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January 11, 2012

Country PFM Systems That Donors Can Believe In – A Glass Half Full

Posted by Camille Karamaga

As many participants and stakeholders in developing country budget processes have recognized, channeling external aid through country systems has helped to strengthen institutional and individual capacities, enhance domestic accountability for resources, improve expenditure prioritization, and, ultimately, contribute to more sustainable economic development. However, a recent OECD report on “Aid Effectiveness 2005-10” indicates that, while some progress has been made, donors and developing countries have fallen well short of the goals that they set themselves in the 2005 Paris Declaration on use of country PFM systems.

The findings from the 2011 OCED survey on aid effectiveness-covering 78 countries- provided significant input into the Fourth High Level Forum held in Busan, South Korea on November 29th to December 1st, 2011. This forum acted as a platform for renewed impetus for creating stronger, collective and inclusive global partnership in the final push to meet the Millennium Development Goals (MDGs) by 2015.

Survey methodology

The survey used the World Bank Country Policy and Institutional Assessment (CPIA) framework to measure:

  • Improvement in recipient countries’ PFM systems (Paris Declaration Indicator 2a);
  • Progress by donor and recipient countries in reporting aid flows in national budgets (Paris Declaration Indicator 3);
  • Progress by donor countries in utilization of developing country domestic PFM systems (as measured by Paris Declaration Indicator 5a).

Survey findings

The survey noted that though the overall target set for 2010 was not met, there has been significant progress since 2005, in:

  • Improvement in the reliability of recipient country PFM systems (Indicator 2a), where the proportion of countries that moved up at least one measure rose from 32% in 2005 to 38% in 2010.  However this achievement still fell short of the target of 50% in the original Paris Declaration;
  • Donors use of domestic PFM systems (Indicator 5a), where the average use of country systems aid increased from 40% in 2005 to 48% in 2010. But, again, this fell short of the Paris Declaration target of 55% by 2010;
  • However,  the 2010 target of ensuring that 85% of the total volume aid flows for the government sector were captured in partner government budgets(Indicator 3) was not met as only 41% of aid was captured in country budget.

In seeking to explain why progress in bringing aid onto the budget has fallen behind Paris Declaration goals, the survey highlighted the following issues:

  • Donors were not systematically making greater use of country systems in countries even where these systems have become more reliable. Some of the reasons include: i) differences in the fiscal years used by donors and partner governments that  make it difficult to estimate when funds are likely to be disbursed; ii) poor reporting of anticipated disbursement schedules and limited information captured by budget authorities, and; iii) many bilateral donors remain constrained by annual budgeting processes;
  • Recipient country government budgets may not reflect external finances even when donors provide this information. Reasons advanced include: i) provisions in some PFM legislation that bind the appropriation laws to exclude resources over which spending agencies have no control; ii) exclusion of grant-financed technical assistance from national  budgets for the same reasons; iii) applying a discounting factor to external financing; and iv) improvements in domestic PFM systems remain skewed in favor of the ministries of finance/treasury with little or no improvement in line ministries and other government agencies where donors operate;
  • Institutional challenges and weak financial management information systems may hinder effective collaboration across government departments involved in budget preparation and management of external aid.

The survey also highlighted the important role that donors have played in contributing to improvements in the quality of public financial management systems in partner countries, and thereby encouraging expended utilization of country systems by other donors. However, this is also evidence of how the lack of predictability of donor aid can get in the way of improving medium-term fiscal and budgetary planning at country level and undermining efforts to bring aid onto the budget.

Some reflections on the survey findings

The mixed findings of the OECD survey remind us that bringing aid on budget and building reliable domestic PFM systems are related reforms which depend on the level of confidence that governments and development partners have in each other. Donors are not systematically making greater use of country systems in countries even where these systems have become more reliable, as anticipated in the Paris Declaration (2005) and Accra Agenda for Action. Yet, there is evidence that donors have played a key role in contributing to the quality of public financial management systems in partner countries especially if they contribute to PFM-related technical assistance. Going forward stronger PFM systems should attract more external funding channeled through them. While this process has not proceeded as quickly as the signatories to the Paris Declaration would have liked, these are signs that progress can be made where donor support and PFM reform move hand in hand.

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.

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