Study Recommends Securitization as a Means of Clearing Stock of Government Arrears

• Pages: 198-199

Page 198

In Working Paper 98/70, Government Expenditure Arrears: Securitization and Other Solutions, Alberto Ramos of the IMF's Western Hemisphere Department presents and evaluates various options for addressing the arrears problem. He recommends that governments recognize their implicit financial liabilities, set a timetable for their clearance, and issue market-negotiable titles-that is, securitize their arrears. He also documents several recent country experiences with securitization operations and provides a model to support the claim that securitization can improve a country's welfare. Ramos spoke with the IMF Survey about his study.

IMF Survey: What options are available to a government in addressing a buildup in its arrears? Ramos: One option would be for the government to be passive-to do nothing in terms of the fiscal consolidation necessary to contain the arrears buildup. The stock of arrears is, however, bound to increase even further if the government does not address the fiscal imbalance at the flow level-where current revenues fall short of current expenditure commitments. This unsustainable alternative is not viable. Presumably, the government would instead try to solve, or at least contain, the fiscal flow imbalance and strive to find the most efficient or least distortionary way to reduce the historic stock of arrears.

Once the government stabilizes the arrears problem at the flow level, it could simply elect to repudiate the stock of arrears by announcing that it will not honor its liabilities. Such an approach would be tantamount to enacting an individual-specific lump-sum tax, payable by those from whom the government initially borrowed. This is obviously a political economy decision on which this paper is silent, but which, from a normative point of view, should be discouraged.

Old arrears can be settled in kind or offset against tax arrears to the budget. In Moldova, for example, the authorities undertook an in-kind operation to liquidate debts to pensioners. In 1997, all pensioners received a "talon," specifying the cumulative amount of debt owed to them at the end of 1996 and enabling them to buy goods from government shops and to pay for services and taxes. One problem with this scheme, however, was that pensioners' choices were limited to expensive and potentially unwanted goods.

In countries where goods suppliers-for example- have substantial tax arrears to the budget, the government could embark on a netting...