Fiscal Transparency in Turkey The Practical Consequences and Costs of non-Transparency Anand Rajaram, PRMPS World Bank, 2001

Outline of Presentation Stylized sketch of political economy Definition and assessment of FT Some consequences of lack of FT Interaction of fiscal and financial transparency

Four Points to Convey from Turkey case Political/institutional factors play a major role in determining the quality of fiscal information available Absence of comprehensive, accurate and timely fiscal information is very costly to the economy and to the political system Interactions between inadequate fiscal and financial transparency compound the risks to the economy Fiscal Transparency is indispensable for domestic policy makers and fiscal managers

Stylized facts on Turkey Some facts –A political economy with short lived coalition governments (57 in 78 years) and a history of military interventions (1980, 1997) –A volatile economy with periodic crises and high average inflation Some presumptions –Short time horizons of decision makers –Fragmentation of information and institutional responsibility is a serious handicap to economic management –Non-transparency is both a symptom of unstable politics as well as a contributor to political and policy dissonance

Vicious cycle of political instability, fiscal policy based on fragmented information, and declining transparency Unstable Coalition Politics Periodic Economic Crises Fragmented approach to Fiscal and sector policy Politicized Agencies and Technocrats

Fiscal Transparency: Definition Code of Good Practices on Fiscal Transparency –Clarity of roles and responsibilities in government –Public availability of full information on government activities –Open budget preparation, execution and reporting –Independent assurance of integrity of fiscal information Ref.

Turkey ’ s score card on self administered FT questionnaire Clarity of roles43% Public availability of information47% Open Budget process 47.5% Integrity of Information58% Total value49% Specific problems identified –Sustainability of fiscal policies –Uncertainty re current liabilities and definition of fiscal risks FAD thought self-assessment was too critical!

IMF ’ s Fiscal Transparency Review, 2000 “ Turkey ’ s fiscal management practices still fall short..of the fiscal transparency code in a number of important respects. Budget coverage is limited to the consolidated central government; budget preparation and execution are fragmented among a number of institutions, with none of them having full ownership; budget preparation is not based on a comprehensive costing of the government ’ s policies nor cast against a medium-term macroeconomic framework; and financial relationships between different levels of government and between government and state-owned enterprises need further clarification. Many quasi-fiscal operations are not yet reflected in the budget. The presence of a large number of budgetary and nonbudgetary organizations … hinders transparency of fiscal operations. ”

Transparency inadequate due to Roles and responsibilities –Not clearly delineated due to quasi-fiscal operations and offsetting debts to SOEs against tax obligations –Divided responsibilities for fiscal management –Central/municipal govt. roles ambiguous Availability of full information on fiscal activities –Consolidated budget provides incomplete coverage of central government –EBFs, QFOs and contingent liabilities not reported until recently Budget preparation, execution and reporting –Limited credibility, improved execution, disparate accounting standards, Integrity of fiscal information –audit coverage not comprehensive

Visible and hidden fiscal activities Percent of GNP Expenditure by Net Consol.Budget Non budget funds Aut.Agencies Social Sec.Inst Quasi-fiscal Total Consol Budget

Some consequences of low fiscal transparency Government managers in central agencies are frustrated by complexity of current fiscal reporting and “ low visibility ” of forward conditions Acceptance of explicit and implicit contingent liabilities is not constrained due to lack of information Line agency managers feel budget process is not credible and feel compelled to resort to off-budget arrangements MOF view – contingent liabilities are UT problem SPO view – investments are essential, regardless of financing Health ministry unable to account for expenditure on health sector

Compounding fiscal risks: low fiscal transparency plus low financial transparency QFOs were non-transparent fiscal (subsidy) policy Delayed settlement of QF obligations to state banks affected their liquidity and pushed them towards risky borrowing and FX positions More general problems of inadequate financial regulation which affected private banks Figure: “Duty Losses” of State Banks Source: Undersecretariat of Treasury and WB estimates.

Fiscal Costs of Lack of Transparency Estimated (?) cost of banking sector cleanup is US$40 billion Public debt ratio will rise from 58% of GNP in 2000 to 79% at end Reversal of interest rate decline over Real and political costs to economy. Figure 5: Public Sector Net Debt and Real Interest Rates Source: Treasury, IMF and WB estimates.

To conclude on a positive note Strong commitment at technical level to fiscal transparency (closure of EBFs and phase out of QFOs, initiating a major PEM reform) Political level – commitment (?) Possible to make some gains on fiscal transparency which will constrain political choices

Conclusions Political/institutional factors play a major role in determining the quality of fiscal information available (and vice versa) Absence of comprehensive, accurate and timely fiscal information is very costly to the economy and to the political system Interactions between inadequate fiscal and financial transparency compound the risks to the economy Fiscal Transparency is indispensable for domestic policy makers and fiscal managers – it is a mistake to view these as IFI dictates

Some implications for PEM work Budget coverage is half the battle(Sufi tale) QFOs, contingent liabilities and interaction with financial or SOE sector may be a factor in some countries Take implicit account of the political economy (as far as possible)