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

Other arguments invoked to justify taking on risks through contingent liabilities 
include income redistribution and international competitiveness. Because competitive 
markets would produce efficient, but not necessarily equitable, outcomes, governments can 
intervene to ensure a socially desirable income redistribution. In the context of contingent 
liabilities, government guarantees could keep some firms alive, and prevent increases in 
unemployment. In the context of deposit or export guarantees, it has been argued that a 
country’s financial or export sectors would be disadvantaged in terms of international 
competitiveness if the country were to unilaterally withdraw its deposit guarantee or export 
guarantees when other countries offer them. 
Even if a rationale exists for the government to enter into contingent liabilities, such a 
move is justified only if its benefits outweigh the costs and it is the most efficient means 
of achieving a goal. As should be the case with all decisions that involve the use of public 
funds, decisions to take on fiscal risks through contingent liabilities should be made on the 
basis of a cost-benefit analysis. This involves the determination that assuming the liability 

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has net (social and/or monetary) benefits and that these benefits are larger than those of 
alternative proposals. For example, the decision on whether to provide state flood insurance 
should weigh the cost of offering this insurance against the benefits of not having to provide 
extensive disaster relief. In cases when a monetary value cannot be assigned to all costs and 
benefits, alternative assessment techniques should be used, such as cost effectiveness 
analysis, which compares only the costs of alternative ways of achieving the same goal and 
chooses the one with the minimum cost. As suggested earlier and as discussed in Box 2, there 
are in principle relatively few situations when contingent liabilities might be preferable to 
other forms of budgetary support, such as direct loans or subsidies. Given the numerous and 
difficult considerations involved in a cost-benefit or cost effectiveness analysis, including the 
quantification of costs and benefits, it is good practice to put in place guidelines for the entire 
public sector on how to conduct such an analysis, especially if the decision-making on fiscal
risks is not centralized in one institution. An example of such guidelines is the “Cost Benefit 
Analysis Primer” issued by the New Zealand Treasury.
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