Governments could be hit by huge unexpected pay-outs if steps are not taken to manage hidden liabilities in unfunded pensions, loan guarantees, disaster relief and other contingencies. This is the stark warning in a recent Commonwealth report, offering countries tailored risk management strategies to account for their liabilities.
According to the research, countries’ budgets and debt recording strategies do not always take into account the potential cost if a liability, such as a guarantee on a loan, was to become due.
The report, its author Dr Howard Haughton said, offers a coherent and formalised approach to manage these contingent liabilities, and will give governments a more accurate picture of their levels of risk. It involves a probability and severity analysis of the liabilities and ongoing risk tracking and management that can respond to shifts in the global economy.
The initiative also examines the role of legislatures, debt management departments and other agencies. Crucially, it requires that money be set aside in case it is needed to pay a liability.
“Many of the small and developing Commonwealth members are now considered middle-income countries and are no longer eligible for concessionary financing from the multilateral lending institutions. These states are also highly-indebted and prone to natural disasters and economic shocks. They are increasingly using public private partnerships agreements to fund infrastructure and other forms of development, which could contain hidden obligations for governments,” said Dr Haughton.
But it is not just the small and vulnerable countries who are at risk, he added. Some developed countries have estimated liabilities of well over 20 per cent of their GDP.
“Unfunded pension payments, unpaid student loans and banking bailouts are just some of the examples of liabilities that could add up to wreak havoc on developed economies, if governments do not begin to plan ahead. This is a ticking time bomb and I think if you scratch beneath the surface you will find some staggering figures.”
He added: “Conservatively, even if we say that the average of contingent liability as a percentage of GDP is four per cent, and we know it would be much higher, we could be looking at $418 billion or around £337 billion in liabilities across the Commonwealth.”
The report has already caught the attention of the International Monetary Fund and World Bank. The Commonwealth, Dr Haughton said, is following up with a case by case analysis of member countries, which will form the basis for individual risk management plans.