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

VII. C
ONCLUSION
 
The increased awareness that contingent liabilities can impose substantial fiscal costs, 
including impair fiscal sustainability, has prompted many countries to develop ways to 
safeguard the fiscal position against risks associated with contingent liabilities. These efforts 
have also been driven by calls for transparency from international institutions and by the 
attention increasingly paid by rating agencies to contingent liabilities in assessing sovereign 
creditworthiness. 
The paper discussed theoretical and practical issues raised by contingent liabilities, including 
the rationale for taking them on, how to safeguard against the risks associated with them, 
how to account and budget for them, and how to disclose them. A review of country 
experiences in these areas points to the emergence of a body of good practices in mitigating, 
managing, and disclosing risks associated with contingent liabilities, as well the institutional 
arrangements for dealing with them. 
Mitigating contingent liability risk requires that policymakers understand the nature of the 
risks involved and address them before entering into contingent liabilities. This is best 
achieved by putting in place a comprehensive framework that guides policy-makers in 
assessing the need to enter into contingent liabilities, the net social or financial benefits of 
doing so, and the players best positioned to bear the risks, requiring ultimately accountability 
for the decisions to take on such liabilities. The framework should also address the incentives 

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and costs involved in issuing contingent liabilities (such as guarantees), by requiring risk-
sharing with the private sector to mitigate moral hazard; charging the beneficiary for the 
fiscal cost of the liability (unless it is issued as a subsidy); and treating the subsidy cost of the 
contingent liability as budgetary expenditure, where feasible. Finally, external scrutiny of the 
decisions to take on contingent liabilities is desirable and can be ensured through early 
parliamentary involvement in decisions to take on contingent liabilities and submission to the 
audit by national audit institutions. 
Managing retained risks requires their systematic monitoring and putting in place funding 
mechanisms for dealing with them should these risks realize. Managing low-impact risk can 
be handled through budgetary flexibility—including contingency appropriations, 
supplementary budgets, or allowing, under strict conditions, spending in excess of budget— 
or by relying on contingency funds for self-insurance. On the other hand, for the low 
probability but high impact events, such as natural disasters, the most appropriate vehicle is 
often market insurance or hedging.
Disclosure of contingent liabilities should be guided by internationally-accepted standards in 
accounting and fiscal transparency. Disclosure venues could differ, but should include budget 
documentation and financial statements so as to allow an integrated assessment of the fiscal 
position. In providing information on contingent liabilities, the appropriate balance has to be 
struck in ensuring that the information is meaningful, while at the same time avoiding it from 
being overwhelming. While there may be circumstances when it may not be desirable to 
disclose the magnitude of some contingent liabilities, these should not be used as a pretext 
for avoiding disclosing them altogether. To ensure accountability, clear and strict 
responsibility for the provision of accurate reporting on contingent liabilities should be 
established.
Finally, in the area of institutional arrangements for managing contingent liability risks, the 
key issues are where to house responsibility for monitoring and managing these risks and the 
degree of centralization required. The monitoring of all risks from contingent liabilities 
should be centralized in the fiscal policy-making institution. While centralizing risk 
management may also be desirable, including through the integration of contingent liabilities 
management with that of conventional debt, in practice the appropriate setup depends 
critically on the public finance management system in the country and capacity. 

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