Monitoring Fiscal Risks of Subnational Governments

Growing experience with decentralization indicates that a country's public finance system suffers when subnational governments expose themselves to excessive risk. But central governments often lack the information needed to monitor the fiscal risks of subnational governments. Several countries, having experienced subnational fiscal crises, have established systems to monitor such risks. These systems assess subnational fiscal health and call for central government attention-and possible intervention-if preset indicators of fiscal imprudence are exceeded. In developing countries such systems also provide useful information for subnational credit ratings. This note describes several country experiences with indicators of subnational fiscal risks, identifies some limitations of such indicators, and suggests alternative indicators.