Financial Planning-Part-2 Policies - Tarun Das

Financial Planning Methodology and Policies – Tarun Das
Financial Planning Methodology and Policies

Part-2: Policies
________________________________________________________________
Prof. Tarun Das1, Ph.D.

Glocom Inc. (USA)
Strategic Planning Expert
ADB Capacity Building Project
On Governance Reforms
________________________________________________________________
Ministry of Finance
Government of Mongolia
Ulaanbaatar, Mongolia.
January 2008
.
1
Formerly Economic Adviser, Ministry of Finance and Planning Commission of the
Government of India, and Professor (Public Policy), Institute for Integrated Learning in
Management (IILM), New Delhi. For any clarifications contact das.tarun@hotmail.com
MOF, Govt. of Mongolia 1 Glocoms Inc. (USA)


Prof. Tarun Das
CONTENTS
Part-1: Methodology
1. Introduction and Scope

1.1 Objectives of Financial Planning
1.2 Components of Financial Planning
1.2.1 Reallocation of budgetary resources
1.2.2 Budgetary Planning for the future
1.2.3 Nominal number planning versus ratio planning
1.2.4 Independence of fiscal and financial authorities
1.2.5 Financial control systems and mechanisms
1.3 Status of Fiscal Planning in Mongolia
1.3.1 The larger role of the government
1.3.2 New public sector management
2. Public Finance Management in Mongolia

2.1 Determination of policies and priorities
2.2 Allocation of public resources
2.3 Establishment of mechanisms for financial control
2.4 Uniformity of accounting standards and fiscal statistics
2.5 Internal and concurrent audit system
2.6 Ex Ante Financial Control
3. Relation Between Financial Planning and Budget Planning

3.1 Budget planning and Strategic Planning
3.2 Public Sector Management and Finance Act (PSMFA 2002)
3.3 Progress of Implementation of PSMFA during last five years
4. Methodology for Financial Planning for 2009-2011

4.1 Macro-economic framework
4.1 Methodology for Financial Planning
4.3 Financial Planning for 2009-2011
Annex: Financial Accounting Tables prescribed by IMF GFSM-2001
Selected References

Part-2: Policies
5. Policies for Financial Planning and Risk Management

5.1 Risk Management for Natural Disaster
5.1.1 The credit system
5.1.2 Risk transfer instruments
5.1.3 Insurance and development bonds
5.2 Management of Contingent Liabilities

5.2.1 Contingent liability- definitions and measurement
5.2.2 Fiscal risk matrix for Mongolia
5.2.3 Lessons from international best practices
5.2.4 Management of contingent liabilities
5.3 Management of Public Debt

5.3.1 Public debt of Mongolia
5.3.2 Debt sustainability and fiscal deficit
5.3.3 Risk management systems for public debt
(a) Independent and integrated Public Debt Office
(b) Composition and functions of the Public Debt Office
(c) Transparency in risk management
(d) Basic principles f risk management
(e) Risk management framework
(f) Assessment of risk
5.4 Management of External Debt

5.4.1 Various risks of external debt
5.4.2 Risks for different modes of capital transfer
5.4.3 External debt sustainability measurement
5.4.4 Risk management policies for external debt
5.4.5 Stress tests
(a) Standard stress tests
(b) Indicators of debt distress episodes
(c) Determinants of debt distress
(d) Quality of institutions and policies
(e) Indicators of debt and debt service thresholds
(f) Debt distress classifications
5.4.6 International best practices for debt management
Selected References


Prof. Tarun Das, Strategic Planning Expert
Part-2: Policies
5. Policies for Financial Planning and Risk Management

5.1 Management for Natural Disaster
One of the major objectives of the ex-ante Financial Planning is to deal with
contingent liabilities of the government and risk management for unforeseen
events such as droughts, floods, earthquakes, land slides and other natural
disaster. Risk management and emergency response need to be clearly
distinguished. Risk management calls for ex-ante planning and investments to
reduce vulnerability. Emergency response involves ex-post expenditures for
reconstruction, rehabilitation and restoration of public infrastructure affected by
natural disaster, which can be greatly reduced through ex-ante planning and
investments in prevention and mitigation. While the occurrence of natural events
can not be predicted precisely and prevented fully, there is a possibility to reduce
the degree of vulnerability of populations through risk management. This can be
achieved in two ways: (i) planning with the purpose of the identification and
reduction of risk by integrating prevention and mitigation measures into national
development and financial plans and programs and (ii) financial protection
provided by transferring risk partly to the private sector or spreading it over time.
The latter can be achieved by strengthening both life and non-life insurance
institutions and allowing foreign and private investment in insurance funds.
However, this requires development of appropriate rules and regulations and
strengthening the independent regulatory authorities.
5.1.1 The Credit System
The development of an efficient savings and credits system through the

development banks, commercial banks, co-operative banks, savings banks,
informal and formal non-banking financial institutions, and micro-credit
institutions would contribute to the mobilization of the resources needed to
finance investments in prevention, mitigation, rehabilitation and reconstruction.
The system of contingent credit mechanism makes it easier to obtain financing in
the event of a disaster. In the case of a contingent credit, in exchange for an
annual fee to a general insurance company, the right is obtained to take out a
specific loan amount post-event that has to be repaid at contractually fixed
conditions. In order to tackle the adverse impact of severe dzuds in Mongolia, if
any in future, a system of contingent credits or crop insurance or herds insurance
can be developed.

5.1.2 Risk Transfer Instruments
Risks can be transferred by creating suitable risk transfer instruments and

mechanisms currently in use in developed countries, especially insurance. Since
insurance premiums are a function of prevention and mitigation measures taken
by the insured party, the establishment of insurance mechanisms increases
awareness of the need to invest in such measures. Financial protection against
natural disasters through insurance mechanisms is attractive as it offers the
opportunity of transferring part of the risk to others, while avoiding the need for
borrowing to deal with an emergency. Financing through ex ante credits offers
even more incentives to mitigate risk because risk transfer instruments offer
opportunities to contain moral hazards or adverse selection problems.
Ex-ante measures to tackle unforeseen events include prevention and mitigation,

insurance, contingent credit and reserve funds. Mitigation reduces the damages,
whereas risk financing measures reduce losses by transferring risk or sharing
risk with others. Mitigation is directed towards decreasing engineering or physical
vulnerability, whereas risk financing reduces financial vulnerability (Fig. 1).
natural
hazard
engineering financial economic
engineering damage financial
vulnerability
vulnerability vulnerability
vulnerability loss
exposure mitigation ex-ante instruments
Fig. 1:Mitigation and Risk Financing

Risk transfer provides indemnification against losses in exchange for a premium
payment. Risk is transferred from an individual to a (large) pool of risks through
insurance/ reinsurance, reserve funds and contingent credit systems (Fig.2).
Insurance and reinsurance funds bear part of the risk. In a reserve fund
arrangement, liquid funds are laid aside so that the fund accumulates over the
years without unviable impact on the present budget. In case an unforeseen
disaster takes place, the accumulated funds can be used to finance the losses.

