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March 2010

March 31, 2010

New Working Paper, "A Public Financial Management Framework for Resource-Producing Countries"

Posted by Teresa Daban and Jean-Luc Helis 

A recent working paper overviews the challenges posed by nonrenewable resource revenues, the policy prescriptions to meet them, and the Public Financial Management (PFM) framework and reforms those low-income resource-producing countries (LIRPCs) should adopt. This paper contributes to fill in a gap, and therefore could be helpful in particular to technical assistance practitioners and authorities involved in reforms in this area. Indeed, there exists little guidance in the PFM literature on answering the following questions on a systematic and comprehensive way: What are the minimum requirements for a PFM framework to be robust enough to prevent the resource curse?[1] And, given LIRPCs’ weak PFM systems, what essential PFM reforms are politically and technically feasible? Most of the literature focuses on some of the elements that underpin a sound resource revenue management framework, such as the establishment of well-defined resource funds and the promotion of transparency.

Drawing on country experience, the paper shows that in a few cases the adoption of special operational mechanisms for the management of resource revenue has been successful. However, it also shows that the design and implementation of these operational mechanisms pose significant challenges to LIRPCs. For instance, earmarking mechanisms, when designed and implemented in a very rigid way, have sometimes hampered the implementation of unified budget and liquidity management. They have also eroded the competition for resources within the budget, affected the efficiency of government spending, and led to the fragmentation and delay of the budget process, especially in countries with poor information-sharing practices. In some other cases, the establishment of separate investment committee and oversight bodies has resulted in high administrative costs, reflecting the differentiated, expensive, and sometimes privileged bureaucracy of the separate bodies. In addition, in LIRPC it could be difficult to find enough qualified people to staff these committees, which may end up not being independent and accumulating a lot of power. Moreover, if they are not well designed, the existence of separate budgetary bodies in LIRPCs could erode incentives for reforming existing budgetary institutions and building an efficient and merit-based civil service.

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March 29, 2010

Optimal Structures for Ministries of Finance

Posted by Ian Lienert 

The need for internal restructuring of ministries of finances (MoFs) arises from time to time in the Fiscal Affairs Department’s (FAD) discussions with country authorities. Existing structures may no longer be conducive for attaining the desired outcomes of the ministry in the most effective manner. Ministerial restructuring needs a high-level political decision. For mergers of two ministries (e.g., planning and finance) one minister of the Cabinet of Ministers loses his post. When a ministry is split into two ministries, a new minister may be added to the Cabinet. Such mergers or splitting of the MoF are not common. It is more frequent for the MoF to undergo an internal restructuring, to “modernize” the ministry or rationalize its functions. For example, new business processes may have been developed (MTEF, performance budgeting, modernized treasury management, etc.) and now need to be embedded in the organizational structure.

Are there any guidelines that could be used for restructuring a MoF?  Clearly a starting point is to examine the generic functions of any MoF. The attached listing of core and non-core functions of a MoF could be a starting point for national authorities that may be considering an organizational restructuring of its MoF. I would like to solicit your comments on this proposal.

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March 26, 2010

IMF Job Offers: The IMF Fiscal Affairs Department Is Seeking Public Financial Management (PFM) Specialists (Job Number: 1000161)

 The Fiscal Affairs Department of the International Monetary Fund is seeking public financial management (PFM) specialists to fill a number of current and prospective vacancies. These include:

  • Four (4) headquarters-based consultant positions (HQBC) based in Washington DC, of which one will require fluent French and another one fluent Spanish.
  • Five (5) advisor positions in regional technical assistance centers (RTAC), AFRITAC East/Tanzania (2), AFRITAC South/Mauritius (2), and AFRITAC West 2/Ghana (1).
  • Six (6) regional advisors based in Ghana (1), Central Asia (1), South East Asia (1), Barbados (2, of which one should be a GFMIS specialist), and South America (1 GMFIS specialist).
  • Five (5) country advisors: East Africa (PFM reforms coordination), West Africa (PFM reforms coordination, accounting), South East Asia (government accounting) and South America (cost accounting)

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March 24, 2010

IPSAS: A True Global Standard for Government Accounting?

