Fiscal Risk Testing Key to Prudent Public Finance Management – CMI

The COMESA Monetary Institute (CMI) has emphasized the importance of fiscal stress testing for financial institutions in the region as it leads to prudent management of public funds.

CMI Director Mr Ibrahim Zeidy states that addressing fiscal risks is therefore the key element of the COMESA Multilateral Fiscal Surveillance Framework. 

He was speaking in Nairobi, Kenya during the training on “Fiscal Stress Testing for Central Banks and Ministries of Finance” from 8th to 12th April, 2019. 

The training was motivated by the fact that fiscal risks exist in all countries irrespective of income levels, and hence the need to undertake a detailed analysis of these risks for sound fiscal public finances and macroeconomic stability. 

Fiscal risks involve the effects of factors outside government control such as excessive exchange rate depreciation, excessive debt to GDP (Gross Domestic Product) ratio, bailing out loss making public enterprises etc. Such factors cause fiscal outturns to deviate from their initial forecast, creating potential threat to fiscal and debt sustainability. 

Fiscal stress test also involves identifying relevant fiscal risk drivers, selecting appropriate methods or model and using that method to calculate the effect of large shocks.

“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,” Mr Zeidy added. It entails “a what if” exercise which has to be carried out by each country to ensure fiscal sustainability.

Mr. Zeidy pointed out that countries need a more complete understanding of the potential threats to their fiscal position, in form of fiscal risk test that can help policy makers simulate the effects of shocks to their forecasts and their implications for government solvency, liquidity and financial needs.

The main objectives of the workshop included Identifying specific fiscal risks; Designing stress test scenarios for fiscal stress test; Undertaking fiscal stress testing for individual risk factors; Interpreting the results correctly for effective macroeconomic management; Sharing knowledge and experience on fiscal stress testing in member countries; and enhancing the implementation of the COMESA Multilateral Fiscal Surveillance Framework.

The training was attended by delegates from Central Banks and Ministries of Finance of COMESA Member States namely: Djibouti, Egypt, Kenya, Sudan, Uganda, Zambia and Zimbabwe.  

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