Government Strategies to Address Off-Budget Financing and Contingent Liabilities
Off-Budget Financing
Off-budget financing refers to the financial activities undertaken by government entities that are not included in the formal budget. This includes borrowing by state-owned enterprises (SOEs) and other public sector undertakings (PSUs), which can lead to hidden fiscal risks.

Enhanced Transparency and Reporting

Disclosure Requirements: The government has introduced stringent disclosure requirements to ensure that off-budget borrowings and contingent liabilities are reported transparently. This includes mandatory reporting of SOE borrowings and guarantees in budget documents and financial statements.
Fiscal Responsibility and Budget Management (FRBM) Act: Amendments to the FRBM Act mandate the government to provide detailed statements on off-budget borrowings and contingent liabilities, improving fiscal transparency.
Centralized Monitoring

Debt Management Office (DMO): Establishing a centralized DMO to monitor and manage the borrowings of SOEs and other public sector entities. This office ensures that borrowing practices are in line with fiscal sustainability.
Public Debt Management Agency (PDMA): The proposed PDMA aims to centralize the management of public debt, including off-budget borrowings, to ensure better coordination and risk management.
Regulatory Reforms

Audit and Oversight: Strengthening the role of the Comptroller and Auditor General (CAG) to audit and oversee the financial activities of SOEs and PSUs, ensuring adherence to fiscal norms.
Limitations on Borrowings: Imposing limits on the borrowings of state-owned enterprises to prevent excessive debt accumulation and ensure fiscal discipline.
Contingent Liabilities
Contingent liabilities arise from guarantees provided by the government to various entities, which can become actual liabilities if the guarantees are called upon.

Risk Assessment and Management

Guarantee Management Framework: Developing a comprehensive framework for assessing, managing, and monitoring contingent liabilities. This includes regular risk assessments and setting up a dedicated unit within the finance ministry to manage guarantees.
Guarantee Redemption Fund (GRF): Establishing a GRF to cover potential payouts from invoked guarantees, ensuring that such liabilities do not adversely impact the fiscal position.
Policy Reforms

Stricter Criteria for Guarantees: Implementing stricter criteria for issuing government guarantees, including thorough risk assessments and clear justifications for the need for guarantees.
Contingency Planning: Formulating contingency plans to manage the impact of potential liabilities on the fiscal position, ensuring that the government is prepared to address any financial shocks.
Impact on Fiscal Position and Fiscal Risk Management
Improved Fiscal Discipline

Transparent Reporting: Enhanced transparency and reporting of off-budget financing and contingent liabilities lead to a more accurate assessment of the fiscal position, promoting better fiscal discipline.
Reduced Hidden Liabilities: By bringing off-budget borrowings and contingent liabilities into the formal budgetary framework, the government can more effectively monitor and manage these liabilities, reducing hidden fiscal risks.
Enhanced Credibility and Investor Confidence

Market Perception: Improved transparency and robust management of off-budget financing and contingent liabilities enhance the credibility of the government’s fiscal policies, boosting investor confidence and potentially lowering borrowing costs.
Credit Ratings: Effective management of fiscal risks positively impacts the country’s credit ratings, making it easier and cheaper for the government and SOEs to access capital markets.
Better Fiscal Risk Management

Centralized Monitoring: Centralized monitoring and management of borrowings and guarantees help in identifying potential fiscal risks early and taking corrective actions promptly.
Risk Mitigation: The establishment of funds like the GRF and the implementation of a robust guarantee management framework mitigates the impact of contingent liabilities on the fiscal position, ensuring fiscal sustainability.
Long-Term Fiscal Sustainability

Debt Management: Effective debt management practices, including the centralized monitoring of borrowings and limitations on SOE debt, contribute to long-term fiscal sustainability.
Contingency Planning: Proactive contingency planning and risk assessments ensure that the government is better prepared to handle fiscal shocks, maintaining overall fiscal stability.
Conclusion
The government’s strategies to address off-budget financing and contingent liabilities focus on enhancing transparency, centralized monitoring, regulatory reforms, and robust risk management frameworks. These measures aim to improve fiscal discipline, reduce hidden liabilities, and strengthen the government’s ability to manage fiscal risks. The impact of these strategies is seen in improved investor confidence, better credit ratings, and long-term fiscal sustainability. Effective implementation and continuous monitoring are essential to ensure that these strategies achieve their intended outcomes and contribute to a stable and sustainable fiscal environment.