Government liability and asset management, including the granting of rights to use or exploit public assets, should have an explicit legal basis

102. In addition to covering taxation and public expenditure, the framework for fiscal management should include primary legislation, such as a budget system law or debt management law that covers all transactions that result in a change in public assets or

liabilities. In addition to a legal requirement for debt and asset management, there should also be requirements for the transparent management of nondebt liabilities, including monitoring government guarantees, unfunded pensions, arrears, and any other contractual obligations of government. These disclosure requirements are discussed further in Chapter III, under practice 3.1.5.

Debt management

103. Debt management legislation should clearly assign authority to a single person, usually the minister of finance, to select the instruments necessary for borrowing; to produce a debt management strategy; to assign debt limits (if no limit is set by law), usually with reference to a sustainable debt strategy; to establish and control the organization responsible for debt management (whether it is located within the ministry or is a separate agency); and to issue regulations covering debt management. The granting of government guarantees should legally rest with a single individual, usually the minister of finance or the head of the agency responsible for debt management with clearly specified constraints. In some countries the legislature must approve all government guarantees. The legislation should define the role of the central bank as fiscal agent of the government so that issuance of treasury securities cannot be confused with monetary policy operations. All loans should be credited to a bank account under control of the finance ministry, with liabilities incurred and terms of the loans fully disclosed to the public. For fiscal transparency, legislation should set requirements to report annually on debt stock and flows, including data on government-guaranteed debt, to the legislature and public, though more frequent reporting would be

51 An example of good practice is Egypt, where all contracts are made public, whether awarded through negotiated deals or bid rounds.

preferable. Best practice would be a requirement for an annual audit of debt management operations performed by the external audit institution.⁵²

104. Legislation on public debt should cover all debt transactions and guarantees, including by subnational governments; extrabudgetary funds; and public corporations.

Because it can be difficult to monitor debt incurred by these other entities, some countries avoid this fiscal risk by simply prohibiting these entities from holding debt, except possibly on-lending from the central government. Some countries, such as the United States,

implement a credible “no-bailout” policy for subnational governments. Other countries either require central government authorization for debt-creating transactions, or set limits on the debt that can be incurred by subnational governments or other public entities. A public debt law (or other primary legislation) should clearly define all limits placed on subnational governments, extrabudgetary funds, and public corporations, and it should also cover monitoring (through secondary regulations) of these limits.

105. Fiscal transparency requires that public debt management have a legal basis that is supported by clear secondary regulations. Regulations may be in the form of an

official procedural manual or other instructions that cover the details of the debt management process, operational controls, and reporting arrangements. This would include restrictions on such things as the types of instruments that can be used for debt management, risk

parameters, and content of a medium-term debt management strategy; the methods for analyzing contingent liabilities and risk of called government guarantees; as well as the usual accounting standards and reporting and auditing requirements. If the legislation does set limits on guaranteed debt, it is critical that the regulations provide clear criteria for consideration and approval of guarantees.

106. Regulations should also define the responsibilities of the debt management unit, whether this structure is located within the ministry of finance, the central bank, or a separate agency, and the objective of the unit should be clearly stated and include minimizing costs of debt servicing while taking steps to manage associated risks. The head of this unit may be given delegated authorization by the minister of finance to manage domestic and external debt. In other countries, such as the United Kingdom and Ireland, the debt

management agency has broad powers and independence, and monitoring by the legislature is through ex post scrutiny.

Asset management

107. For countries that accumulate financial assets through investment of savings, it is critical to have an open and clear asset management strategy.⁵³ Countries with significant

52 It is recommended that debt management practices follow the IMF Guidelines on Public Debt Management (2003c).

53 Norway’s Government Pension Fund-Global is considered a best practice in transparent asset management.

Box 6 in the Guide on Resource Revenue Transparency provides more details on the asset management guidance, reporting, and auditing of these assets.

natural resource assets face important issues regarding debt and asset management, as discussed in Box 6. The objectives of savings, such as stabilization or saving for future generations, or other considerations, such as investment abroad to avoid exchange rate appreciation, should be clearly stated. Changes to asset management policy should be clear and publicly available. In addition, the asset management function should be carried out under clear investment guidelines that are issued by the ministry of finance and available to the public. The guidelines should set limits on risk, types of assets, and geographical or currency composition of financial assets. Information should also be provided on how asset managers will be held accountable, such as through comparison with a benchmark portfolio.

