Use of Country Systems―A “Courageous” Policy?

Posted by Richard Allen

The World Bank is planning to increase the use of country’s own systems of public financial management for its investment lending operations, rather than its traditional ring-fenced funding arrangements. Several African countries―Benin, Burkina Faso, Ghana, Mali, Mozambique, and Uganda―are already targeted, and others may follow. Sir Humphrey, of “Yes, Minister” fame (http://en.wikipedia.org/wiki/Sir_Humphrey_Appleby), might have described such a policy as “courageous”, thus indicating skepticism about its fundamental soundness. Is such skepticism justified? Does the decision reflect the ascendancy of the Bank’s developmental culture over classic fiduciary concerns?

Certainly, the new policy conforms with prevailing international approaches on the effective use of international aid, as reflected in the Paris Declaration (2005), and the subsequent Accra Agenda for Action (AAA). These agreements are putting pressure on donors to channel their lending through budget support operations, and similarly to use country systems for aid and investment lending operations.

The strongest argument for using country systems is that the large number of ring-fenced arrangements used by the Bank and other donors is complex and inefficient. In principle, streamlining the current arrangements into a single system would lead to efficiencies both for donors and national authorities. However, this assumes that all donors agree to use country systems. Moreover, using country systems does not mean that investment funds will be adequately safeguarded and will not be misappropriated for unintended and sometimes illegal purposes.

Program Budgeting Without Institutional Reform – Why It Doesn’t Work

Posted by Holger van Eden

In comparing PFM reforms to Revenue Administration reforms, one of the striking features is that reforms of the budget process are often attempted without much consideration of the institutional changes that are required. MTEF and program budgeting reforms are often implemented with only limited changes to capacities and institutional structure of ministries of finance (or line ministries). The changes to the budget process that these reforms imply are quite fundamental however, and do require changes in staffing level, professional capacities and organizational structure.

In contrast, the reform action plans of our revenue administration colleagues here in the Fiscal Affairs Department sometimes read more like the textbooks of management consultancy gurus. Reforms are intimately connected to restructuring of the tax administration organization, retraining of staff, and changing of organizational culture. For example, tax-based collection agencies are transformed into client-based structures, not only affecting work processes, but fundamentally changing the institutional delineation and hierarchy. Much attention in the reforms is focused on changing management styles, organizational culture and retraining of staff.

Top-Down Setting of Sectoral Ceilings Problematic

Posted by Marc Robinson

 Countries are often advised to set firm ministry (or sectoral) budget ceilings right at the start of the budget preparation process, as an entirely “top-down” process prior to any budget bids or other bottom-up input from spending ministries. This, they are told, should happen immediately following a government decision on the level of aggregate expenditure ceiling.

This raises an important question: is such an early decision on ministry ceilings compatible with good expenditure prioritization?

Good expenditure prioritization is a crucial part of good budgeting. This has never been more true than at the present time when in most countries, the scope to fund new initiatives from additional revenues is limited or non-existent and when economic recovery will demand fiscal consolidation, with tough choices about what spending is to be cut. Good expenditure prioritization requires flexibility in the allocation of the budget between ministries. It means that ministries running ineffective or inefficient programs have money taken away from them. It also means – although the scope for this is clearly very limited at present – that ministries with new policy initiatives with high political priority should be able, as far as possible, to access additional funding. So we would want to be sure that setting ceilings early does not obstruct such reallocation of resources.

Welcome to iMF direct, the New IMF Blog

Posted by Michel Lazare.

 

Earlier this month, the IMF launched a new blog: iMF direct. This new blog discusses issues related to the global economy and economic policy making, with currently a heavy focus on policy responses to the 2008-09 recession. Its authors are IMF senior officials: the IMF's First Deputy Managing Director (John Lipsky) and a number of directors or deputy directors of IMF departments, including our Fiscal Affairs Department director (Carlo Cottarelli.)

This is how iMF direct pictures itself:

iMF direct is a weblog covering the global economy and policy issues, posted by the International Monetary Fund (IMF) headquartered in Washington D.C., United States. iMF direct posts content related to the IMF’s work in economics and finance at global or national level, and posts currently highlight the debate over policy responses to the biggest global recession since the Great Depression.

iMF direct welcomes readers' comments (it sees itself as a "forum").

