Pandemic policy response leaves ‘hidden risks’ in public balance sheets

16 Mar 22

Hidden risks threaten public sector balance sheets because of policies introduced in response to the pandemic and its economic impact, a World Bank report has warned. 

Poorly performing publicly owned enterprises, outsourced services and opaque sovereign debt all mean governments could be exposed to further shocks, it said.

Services delivered via public-private partnerships or concessions have seen plummeting revenues amid the economic slowdown caused by Covid-19, the report said.

Similarly, state-owned utility companies have held off on tariff increases and accepted bill arrears to avoid hurting households – a trend that continues in many countries as cost of living fears grow. Such companies – and even important financial institutions – might need rescuing if they are under threat of collapse, the report said.

“Sooner or later, the losses could end up on the budget,” it warned.

A 2016 International Monetary Fund paper found the average fiscal cost of realising contingent liabilities is 6% of GDP, reaching up to 40% for major financial sector bailouts.

Increased complexity in sovereign debt markets provides another risk, the report said. In 2020, the average total debt burden of low- and middle-income countries grew by 9% of GDP, compared with an annual average of 1.9% the previous decade.

But an unknown amount of debt is ‘hidden’ with quasi-sovereign entities, state-owned vehicles and private companies, and arrangements are not typically recognised as debt.

Many new bilateral loans also contain lengthy non-disclosure clauses. This lack of transparency makes it hard to assess the precise level of danger the debt poses – and harder for governments to manage and restructure their debt if it becomes unsustainable – the report said.

The World Bank also raised concerns over bank loans, covered at the start of the pandemic by large-scale relief measures such as debt moratoria and credit reporting freezes.

As these end, banks might underplay their exposure to non-performing loans, which are likely to grow as support winds down, the report said. Strong bank supervision and robust regulatory definitions of NPLs could give a fuller picture of banking system stress.

Non-bank lenders that hold similarly risky debt also threaten stability, the report said, although regulators are stepping up oversight.

Khalid Hamid, international director at CIPFA, said: “It is crucial that transparency through effective financial reporting enables appropriate policy and risk management post-Covid-19. Effective strategic management over liabilities must be undertaken urgently.”

Image credit |Getty

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