One of the key roles of a government is to develop the national budget as a guide towards achieving specific development and social objectives. This includes determining the resource envelope namely; domestic revenue (tax and non-tax revenue), donor grants, and the borrowing needs for funding the identified priorities.
Quite 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. This poses 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. Moreover, unexpected spending pressures or revenue losses often require disruptive adhoc adjustments during the fiscal year.
This challenge prevails among COMESA countries hence, addressing fiscal risks is a key element of the COMESA Multilateral Macroeconomic Surveillance Framework. Pursuant to this effort, the COMESA Monetary Institute (CMI) has developed a training programme on how to deal with fiscal risks.
On 27 June – 1 July 2022, CMI organized Fiscal Stress Testing training that brought together 35 delegates from 12 Central Banks and Ministries of Finance from the Democratic Republic of Congo, Djibouti, Egypt, Eswatini, Kenya, Malawi, Rwanda, Seychelles, Sudan, Uganda, Zambia and Zimbabwe. The training was aimed at providing a deeper understanding of how to deal with fiscal risks.
Fiscal stress test examines how the public finances would respond to fiscal risks. A comprehensive disclosure and analysis of fiscal risks can help governments to ensure that fiscal policy settings can respond to a range of potential future economic and fiscal shocks; those specific risks are actively monitored and managed; and that abrupt and disruptive changes in policy are avoided 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.
Addressing the delegates, Director of the CMI, Mr. Ibrahim Zeidy, underscored the importance of conducting fiscal stress tests in COMESA member countries.
“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,” he said.
The training will enhance the implementation of the COMESA multilateral fiscal surveillance framework and skills to identify specific fiscal risks and design stress test scenarios for fiscal stress test.