December 06, 2017

Fighting Illicit Fund Flows in Sub-Saharan Africa

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Posted by Howard Cooper, Paul Nash, and Oliver Stern[1]

In September 2017, Kroll delivered a seminar to a group of representatives from the Fiscal Network of the IMF’s African Department. The seminar, entitled ‘Fighting Illicit Fund Flows in Sub-Saharan Africa’, covered Kroll’s experience of performing forensic audits in various countries in Africa and other parts of the world, including the recent independent audit of three state-owned enterprises in Mozambique. The presentation also raised the global and growing issue of illicit fund flows, demonstrated how modern data analytics techniques can help to effectively detect and stop these flows, and highlighted the obstacles that currently prevent a coordinated data analytics strategy from working effectively.

Kroll is often asked to carry out discreet investigatory work to identify the origins of bottle-necks in decision making, or transparency issues associated with various transactions in emerging markets.  These markets are often characterized by a combination of weak institutional capacity and highly politicized government spending. Powerful commercial and political patronage networks, and weak public financial management frameworks increase the risk profile for Kroll’s clients. In addition to the macro-economic challenges associated with, for example, off-budget spending, a highly politicized environment can leave investors facing challenges over their security of tenure and a general lack of predictability.

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December 01, 2017

IPSAS on Social Benefits

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Posted by Guohua Huang[1]

Providing social benefits to the public is a critical responsibility of governments. However, concerns have been raised about the financial sustainability of social benefit policies in many countries. One recent IMF study[2] showed that, without further reforms, spending on age-related programs (pensions and health) would increase by 9 percentage points of GDP in advanced countries and 11 percentage points of GDP in less-developed countries, between 2015 and 2100. The fiscal consequences are potentially dire. Such spending increases could lead to unsustainable public debts, require sharp cuts in other spending by governments, or necessitate large tax increases that could stymie economic growth.

Even though the sustainability of social benefits is an important policy issue, there is no an international standard on how to appropriately account for the related liabilities and expenses. The International Public Sector Accounting Standards Board (IPSASB) has been criticized for not issuing any standards on this issue. For example, when assessing the suitability of IPSAS in the EU member states a few years ago, the European Commission stated that the coverage of IPSAS was incomplete, and expressed concerns about its applicability to some important types of government flows, such as taxes and social benefits. IPSASB’s oversight body, the Public Interest Committee, has been recommending IPSASB to focus its resources on social benefits and other key issues of public policy.

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November 28, 2017

Cost-Benefit Analysis of State-Owned Enterprises

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Posted by Taz Chaponda[1]

The problems associated with state-owned enterprises (SOEs) are well known. They are very costly to run, few of them make profits, or if they do, they tend not to pay dividends on a consistent basis. This problem is more applicable to developing countries and emerging markets than to advanced economies. In the latter, deregulation has sharply reduced the number of SOEs and improved their performance. But in emerging markets, SOEs are still pervasive and their failure can result in huge economic and fiscal costs. Given these risks, why do governments continue to keep them?

To understand the ubiquitous nature of SOEs, it is necessary to go back in history to when governments set up dedicated entities to provide services that were viewed as having some “public good” characteristics, or where natural monopolies existed. It was argued, that certain essential services could not be left to the private sector as it would not supply these services reliably to everyone that needed access (think of public utilities). Another argument was to promote industrialization by investing in strategic sectors through SOEs. Economies in East Asia led the way in this respect. The chart below shows countries with the highest SOE presence among their top ten firms.

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November 22, 2017

Debt Defaults and Public Investment in Emerging Markets

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Posted by Rohini Ray[1]

A recent study by Ruiz Nunez and Wei[2] shows that emerging markets face an investment gap of 6.1 percent of GDP and need to double their current investment expenditure to meet the growing demand for economic infrastructure. Unlike in advanced economies, where the private sector is typically taking on a larger role in providing infrastructure, in emerging markets the public sector still finances most of these investments. Whilst there is a growing need for investments, debt defaults and rescheduling have been on the rise in emerging markets and, according to a study by Reinhart and Rogoff[3], almost tripled in Latin America and Asia between the period of 1950-74 and 1957-2006. Since a default lowers a country’s ability to borrow, it creates a vicious circle in which the investment gap and borrowing needs increase still further.

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November 14, 2017

Making Ireland’s Public Investment More Efficient

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Posted by Carolina Renteria and Richard Allen[1]

In July 2017, the Department of Public Expenditure and Reform (DPER) in Ireland invited the IMF’s Fiscal Affairs Department to carry out a review of the country’s public investment management policies and practices. The report—which was welcomed by the Minister of Finance and Public Expenditure and Reform—has now been published by the IMF and released on the DPER’s website. In a press release on November 10, 2017, the Minister noted that the PIMA was specifically tailored to Ireland’s needs, and “will play an important role in identifying how institutions and public governance systems in Ireland who are responsible for planning, allocating and delivering public capital infrastructure might be further strengthened.”

The assessment uses the PIMA framework [2] which has been employed in 30 countries around the world, but Ireland is the first advanced country to have applied it. This framework is based on an IMF policy paper that provides evidence of a positive relationship between public investment, aggregate demand, and potential growth.