Contingent credit arrangements do not transfer risk, but rather spread it

intertemporally. As explained earlier, in exchange for an annual fee, the right is
obtained to take out a specific loan amount post-event that has to be repaid at
contractually fixed conditions.
Flow of Funds from Three

Instruments Capital Accumulation
+ a) Reserve Fund Fund Payment
-
b) Contingent Credit Credit Payment
+
Administrative Costs Debt Repayment
-
c) Insurance
+ Insurance Payment
Premium
Fig.2- Flow of funds from three ex-ante financing instruments -

Reserve Fund, Contingent Credit and Insurance
5.1.3 Insurance and development bonds
Development of insurance markets requires updating legislation and institutional

set up. Although most of the weaknesses exist on the demand side (such as the
lack of enforcement of building codes and difficulties in assessing asset values,
and the generally low capacity of clients to pay premiums), supply-side
adjustments are also necessary. These include strengthening independent
supervision systems to improve monitoring of the solvency of insurance
companies and eliminate conditions that favor anticompetitive practices.
There is also a need to establish the necessary conditions for the use of
innovative capital market mechanisms such as catastrophe or natural calamity
bonds, commodity futures and weather-related derivatives. These instruments,

which may be of interest to international financial entities, avoid the major

difficulties related to asset valuation and loss settlement procedures, but have to
be implemented at pool or governmental levels.
The same arguments hold good for life and non-life insurance. But, catastrophe
or natural calamity bonds are difficult to be developed by developing countries
like Mongolia which lack efficient money and capital markets. It may be easier for
Mongolia to develop other kinds of bonds such as “development funds” (viz.
municipal, social, urban, rural, roads, infrastructure development bonds etc.) to
meet critical needs. This can be helped by international development agencies.
Another instrument that could be highly useful is to establish a “contingent liability

fund” and to make budgetary contributions. Government of Mongolia has already
established such a contingent fund, road development fund and a general
Development Fund.
The private sector also has the direct investment option. The community-wide
formal and informal financing instruments perform a very important role at the
local level by supplying resources, particularly in poorer areas. Regardless of the
source of financing, the implementation of these mechanisms requires close
cooperation between the public and private sectors, especially in reference to the
establishment of the appropriate legal and regulatory framework.
Table-8 summarizes various sources of ex ante and ex post disaster financing.

The ex ante non-reimbursable and reimbursable financing mechanisms without
risk transfer include grants and credits. The corresponding risk transfer
instruments encompass insurance and natural calamity bonds, which can cover
the damage based on real losses (indemnification) or the parametric payments.
Financing instruments established ex post include grants, taxes, emergency and

reconstruction loans, and refinancing of existing loans. In the event of a disaster,
immediately available and lowest-cost financing options, such as an existing
calamity fund or catastrophe bonds, insurance and reinsurance, are generally
used first. Similarly, part of budgeted resources from the existing government
programs would be transferred to meet immediate emergency needs.
In some cases, existing development funds (municipal, social, urban, rural) may
also be used. Government can also impose an emergency cess or tax on the
existing tax payers. At the same time, the government would seek as much
international aid and donations as possible and resort to contingency credits.

Table-8 Provisional Classification of Disaster Financing Mechanisms
5.2 Management of Contingent Liabilities
5.2.1 Contingent liabilities- definitions and measurement
Contingent liabilities are defined by the System of National Accounts 1993 as

contractual financial arrangements that give rise to conditional requirements
either to make payments or to provide objects of value. A key characteristics of
such financial arrangements, as distinguished from the current financial liabilities,
is that one or more conditions or events must be fulfilled before a contingent
liability takes place. A key characteristic that makes such liabilities different from
normal financial transactions is that they are uncertain.
Contingent liabilities represent potential claims against the government, which

have not yet materialized, but which could trigger a firm financial obligation or
liability under certain circumstances. Several studies have shown that contingent
liabilities, once materialized, can be a major factor in the build up of public sector
debt and can pose significant risks to the government’s balance sheet.
Contingent liabilities are of two main types- explicit and implicit. Explicit
contingent liabilities are based upon legal and contractual commitment. Explicit
contingent liabilities include bonds or other liabilities contracted by the
government with put options for lenders, credit-related guarantees, performance
guarantees, various types of government insurance schemes (e.g., against

banking deposits, crop failure, natural disasters, etc.), or legal proceedings
representing claims for tax refunds or against government providers of services
such as health care, education, defense, housing, etc.
Implicit contingent liabilities represent potential claims where government does

not have a contractual obligation to provide financial support, but society expects
the government to provide assistance because of moral considerations. Implicit
contingent liabilities include bailing out weak banks or failed financial institutions
or meeting the obligations of the subnational (state and local) governments or the
Central Bank in the event of default following systematic financial crisis.
Other implicit contingent liabilities include disaster relief, corporate sector bail
outs, municipal bankruptcy, defaults on non-guaranteed debt issued by sub-
national governments and state-owned enterprises or government obligations
under a fixed exchange rate regime to defend its currency peg. These risks can
be particularly significant in emerging market economies like Mongolia
undergoing financial sector and capital convertibility reforms and where the
regulatory bodies and disclosure standards are weak.
5.2.2 Fiscal Risk Matrix for Mongolia
Following Polackova (1998), contingent liabilities can be best described in terms

of a Fiscal Risk Matrix classifying sources of potential risks on government
finance into four types: direct or contingent, each of which may be explicit or
implicit. Table-9 presents a typical fiscal risk matrix for Mongolia.
Contingent liabilities are complex and not easy to quantify. There is no single and
uniform framework for their measurement. The choice of a technique depends on
the type of contingent liability being measured and the availability of requisite
data and information. It is well recognized that cash based accounting systems,
even supplemented by off-budget and off-balance sheet transactions, are not
suitable for managing contingent liabilities. Only the accrual accounting systems
can capture contingent liabilities as they are created. Within such systems,
contingent liabilities can be recorded at full face value or maximum potential loss
or expected value and expected present value of contracts.

Table-9: Fiscal Risk Matrix for Mongolia
Direct Contingent
Liabilities
Explicit • Sovereign debt • Direct guarantees for external loans
(domestic and external) by Aimags, local bodies, budgetary
• Committed Expenditures- entities and public sector enterprises
legal and non- • Guarantees on currency risks of
discretionary in the long foreign loans by commercial and
term (civil service development banks, if any
salaries and wages, • Guarantees on various types of risks
social security and (including market, currency,
insurance contributions, regulatory, political) in Built on
employment of Transfer (BOT) contracts or other
specialized staff in rural Public-Private Partnership, for the
areas, pension other development of infrastructure and
compensation to civil social sectors
servants, Social Welfare • Umbrella guarantees for various types
Fund) of loans (agriculture, agro-business,
• Benefits to children and micro-enterprises, housing etc.)
poor families • Deposit insurance of savings and
• Benefits to SMEs and commercial banks
rural areas, jobs creation • Guarantees on benefits (unfunded
and national liabilities) of the social security system
development • Future health care financing
Implicit • Future recurrent costs of • Support to insurance and pension

public investment companies in case of financial crisis;
projects • Support to Bank failures (beyond state
insurance or guarantees)
• Support to Bank of Mongolia (the
central bank) in case possible default
• Possible need to further recapitalize
week commercial and development
banks
• Cleanup of the past liabilities of
privatized entities
• Support to institutions of national
interest (in case of financial crisis and
for non-guaranteed obligations)