The public should also have information on total financial assets and on the return on

investments. The agency or business in charge of asset management should also be subject to external audit.

Box 6. Authority over Natural Resource Assets and Resource-related Borrowing The government’s involvement with natural resources should be clearly established in law, and the power to grant rights to explore, produce, and sell and buy these resources should be well established in laws, regulations, and procedures that cover all stages of resource development.

The Guide provides detailed guidance in this area.

Financial asset holdings, including any related to the saving and investment of resource revenues, should be subject to clear rules for disclosure, regardless of which government agency,

extrabudgetary fund, or public company holds the assets. They should be considered as part of the overall financial assets of the government, and the assets should be reported on the

consolidated government balance sheet if one is maintained.

Rights to borrow for public purposes should be under the authority of one government ministry (usually the ministry of finance). Countries with important natural resources may face additional issues related to control and transparency of financial assets and liabilities because loans may be made with future resource revenue as collateral. The terms of such loans tend to be negotiated and usually are not available to the public, and the authority for such borrowing may not be subject to the usual rules and oversight. Fiscal transparency requires that the legal framework include adequate disclosure and oversight requirements for all borrowing, and that oversight agencies such as the external audit agency be given sufficient authority and capacity to implement the law. These requirements should apply equally to any borrowing or collateralization by the national resource company.

108. Physical assets should be inventoried, and sales and purchases monitored, in order that the full stock of physical assets is known at any point in time. Under accrual accounting, the balance sheet would include nonfinancial assets. The valuation of such assets raises some transparency questions as discussed in Chapter III.

II. OPEN BUDGET PROCESSES

109. The budget process and the information presented in the budget documentation are central to fiscal transparency. Almost without exception, the annual budget is the

government’s main instrument for setting fiscal policy. It is the occasion on which the government presents its expenditure proposals, and the means by which it will finance them, within the context of explicit statements of its policy intentions. Alongside the formal set of line-item allocations of spending organized by administrative unit, which forms the core of information needed by the legislature to scrutinize and approve spending, the government uses the budget to detail its proposals for revenue collection and borrowing, placed in a historical framework, and explains how these proposals will help achieve its objectives.

110. Information provided at the time of the annual budget should cover all fiscal

activities, irrespective of the institutional arrangement under which they take place. Only if such elements as extrabudgetary funds, quasi-fiscal activities, and tax expenditures are included in the budget presentation is it possible to review the full extent to which public resources are allocated according to announced policy objectives and programs. Information should also be readily available on how budgets are prepared and executed, including the role of such documents as budget circulars. The type of information required for fiscal

transparency—including functional and economic presentations—is described further in Chapter III; it will be referred to only selectively in this chapter.

111. Although the principles and practices outlined in this chapter are described primarily in the context of the central government, they have parallels also for levels of subnational government that have tax powers and expenditure responsibilities, receive or make transfers to the central government, and may themselves have borrowing capacity. Transparency considerations apply both in regard to the need to provide sufficient information to the central government to carry out its responsibilities for determining overall fiscal and

macroeconomic policy and to assessing the implications for its own budget and the rest of the public sector, and to ensure their own public accountability. In a similar vein, the information provisions documented in Chapter III apply in large measure also to subnational

governments.

112. Principles and practices relating to openness of the budget process concern budget preparation, documentation, and presentation, as well as procedures for budget execution, fiscal reporting, and auditing. Many of the OECD Best Practices for Budget Transparency apply particularly to this pillar of the Code, and they are referenced here when they extend significantly beyond the good practices described in this pillar.⁵⁴

54 Readers may also wish to refer to Guidelines on Public Expenditure Management at

http://www.imf.org/external/pubs/ft/expend/index.htm as well as the World Bank Public Expenditure

(continued)

Budget Preparation Process

2.1 Budget preparation should follow an established timetable and be guided by