Post-conflict PFM -- IMF Lessons of Experience
Summary of lessons from FAD support
Posted by Bill Dorotinsky
The challenges of rebuilding fiscal institutions in post-conflict settings are daunting. An April 23, 2008, post summarized some lessons from USAID experience. The IMF Fiscal Affairs Department (FAD) has been directly involved in rebuilding fiscal institutions. Work done in 2004 summarized FAD's experience and some key lessons --- lessons reinforced by the recent USAID paper.
FAD experience was summarized in a 2005 Occasional Paper 247, Rebuilding Fiscal Institutions in Postconflict Countries, by Messrs. Gupta, Tareq, et. al. The work draws on background papers prepared in 2004, including a December 2004 paper "Rebuilding Fiscal Institutions in Post-Conflict Countries," and October 2004 case study summary Background Paper for "Rebuilding Fiscal Institutions in Post-Conflict Countries" (both available electronically).
The papers summarize FAD experience in 17 post-conflict countries: Afghanistan, Albania, Bosnia-Herzegovina, Cambodia, Croatia, Democratic Republic of Congo, Kosovo, Lebanon, Liberia, Mozambique, Rwanda, Serbia and Montenegro, Sierra Leone, Tajikistan, Timor-Leste, Yemen, and West Bank and Gaza.
The papers include a wealth of information, but some key points to draw from the work include:
Donor coordination is essential. While important any time, the sheer number of donors in the immediate post-conflict period and absence or weakness of domestic fiscal institutions place an added premium on donor coordination. Failures of coordination can do more harm, more easily in this environment. The burden of coordination on the country is magnified, and this administrative burden should fall on the shoulders of donors rather than the country authorities. In some countries, FAD has taken a leading role in coordination (Cambodia, Mozambique, Yemen).
Three Basic Steps to rebuilding fiscal institutions: (i) proper legal and regulatory framework for fiscal policy; (ii) establishment of a central fiscal authority and means for coordinating foreign assistance; (iii) revenue and expenditure policy changes with simple administrative arrangements for collection and expenditure. Actual sequencing will vary by country, particularly the type of conflict and nature of the state emerging from the conflict (new state, pre-existing state with high disruption, or pre-existing state with moderate to low disruption).
While reforming laws might not seem an immediate priority when confronted with the dire needs of collecting revenue and making expenditures, if the tax code or expenditure rules are too complex or inequitable, the administering them effectively and achieving results may be impossible. Overly complex budget execution systems might be designed to limit the potential for waste, but in the process also prevent expenditure and reconstruction (the real purpose of the system). Simple, clear rules and systems may need to be adopted to start the fiscal machinery working.
Establish or strengthen a central fiscal authority. A capable ministry of finance responsible for fiscal strategy development and monitoring, expenditure policy formulation and execution, and revenue policy and collection, is essential. Absent resources, government cannot function. Absent a fiscal authority, there are no resources, no application of resources to public purposes, and not enough attention to macroeconomic and fiscal stability to enable resumption of economic growth and a stable peace. Central fiscal authorities have four main functional departments: (i) budget department; (ii) treasury department; (iii) customs administration; and (iv) domestic revenue administration. In some cases, a macrofiscal unit was established separate from the budget department. In some cases, a special unit ion the ministry of finance was established to coordinate and administer donor financing, while in other cases a multi-donor trust fund was used.
Fiscal decentralization can complicate state fiscal management even as it promises to support peace efforts. FAD recommended a flexible approach, whereby fiscal decentralization proceeded gradually over the medium-term in tandem with subnational capacity to use the resources well and central fiscal authority capacity to monitor consolidated government spending and macroeconomic developments.
Initial revenue efforts tend to focus on indirect taxes, which are easier to collect. These include international trade taxes (sales and excise taxes on imports), and simple customs tariffs. Exports taxes, suboptimal for the medium to longer-term economic development, may be a necessary evil in the short-run. Taxes on selected industries that are easily administered, such as hotels and restaurants, may be needed. Second-best policies may be necessary to get systems operating at all.
Revenue administration needed to be simple, easily administered. Steps include: (i) establishing, equipping, and staffing a revenue administration; (ii) appointment of senior officials; (iii) creating a simple taxpayer registration system; (iv) creating a basic filing and payment procedure; (v) creating a large taxpayer unit; (vi) a simple information system for monitoring operations and collections; and, (vii) simple procedures for reconciling payments with estimated taxes due and with actual bank receipts and treasury balances.
Expenditure management and control should also be simple. Key steps include (i) creating a treasury and payment system; (ii) create a treasury single account for collecting all cash and making all payments, and ensure comprehensiveness of the system over all revenues and expenditure to simplify management and reporting; (iii) a simple but meaningful accounting and budget classification system for recording and reporting on revenues and expenditures needs to be established, perhaps with a simple information system; and, (iv) widespread but basic training in PFM.
Numerous important but 'second stage' PFM improvements were needed, including (i) cash flow planning; (ii) expenditure commitment controls; (iii) deeper training efforts; (iv) building PFM and management capacity in line ministries; (v) formal budget preparation and execution manuals; (vi) clear, thorough procedures for budget monitoring and control; and, (vii) building audit capacity and establishing a code of fiscal conduct.
Building local PFM capacity and avoiding parallel expenditure systems that fragment local capacity and inhibit comprehensive reporting and monitoring are important. Expatriate staff and resident advisers may play operational roles in the short-term to get fiscal machinery running, but immediate, parallel efforts to build local capacity and turn operations over to local personnel quickly will be key for sustainable PFM systems. Avoiding parallel PFM systems for externally-financed programs is an important dimension of building country PFM systems.
PFM Blog Comments. The recent USAID paper closely mirrors the experience of the IMF FAD. The similarity of the lessons reinforces the road map for rebuilding fiscal institutions in post-conflict settings. Sadly, the road-map is one that will likely be well-trodden over time. However, one particular area that has not received much attention in the literature is asset safeguarding. Measures to safeguard revenues once collected and prior to actual use, as well as other public assets, are important dimensions for good PFM and effective government. Not all revenues (from external or domestic sources) are cash. Some are in-kind goods or services. Storing and safeguarding the assets, recording and reporting on use, and applying these to approved public purposes, would be worth a guidance note or summary of lessons.