5.2.3 Lessons from International Best Practices
The issue of managing contingent liabilities in an emerging economy like

Mongolia is to be seen in the broader context of economic development.
Provision of government guarantees per see is not bad. But, problems of
contingent liabilities arise when the risks inherent in such liabilities are not
properly assessed and quantified, and adequate provision is not made for the
possible impact of such risks.
There is no fundamental difference between the risks associated with direct

Government loans and risks associated with Government guarantees. In both
cases, the Government has to use taxes to pay back lenders. In some cases,
guarantees can be better than direct loans because guarantees can be made
more explicit and can cover only sub sets of risks, while the rest of the risks can
be assigned to the private operators and insurance companies. But Government
should make proper appraisal and use discretion while granting guarantees.
5.2.4 Management of contingent liabilities
Explicit contingent liabilities may represent a significant balance sheet risk for a
government. However, unlike most government financial obligations, contingent
liabilities have a degree of uncertainty. They are exercised only if certain events
occur, and the size of the actual fiscal outgo depends on the structure of the
contingent liabilities.
Sound public policy requires that a government needs to carefully manage and
control the risks of their contingent liabilities. The most important aspect for this
is to establish clear criteria as to when contingent liabilities will be used and to
use them sparingly. In a well-managed program, the government debt office may
be called on to assist in evaluating the government’s cost and risks under the
contingent liabilities, and to recommend policies for managing these risks.
Experiences of the industrialized countries suggest that more complete
disclosure, better risk sharing arrangements, improved governance structures for
state-owned entities and sound economic policies can lead to substantial
reductions in the government’s exposure to contingent liabilities.
An emerging country like Mongolia can adopt several public policy measures to
contain the risk of contingent liabilities. These include the following:
1. As an initial step towards risk management, it is necessary to promote

disclosure and accountability with regard to explicit contingent liabilities. A
centralised unit may be set up in the Department of Fiscal Policy and
Coordination in the MOF to identify and measure the magnitude and

associated risk of all contingent liabilities. However, disclosure of implicit

contingent liabilities could result in greater moral hazard costs for the
government if the stakeholders take this disclosure as a commitment or
indication that the government is likely to provide future financial assistance in
the case of defaults.
2. In its Code of Good Practices on Fiscal Transparency, the IMF has

recommended that countries should disclose the central government
contingent liabilities in their Budget documents, provide a brief indication of
their nature and extent, and indicate the potential beneficiaries. The Code
suggests that best practice in the area would involve providing an estimate of
the expected cost and the degree of risk for each contingent liability wherever
possible and the basis for estimating expected cost and risk.
3. Best management practice for contingent liabilities is to make adequate

provision for expected losses and to hold additional assets against the risk of
unexpected losses. In cases where it is not possible to derive reliable cost
estimates, the available information on the cost and risk of contingent
liabilities should be summarized in the notes to the Budget tables or the
government’s financial accounts.
4. It is useful that the said centralised unit designs and issues contingent liability
instruments and monitors the associated risk exposures, and ensures that the
government is well informed of these risks.
5. Once the concepts, definitions, methodology and data problems have been
resolved and key organisational challenges addressed, a computerized
recording system for management of debt and contingent liability could be
introduced. Ministry of Finance, Mongolia is using the UNCTAD Debt
Management and Financial Analysis System (DMFAS) for recording and
monitoring external debt. The same system can be easily extended for
management of internal debt and contingent liabilities.
6. A guarantee fee must be charged for all guarantees. The fee needs to be
determined on the basis of the cost of borrowing plus the cost of provisioning.
Guarantee fees collected should not be taken as general revenues; rather be
kept in a separate contingency fund or contingent liability redemption fund.
The revenue from the guarantee fee will enable adequate reserves to be built
up over time. The government still may have to allocate some initial capital
from general revenues into the Reserve Fund in the event that the contingent
liability is called prior to the build up of sufficient reserves. The Government of
Mongolia has already established such a Contingency Fund.

7. Sound risk sharing arrangements would include providing termination dates

or sunset clause for the contingent claims, pricing the contingent liability on a
risk adjusted basis and charging the beneficiaries accordingly.
8. Risks associated with contingent liabilities can be reduced by promoting

sound governance rules for managing sub-national entities and state-owned
enterprises, and making them accountable for managing their own risks.
9. It is equally important to improve the supervision and regulation of the

banking and insurance system and capital markets, including the use of such
instruments as mandatory risk limits and minimum capital adequacy norms.
Stronger accounting and disclosure requirements for private corporations are
important mechanisms for limiting the likelihood that a systemic crisis might
occur, and will limit the government’s exposure if it does.
10. The odds for the occurrence of a financial crisis and so the risk of implicit
contingent liabilities can be reduced by sound macro-economic policies,
complemented by appropriate legal, regulatory and institutional set-up for
effective prudential regulation, monitoring, surveillance and supervision of the
financial system and improved corporate governance. However, these entail
structural reforms with an unavoidably long-time scale.
5.3 Management of Public Debt
5.3.1 Public Debt of Mongolia
Mongolia’s public debt at around 55 percent of GDP is not high as judged by

international standards, and it does not pose any problem for financing debt
services as the Government of Mongolia has maintained a surplus on current
fiscal account for the last few years. However, government revenues are highly
dependent on mineral taxes and are subject to risk in volatility of international
prices of minerals, particularly copper and gold. Although there is surplus on
minerals account, there is a significant deficit on non-minerals balance. One of
the major challenges for the government to maintain fiscal sustainability is to
reduce non-minerals deficit over time by widening tax base to include services
which now account for about 55 percent of Mongolian GDP but remains relatively
under-taxed. It is also necessary to strengthen tax administration for personal
and corporate income taxes and value added tax. At present the personal income
tax is ten percent at all levels of income which does not satisfy the basic equity
for a tax system. It may be necessary to make it progressive while strengthening
the tax administration to deal with tax evasion. On the expenditure side, there
may be a need to set limits on rise of salaries, subsidies and social securities as
have been explained earlier in financial planning.