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November 08, 2017

Farewell Mario Pessoa

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The PFM community is mourning the sudden passing of Mario Pessoa at the early age of 53, following a courageous struggle with a short illness. Mario was a highly-respected professional who graduated with a master’s degree in economics and social science from the University of Wales, United Kingdom. He had worked since 2006 in the IMF’s Fiscal Affairs Department, most recently as the Deputy Division Chief of the Public Financial Management Division II. Previously, Mario was a senior official in Brazil’s National Treasury Secretariat of the Ministry of Finance and the Federal Internal Control Secretariat.

Mario will be well known to many readers of the blog as well as to colleagues at the Fund, country officials, and anyone with an interest in PFM. He was the author of many papers and articles on topics such as cash management, expenditure arrears, and building fiscal capacity in fragile states. He co-edited the book, Public Financial Management in Latin America: The Key to Efficiency and Transparency, published in 2015. Mario helped to establish the Latin American Treasurers (FOTEGAL) and the General Accountants (FOCAL) fora. He was a leading light in these groups as a speaker and an organizer of seminars and conferences, working closely with colleagues at the IADB and the World Bank. His most recent article in the PFM Blog, published only two months ago, reported on a FOTEGAL meeting in Costa Rica.

Colleagues at the Fund have come forward with many tributes to Mario’s warmth and generosity of spirit, to his brilliance, availability, reliability, and friendliness, to his politeness and gentleness, to his devotion to work and excellence as a team player, and to his unfailingly helpful and courteous mentoring of less-experienced staff and experts. He was a fire-fighter who could always be relied upon to resolve issues in a sensitive and diplomatic way. Mario led many technical assistance missions to countries all over Latin America, but also in Africa and Asia, including most recently in Indonesia and India. He was a realist about what could be achieved, and unstinting in his desire to ensure that all possible avenues were explored in the dialog with counterparts, and that the fullest possible understanding was reached on complex and sometimes politically-sensitive issues.

Mario was a wonderful colleague and a unique person. Our thoughts and sincere condolences go out to his family. We shall miss him dearly.

If readers have a tribute or story and pictures about Mario they would like to share, please send it to pfmblog@imf.org. All contributions will be recorded in a Commemorative Book that is being prepared and will be presented to Mario’s family.

Richard Allen, Teresa Curristine, Manal Fouad, and Michel Lazare

November 01, 2017

Setting the Fiscal Deficit in India[1]

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Posted by Anand P. Gupta[2]

For the current fiscal year, 2017-18, the Government of India has budgeted a fiscal deficit of Rs. 5,46,532 crore, equivalent to 3.2 per cent of GDP.  Is this number written in stone?  Some experts say that the Government should maintain the current deficit, because a fiscal deficit higher than 3.2 per cent of GDP will be inflationary and will damage the Government’s credibility.  Others say that, given the slowdown in the economy, the Government should increase spending and borrowing to stimulate the economy.

In my view, deficit financing is not necessarily a bad thing.  Much depends on how public money is allocated, how efficiently and effectively it is used, what public entities other than the Government of India are planning to spend and borrow, and India’s macro-economic situation. Given the current state of the economy, there is a strong case for relaxing this limit of 3.2 per cent of GDP, perhaps by an additional 1 percent of GDP. At the same time, the Government needs to put in place a credible mechanism to ensure that the money it spends is used only for providing public goods, and is spent efficiently and effectively.

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October 30, 2017

Simplify Program Budgeting: Is There a Place for ‘Activities’ in a Program Classification?

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Posted By Khuram Farooq and Michael Schaeffer [i]

The traditional program budgeting structure is program, sub-program and activity. Can we simplify this structure? Is the ‘activity’ element of this classification really necessary?  Why ‘activity’?  The conventional argument is that ‘activity’ will be used to capture ‘projects’ or capital expenditures under sub-programs. This may be a valid explanation on paper. In practice, however, the concept of ‘activity’ has caused much confusion and difficulties during the implementation of program budgeting in several countries.

In Zambia, there were 3000 ‘activities’ under the Ministry of Health’s budget (FY 2011), with at least 5 subheads under each activity. This constituted around 15000 line-items! In Cambodia, there are 10,000 activities under the newly introduced program classification. This level of detail and complexity in the budget classification system is problematic on several counts, but the most fundamental issue is that it undermines the justification for moving to program budgeting.

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October 24, 2017

Stocktake of PFM Diagnostic Instruments

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Posted by Lewis Hawke[1]

So, you’ve heard of PEFA, and maybe TADAT, FTE and DeMPA. But what about EITI, EU-FB, GACAP II, HTS or MiGestion? The PEFA program has just released a consultation draft report that provides a stocktake of public financial management (PFM) diagnostic tools[2] under three main categories:

  1. Broad diagnostic or analytical tools covering all aspects of the PFM system;
  2. Tools focusing on individual PFM elements, institutions or sub-systems; and
  • Tools used by development partners to assess fiduciary risk.

The stocktake was limited to tools that were in common usage internationally in 2016 but still managed to identify 46 different products. There were 12 broad, government-wide diagnostic tools, 25 tools covering a wide range of sub-systems and institutions, and 9 tools focusing on fiduciary risks to country financial systems.

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October 20, 2017

How to Strengthen the Management of Government Guarantees

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Posted by Sandeep Saxena[1]

A new paper on “How to Strengthen the Management of Government Guarantees” has been published by the IMF. The paper highlights commonly observed weaknesses in the management of government guarantees, describe good practices, and discuss measures governments could take to strengthen this often-neglected area.

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