Posted by Sailendra Pattanayak 

The cornerstone of any government financial reporting system is accurate, consistent, and timely reporting of government expenditures and revenues, and assets and liabilities. Only then can financial reporting serve its purpose of accountability to parliament and the public at large for the appropriate use of public money. Most countries have laws, rules, and regulations defining their government accounting and reporting systems, but these usually reflect each country’s legal/regulatory/administrative tradition as well as its specific needs.

As part of the discussions the IMF has with country authorities on modernizing government accounting systems, a number of questions regularly emerge. Are accounting systems capable of producing financial statements/reports that can provide a valid assessment of the government’s financial performance and financial position? In an era of increasing globalization in which the governments are rated on their creditworthiness, can governments produce financial statements that are understandable and comparable across countries? Can we standardize the preparation of government financial statements across all countries? This is an ongoing discussion with and within countries. The development of the International Public Sector Accounting Standards (IPSAS) is an attempt to address some of these questions.

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March 22, 2010

Pakistan: Monitoring Implementation of the Fiscal Responsibility and Debt Limitation Law

Posted by YangHyun Jin 

As posted earlier, Fiscal Responsibility Legislation has during the present global crisis become popular as an instrument to anchor fiscal policy. While some legislation focuses on accountability and transparency issues, and others on fiscal process (i.e., are budget totals agreed on in advance of the detailed budget discussion), a main characteristic of many laws is the setting of limits to the main fiscal aggregates. The aim of this post is not to discuss the logic or best model of the FRL approach but rather the practical issues of implementation. Fiscal monitoring is crucial. Pakistan represents a country with a clear fiscal objectives and compliance reporting type fiscal framework in its FRL. The annual Fiscal Policy Statement (FPS) has played an important role in raising the awareness of fiscal policy objectives and guiding the country to better fiscal discipline and long-term economic growth. 

In 2005, Pakistan adopted a Fiscal Responsibility and Debt Limitation (FRDL) Act 2005. To monitor implementation of the law, the Ministry of Finance publishes an annual “Fiscal Policy Statement” and an annual “Debt Policy Statement”. The latest available pertain to 2009-10. The FPS summarizes overall fiscal developments during the past fiscal year and provides clear and comprehensive review of performance of the legal requirements of the FRDL. The FPS also analyzes whether there has been any deviations from the fiscal targets and if federal government policies have remained in conformity with the principles of sound fiscal and debt management.

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March 19, 2010

PFM Studies: Why Not the Quartier Latin?

Posted by Franck Bessette 

Our short series on PFM studies at the University raised a lot of interest and debate among our fellow blog readers. The first post from Dimitar Vlahov concluded with this statement: “While understandable perhaps, the lack of PFM studies does seem unfortunate. The present world economic crisis points to a continued need for high-quality management of public finances”, which triggered a response from the University of London: “Teaching Public Financial Management is getting hot!” Another response came from outside the English speaking sphere: from Professor Michel Bouvier, at the University of Sorbonne in Paris, where I had the privilege to teach public finance a few years ago to students preparing for civil service competitive exams.

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March 17, 2010

Italy: Toward Modernizing Public Finance Management

Posted by Lusine Lusinyan 

The year 2009 ended with a milestone for Italy’s public financial management system. The Accounting and Public Finance Law (n. 196, 12/31/09) was enacted overhauling a long outdated 1978 law on accounting (n. 468) and marking a first step in bringing Italy’s public financial management in line with best international practices. Its focus on the broader public administration, harmonization of accounting systems, and strengthening expenditure control and monitoring are steps in the right direction. But the reforms fail to address the need to strengthen multi-year expenditure planning and top-down budgeting as keys to establishing and maintaining fiscal discipline. Going forward, ensuring smooth transition and coordination with ongoing fiscal federalism reform at the same time as designing effective implementation mechanisms will be a challenge.

 

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March 16, 2010

China’s Local Government Cash Management – Regulation or Centralization?