5.3.2 Debt Sustainability and Fiscal Deficit
Debt sustainability is closely related to the fiscal deficit, particularly to the primary
deficit (i.e. fiscal deficit less interest payments). Sustainability requires that there
should be a surplus on primary account. It also requires that the real economic
growth should be higher than the real interest rate. Countries with high primary
deficit, low growth and high real interest rates are likely to fall into debt trap.
Economic theory states that high fiscal deficit spills over current account deficit of
the balance of payments. Persistent and high levels of current account deficit is
an indication of the balance of payments crisis and needs to be tackled by
encouraging exports and non-debt creating financial inflows.
At present, Mongolia does not face these problems. For the past few years,
Mongolia has high economic growth, surplus on both domestic and external
current account and very low (in fact negative) real interest rate on external debt.
These positive developments should not lead to complacency on the part of the
government. The main challenge will be to ensure fiscal sustainability, low
inflation rates and stability in real exchange rates by adopting strict fiscal and
monetary discipline and sound management of mineral resources. Medium term
output is vulnerable to unfavourable weather shocks in the domestic sector and
risk of sharp fall of global prices of minerals, which may lead to fall in government
revenues and put constraints on social welfare and investment programs
financed by the windfall profits tax on minerals.
Among other challenges, public investment plan needs to address the

environmental degradation due to overuse and illegal trade in forest products and
wild life. Overexploitation of natural resources, lax control on smaller mines and
faster urbanization may lead to loss of agricultural production, shortage of water
supply, sanitation problems, traffic hazards and pollution. These issues also put
constraints for achievement of primary education and the achievement of
environmental targets in the Millennium Development Goals.
5.3.3 Risk Management Systems for Public Debt
Public debt needs to be managed in such a way that the required amount of
financial resources is raised at the lowest possible medium and long-term cost
and with a prudent degree of risk. Risks include foreign exchange and financial
crisis; change in creditworthiness and insolvency (‘debt distress’); leading to
economic crisis and social instability (as in the case of East Asian crisis in 1997-
1999). Ministry of Finance should have a risk management framework that
identifies and assesses the financial and operational risks for the management of
public debt including external debt.

(a) Independent and Integrated Public Debt Office

International best practices indicate that there is generally an independent and
integrated public debt office dealing with both internal and external debt, and in
most of the countries such an office is situated in the Ministry of Finance.
Although the MOF in Mongolia deals with management of domestic and external
debt, there is no such well structured and integrated office. There is a need to set
up an independent and integrated Public Debt Office under the Ministry of
Finance with the following functions:
• To deal with both domestic and external debt

• To set bench marks on interest rate, maturity mix, currency mix, composition
of debt in terms of domestic debt and external debt.
• Identification and measurement of contingent liabilities
• Policy formulation for debt management
• Monitoring risk exposures
• Building Models in Assets Liability Management (ALM) framework
(b) Composition and Function of the Public Debt Office:
Public Debt Office will consist of the following independent debt offices with
associated functions:
(i)Independent Front Offices, which are responsible for negotiating new loans
with multilateral and bilateral funding organisations and other sources of
internal and external finance.
(ii)Back office, which is responsible for auditing, accounting, data consolidation
and the dealing office functions for debt servicing.
(iii)
(iv)Middle office, which is responsible for identification, assessment,
measurement and monitoring of debt and risk, dissemination of data and policy
formulation for both short and medium term, and setting benchmarks for debt
composition and currency-interest rate- maturity mix, and
(v)Head Office, which accords final approval for both internal and external debt.
(c)
Transparency in Risk Management: Debt management objectives should be
clearly defined, documented and disclosed at all levels dealing with debt
management. The measures of cost and risk that are adopted should be
explained. Objectives of debt management and preferred policies and measures
should be clearly indicated by the middle office. Equally important are the rules,
regulations, institutional and legal framework for debt management. Some may
feel that having a comprehensive debt management system as described here
will be expensive, but not having one may be more expensive.

Table-10 Institutional Arrangement of Debt Offices and Annual Borrowing

Authority and Total Outstanding Debt Ceiling Limit
Institutional Countries Limit on Annual Total Outstanding

Arrangement Borrowing Debt Ceiling Limit
Authority
Ministry of
Finance
Belgium ×
Canada ×
Finland ×
France ×
Germany ×
Greece ×
Hungary ×
India
Italy ×
Mexico ×
Morocco ×
New Zealand ×
United States ×
United Kingdom ×
Autonomous
Agency
Australia ×
Ireland ×
Portugal ×
Sweden ×
Central Bank
Denmark ×
Source: Guidelines for Public Debt Management, SM/00/135, IMF.

Table -11 Legal Framework for Debt Offices
Countries Limit for Domestic Borrowing Decides new limits
Ministry of
Finance
Belgium Limit on the cost of borrowing The Parliament
Canada Yes, Borrowing Authority Act The Parliament
Germany Yes, a limit is set by federal The Parliament

legislative authorization
(Budget Law)
Greece No, except for the limit to T-Bills
India Yes, a limit is set by Fiscal The Parliament

Responsibility and Budget
Management Act 2003
Japan Yes, a limit is set by Budget Law The Parliament
Mexico Yes, a limit is set according to the The Congress
Federal Budget
Netherlands Implicit limit (budgeted borrowing -
requirement)
New Zealand No legal limit MOF may alter the
program
Switzerland No legal limit -
Turkey Only for govt. bonds the limit is For govt. bonds, the
twice the budget deficit Parliament
United Kingdom Limit by the funding remit -
Autonomous
Agency
Australia Yes, financial year budgetary need DMO and the Treasurer
Austria Yes, the limit is set by the Financial The Parliament
Law
Ireland No -
Sweden Limit only for foreign exchange -
funding
Central Bank
Denmark Limit on the level of debt The Parliament
outstanding
Source: OECD as mentioned in “Risk Management of Sovereign Assets and
Liabilities”, Working Paper, WP/97/166, IMF, December 1997.

(d) Limits on Public Debt: As regards legal framework, many countries have
enacted Fiscal Responsibility and Budget Management Acts and have set limits
on annual borrowing and total outstanding public debt as a percentage of GDP.
Parliament is the appropriate authority to set new limits of public debt (see Table-
10 and Table-11). It will be beneficial for Mongolia to legislate similar acts with
limits on fiscal deficit, annual borrowing and total outstanding public debt.
(e) Basic Principles of Risk Management: The risks in the structure and
composition of total debt should be carefully monitored and evaluated. Special
attention may be given to risks associated with foreign-currency and short-term
or floating rate debt due to exchange rate fluctuations over time. The risks should
be mitigated to the extent feasible by modifying the debt structure and taking into
account cost of doing so.
(f) Risk Management Framework: A risk management framework should help to

identify and manage the trade-offs between expected cost and risk in the debt
portfolio. Cost includes financial cost of raising capital and potential cost of
business loss. Market risk is measured in terms of potential increases in debt
servicing costs associated with changes in interest or exchange rates.
(g) Assessment of Risk: Another task of the Public Debt Office is to identify
measure and monitor risk. There are various models for risk assessment:
• To conduct stress tests of the debt portfolio based on economic and financial
shocks.
• Simple scenario models used by the World Bank and IMF.
• To project future debt services over medium and long term.
• To list key risk indicators over time.
• To summarize costs and risks for alternative strategies and debt portfolio.
5.4 Management of External Debt

5.4.1 Various Risks of External Debt
External debt constitutes about 95 percent of public debt and is subject to various
risks such as liquidity risk, exchange rate risk, market risk, convertibility risk,
interest rate risk and yield risk (see Box-1).
At present, external debt service ratio at 2 percent of exports does not pose any
problem for the Mongolian economy, but in future debt sustainability may be at
risk if there is sudden fall of international prices of Mongolia’s major exports or
unexpected rise of prices of major imports. Significant falls in the global prices of
copper, coal, gold and cashmere and substantial rise of prices of petroleum
products may affect adversely the current account of the balance of payments
and may lead to the problem of external debt servicing for Mongolia.

