COVID Module Question 6

Do published documents or information on the emergency fiscal policy package under consideration include information on loans and loan guarantees and related liabilities?

Guidelines
This question asks about loans and loan guarantees or other types of programs (like insurance) that are designed to support specific individuals or types of businesses (e.g. small and medium enterprises) weather the economic crisis by providing credit and liquidity support, but that generate contingent liabilities for government. In some cases, the government will be making loans or guaranteeing loans directly, or it may authorize the national development bank or another state-owed enterprise to do so on its behalf. Both should be taken into account for this question.

Contingent liabilities only generate a cost for government when the contingent event occurs. For example, if government guarantees a bank loan, then it will only make a payment if the borrower defaults. For a direct loan, government disburses funds to the borrower upfront, but then expects a stream of repayments over time. If the borrower defaults, then the repayment is lost. Thus, a key issue for assessing the impact of these programs on the budget is determining the likelihood of the contingency (default) occurring. That may be particularly difficult to do, given the unique nature of the pandemic, increasing the risk that these liabilities may not be adequately captured in the budget’s estimates of revenues, expenditures, and deficit estimates.

To assess these practices, this question asks about whether the documents published with the emergency fiscal policy package provide a description of and rationale for loan or loan guarantee policies (or other policies creating contingent liabilities), identifies the intended beneficiaries of these policies, the maximum size of a loan or loan guarantee for each beneficiary, the entry requirements and approval process to receive a loan or loan guarantee under the policy, and what reporting requirements the entity making the loan or guarantee must meet. It also asks about the estimated total cost for the program, or the maximum allowed exposure (i.e., the total amount of loans or guarantees that can be made).

Example: New Zealand's Business Finance Guarantee Scheme; South Africa's Economic Response Document (see Annexure p2)

Tick boxes: ''Please check the boxes of the items that appear in the relevant documentation. If none of the items are presented, please check ‘None of the Above’. In the comment box, please provide a detailed citation for each item selected below as described in the assessment directions as well as any additional details.''


 * ☐  Description and policy rationale
 * ☐  Intended beneficiaries
 * ☐  Maximum amounts allowed
 * ☐  Entry requirements and approval processes
 * ☐  Reporting requirements
 * ☐  Total cost estimates (or maximum exposure)
 * ☐  None of the above

1) Distinguishing between Questions 6, 10 and 13
Element's of Turkey's COVID-19 relief package were financed in a variety of ways: The Treasury-backed Credit Guarantee Fund guaranteed loans to businesses and individuals; citizens used its regular Unemployment Fund (which functions like a social security fund - individuals make regular contributions to the fund and can withdraw in cases of unemployment); and, as part of the National Solidarity Campaign, a fund was established to collect domestic donations from agencies, banks, individuals and others.

However, we did not assess any of these in Question 10 on domestic sources of financing for specific policy initiatives.

Since the Credit Guarantee Fund and Unemployment Fund were doing what they were doing before (providing loan guarantees and unemployment insurance), but now as part of the COVID response, we assessed them, respectively, in Question 6 on loan guarantees and liabilities and in Question 13 on extra-budgetary funds. (Note: If the two funds had simply transferred resources to the Treasury, and the Treasury had then used them to finance COVID-19 related spending, these arrangements could have been addressed in Question 10 and indicated as "Other".)

Meanwhile, we also assessed the National Solidarity Campaign domestic donation fund in Question 13, as it appears to take the form that other extra-budgetary COVID funds financed by pooled donations in other countries are taking (see the second document in this list titled “COVID-19 Funds in Response to the Pandemic”).

A key takeaway here would be to be careful not to double-count (not to assess funds like these under multiple questions in the COVID module).

2) Should researchers only reference documents produced by the executive?
No. Researchers can use any documents produced by any public entity to answer the questions, at least to start with. We can then, when analyzing the results, decide whether these "count" or not. If you have any questions or concerns regarding a particular document, please bring it to the team.

3) Should we also look at regulations that require the suspension of loan payments?
Not sure of the final resolution to this question. Please see team discussion below.

PAOLO: I'M ASSUMING THIS REFERS TO A RELIEF MEASURE THAT ALLOWS CERTAIN ACTORS TO SUSPEND LOAN REPAYMENTS TO THE CENTRAL BANK IN ORDER TO IMPROVE THEIR FINANCIAL SITUATION DURING THE CRISIS. I GUESS THAT IS KIND OF A TEMPORARY GUARANTEE, SO WE COULD MENTION IT UNDER Q6. IT ALSO DEPENDS ON WHAT THE LOANS WERE ORIGINALLY MEANT FOR, AND IF THEY CAN BE CONSIDERED AS FISCAL OR QUASI-FISCAL OPERATIONS. COSETTE: Just to clarify, this would be an indefinite suspension of loan payments? I have a number of countries where loan payments were postponed (2-3 months) but haven’t been accepting these as guarantees, because it does not appear that the government assumed the liability. These are mentioned in the comments but I haven’t ticked boxes

Sally: Thanks Cosette. Yes, this was a temporary suspension of all loan repayments (not just those issued by the central bank, although I’m surprised the government had the authority to do this) with a finite end date of a few months. My inclination was not to count it, and look for actual new loan guarantees, but I wanted to confirm. Joel: Not sure what I think. The guidelines suggest that we are looking for activities that create a contingent liability. On the one hand, a temporary suspension is just a timing shift in the repayment schedule, with a temporary cost (when payments are not made) followed by a temporary savings (as repayments increase above where they were anticipated to be in a later period). But the underlying contingent liability doesn’t change, so Q6 wouldn’t apply. On the other hand, you could argue that a temporary suspension of repayments is like revising the terms of the loan (forbearance), with the intent of helping borrowers weather the economic crisis and thereby increase the likelihood that they would not default. As such, could argue that such actions were taken as a way to reduce the government’s contingent liability (or at least protect them from getting worse). In that case, would count for Q6.