So far, iMF direct has published posts by Caroline Atkinson, the IMF's External Relations Department (see in particular her August 3 post launching the blog) and by Ajay Chopra, Deputy Director of the European department (see in particular his recent post comparing the recent crisis with the Asia Crisis of the 1990s, as well as his earlier post on Sweden's approach to bank resolution).

iMF direct can be accessed by clicking on this link; for convenience to our readers, we have also added a link to iMF direct on top of our blog's left column.

PFM Blog wishes long life and full success to its new IMF sibling.

Sustainability in PFM Capacity-Building in Post-Conflict Countries – Afghanistan’s Experience

Posted by Sailendra Pattanayak

Post-conflict countries typically lack both capacity and infrastructure in the area of public financial management (PFM). International institutions, donor organizations and NGOs play a crucial role in rebuilding the financial and fiscal institutions in such countries. Contributions generally come in the form of financial support and technical assistance (TA), through the funding of a large number of advisors/consultants to build PFM capacity. However, the continued heavy reliance on contracted technical assistance appointments (through donor-financed projects) for operational activities, raises the question of the sustainability of PFM capacity-building.

Afghanistan is a clear example of the pivotal role being played by international institutions and donors in the development of governance and public finance institutions in a post-conflict environment. The Ministry of Finance (MoF) has been a large recipient of TA from a range of donors and international organizations in fields such as strategic advice, operational support, and capacity-building. The use of TA has enabled significant gains in the PFM area, but there are considerable concerns about the effectiveness and sustainability of the current approach.

Budget Gimmicks in the US

Posted by Franck Bessette

I have not been to the beach this summer but did nevertheless do some beach reading. A particularly interesting book drew my attention: Fiscal Challenges: An interdisciplinary Approach to Budget Policy, edited by Elizabeth Garrett, Elizabeth A. Graddy and Howell E. Jackson at CUP, Cambridge, USA, 2008. The book deals with budget processes in the US, both at the federal and state level. Many contributions are very enlightening for someone who would like to understand US budget processes better, and grasp, say, the present California budget crisis. I would like to focus, however, on one article in particular: “Budget Gimmicks” by Cheryl D. Block, who recently became professor of Law at Washington University in St Louis, after many years on the faculty at the George Washington University Law School in Washington D.C.

Budget Gimmicks is about presenting budget information and (hopefully) not getting caught. Despite increasingly sophisticated modeling techniques, budget forecasters are of course always subject to sometimes getting the numbers for future years wrong, just because the future is inherently uncertain. Forecasters will get it wrong even without deliberate attempts to manipulate or deceive. In some cases though, and surely not only in the US, deliberate manipulation of numbers or other budget tricks are used in pursuit of a particular political agenda. In the US the reason is perhaps that taxpayers and the politicians who represent them suffer from the same budget pathology, namely they want to increase spending for favored government programs, decrease tax burdens, and also achieve a budget surplus. That trinity of objectives is hard to attain, even in the most favorable economic circumstances. Budget gimmicks can help us convince ourselves that “one can have one’s cake and eat it”.

Budget Practices and Procedures in Africa

Posted by Paolo de Renzio

As already reported in the IMF PFM Blog in October of last year (see post here), in 2008 the OECD extended its Survey on Budget Practices and Procedures to a total of 97 countries, including data for 26 African countries that were collected in collaboration with the Collaborative Africa Budget Reform Initiative (CABRI). In preparation for CABRI’s 5th Annual Seminar, held in April 2009 in Senegal, a team from the London School of Economics analyzed the survey results. The resulting report (available here), compiled with support from the African Development Bank, brings together selected findings from the survey to give an overall picture of the state of budgeting in Africa.

