CMI Develops User’s Guide on Fiscal Stress Testing for Central Banks

The COMESA Monetary Institute (CMI) has developed a user’s guide on Fiscal Stress Testing for Central Banks and Ministries of Finance whose main objective will be to assist Member States better understand how to deal with fiscal risks.

CMI Director Mr Ibrahim Zeidy states that addressing fiscal risks is a key element of the COMESA Multilateral Macroeconomic Surveillance Framework and the fiscal stress test examines how the public finances would respond to fiscal risks. 

He was speaking during the opening of the validation and training workshop which enabled participants from Member States to review and approve the Users’ Guide. According to financial experts, a comprehensive disclosure and analysis of fiscal risks can help governments to ensure that fiscal policy settings respond to a range of potential future economic and fiscal shocks. This also helps governments monitor and manage specific risks and avoid abrupt and disruptive changes in policy when risks materialize.

Fiscal stress test is therefore, an important activity that all countries are required to perform for prudent public finance management, in order to understand how public finances would respond to significant economic and/or financial shocks. 

“It is important for COMESA Member States to be conducting fiscal stress tests and therefore we believe this validation workshop will go a long way in equipping the experts with the right tools to conduct these stress tests,” Mr Zeidy said during the workshop which was held virtually from 22 to 26 March 2021.

One of the key roles of government is to develop the National Budget as a guide towards achieving specific development and social objectives. However, more often fiscal outturns differ substantially from the budget forecasts, owing to factors outside the government’s control such as deviations of economic growth from expectations, terms of trade shocks, natural disasters, calls on government guarantees, among others, thus posing challenges to the attainment of the government’s intended objectives. 

Specifically, the occurrence of fiscal risks, defined as the deviation of fiscal outturns from initial forecast, leads to additional government obligations, revenue losses, larger public debts, and occasionally, refinancing difficulties and crises. 

The 49 delegates drawn from 12 Central Banks and Ministries of Finance were taken through identifying specific fiscal risks and designing stress test scenarios for fiscal stress tests. They were trained to be able to undertake fiscal stress testing for individual risk factors and to interpret results correctly for effective macroeconomic management. They also used the opportunity to share knowledge and experience on fiscal stress testing in member countries.

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