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October 03, 2007

Low-Income Countries' Public Financial Management Systems Need Upgrading to Enhance the Benefits of Scaled-Up Aid

A September 2007, IMF Survey article, and associated staff working paper, examines the challenges facing low-income countries in upgrading their public financial management (PFM) systems, and their implications for international development assistance. The article notes that PFM systems in most low-income countries (LICs) need strengthening if these countries are to fully benefit from scaled-up aid. Weaknesses in PFM can undermine budgetary planning, execution and reporting, reduce fiscal transparency, and result in leakage of scarce resources.

The article identifies essential steps LICs should take to improve PFM systems and the impact of expenditures. Theses include:

  • establish a coherent and well-integrated approach to strategic planning and budgeting;
  • build capacity in budget execution and reporting to ensure the efficient, effective, and transparent use of public resources;
  • more fully incorporate donor aid in the budget; and,
  • take initial steps to give the budget a results orientation

The article recommends that LICs prepare an action plan for strengthening their PFM systems. To deal with initial capacity constraints, system reforms need to be planned and implemented in a series of sequenced steps. The article recommends that the initial reform focus should be on critical areas such as budget classification and accounting, but plans may also deal with subnational PFM and service delivery, linkages to other public sector reforms (e.g. civil service), and strengthening national audit offices.

Not least, the article notes that international technical assistance providers, including the IMF and World Bank, need to coordinate assistance for maximum impact.

Posted by Richard Allen

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Comments

Restructuring public finances aimed at macroeconomic stabilization and achieving revenue account balance requires a broad analytical framework. The impact of the size and composition of government expenditure on growth, inflation, interest rate and the external account has to be considered in a framework that takes into account relevant inter-relationships and feedbacks. The structure of public finances relates, inter alia, to the size and composition of expenditure.

Government expenditure as a proportion of GDP differs from country to country. Getting the right size and the right composition of government expenditure with a view to facilitating achievement of highest attainable growth rates, and meeting governments’ social obligations including poverty reduction and provision of health and education should be considered integral to any plan for restructuring public financial management. This requires increasing public spending in social and economic infrastructure for accelerating growth while reducing the overall fiscal imbalance.

I would agree. Conventionally, there are three main objectives of any public financial management (PFM) system: (1) promoting macroeconomic and fiscal stability; (2) promoting strategic allocation of resources by authorities to national priorities; and (3) promoting technical efficiency of spending. The rules, roles, and incentives at work in public financial management systems (formal and informal) sometimes do not promote these objectives. PFM reform is generally about building PFM system capacity and introducing other reforms to better meet these three objectives.

Not only does GDP differ between countries, but the PFM system needs also vary by country. A PFM system developed for an OECD country would generally not be the same as that developed for a developing or middle-income country. Scale, capacity, accountability, and management requirements will be different, and the PFM system needs to reflect these differences.

Regards,
Bill Dorotinsky

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