The Promise and Risks of Fiscal Decentralization in South Asia

Notes

Subnational Governments in South Asia: Balancing the Fiscal Risks of Government Decentralization with the Returns 4

Fiscal decentralization is on the rise around the world, including in South Asia. This chapter investigates subnational fiscal risks and contingent liabilities in South Asia, a region where many countries are already at high risk of debt distress.1

The chapter first examines the institutional frameworks across South Asia and relates them to the likelihood of exposure to subnational fiscal risks. An important finding is that central governments in most South Asian countries delegate extremely limited authority to subnational governments to borrow—thus minimizing subnational fiscal risks but also potentially foregoing the benefits of decentralized decision making.

The chapter next studies Pakistan, one of the two countries in South Asia whose institutional framework allows the central government to be exposed to significant subnational fiscal risk. The discussion highlights how a lack of transparency in subnational public debt statistics and guarantees reduces policy makers’ accountability and exposes the country to substantial fiscal risks.

The chapter then quantifies contingent liabilities for India—the one country in the region with sufficient data—and examines their impact on fiscal dynamics and the local economy. India’s experience is illustrative for the rest of the region, especially for countries such as Pakistan, where provincial borrowing has been expanding, and for Maldives and Nepal, which have started to decentralize fiscal policy.

The chapter concludes by synthesizing the empirical findings, discussing the main drivers of subnational fiscal risks in South Asia, and presenting recommendations to manage them.