Risk Management of the Government’s Contingent Liabilities
This research examines the following explicit contingent liabilities: Government guarantees (maximum exposure as of May 2012 was about 12.3 billion NIS), “safety nets” for PPP projects (exposure of around 1 billion NIS), and insurance and indemnities granted by the government (insurance of government property and military damages, compensation for government employees, etc.).
Contingent liabilities are a significant share of a government’s obligations, but in most cases they are not included as part of the government debt or as a budget expenditure (OECD, 2005). These liabilities form a “hidden debt” that is not expressed in the debt-to-GDP ratio but is likely to increase the ratio significantly in the future. For this reason, politicians can exploit contingent liabilities to enlarge the budget in the short term—in return for significantly higher future risk. This document will survey the preparedness of the Israeli government to deal with contingent liabilities and suggest tools to manage the risks.