Contingent Government Liabilities: A Hidden Risk For Fiscal Stability

Governments are facing increasing fiscal risks and uncertainties. There are four main ways governments can address fiscal risks: (a) control the contingent as well as direct, and implicit as well as explicit fiscal risks and orient policies toward good quality rather than rapid fiscal adjustment; (b) publicly recognize the limits of the state's responsibilities so as to deter moral hazard in the markets; (c) ensure that institutional arrangements for public finance and standards for budgeting, accounting, financial planning, reporting, and auditing address both contingent and direct liabilities and promote fiscal prudence and equity in all contingent as well as directly financed public programs; and (d) develop and employ institutional capacities to evaluate, regulate, control, and prevent financial risks in both the public and private sectors.