Guidelines on Local Government Borrowing and Recent Developments in South East Europe
2. What to consider in the national legislation?

The financial framework of local governments plays a key role in the sustainable development of local credit markets. The design of intergovernmental fiscal structure together with the accounting system and reporting procedures are important factors that are taken into consideration by financial institutions when assessing the opportunity to finance local governments. By establishing the general structure of local revenues and expenditures, the intergovernmental fiscal framework determines in broad terms the borrowing capacity of local governments from within a country. Financial institutions need readable, credible, transparent and comparable financial documents and reports as an input in the credit risk analysis of local governments. This can only be achieved if local governments adhere to national accounting standards, which accurately reflect the true financial position of local governments. Authorisation process of local borrowing should ensure that (i) all legal aspects related to local indebtedness are met, (ii) there is a real necessity to pursue external financing which benefits the local economy, (iii) the financial stability of the local government is not threatened by the future debt repayment. The central government's involvement in the authorisation process should be limited to the control of the legal aspects related to local borrowing. Limits to local indebtedness should be clearly stiplulated in legislation on local public debt and should include at least the purpose of borrowing and maximum debt thresholds. Short term borrowing should be pursued only to cover temporary liquidity shortages while long-term borrowing is warranted to finance capital expenditures.



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