Fiscal risks refer to the uncertainty associated with the outlook in public finances and can be defined as the probability of significant differences between actual and expected fiscal performance, over the short to medium-term horizon (Kopits 2014). Fiscal risks are, by definition, uncertain. However, awareness and understanding of them allow policy makers to increase the government’s capacity to adapt and rebound from them. The 2015 OECD Recommendation of the Council on Budgetary Governance advises governments to “identify, assess and manage prudently longer-term sustainability and other fiscal risks.”
In half of the Western Balkans, there is a central unit or agency responsible for identifying and managing overall fiscal risks located in the CBA or other part of the Ministry of Finance. This is the case in slightly less than three quarters of OECD countries. The existence of centrally defined criteria about the type of risks that need to be measured and monitored could contribute to the comprehensive and integrated assessment of potential shocks and guide the development of practices aimed at limiting exposure as well as advancing in transferring, sharing and provisioning for fiscal risks (IMF 2016). North Macedonia is the only country in the Western Balkan region that reported having centrally defined criteria, as part of their fiscal strategy document, for deciding which fiscal risks need to be measured and monitored; this is the case in slightly less than one-third of OECD countries.
There are fiscal risks that are external (i.e. not linked to government activity) and may result from the exposure of public finances to variations in key economic indicators. For example, countries that are aid recipients may be sensitive to aid shortfalls, commodity-producing countries may be vulnerable to sharp swings in commodity prices and countries with relatively high debt levels may be vulnerable to interest rate shocks. Five among the six Western Balkans consider macro-economic shocks and changes in interest rates to be fiscal risks; however, only Kosovo and Serbia reported measuring them and disclosing the results.
Other types of fiscal risks are directly associated with government activities. They are in general narrower and arise from specific sources, such as the potential costs of guarantees backed by the government, pending lawsuits, financial incentives granted in the framework of PPP contracts and those resulting from environmental degradation. With the exception of Montenegro, the Western Balkans consider government guarantees as a fiscal risk and estimate their potential effects on public accounts. These guarantees are often sought by private or public agents developing infrastructure and or service delivery projects and could come in many forms, for example the government might be asked to compensate if demand falls short of forecasts in an infrastructure project, to ensure exchange rate conditions or promise to repay the debt if a service provider becomes insolvent. Finally, the national/federal government could also be responsible for risks undertaken by other public entities such as subnational government or state-owned enterprises. Only Albania and Serbia consider the activities of subnational government to be a potential fiscal risk. In turn, while the activities of state-owned enterprises are more widely viewed as fiscal risks by the Western Balkans (4 out of 6), none of them has in place a mechanism for measuring them, this is the case in 44% of OECD countries.
