debt/internal debt

53

slide54

Vulnerability (Static) indicators

5.1 Vulnerability indicators

  • Domestic debt indicators
      • Average maturity
      • Duration
      • Weighed average interest rate

54

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Vulnerability (Static) indicators

5.1 Vulnerability indicators

  • Domestic debt indicators
  • These indicators must consider contingent liabilities with high materialization probability, such as
    • pensions plans
    • guarantees
    • judiciary resolutions
    • financial rescues.

55

slide56

5.2

Sustainability

indicators

56

slide57

Sustainability - Concept

5.2 Sustainability indicators

Governments’ fiscal sustainability

The present value of its future revenues is greater than its expenditures, including the debt service

Pv (revenues) > Pv (expenditures, debt service)

57

slide58

Sustainability - Measurements

5.2 Sustainability indicators

Measurements help answer questions such as:

Can the government keep the same path of expenditures and revenues or an adjustment has to be made in order to keep the ratio debt/GDP constant?

58

slide59

Sustainability - Measurements

5.2 Sustainability indicators

Measurements help answer questions such as:

Can the current fiscal policy be kept without an explosive growth of the public debt?

Does the government need to increase taxes or decrease expenditure to avoid an explosive debt trend?

59

slide60

Sustainability - Measurements

5.2 Sustainability indicators

Central scenario

Macro-economic

conditions

Sustainability

indicators

Analysis

There’s the possibility or the risk that macroeconomic conditions might have significant changes. Therefore, a evaluation on the public finances sustainability in presence of these changes must be made

60

slide61

Starting point of the sustainability analysis

Pv(revenues) Pv(expenditure, debt service)

5.2 Sustainability indicators

Government budget constraint

The present value of future revenues must be equal to or greater than its expenditures, including debt service

61

slide62

Starting point of the sustainability analysis

5.2 Sustainability indicators

Government budget constraint

According to Blanchard, ceteris paribus, fiscal policy is sustainable if real debt does not grow faster than the interest rate.

That is equivalent to say that the real debt with respect to the GDP does not grow faster than the (positive) difference between interest rate and the economy growth rate

62

slide63

Sustainability analysis

5.2 Sustainability indicators

    • Debt / GDP
    • Primary deficit /GDP
    • Inter-temporal
    • government
    • budget constraint
  • Other
  • macro-economic
    • indicators and
  • variables

Central scenario

  • Primary surplus
  • estimate
  • needed to keep
  • debt constant

63

slide64

Sustainability analysis

5.2 Sustainability indicators

Government budget constraint

The accumulation of interests increases debt, so in order to keep it constant, the increased interests must be compensated with a primary surplus of the same magnitude

64

slide65

Sustainability analysis

5.2 Sustainability indicators

Primary surplus estimate

The indicator shows the amount that the primary surplus must be in order to compensate the interests payments and, therefore to keep the debt constant

65

slide66

Sustainability analysis

5.2 Sustainability indicators

  • Expected Value
  • of the primary
  • surplus
  • Primary surplus
  • estimate
  • needed to keep
  • debt constant

The difference between these values is an

measure of the required fiscal adjustment to reach a sustainable path

66

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Intertemporal constraint Talvi and Vegh

5.2 Sustainability indicators

  • Real Interest
  • payments
  • on the initial
  • government debt
  • amount
  • Permanent
  • primary
  • surplus

If the difference equals zero, fiscal policy wil be sustainable

If the difference is positive, the planned trajectory of revenues and expenditures will not meet the inter-temporal budget constraint, because it will not be enough to cover the interest payments

67

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Budget constraint Blanchard

5.2 Sustainability indicators

Observed

Tax rate

  • Tax rate
  • assuring the
  • sustainability of the
  • initial debt

If the difference is positive, an adjustment implying a tax increase or an expenditure restraint will be necessary

68

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Scenarios analysis

5.2 Sustainability indicators

  • Macro-economic scenarios

Measurements based on the expected scenario, or on their long-run level, show sustainability, but, when facing changes in any macro-economic variable, such as the rate of growth of GDP or in the interest rate, may cause such a perturbation that might become a crisis

69

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Scenarios analysis

5.2 Sustainability indicators

  • Stress Analysis
      • Recession
      • Shocks in interest rates
      • Shocks prices of exported raw materials
      • Currency exchange
      • Contingent liabilities
      • Market or credit risks

70

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Scenarios analysis

5.2 Sustainability indicators

  • The results of
      • Macro-economic scenarios
      • Stress scenarios

Investment banks and several international agencies, use this analysis to assess public finances. In particular, the International Monetary Fund promotes the use of these indicators

71

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Evaluation of debt sustainability

5.2 Sustainability indicators

  • Is the government able to meet its debt
  • commitments?
  • What is the magnitude of a fiscal
  • adjustment needed in order to return to
  • a sustainable situation?