Posted by Holger van Eden 

Not all governments around the world are anxiously looking at their empty state treasury coffers. The Chinese central and local governments have accumulated large cash reserves over the past decade. In part these accumulations represent continued under-execution of the budget over a number of years, a quite common phenomenon in the developing world. These reserves, however, also reflect the success in setting up Treasury Single Account (TSA) structures by central, provincial, and larger city governments. The liquidity that in the past would have accumulated in line ministry and agency commercial bank accounts at various levels of government–China has 5 distinct layers of government–has in part been brought back into TSA accounts held at the People’s Bank of China (PBoC).

Local government reserves in China represent an estimated 3-4 percent of GDP. This represents a sizable amount by any international standard and raises the question of how these resources should be managed: to what extent should treasury management power of local government be centralized? What sort of autonomy in financial investment management should be granted to local government to maximize financial return while preserving investment security, etc.?

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March 12, 2010

Petroleum Product Subsidies: Costly, Inequitable, and Rising

Posted by Justin Tyson 

Petroleum product subsidies around the world have again started to rise with the rebound in international commodity prices. A recent Staff Position Note reviews the latest developments in subsidy levels and argues that it is necessary to reform the policy framework for setting petroleum product prices in order to reduce the fiscal burden of these subsidies and to address climate change.

In 2003, global consumer subsidies for petroleum products, measured as the difference between domestic retail prices and international prices adjusted for transport and distribution costs, totaled nearly $60 billion. They are projected to reach almost $250 billion in 2010. Including tax subsidies (the difference between “optimal” taxes to raise revenue and corrected for externalities and actual taxes), such subsidies are substantially higher. Taking an optimal tax in the range $0.30-$0.40 per liter, projected subsidies are estimated at between $740-$970 billion (or 1.0–1.3 percent of global GDP). Including producer subsidies for other fuels, such as subsidized coal for power plants, would drive these estimates even higher. G-20 countries account for over 70 percent of projected tax-inclusive subsidies, with emerging G-20 countries accounting for a sizable part of that. Halving tax-inclusive subsidies could reduce projected fiscal deficits by one sixth in subsidizing countries and could reduce greenhouse emissions by around 15 percent over the long run.

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March 11, 2010

GAO Critical About U.S. Government Financial Reporting

Posted by Sanjay Vani 

It may be a strange kind of reassurance to developing countries that governments in advanced economies can also have serious problems with getting their annual accounts certified by the Supreme Audit Institution (SAI). You may have read in the newspapers that the U.S. Government Accountability Office (GAO) has refused to provide an opinion on the fiscal year 2009 consolidated financial statements of the U.S. government. This is now for the 13th time in a row that such an opinion has been refused. The GAO can hardly be accused of not being consistent! Not providing an opinion is similar, but technically not exactly the same, as not certifying the accounts. 

The GAO notes three major impediments that prevented it from rendering an opinion (see also http://www.gao.gov/financial/fy2009financialreport.html). First it notes serious financial management problems at the Department of Defense (DOD) that have prevented DOD’s financial statements from being auditable. In addition, the financial statements of the Department of Homeland Security and the National Aeronautics and Space Administration for fiscal years 2009 and 2008 were determined as not being auditable. Second, the U.S. federal government was unable to adequately account for and reconcile intragovernmental activity and balances between federal entities and the Department of Treasury’s (Treasury) records of disbursements. Third, the federal government’s process for preparing consolidated financial statements is seen as ineffective due to a number of important issues, including having inadequate systems, controls, and procedures to ensure that the consolidated financial statements are consistent with the underlying audited entity financial statements, properly balanced, and in conformity with U.S. generally accepted accounting principles (GAAP).

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March 08, 2010

Fiscal Exit Strategies

Fuad Hasanov 

As the global crisis is winding down and recovery is taking hold in many countries, policy makers are asking themselves what the best exit strategy is from the significant policy interventions that have taken place over the past 18 months. That is not a simple question as there has been an array of fiscal, monetary, and financial crisis interventions. Moreover, the cyclical unwinding of policy measures is intertwined with structural fiscal challenges.

Basic questions for all countries, however, are: when should policymakers unwind crisis-intervention measures, which policies should be unwound first, and when should fiscal retrenchment begin in earnest? Two recently-published IMF Board papers—“Exiting from Crisis Intervention Policies” and “Strategies for Fiscal Consolidation in the Post-Crisis World”—provide a useful framework to address these questions.