Box 1. Risks for External Debt

A. External Market-Based Risks
(A1) Liquidity risk. Shortage of revenues, cash and foreign exchange to repay debt
and make interest payments. East Asian financial and foreign exchange crisis during
1997-1999 is the best example of liquidity crisis.
(A2) Interest rate risks. While fixed interest rate has the advantage of having fixed
interest payments over time, there may be a substantial loss in a regime of falling
interest rates. Solution lies to have a proper mix of variable and fixed interest rates.
(A3) Rollover risk. The risk that debt will have to be rolled over at an unusually high
cost or in extreme cases that it cannot be rolled over at all. To the extent that rollover
risk is limited to the risk that debt has to be rolled over at higher interest rates, it may be
considered a type of market risk.
(A4) Credit risk. Central government on-lends external debt to Aimags, local
governments and public sector enterprises. Losses may arise if these investments
donot have sufficient yields to repay debt and pay associated interests.
(A5) Currency risk. Currency risk arises when there is substantial depreciation of the
domestic currency in terms of the currencies in which external dent is denominated.
(A6) Settlement risk: Refers to the potential loss that the government could suffer as a
result of failure to settle, for whatever reason other than default, by the counterparty.
(A7) Convertibility risk: Easy convertibility of the domestic currency may lead to
capital flight at the slight anticipation of crisis.
(A8) Budget/ Fiscal Risk: Fiscal risk may arise from unanticipated shortfalls in
revenue or expenditure overruns. Government should consider both budget and off-
budget liabilities and try to minimize contingent liabilities.
B. Operational and Management Risks
(B1) Operational Risk is the risk that arises from improper management systems
resulting in financial loss. It is due to improper back office functions including
inadequate book keeping and maintenance of records, lack of basic internal controls,
inexperienced personnel, and computer failures. Probability of default is high with
inadequate operational and management systems.
(B2) Control system failure risks arise due to outright fraud and money laundering
because of weak control procedures, inadequate skills, and poor separation of duties.
(B3) Financial error risk. Incorrect measurement and accounting may lead to large
and unintended risks and losses.
C. Country specific and political risks influence foreign investment by the

multinational companies. Political and economic stability, scale economies, lower
wages, fiscal incentives, high yields, trade openness and open door policy for foreign
investment stimulate non-debt creating financial flows. Foreign capital is also attracted
by countries which allow free repatriation of capital and profits, and donot insist on
appropriation of private capital in public interest.
Source: Tarun Das (2006a)

Debt sustainability basically implies the ability of a country to service all debts –
internal and external on both public and private accounts- on a continuous basis
without affecting adversely its prospects for growth and overall economic
development. It is linked to the credit rating and the creditworthiness of a country.
5.4.2 Risks for Alternative Modes of Capital Transfer
Capital inflows to Mongolia had been mainly in the form of concessional loans
from multilateral and bilateral countries. There is very small reliance on non-debt
creating flows or other modes of capital due to underdeveloped capital and bond
markets. Such a system may not be sustainable for a long time and there is need
to diversify foreign capital market.
Major alternatives to concessional financial assistance include the following:

(a) Syndicated bank lending
(b) Bond lending
(c) Financing through new instruments such as derivatives consisting of
interest and exchange rate swaps and options
(d) Foreign Direct Investment (FDI)
(e) Foreign portfolio investment in equities
(f) Foreign quasi-equity investments such as joint ventures, licensing
agreements, franchising, management contracts, turnkey contracts, and
all kinds of Built-Operate-Transfer (BOT) agreements.
While bond lending and lending through new instruments together with
syndicated bank lending are forms of general obligation finance in the sense that
the lender provides money to be repaid on terms independent of the success of
investment made with the funds, financing by other alternatives (i.e., FDI, foreign
portfolio investment and foreign quasi-equity investment) involves risk-sharing
and responsibility sharing. For example, under FDI an investor is entitled to a
share of the distributed profits of a firm and an investor also shares in the
responsibility of managing the firm. Portfolio investment is similar, except that it
does not encompass sharing management responsibility.
Unlike other capital flows, FDI is a package that embodies capital along with
technology and managerial, marketing and technical skills. Presence of
multinationals promotes greater efficiency and dynamism in the domestic sector
and widens external trade. Training gained by local employees and their
exposure to modern organizational system and international best practices are
valuable assets for the host country.
These sources of foreign capital can be assessed in terms of expected cost,

degree of risk-sharing and degree of managerial participation in the project
(Table-12). The major advantages of foreign direct investment, foreign portfolio
investment and foreign quasi-equity investment are that they involve risk sharing,

sharing of managerial responsibilities and the promotion of a more efficient use

of resources. Foreign portfolio investment, in addition, has a favorable impact on
local capital markets.
Table-12: Relative risks of alternative sources of capital
Modes of capital Expected Cost Risk-sharing Management-sharing

(1) (2) (3) (4)
1.Bank lending High Low Low
2.Bond Lending Medium Low Low
3.Market derivatives Medium Medium Low
4.Foreign Direct Investment High High High
5.Foreign Portfolio Equity Medium Low Low
6.Quasi-Equity Investment Medium High Medium
5.4.3 External Debt Sustainability Measurements
There are broadly two approaches to determine debt sustainability of a country.

One is to develop a comprehensive macroeconomic model for the medium term
particularly emphasizing fiscal and balance of payments problems, and another
is to assess various risks associated with debt and to monitor various debt
sustainability ratios over time.
Economy wide model is constructed in the Asset and Liability Management

(ALM) Framework and is aimed at minimizing cost of borrowing subject to
specified risks or to minimize risk subject to specified cost. Benefits of such
models are quite obvious. The model can be used not only for debt management
but also for determination of optimal growth, fiscal profiles, medium term balance
of payments etc. However, building up such models requires not only huge data
but also expertise on the part of modelers for which there may be constraints in
developing countries like Mongolia. Alternatively, various debt sustainability
indicators, indicated in Table-13 may be regularly measured and monitored.

Table-13: Debt Sustainability Indicators
Purpose Indicators
1. Solvency ratios (a) Ratio of interest payments to exports of goods and

services (XGS)
(b) Ratio of interest payments to foreign exchange reserves
(c) Ratio of interest payments to revenue
(d) Ratio of external debt to GDP
(e) Ratio of external debt to XGS
(f) Ratio of external debt to revenue
(g) Ratio of present value of external debt to GDP
(h) Ratio of present value of external debt to XGS
(i) Ratio of present value of external debt to revenue
2. Liquidity (j) Debt service ratio: Ratio of total debt services (interest
monitoring ratios payments plus repayments of principal) to XGS
(k) Ratio of interest payments to reserves
(l) Ratio of short-term debt to XGS
(m) Ratio of total imports to foreign exchange reserves.
(n) Ratio of reserves to short-term debt
(o) Ratio of short-term debt to total debt
3. Debt burden ratio (p) Ratio of external debt outstanding to GDP

