Decentralizing Borrowing Powers

Abstract

The note highlights the importance of
\n sound intergovernmental fiscal relations, and proper
\n regulation for successful sub-national borrowing, and
\n illustrates the potential macroeconomic hazards of
\n decentralizing borrowing powers, arguing that the impact of
\n a possible moral hazard problem, namely, the access to
\n financial markets by sub-national governments, may generate
\n unplanned liabilities for central governments. Yet academia,
\n and country experiences do not suggest adverse links between
\n decentralized borrowing powers, and the central
\n government's ability to maintain fiscal discipline, and
\n macroeconomic stability. Rather the key seems to lie in the
\n design of fiscal decentralization, particularly the
\n regulatory framework under which borrowing powers are
\n decentralized. The note outlines the reasons why
\n sub-national governments require access to financial
\n markets: to finance capital spending, and foster political
\n accountability, which can be achieved through direct
\n borrowing by central government, through a public financial
\n intermediary, or, through direct borrowing. As per designing
\n the regulatory framework, the note suggests better
\n information systems, bankruptcy laws, and access to tax
\n bases, in addition to separate fiscal/financial systems, and
\n sound legislation to impose budget discipline, enabling
\n access to capital markets to complement fiscal powers
\n devolution to regional authorities.