Fiscal insurance: a new tool of fiscal stability

Exogenous shocks can have an extremely negative impact on the fiscal balances of both developed and developing economies. Emerging and developing economies have been the least equipped to prepare for and deal with the aftermath of exogenous shocks, often damaging their financial sustainability. These economies are encouraged to take a renewed look at their risk management practices and address their vulnerability to exogenous shocks with a more targeted approach of "fiscal insurance," aimed at transferring to the market a specific layer of risk. A series of obstacles are contributing to these economies' insufficient uptake of products routinely utilized by advanced countries. In this light, there is rekindled pressure for multilateral development banks to correct this "market failure" and, potentially, create a specialized agency to encourage a broader use of fiscal risk management tools.