WASHINGTON, DC – A new study released here Monday has detailed how fiscal institutions in Latin America and the Caribbean (LAC) can improve fiscal credibility, debt management, and public investment outcomes.
The 84-page study titled “Fiscal Rules and Medium-Term Fiscal Frameworks in Latin America and the Caribbean: Managing New Challenges” is part of the Departmental Papers of the Interational Monetary Fund (IMF) with the Washington-based financial institution indicating that the views of the authors do not necessarily represent its views or that of its executive board or IMF management.
The study finds that while fiscal rules and medium-term fiscal frameworks (MTFFs) are widespread, their effectiveness depends on credibility, consistent implementation, and integration into budgeting and accountability systems.
It said that fiscal institutions are being asked to do more than signal discipline in the LAC region and that in an environment of elevated public debt, tighter financing conditions, and persistent demands for social spending, they need to anchor credible medium-term adjustment, preserve space for growth-enhancing spending, support market confidence, and remain sufficiently flexible to absorb shocks.
The study provides an updated regional stocktaking of fiscal rules using the IMF Fiscal Rules Dataset Update covering 1985– 2024. It also introduces a newly compiled database of MTFFs in LAC documenting their characteristics (legal foundation, design elements, accountability standards, and coverage of fiscal risks).
In addition, the study provides new empirical evidence on whether fiscal rules and MTFFs help anchor medium-term fiscal paths, improve fiscal planning and predictability, safeguard growth-enhancing spending, reduce debt surprises, and shape sovereign rating narratives.
The study documents the widespread adoption and evolution of fiscal rules in LAC.
According to the authors “many countries now combine budget balance, debt, and expenditure rules, whereas escape clauses, flexibility devices, suspensions, and correction mechanisms have become more common.
“This evolution reflects lessons from large shocks, including the global financial crisis, commodity price swings, and the pandemic. It has also made fiscal frameworks more flexible and, in principle, more resilient. But this comes with costs.”
The study’s evidence suggests that fiscal rules are most useful when they shape fiscal behavior, not simply when they are present in law.
“Formal compliance with numerical rules does not necessarily imply fiscal effort sufficient to stabilize or reduce debt, particularly when numerical rules are not well aligned, correction mechanisms are weak, targets are revised, or escape clauses and suspensions are not accompanied by credible return paths.”
MTFFs have also become prevalent in LAC, but their design varies considerably. Some frameworks are legally anchored, integrated with the budget process, and linked to fiscal rules and debt strategies, whereas others remain largely informational.
MTFFs embody a fundamental flexibility–commitment tradeoff: although flexibility allows governments to respond to new information and shocks, repeated revisions without corrective mechanisms weaken their anchoring role.
The study finds that the adoption of fiscal rules and MTFFs is associated with smaller and less volatile forecast errors for debt and public investment, and with a lower probability of unexpected debt surges.
“These results suggest that fiscal institutions can improve fiscal discipline and the information environment in which fiscal policy is assessed. However, the gains are uneven across fiscal aggregates. Forecast performance for current expenditure appears more straightforward and changes little across institutional settings, likely reflecting the predominance of rigid and nondiscretionary components that are less responsive to medium-term planning.
“Although MTFFs can help reduce investment volatility and protect growth-enhancing expenditure, they cannot substitute for broader reforms to address spending rigidities, improve expenditure prioritization, and strengthen the link between medium-term plans and annual budgets.”
The study finds that credit rating agencies’ reports discuss both the existence and the implementation of fiscal institutions.
It said that text-based analysis of sovereign rating reports suggests that references to fiscal rules, councils, and MTFFs are more meaningful when they are associated with credible policy implementation, transparency, and forward-looking debt sustainability considerations.
The study notes that the next generation of fiscal institutions in LAC should focus on strengthening their credibility, integration, and implementation rather than introducing new ones.
“Policy priorities include calibrating fiscal rules to support realistic debt convergence, reinforcing correction mechanisms, enhancing the transparency of escape clauses, embedding MTFFs more firmly in the budget process, and strengthening the identification, disclosure, and mitigation of fiscal risks, including through closer integration with fiscal risk analysis and debt management strategies.”
