Posted by Duncan Last
The current crisis has exposed PFM weaknesses in both advanced and developing countries, and has put even the strongest budget system to test. The tighter fiscal environment forces Ministries of Finance (MoFs) to look more closely at, on the one hand, how efficiently revenues are collected, and, on the other hand, how well those resources are prioritized, allocated, and spent. The MoF’s ability to respond to these pressures depends on the quality and timeliness of information at their disposal and responsiveness of the underlying PFM systems. However, particularly (though not exclusively) in low-income countries, all too often the information needed to analyze current spending is neither timely nor adequate, frustrating the MoF’s ability to make critical fiscal decisions in a crisis. Its ability to control and tighten spending, even if the information is available, may be further hampered by ineffective processes and procedures, bureaucratic rigidities, and bad practices. The consequence is often loss of macro-fiscal control, deterioration of budget credibility, recourse to unsustainable borrowing, and build-up of arrears.
For many low-income countries, the current crisis is a largely external event that buffeted their fragile, open economies through second-round effects associated with contraction in advanced country demand for their raw materials, be they natural resources or agricultural products. Many of these countries had been counting on the revenues generated as a result of the strong demand from the global economy over the last decade to fund much needed development spending. Now, a growing number are faced with serious fiscal challenges and a need to cut back spending. While political pressure may assure countries of some compensatory funding from donors and multi-lateral institutions, the fiscal impact of the crisis on OECD countries (where debt ratios are set to rise to record levels as a result of stimulus spending) may see domestic or regional pressures take precedence over a further increase in development assistance.