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March 05, 2010

Burundi: What Lessons Has the IMF Learned from its Technical Assistance?

Posted by Jean-Luc Helis 

Burundi is a very poor, post-conflict country in Africa with serious structural and institutional weaknesses, particularly in all areas of public financial management (PFM). Until 2005, progress in the implementation of PFM reforms was hampered in particular by the following factors: (1) there was a lack of ownership of the reforms by the Ministry of Finance (MoF); (2) reliable financial information was scarce; (3) procedures were not well defined, nor implemented in a transparent way; (4) there was no coherent overall strategy for PFM reform; and (5) the coordination of the donors’ technical assistance (TA) was ineffective.

In 2005, the Fiscal Affairs Department (FAD) decided to regularly provide TA to improve and develop the Burundian PFM system. This TA has been provided through: (1) missions from headquarters; (2) a PFM peripatetic expert financed by Japan to assist the authorities in strengthening budget execution, accounting, and fiscal reporting; (3) another PFM peripatetic expert, financed by the World Bank and later on by Belgium, to review the legal and regulatory framework for PFM; and (4) additional short-term TA from the Fund’s regional technical assistance center in Gabon, AFRITAC-Central (AFC), to improve cash management, and develop the computerized system for budget management (SIGEFI).

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March 03, 2010

The South African 2010 Budget—A Renewed Focus on “Service Delivery, Value for Money and Oversight”

Posted by Davina F. Jacobs 

Successful implementation of performance-based budgeting in South Africa has become more crucial in recent years, given the extremely tight revenue situation. That is a key message in a recent critique of the 2010 Budget. Experts from IDASA (a local independent public interest organization committed to promoting sustainable democracy) present their views and concerns in a recent paper titled “Budget 2010: Still a Rocky Road Ahead”, by Len Verwey, Saranne Durham and Musa Zamisa (attached below).

As the authors discuss, it was already clear in last year’s medium-term budget policy statement (MTBPS) of October that South Africa needed to make a substantial adjustments to its public finances over the next few years. Though the South African economy has formally moved out of recession, and though some indicators, such as household consumption expenditure, are improving, economic recovery will be slow. This means, of course, that the recovery of tax revenue will also be slow. Doing more with less, and how to actually achieve this, is therefore an important aspects of the 2010 Budget.

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March 01, 2010

Overview of the Italian Law on Fiscal Federalism

Posted by Maria Gabriella Briotti and Maria Cristina Mercuri1 

Last May, the Italian Parliament approved a framework law on fiscal federalism. The law represents a crucial step towards the implementation of the reformed Title V of the Italian Constitution, which transfers increasing legislative authorities and administrative functions to sub-national governments. As such, the law has to be seen as the continuation of a long process of fiscal devolution started in the mid-1990s aimed at correcting gradually the existing vertical imbalance across levels of governments. The next step will be the adoption, by May 2011, of several legislative decrees that will have to define the operational content and practical application of the principles stated in the law.

Overview

In May 2009, eight years after the reform of Title V of the Constitution (Constitutional Law n. 3/2001), the Italian Parliament approved the framework law on fiscal federalism (Legge Delega n. 42/2009)2. The scope is to enhance tax autonomy and fiscal responsibilities of sub-national governments (Regions, Provinces, Municipalities, and selected Metropolitan area), notwithstanding a full guarantee of solidarity and cohesion principles, while also promoting public administration efficiency and budget consolidation processes.

Operational content and practical application of the principles established by the frame law will have to be defined by subsequent legislative decrees to be adopted by parliament within a 24-month period from the approval of the law (a 12-month deadline is instead set to harmonize the accounting systems across regions). As building blocks of the entire fiscal system, the executing legislative decrees will have to define in detail spending competencies and taxes to be devolved to local administrations, which services will be provided uniformly on the territory, how to finance equalization funds, and the amount of local expenditure to be financed through the equalization funds. The reform must be completed and enter into effect in five years since the frame law approval, although a somewhat longer period might be allowed to individual regions, to take into account special circumstances.

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