(q) Ratio of external debt outstanding to XGS
(r) Ratio of debt services to GDP
(s) Ratio of public debt to budget revenue
(t) Ratio of concessional debt to total debt
4. Debt structure (u) Rollover ratio- ratio of amortization (i.e. repayments of

indicators principal) to total disbursements
(v) Ratio of interest payments to total debt services
(w) Ratio of short-term debt to total debt
(x) Average maturity of external debt
(y) Currency mix of external debt
(z) Ratio of government external debt to total public debt
5. Public sector (aa)Ratio of public sector debt to total external debt

indicators (bb)Ratio of public sector debt to GDP
(cc)Ratio of public sector debt to XGS
(dd) Ratio of public sector debt to revenue
(ee) Ratio of concessional debt to total external debt
(ff) Ratio of concessional debt to total public debt
(gg) Average maturity of public debt
(hh) Average maturity of non-concessional debt
(ii) Ratio of foreign currency debt to total public debt
Source: IMF (2003) and Tarun Das (2006a)


5.4.4 Risk Management Policies for External Debt
Although there is no unique solution to tackle various types of risk, general risk
management practices of the government aim at minimizing risk for government
bodies and public enterprises. These include development of ideal benchmarks
for public debt and monitor and manage credit risk exposures. Typical risk
management policies are summarized in Table-14.
Table-14 Policies for Risk Management
Risk Management Policies

Type of Risk
1. Liquidity risk (a) Monitor debt by residual maturity
(b) Maintain certain minimum level of cash balance
(c) Fix limits for short-term debt
(d) Do not negotiate for huge bullet loans
(e) Develop liquidity benchmarks
2. Interest rate risk (f) Fix benchmark for ratio of fixed versus floating rate debt
(g) Use interest rate swaps
3. Credit risk (h) Have credit rating by major credit rating organizations
(i) Have proper project appraisal before lending;
4. Currency risk (j) Fix benchmark for the ratio of domestic and external debt
(k) Fix ratios of short-term and long-term debt
(l) Fix composition of currencies for external debt
(m) Use currency swaps and have policies for use of market
derivatives
(n) Try to have natural hedge by linking dominant currency of
exports and remittances to the currency of external debt
5. Convertibility risk (o) Gradual approach towards capital account convertibility.
(p) Eencourage initially non-debt creating financial flows
followed by long term capital flows.
(q) Short term or volatile capital flows may be liberalised only at
the end of capital account convertibility.
6. Budget Risk (r) Enact a Fiscal Responsibility Act.
(s) Put limits on debt outstanding, annual borrowing, fiscal
deficit
(t) Use government guarantees and other contingent liabilities
(such as insurance and pensions etc.) judiciously and
sparingly
7. Operational risks (u) Allow independence and transparency of different offices
(such as front, back, middle and head offices) dealing with
public debt
(v) Strengthen capability of different offices
8. Country specific (w) Have stable and sound macro-economic policies
and political risk (x) Have co-ordination among monetary and fiscal authorities

5.4.5 Stress Tests
Stress tests are closely related to the debt sustainability indicators and are useful
in identifying major liquidity risks, as well as strategies to mitigate them. Stress
tests can be used to test a variety of scenarios such as the following:
(a) Types of capital inflows (FDI, trade credit, other credits)
(b) Periods of access to capital markets
(c) Exchange rate changes/ derivative positions
(d) Risks due to price and interest rate changes
(e) Macroeconomic uncertainties (such as outlook for exports and imports)
(f) Policy uncertainties (fiscal and monetary policies)
(a) Standard Stress Tests
(a) Revenue growth = Baseline GR – 1 SD

(b) Export value growth = Baseline GR – 1 SD
(c) Assets value growth = Baseline GR – 1 SD
(d) Inflation rate = Baseline Rate + 1 SD
(e) Net non-debt creating flows = Baseline Inflows – 1 SD
(f) One-time major nominal or real exchange rate depreciation = Baseline +
½ SD
(b) Indications of debt distress episodes
Debt distress indicated by recourse to any of the following forms of exceptional

finance:
(a) Arrears: Number of years in which principal and interest arrears to all
creditors is in excess of 5% of total debt outstanding
(b) Debt rescheduling: Year of initial debt restructuring plus two subsequent
years
(c) Bailout by financial institutes
(d) Normal times are non-overlapping periods of five years in which no
signs of above mentioned debt distress are observed.
(c) Determinants of debt distress
• Traditional Debt Indicators

– Present value of debt/exports ratio
– Present value of debt/revenues ratio
– Present value of debt/assets ratio
– Debt service/exports ratio
– Debt service/revenues ratio
– Debt service/assets ratio

• Shocks
– Real revenue growth
– Real depreciations
– Assets value growth
(d) Quality of institutions and policies
1. Substantial value-added in looking at role of organizational quality, good

governance, policies and shocks in addition to traditional debt burden
indicators when assessing probability of debt distress
2. Using a common debt-burden threshold to assess sustainability for all
companies is unlikely to be appropriate
3. There is a strong tradeoffs between quality of institutions, policies,
systems of auditing and sustainable level of debt
(e) Indicative Debt and Debt-Service Thresholds (%)
On the basis of experiences of several countries, World Bank has determined

thresholds for various debt indicators for a country depending on the quality of its
debt management policies and systems. These indicators are presented in
Table-15. For example, if a country’s debt management policies and systems are
considered to be poor, then the ratio of net present value of debt to total assets
for the country should not exceed 30 percent. The NPV debt/ assets ratio can go
up to 45 percent for a country having medium quality for debt management
system, while the ratio can go up further to 45 percent for a country having a
strong and very efficient system for debt management policies and systems.
Other thresholds have similar interpretations.
Table-15 Thresholds for Debt Indicators (in percentage)

Indicators Quality of Debt Management Policies and Systems
Poor Medium Strong
NPV of debt/Assets 30 45 60
NPV of debt/XGS 100 200 300
NPV of debt/Revenue 200 275 350
Debt Service/XGS 15 25 35
Debt Service/Revenue 20 30 40
(f) Debt Distress Classifications
• Low risk— all indicators well below thresholds

• Moderate risk—baseline OK, but scenarios/shocks exceed thresholds
• High risk—baseline in breach of thresholds
• In debt distress—current breach, that is sustained over projection period

