IMF Seminar Held at the Center of Excellence in Finance in Ljubljana, Slovenia to Help Address Underlying Weaknesses in Fiscal Institutions in South East European Countries[1]

Posted by Brian Olden and Urska Zrinski[2]

 
The global crisis has impacted on the economies of South Eastern Europe (SEE) to a greater or lesser degree. To address the problems caused by the crisis, countries have designed different strategies to facilitate an orderly exit in extremely volatile global economic conditions. Some countries initially introduced fiscal stimulus measures, where sufficient fiscal space was available while others, facing immediate threats to fiscal sustainability and solvency, needed to introduce a more immediate fiscal consolidation process.

Irrespective of the fiscal stance adopted at the start of the crisis, medium-term fiscal policy in SEE countries now needs to focus on ensuring long-term fiscal sustainability, bearing in mind the fragile nature of the economic recovery and the need to implement key structural reforms to mitigate against the effects of longer-term fiscal challenges. These include, inter alia, demographic changes and increased healthcare costs. The April 2011 IMF Fiscal Monitor also indicated that even those economies experiencing a rebound in revenues need to rebuild fiscal space rather than to increase spending in the near term and that they should make progress on structural reforms to enhance growth and equity and strengthen fiscal institutions and transparency.

The rationale behind strengthening fiscal institutions is very clear. Consolidation planning needs to be supported by clearly articulated fiscal objectives, comprehensive and binding medium-term budget frameworks, greater independent scrutiny, and a stronger focus on performance. Many of these elements are absent or, at best, underdeveloped in SEE countries (it should also be stated that these weaknesses are not confined to this region alone).

Efforts to develop medium-term budget frameworks have been initiated in nearly all countries in the SEE region but they need to be expanded in coverage, impose more binding constraints and to be much more closely linked to the annual budget process. There has been a trend in a few countries in the region to establish independent fiscal agencies to provide input into fiscal policy-making. The effectiveness of the newly established agencies has yet to be determined. Existing independent fiscal agencies may require further capacity development to achieve their objectives, while other countries may need to examine whether such agencies would contribute to fiscal discipline and implementation of sustainable fiscal policy. Efforts to introduce elements of performance budgeting in SEE countries have been disappointing for a variety of reasons, and greater efforts are required to more systematically integrate performance information into budget decision-making in most countries.

A more rigorous top-down approach to budgeting, stronger parliamentary endorsement of consolidation strategies, and more robust contingency arrangements are also needed in many SEE countries. Budgetary rigidities and circumvention of the budget process by powerful sectoral interests diminish its disciplining impact. Parliamentary ownership of the government’s fiscal strategy is, in many cases, quite tenuous. Controls over budget execution are relatively strong but controls on multi-year spending commitments, and debt and cash management needs to be strengthened in order to keep consolidation plans on track.

In June 2011, as part of an ongoing program to strengthen fiscal management in South East European countries, sponsored by the Japanese government, the IMF held a four day seminar on Building Fiscal Institutions to Meet Post Crisis Challenges. The course was held at the Center of Excellence in Finance (CEF) in Ljubljana, Slovenia and attended by senior officials from fiscal institutions (mainly ministries of finance) from 10 countries in the region: Albania, Bosnia and Herzegovina, Bulgaria, Croatia, Kosovo, Macedonia, Moldova, Montenegro, Romania, and Serbia. The primary objective of the seminar was to help participants to better understand the crucial importance their institutions play in fostering economic and financial stability and growth through appropriately designed and executed fiscal policy. 

The seminar examined the role of sound macro-fiscal data and institutions in improving the quality of fiscal management and fostering economic and financial stability and growth. The course focused on reviewing the key stages and institutional requirements to ensure the successful development and implementation of medium-term sustainable fiscal policy. The role of fiscal reporting and analysis was also examined, including the need for robust debt sustainability analysis and the role of transparency in fiscal management as well as the requirements for developing comprehensive macroeconomic and fiscal forecasting capacity to help shape underlying fiscal policy.

Feedback from participants was overwhelmingly positive with the vast majority commentating that they had come away from the seminar with a far clearer understanding of the inter-linkages between different fiscal institutions and how a comprehensive and sequential approach to strengthening fiscal institutions should be a priority in the effort to ensure long-term fiscal sustainability in the region.

The seminar took place in advance of events arranged by the CEF to celebrate its 10^th anniversary as a key training institution for regional countries in public financial management and central banking. (see separate blog post on this event)

Seminar web page: http://www.cef-see.org/imfseminar/

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