The Future of State-Owned Financial Institutions

4. Fiscal Transparency and State-Owned Banks

 Fiscal Transparency and State-Owned Banks 4 I   been paid to the activities of public financial institutions in discussions of fiscal transparency, although the benefits of fiscal transparency are widely recognized. These benefits are highlighted in the International Monetary Fund’s Manual on Fiscal Transparency, which opens by referring to “a clear consensus that good governance is of central importance to achieving macroeconomic stability and high-quality growth, and that fiscal transparency is a key aspect of good governance.”1 An important requirement of fiscal transparency is the provision of information to the legislature and the public about all fiscal activities, no matter where in the public sector they are undertaken. In this connection, the focus has been primarily on transparency in government operations , following Kopits and Craig.2 However, when fiscal activities are undertaken outside government, these should also be disclosed, and this includes fiscal activities associated with the operations of public financial institutions.3 The focus of this chapter is on the fiscal transparency issues raised by a subset of public financial institutions, namely state-owned banks. (The central bank and various nonbank institutions are touched upon only in passing.) The chapter         1. International Monetary Fund (2001a, p. 1). 2. Kopits and Craig (1998). 3. The term public financial institutions, which is used in the 2001 Manual on Fiscal Transparency, corresponds to what in terms of the institutional coverage of the System of National Accounts (1993) are referred to as financial public corporations. 04-1335-5-CH 04 12/9/04 3:35 PM Page 75 describes the role of these banks, discusses the fiscal aspects of their operations, and addresses relevant disclosure practices and requirements. Case studies of Mozambique, Romania, Turkey, and Uruguay are provided in the appendix. The Role of State-Owned Banks State-owned banks are either fully or partially owned by the government, and the functions they perform are usually different from those performed by their private counterparts.4 In developing countries, before the emergence of state-owned banks, formal financing systems were dominated by foreign banks that mainly catered to the financing needs of foreign-owned trading, mining, and other companies . Governments in many of these countries, instead of undertaking deepseated structural reforms to widen the availability of and access to credit (by modernizing legal systems, enforcing contracts, clarifying property rights, improving bank regulation, and so on), which would have taken time to produce results, resorted to direct intervention in credit allocation by banks that they owned. Thus private banks were nationalized, and new state-owned banks were created as sources of credit, often at low cost, for activities that private banks refused to finance because they were either too risky or not profitable. Infrastructure projects are a case in point. These projects have large financing requirements, especially for a single borrower, they often involve significant and highly specialized risks that cannot be easily diversified, and they are usually justified by reference to their social rather than their financial returns, making them unprofitable. During much of the post–World War II period, developing countries and transition economies relied on state-owned banks to provide financial support to sectors that were seen to be engines of growth and development, again on the assumption that private banks would fail to do this.5 Industry, agriculture, and exporting have been the main beneficiaries of preferential credit, because these sectors tend to be regarded by governments as too important politically and economically to be left to the market. Governments pursue a range of objectives through intervention. In the case of industry, the aim is to promote investment and rapid industrialization; in the case of agriculture, it is to bridge the gap between sowing and the sale of agricultural produce, to rapidly introduce new seed varieties and technologies, and to otherwise increase agricultural output; and with export credit programs, the aim is to bridge the period between production  , , ,   4. The following description draws on World Bank (1989) and Leviatan (1993). 5. Special financing institutions date from the nineteenth century, when they appeared in Europe to promote long-term finance and industrial growth. 04-1335-5-CH 04 12/9/04 3:35 PM Page 76 and payment and to compensate exporters for industrial and trade policies that could be biased against them. As indicated in the appendix, both Mozambique and Romania set up specialized state-owned banks to undertake lending in support of these key sectors...