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January 16, 2008

PFM Reform Lessons – Building a Treasury in Indonesia

Posted by Bill Dorotinsky

Public financial management (PFM) is at the center of the development agenda. Sound PFM systems are essential for countries to maintain macrofiscal discipline, achieve national objectives, and use resources efficiently – regardless of the source of financing. Sound PFM systems are an essential component for giving substance to the 2002 Monterrey Consensus (proposal for a new partnership of mutual accountability between countries and development partners), the Paris Declaration on Aid Effectiveness (2005), and for countries to achieve their national objectives and the Millennium Development Goals.

Despite the centrality of PFM, there is still much to learn in terms of improving PFM reform outcomes, building capacity, and strengthening country systems durably. The process of learning what works and how best to support reforms is an on-going effort, with some important lessons emerging (see December 21 post on Mozambique). A recent IMF Survey On-line post on Indonesia cash management reform by FAD staff member Ian Lienert adds to our understanding, providing some useful lessons of PFM reform.

The article describes the efforts by the Indonesian authorities to establish a Treasury directorate in the Ministry of Finance (MoF), from the first diagnostic work at the time of the Asian crisis, when FAD recommended the establishment of a modern treasury, through various reform phases, including the establishment of a new organizational structure of the MoF and the adoption of new laws for budget and treasury processes. The reforms, which are still on-going, are under strong leadership. A more recent focus has been on improving cash management, which will support macrofiscal stability, transparency, and accountability.

Some of the lessons emerging from the Indonesian experience are well worth noting:

  • Realistic assessments are needed for the time required to initiate and implement reforms (ten years thus far, and for a relatively focused reform of improving treasury operations);
  • The importance of strong political leadership and commitment to a reform program, which helps overcome bureaucratic inertia and addresses any resistance to the reforms;
  • That legal and regulatory reform, while important, are only a beginning. Implementation and creation of a functional system or component takes longer, and continued effort;
  • Strategic partnerships between national authorities and international organizations, including technical assistance and international experience, and adapting the experience to domestic circumstances, can bear fruit.

Realistic assessments of the time and pace needed for reforms have important implications, not only for countries’ expectations of results, but also for development partners’ expectations, conditionality, and nature and duration of support. The Mozambique and Indonesian cases provide examples of the conditions needed for successful reform. The challenge is to draw from these experiences, and apply the lessons more broadly.

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