The survey was filled in through an online platform by Ministry of Finance officials in participating countries, and the data gathered on African countries went through a peer review process that involved the CABRI Secretariat, the LSE team and country experts. Each participating country was requested to respond to peer reviewer comments, and a workshop was held in Pretoria in December 2008 to present preliminary results and verify country responses. In some cases the quality of the data can still be improved, and for certain sections the applicability and relevance of the OECD questionnaire to an African context can be questioned (for example in the areas of fiscal rules or performance budgeting). The existence of such a database, however, is an important step forward in understanding how budget systems work across a range of countries.

No Suit, No Mission

The IMF Fiscal Affairs Department provides technical assistance to the IMF member countries on public financial management, expenditure policy, revenue administration and tax policy issues. Interaction between countries and IMF staff takes place mainly through “missions”, staff visits governed by a well-defined process of meetings with the authorities, other government officials, donor representatives, followed by presentation of mission recommendations summarized in a technical assistance report, the Aide Mémoire. In the coming months FAD staff will recollect some of their more memorable mission experiences.     

Posted by Suhas Joshi

“I arrived in the country in question just months after the last dictator had finally been forced out by popular revolt, aided by the international community. The country had just emerged from 15 years of war and 80% of the population was living in the capital city in pretty desperate conditions, with no public transport system, and few, if any, basic services. We advised extensively on the budget formulation process, and made a point about a budgetary allocation to provide for rebuilding public transport in the capital.

Conceptual Design for a GFMIS – A New FAD Technical Guidance Note

Posted by Abdul Khan

Governments are increasingly turning to computerized systems to help manage their finances and satisfy the demand for more relevant and timely information. However, international experience in implementing government financial management information systems (GFMIS), often involving significant resources, varies widely in terms of success and failure.

A July 2009 Fiscal Affairs Department (FAD) Technical Guidance Note (attached below) by FAD staff members Abdul Khan and Mario Pessoa suggests that one of the key reasons for the failure of GFMIS projects is the lack of a common and clear understanding of the conceptual parameters of the desired system. The paper argues that a well-crafted conceptual design—together with, inter alia, sound project management, integration of relevant PFM reforms, and adequate change management—is an essential element of a successful GFMIS project, regardless of whether an off–the-shelf or a custom-made software solution is to be implemented. 

Fiscal Responsibility Laws – More Popular Than Ever Thanks to the Crisis

Posted by Holger van Eden

Fiscal Responsibility Laws (FRL) are presently being developed or considered in countries as diverse as Mongolia, Jamaica, Romania, Ghana, and The Maldives. In Germany, while the country already functions within the Maastricht framework – which has been put in a more accommodating stance in the present crisis – a return to a more restrictive fiscal policy path has recently been enshrined into the Constitution. Many larger emerging market and developing economies –Brazil, India, Argentina, Nigeria –  have introduced some form of fiscal responsibility legislation in the past years. Some of these laws focus on a concrete set of numerical fiscal policy rules, i.e. a maximum deficit, debt or expenditure growth rule, others are more focused on enhancing fiscal transparency and accountability.

The repeated fiscal problems that these countries have faced, are no doubt a major contributor to these legislative initiatives. The present financial crisis seems also to have stimulated the interest in FRLs considerably. Perhaps because countries with fiscal responsibility laws seem to have fared better, and kept their deficits better in check than the countries without such laws. At present the deficits in the Eurozone are about half the size of those in the Anglo-Saxon world. Further research on this hypothesis is needed, and in the past evidence has been inconclusive,[1] but quite a few countries seem to have already made the decision that FRLs are helpful in supporting fiscal discipline.

The argument against fiscal responsibility laws has always been that a fiscal framework doesn’t substitute for “enlightened”, or first-best fiscal policy. Fiscal frameworks are always somewhat crude and 2nd best because: (a) they are developed to withstand numerous types of shocks to the economy, and (b) they need to be simple and straightforward to be politically effective. Most FRLs would not guide fiscal policy as well as a “first best” policy makers. Nominal deficit rules, for example, ignore the desired counter-cyclicality of fiscal policy. For these reasons, economists have often disliked FRLs. In real life, however, fiscal frameworks usually do not have to compete against the best fiscal policy or “enlightened” policy makers. The reality of fiscal policy is that there is a strong political and institutional bias for unduly loose fiscal policy. Thus fiscal responsibility laws have to compete, against 3rd or fourth best competitors, and compared to  these, fiscal responsibility laws can be quite successful.

