Contingent Liabilities: Issues and Practice; Aliona Cebotari; imf working Paper 08/245; October 1, 2008

A. Instruments for Managing Low Impact Liabilities 
Budget Flexibility 
One way to secure financing in case of calls on contingent liabilities is to ensure 
budgetary flexibility to meet unbudgeted expenditures.
• This can be done by including a contingency reserve in the budget that could be used to 
meet calls on contingent liabilities. Most countries include such reserves in the budget, 
although it is usually small (below 3 percent of total spending). In some cases, the use of 
the reserve is restricted to items other than calls on contingent liabilities. In these cases, 
and in situations where calls on contingent liabilities are not insignificant, the anticipated 
payments on these should be appropriated separately in the budget (see Cebotari et al., 
2008, for more details on country practices with contingency reserves). 
• Another way is to rely on provisions that allow government spending in excess of the 
budget, within clear restrictions. In OECD countries, such provisions are included in the 
budget system laws of most countries and in a few instances even in the constitution 
(Austria, Finland, Germany and Japan). These provisions allow the executive to spend in 

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excess of the approved budget in case of clearly specified contingencies, though require 
parliamentary approval ex post (Lienert and Jung, 2004). In some continental European 
and Nordic countries, certain appropriations are labeled as “estimated”—as in the case of 
expenditures that are legally or contractually binding (e.g. debt service) or are difficult to 
estimate—and these appropriations can be exceeded without parliamentary approval, 
although ex-post reporting is required (Finland, France, Norway).
• Other examples of securing flexibility in dealing with realized contingent liabilities 
include supplementary budgets, budget reallocations, and contractual provisions that 
allow for a time lag between calls on guarantees and government payments (as done, for 
instance, under concession contracts in Chile; Hemming et al., 2006).