72

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5.2 Sustainability indicators

Debt management

Debt managers

Central

bank

authorities

Debt managers and the central bank authorities must agree in the objectives of the debt management policy, as well as those of the economic, fiscal and monetary policies

73

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6

Behavior of the

actors

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6.1 Institutions

Evaluation of the institutions

  • Outstanding curriculum
  • History of the institution
  • Controls and policies that it has
  • established
  • Political and institutional
  • management

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6.1 Institutions

Organizational Structure of the office

  • Executive body
  • Control and coordination body
  • Operational bodies: negotiation
  • and service
  • Recording body
  • Analytical body

76

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6.1 Institutions

Debt office and administrative cost

A well organized debt management and administration system will improve the information flows, as well as its quality and, therefore, the suitability of the decision-making to satisfy every country’s needs

77

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6.1 Institutions

Aspects to be evaluated

  • The competence of activities must
  • be clearly defined by laws, norms and
  • regulations
  • Existence of manuals with a detailed
  • description of responsibilities and
  • functions of the offices in charge

78

slide79

6.1 Institutions

Aspects to be evaluated

  • Existence of procedures manuals
  • Existence of organizational charts
  • Description of eachpublic servant’s
  • tasks
  • Accounting system that enables to
  • identify the real cost related to debt
  • management functions

79

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Administrative costs

Expenditure on debt management

Total debt

6.1 Institutions

A benchmarking exercise can be carried out to verify whether the country is above or below the world average.

80

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Administrative costs

6.1 Institutions

  • Direct cost derived from human and material
  • resources, offices, and services
  • Payment of commissions to the agents and
  • institutions responsible for investing or those
  • derived from the opening of credit
  • Tax payments
  • Security or guarantor’s commissions

81

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Goals of the human resources policies

6.2 Human resources

The goals are to support in the best possible way, the institution’s necessities for the optimal accomplishment of the aims for which the institution was created

  • It requires
    • Highly qualified personnel
    • Keep a high performance level each

year

82

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Civil Service

6.2 Human resources

More attention to employee’s development, training and welfare

Strenghtening and planning of activities

Civil service

83

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Integrity and ethics

6.2 Human resources

Since the authorities responsible for the debt management may overlook internal controls, it is important to bear in mind that the public servants’ integrity and ethical values are essential to maintain the effectiveness of the internal controls

84

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Ethics

6.2 Human resources

  • Behavior of the public servants
    • Ethical norms, widely publicized
    • The International Code

of Conduct for Public Officials

85

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Qualification and training

6.2 Human resources

  • Competence
  • Knowledge
  • Capacities
  • Schooling
  • Training
  • Experience
  • Responsibilities

86

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7

Accountability

87

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Quality of service

7 Accountability

Objective:

To generate the required reforms in the public sector management to improve the capacity of reaction and the sensibility of the public institutions by means of requiring and encouraging a greater labor yield

88

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OECD Administration as service, the public as client

7 Accountability

  • Characteristic elements of a service sensible to the customer’s requirements:
      • Transparency
      • Client participation
      • Accessibility

the citizen has the right to demand a suitable and timely accountability in relation to all the public resources that are handled

89

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Use of the Accountability indicators

7 Accountability

  • Public debt management reports must be:
        • Transparent
        • Timely
        • Reliable

90

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Guidelines for public debt management

7 Accountability

Two Premises:

1 The operations will be more effective if the goals and instruments of policy are known to the public (financial markets) and if the authorities can make a credible commitment to meeting them

91

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Guidelines for public debt management

7 Accountability

Two Premises:

2 Transparency can enhance good governance through greater accountability of central banks, finance ministries, and other public institutions involved in debt management

92

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Actions that will contribute to achieve the Citizen-Client’s satisfaction

7 Accountability

  • Clarity of roles, responsibilities and
  • objectives of financial agencies
  • responsible for debt management
  • The objectives of the debt management, explaining the measures on costs and the adopted risks, will be defined and revealed to the general public

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Actions that will contribute to achieve the Citizen-Client’s satisfaction

7 Accountability

  • The substantial aspects of the debt management operations will be disclosed
  • Information on the past, current and foreseen budget activity, considering the financing and the information on the consolidated financial position of the government

94

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Fiscal Transparency Manual IMF

7 Accountability

Four aspect of governmental information supply

  • Annual budgetary coverage
  • Budgetary execution and
  • forecasting
  • Contingent liabilities and quasi-fiscal activities
  • Debt and financial assets

95

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Fiscal Transparency Manual IMF

7 Accountability

Government must regularly provide the citizens with the information on debt structure and financial assets

96

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Fiscal Transparency Manual IMF

7 Accountability

in order to enable the evaluation of the capacity to finance its activities and to accomplish its debt obligations, and to estimate the level of revenues that will be required to meet all the existing obligations

97

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PERFORMANCE AUDIT OF

PUBLIC DEBT

AN EXERCISE OF REFERENCE TERMS

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