5.4.6 International best practices for external debt management
(a) Legal and Institutional Set Up
As regards legal and institutional set up, International experience suggests that
centralized debt offices in most of the countries are located under the Ministry of
Finance (MOF), only in Sweden it is located in the Central Bank, while five
countries viz. Australia, Austria, Ireland, Portugal and Sweden have independent
debt office, not a part of either the MOF or the Central Bank (see Table-16).
There is an advantage of locating the debt management office in the MOF. This is
because MOF in general is in charge of dealing with multilateral financial
institutions and bilateral donors. Within this institutional structure, in most of the
advanced countries, the debt offices are set up as an autonomous or separate
entity within a Treasury or as a statutory unit. This enables the debt office to
assume sufficient degree of operational independence.
It is observed from the legal systems in Brazil, India, Indonesia, Ireland, New
Zealand, Poland, the UK and others that, as a general rule, the Minister of
Finance is entrusted with all responsibilities relating to state finance, not only in
the context of representing the state externally, but also with respect to internal
matters such as reporting to Parliament and managing the domestic debt.
The main argument for entrusting the public debt management responsibility with
the Ministry of Finance or Treasury is the proximity of location, which enables the
senior management within the Ministry of Finance to review, assess and monitor
public debt more easily. Another factor, which prompted many governments to
locate the debt office within the Ministry of Finance, is that the public debt has
budgetary implications in terms of payments of debt services, and co-ordination
between the budget office and the debt office facilitates effective management of
debt and fiscal deficit. This arrangement, thereby, minimizes chances of any
conflict arising out of the budgetary process determining the annual borrowing
requirements and the management of such liabilities.
As regards governance of external debt, most of the countries donot allow Sub
national or provincial governments to borrow directly from the external sources
(see Table-17). Only the Central government borrows from multilateral and
bilateral sources and then on-lends money to the states and local governments.
Government of Mongolia has also the same system of locating the debt
management offices within the MOF. It is necessary to continue with the system
but to strengthen its structure, debt management policies and to adopt modern
techniques for risk management.
(b) Policy Framework

As regards policy framework, international best practices for the management of

external debt leads to the following broad conclusions:
(1) Management of external debt is closely related to the management of

domestic debt, which in turn depends on the management of overall fiscal deficit.
(2) Debt management strategy is an integral part of the wider macro economic
policies that act as the first line of defense against any external financial shocks.
(3) Nearly all of the autonomous debt management offices have adopted an
organizational structure similar to that in leading corporate treasury and
investment banks. They divide functional responsibilities for managing
transactions into different offices within the debt management organization and
established procedures to ensure internal control, accountability, checks and
balances.
(4) Sound governance considerations suggest that debt management functions

should be organized as separate units given their different objectives,
responsibilities and staffing needs. Usual practice is to establish separate front
offices, middle office, back office and head office, as explained earlier.
(5) For an emerging economy like Mongolia, it is better to adopt a policy of

cautious and gradual movement towards capital account convertibility.
(6)
At the initial stage, it is beneficia
l to encourage non-debt creating financial flows (such as direct foreign
investment and equity) followed by liberalization of long-term and medium-term
external debt.
(7)
There is need to have a cautious approach on external short-term credit. In
many developing countries, like India, government does not resort to any short
term borrowing from external sources, although the private sector is allowed to
borrow short-term credit externally subject to certain conditions.
(8) Big bullet loans are bad for small economies like Mongolia, as these can
create refinancing risk in future.
(9) It is not enough to manage the government balance sheet well, it is also
necessary to monitor and make an integrated assessment of national balance
sheet and to put more attention on surveillance of overall debt- internal and
external, private and public. In each of the major Asian crisis economies-

Indonesia, Korea and Thailand- weakness in the government balance sheet was
not the source of vulnerability, rather vulnerability stemmed from the un-hedged
sort-term foreign currency debt of commercial banks, finance companies and
corporate sector.
(10) It is not sufficient to manage the balance sheet exposures, it is equally

important manage off balance sheet and contingent liabilities. Emerging as well
as advanced economies have experienced how bad banks can lead to large
costs to the economy and an unexpected weakening of the government’s
balance sheet. Government guarantees of private debt or public enterprises debt
can also have similar adverse impact.
(11)
It is necessary to adopt suitable policies for enhancing exports and other current
account receipts that provide natural hedge and the means for financing imports
and debt services.
(12)
Detailed data recording and dissemination are pre-requisites for an effective
management and monitoring of external debt and formulation of appropriate
debt management policies.
(13) It is vital that external contingent liabilities and short-term debt are kept
within prudential limits.
(14) It is important to strengthen public and corporate governance and enhance

transparency and accountability.
(15) It is also necessary to strengthen the legal, regulatory and institutional set up
for management of both internal and external debt.
(16) A sound financial system with well developed debt, money and capital
markets is an integral part of a country’s debt management strategy.

Table-16 Institutional Location of Public Debt Management Office

Country Under the Ministry Located within Located elsewhere
of Finance or the Central as an autonomous
Treasury Bank entity
Advanced Economies
Australia 
Austria 
Belgium 
Canada 
Denmark 
Finland 
France 
Germany 
Greece 
Ireland 
Italy 
Japan 
Netherlands 
New Zealand 
Portugal 
Spain 
Sweden 
Switzerland 
United Kingdom 
United States 
Emerging Economies
Argentina 
Brazil 
China 
Colombia 
Hungary 
India 
Mexico 
Mongolia 
Korea 
South Africa 
Thailand 
Turkey 
Source: World Bank, IMF, OECD various documents.

Table-17 Institutional Framework for Borrowing External Loans

and Foreign Currency Denominated Loans
Countries Central Govt. States and State Owned
Local Govt. Enterprises
China MOF Not allowed, Allowed directly
only through MOF
India MOF Not allowed, Allowed directly
only through MOF
Indonesia MOF Not allowed, Not allowed,
only through MOF only through MOF
Korea MOF Allowed directly Allowed directly
Mongolia MOF Not allowed, Not allowed,

Thailand MOF Not allowed, Not allowed,
Argentina MOF Allowed directly Allowed directly
Chile MOF Not allowed, Not allowed,
Colombia MOF Allowed directly Allowed directly
Mexico MOF State Owned banks MOF

Peru DMO under MOF Not allowed, Not allowed,
Venezuela MOF Not allowed, Not allowed,
Czech Republic None Not allowed, Allowed directly
only through MOF
Hungary DMO under MOF Not allowed, Not allowed,
Poland MOF Allowed directly Allowed directly
Russia MOF Allowed directly Allowed directly
Israel MOF Allowed directly Allowed directly
South Africa DMO under MOF Not allowed, Not allowed,

Source: “Managing foreign debt and liquidity risks in emerging economies: an
overview”, John Hawkins and Philip Turner, as excerpted in “Managing Foreign Debt
and Liquidity Risks”, BIS Policy Papers, No. 8, September 2000.
Mongolia added by Tarun Das.

Selected References
Das, Tarun (1999a) East Asian Economic Crisis and Lessons for External Debt
Management, pp.77-95, in External Debt Management, ed. by A. Vasudevan, April
1999, Reserve Bank of India (RBI), Mumbai, India.
_______ (1999b) Fiscal Policies for Management of External Capital Flows, pp. 194-
207, in Corporate External Debt Management, edited by Jawahar Mulraj, December
1999, Credit Rating and Investment Services of India Ltd. (CRISIL), Mumbai, India.
_______ (2000) Sovereign Debt Management in India, pp.561-579, in Sovereign Debt

Management Forum: Compilation of Presentations, November 2000, World Bank,
Washington D.C.
_______ (2002) Management of Contingent Liabilities in Philippines- Policies,