Emerging practice reveals a number of rules-of thumb for developing FRLs.

Who is Ready for Performance. Results. Outcomes.?

Posted by David Nummy[1]

The International Consortium on Governmental Financial Management (ICGFM) has issued a call for speakers, panel members, and presentations to be made at its winter conference, which will be held this year at the offices of the Inter-American Development Bank in Washington, DC, from December 2-4.   The theme of the conference will be: Performance. Results. Outcomes. Understanding Impact in Managing Public Finance.

An expert panel will review all proposals and select the most pertinent and thought-provoking of them for inclusion in the conference program. A stipend will be provided toward travel expenses of the selected presenters. PFM professionals wishing to submit proposals can seek more information at proposals@icgfm.org.

This year’s conference theme was selected in light of the significant changes in public sector spending occurring around the globe as a result of the international financial crisis. Some countries are dramatically increasing budgets for stimulus purposes, while others are facing severe reductions due to depressed revenues. Information on the impact of spending changes can result both in better allocation of new resources, or in better targeting of spending cutbacks.

Disclose Your Fiscal Risks and Avoid Bad Surprises

Posted by Manal Fouad[1]

It is estimated that, as a result of revenue losses related to the present economic crisis, declining commodity prices, fiscal stimulus measures, and financial sector support packages, the fiscal balances of the G-20 countries will weaken by about 7 percentage points of GDP on average over 2008–09. Government debt is projected to rise by 13 percentage points of GDP over the same period, with most of the deterioration occurring in 2009. Collapsing asset prices have also had adverse effects on funded components of pension systems, leading to potentially significant further upward risks for public accounts over the next few years (see Fiscal Implications of the Global Economic and Financial Crisis and its companion paper). This sharp deterioration, totally unexpected at the beginning of 2008, will have significant long-term effects on the sustainability of public finances and require new policies to restore fiscal solvency. Had some of these risks been somehow considered in assessing the fiscal stance, some countries could have exercised more fiscal prudence to prepare for bad times.

Conducting fiscal policy in an uncertain environment is always a challenge for policymakers. At the same time, ignoring sources of fiscal risks—i.e., those causing unexpected deviations of fiscal outcomes from original projections—can be potentially very damaging to the sustainability of public finances. Proper identification of fiscal risks, appropriate reporting, including of off-balance sheet operations, leads to a better understanding of the true magnitude of a country’s fiscal deficit. Adequate disclosure also allows policymakers to better prepare against unexpected shocks and manage fiscal risks before they have serious repercussions. Identification, disclosure and management are all needed to ensure that fiscal policy is geared toward macroeconomic stability and long-term solvency. The present economic crisis has shown that many countries can still make substantial institutional improvements in both areas. A recent IMF staff position note outlines a set of principles to properly account for and disclose fiscal risks, with a special focus on those resulting from the recent (and still ongoing) public intervention in the financial sector.

IMF Fiscal Affairs Department Hosts Spring PEFA Steering Committee Meeting

 

Posted by Frans Ronsholt and Brandon Lundberg¹

The PEFA Steering Committee met in Washington, D.C. on June 11 and 12 for its regular semi-annual meeting, with the IMF as the rotating chair and host. Comprised of representatives of each Partner institution,² the Steering Committee provides direction to the PEFA Program while the Secretariat implements the joint activities. 

This Steering Committee meeting marked the first occasion for the Partners to discuss new initiatives since the inception of Phase III (2009–11) of the PEFA program. In addition to the regularly scheduled update of progress on activities by the Secretariat and that of the Partners’ with the PEFA instrument, some of the highlights of the two-day discussion included possible measures to improve quality assurance; fine-tuning the measurement framework; a comparison of the IMF’s Fiscal ROSC and the PEFA assessment; and an update on progress of the guidance note on the use of PEFA reports for reform sequencing. The meeting also confirmed the program’s close and continuing engagement with the OECD-DAC in pursuing the Paris Declaration objectives and the Accra Action Agenda on PFM issues through the new Task Force on PFM.