Publication: Decentralizing Borrowing Powers
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1999-01
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2012-08-13
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The note highlights the importance of sound intergovernmental fiscal relations, and proper regulation for successful sub-national borrowing, and illustrates the potential macroeconomic hazards of decentralizing borrowing powers, arguing that the impact of a possible moral hazard problem, namely, the access to financial markets by sub-national governments, may generate unplanned liabilities for central governments. Yet academia, and country experiences do not suggest adverse links between decentralized borrowing powers, and the central government's ability to maintain fiscal discipline, and macroeconomic stability. Rather the key seems to lie in the design of fiscal decentralization, particularly the regulatory framework under which borrowing powers are decentralized. The note outlines the reasons why sub-national governments require access to financial markets: to finance capital spending, and foster political accountability, which can be achieved through direct borrowing by central government, through a public financial intermediary, or, through direct borrowing. As per designing the regulatory framework, the note suggests better information systems, bankruptcy laws, and access to tax bases, in addition to separate fiscal/financial systems, and sound legislation to impose budget discipline, enabling access to capital markets to complement fiscal powers devolution to regional authorities.
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“Ahmad, Junaid. 1999. Decentralizing Borrowing Powers. PREM Notes; No. 15. © World Bank. http://hdl.handle.net/10986/11501 License: CC BY 3.0 IGO.”
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