Processes, Legal Framework and Institutions, pp.1-60, March 2002, World Bank,
Washington D.C.
______ (2003a) Off budget risks and their management, Chapter-3, Philippines
Improving Government Performance: Discipline, Efficiency and Equity in Managing
Public Resources- A Public Expenditure, Procurement and Financial Management
Review (PEPFMR), Report No. 24256-PH, A Joint Document of The Government of
the Philippines, the World Bank and the Asian Development Bank, Poverty
Reduction and Economic Management Unit, World Bank Philippines Country Office, April
30, 2003.
______ With Raj Kumar, Anil Bisen and M.R. Nair (2003b) Contingent Liability
Management- A Study on India, pp.1-84, Commonwealth Secretariat, London.
_______ (2003c) Management of Public Debt in India, pp.85-110, in Guidelines for

Public Debt Management: Accompanying Document and Selected Case Studies, 2003,
IMF and the World Bank, Washington D.C.
_______ (2005) International Cooperation Behind National Borders- A Case Study for
India, pp.1-50, Office of Development Studies, UNDP, UN Plaza, New York, 2005.
_______ (2006a) Management of External Debt: International Experiences and Best

Practices, pp.1-46, Best Practices series No.9, United Nations Institute for Training
and Research (UNITAR), Geneva, January 2006.
_______ (2006b) Governance of Public Debt- International Experiences and Best

Practices, pp.1-23, Best Practices series No.10, United Nations Institute for Training
and Research (UNITAR), Geneva, January 2006.
_______ (2008) Accrual Accounting Rules for Government Finance Statistics, pp.1-36,
ADB Capacity Building Project on Governance Reforms, Ministry of Finance,
Govt of Mongolia, Ulaanbaatar, January 2008.

Das, Tarun and E. Sandagdorj (2007a) Strategic Business Planning- objectives and
suggested structure for Mongolia, pp.1-95, ADB Capacity Building Project on
Governance Reforms, Min of Finance, Govt of Mongolia, Ulaanbaatar, August 2007.
_______ (2007b) Output costing and output budgeting, pp.1-50, ADB Capacity
Building Project on Governance Reforms, Ministry of Finance, Govt of Mongolia,
Ulaanbaatar, October 2007.
_______ (2007c) Transition from Cash Accounting to Accrual Accounting, pp.1-35, ADB
Capacity Building Project on Governance Reforms, Ministry of Finance, Govt of
Mongolia, Ulaanbaatar, October 2007.
________ (2008) Seven-Year (2008-2014) Action Plan for the Complete Implementation
of the Provisions of Public Sector Management and Finance Act (27 June 2002), ADB
Capacity Building Project on Governance Reforms, Ministry of Finance, Govt of
Mongolia, January 2008.
International Monetary Fund (2002) Government Finance Statistics Manual 2001,

Statistics Department, IMF, Washington D.C., August 2002.
_______ (2003a) The Implications of the Government Finance Statistics Manual 2001
for Country Work in the Fund, GFS Policy Development Taskforce, IMF, Washington
D.C., August 2003.
_______ (2003b) External Debt Statistics- Guide for Compilers and Users, 2003, IMF,
Washington D.C.
International Monetary Fund and the World Bank (2003) Guidelines for Public Debt
Management: Accompanying Document and Selected Case Studies, 2003,
Washington D.C.
Ministry of Finance, Government of Mongolia (2007) Government Budget 2008,

Ulaanbaatar, December 2007.
Keipi, Kari Juhani and Justin Tyson (2002) Planning and financial protection to
survive disasters, Sustainable Development Department Tech. Studies series: ENV-139,
Inter-American Development Bank, Washington D.C., Oct. 2002.
Reserve Bank of India (RBI) (1999) External Debt Management- Issues, Lessons and
Preventive Measures, pp.1-372, edited by A. Vasudevan, RBI, Mumbai, April 1999.
World Bank (2000) Sovereign Debt Management Forum: Compilation of Presentations,

November 2000, World Bank, Washington D.C.

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Financial Planning Methodology and Policies – Tarun Das

Financial Planning Methodology and Policies

Prof. Tarun Das1, Ph.D.

MOF, Govt. of Mongolia 1 Glocoms Inc. (USA)

Financial Planning Methodology and Policies

1. Introduction and Scope

2. Public Finance Management in Mongolia

3. Relation Between Financial Planning and Budget Planning

4. Methodology for Financial Planning for 2009-2011

Annex: Financial Accounting Tables prescribed by IMF GFSM-2001

MOF, Govt. of Mongolia 2 Glocoms Inc. (USA)

5. Policies for Financial Planning and Risk Management

5.2 Management of Contingent Liabilities

5.3 Management of Public Debt

5.4 Management of External Debt

MOF, Govt. of Mongolia 3 Glocoms Inc. (USA)

Financial Planning Methodology and Policies

5. Policies for Financial Planning and Risk Management

5.1.1 The Credit System

The development of an efficient savings and credits system through the

MOF, Govt. of Mongolia 4 Glocoms Inc. (USA)

5.1.2 Risk Transfer Instruments

Risks can be transferred by creating suitable risk transfer instruments and

Ex-ante measures to tackle unforeseen events include prevention and mitigation,

Fig. 1:Mitigation and Risk Financing

MOF, Govt. of Mongolia 5 Glocoms Inc. (USA)

Contingent credit arrangements do not transfer risk, but rather spread it

Flow of Funds from Three

+ a) Reserve Fund Fund Payment

Fig.2- Flow of funds from three ex-ante financing instruments -

5.1.3 Insurance and development bonds

Development of insurance markets requires updating legislation and institutional

MOF, Govt. of Mongolia 6 Glocoms Inc. (USA)

which may be of interest to international financial entities, avoid the major

Another instrument that could be highly useful is to establish a “contingent liability

Table-8 summarizes various sources of ex ante and ex post disaster financing.

Financing instruments established ex post include grants, taxes, emergency and

MOF, Govt. of Mongolia 7 Glocoms Inc. (USA)

Table-8 Provisional Classification of Disaster Financing Mechanisms

5.2 Management of Contingent Liabilities

5.2.1 Contingent liabilities- definitions and measurement

Contingent liabilities are defined by the System of National Accounts 1993 as

Contingent liabilities represent potential claims against the government, which

guarantees, various types of government insurance schemes (e.g., against

Implicit contingent liabilities represent potential claims where government does

5.2.2 Fiscal Risk Matrix for Mongolia

Following Polackova (1998), contingent liabilities can be best described in terms

MOF, Govt. of Mongolia 9 Glocoms Inc. (USA)

Table-9: Fiscal Risk Matrix for Mongolia

Implicit • Future recurrent costs of • Support to insurance and pension

MOF, Govt. of Mongolia 10 Glocoms Inc. (USA)

5.2.3 Lessons from International Best Practices

The issue of managing contingent liabilities in an emerging economy like

There is no fundamental difference between the risks associated with direct

5.2.4 Management of contingent liabilities

1. As an initial step towards risk management, it is necessary to promote

MOF, Govt. of Mongolia 11 Glocoms Inc. (USA)

associated risk of all contingent liabilities. However, disclosure of implicit

2. In its Code of Good Practices on Fiscal Transparency, the IMF has

3. Best management practice for contingent liabilities is to make adequate

MOF, Govt. of Mongolia 12 Glocoms Inc. (USA)

7. Sound risk sharing arrangements would include providing termination dates

8. Risks associated with contingent liabilities can be reduced by promoting