Quasi-Fiscal Deficit in Non-financial Enterprises

A new working paper from the IMF discussing quasi fiscal deficits;

“This paper discusses two ways of evaluating the quasi-fiscal deficit (QFD) and the link between them. It also suggests how to properly account for the QFD when calculating the overall deficit of the public sector. Finally, using an example of the energy market, it shows how to untangle a web of mutual nonpayments and properly evaluate the QFD generated in a sector characterized by the presence of both private and public agents.”

Some excerpts from the paper;

“Quasi-fiscal activities refer to operations that result in a net transfer of public resources to the private sector through nonbudget channels (IMF, 2001, pp. 27–32). They may have significant macroeconomic implications: not reported, they distort the picture regarding the government’s true fiscal position as well as its size; they may generate significant contingent liabilities; they may lead to central bank losses, thus contributing to monetary expansion and resulting in crowding out and increasing debt; acting in the same way as taxes and subsidies, they may have undesirable redistributive effects.

In the example considered in this paper, the QFD and contingent liabilities arise because of the provision of services at low prices through publicly owned enterprises. These losses do not show up in the books until these entities experience financial distress and the state is forced to intervene and bail them out. The longer the enterprises manage to linger on, the bigger the bailout is likely to turn out to be.

An enterprise may find itself in distress not only because it is forced to provide services at low prices, but also because it does not have enough power to ensure full payment collection. Not being able to raise enough funds, the enterprise may finally be forced to cut down on necessary maintenance expenditures, operating inadequate and obsolete equipment, which in turn may result in additional output losses. Losses may also reflect tolerated theft.

Apart from constituting a factor contributing to future troubles, cutting down on maintenance is also a way of financing the QFD. However, it is not the only one. Often an enterprise facing payment arrears starts to run arrears itself with suppliers and tax authorities. The state is often reluctant to enforce payment of the tax arrears, since it is to some degree their cause. In the past, the authorities in such countries have resorted to various offset schemes, canceling debt of the state entities to the state-owned providers in exchange for the tax debt. Private agents unfortunate enough to have to deal with such enterprises, however—for example, as providers of supplies or labor—generally do not have such tools at hand, and find in turn their own businesses in trouble.

In the end, inadequate payments get woven into a complicated web of mutual arrears, being often two sides of the same coin, which makes their evaluation as well as an evaluation of the overall public sector deficit overly complicated.”

References;
Chivakul, Mali, and Robert C. York, 2006, “Implications of Quasi-Fiscal Activities in
Ghana,” IMF

International Monetary Fund, 2001, Manual on Fiscal Transparency,

_____, 2002, “Energy Sector,” in Ukraine: Selected Issues, IMF Country Report No. 03/173.

Mackenzie, G.A., and Peter Stella, 1996, “Quasi-Fiscal Operations of Public Financial
Institutions,” IMF Occasional Paper No. 142

Petri, Martin, Günther Taube, and Aleh Tsyvinski, 2002, “Energy Sector Quasi-Fiscal
Activities in the Countries of the Former Soviet Union,” IMF

Saavalainen, Tapuo, and Joy ten Berge, 2006, “Quasi-Fiscal Deficits and Energy
Conditionality in Selected CIS Countries,” IMF