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March 05, 2013

Can Arab Countries Improve Fiscal Transparency?

Posted by Manal Fouad

When people took to the streets in several Middle Eastern and North African (MENA) countries in early 2011, it was not only about social justice, but also to demand accountability from their governments. This means more information about how public resources are allocated, spent, and audited. Unfortunately, according to a recent publication by the International Budget Partnership, the MENA region records by far the lowest scores on transparency in the Open Budget Index, and most countries are still classified among those with scantest information about their budgets (only Jordan had a relatively good score of 57 in 2012, while Tunisia, Egypt, Algeria, Yemen are all in the bottom range of 0-20). Even more troublesome, Egypt has seen a significant worsening in its rating from 49 in 2010 to only 13 in 2012.

Yet, many of the demands from the youth who led the Arab revolutions were for increased fiscal transparency. These demands range from disclosure of very simple figures to more complicated issues. Such disclosures would answer many questions that are vibrantly present in the public debate. How much does the debt contracted by previous regimes cost in the budget? Are these levels of debt more or less than the government’s spending on health and education? Are the high levels of public subsidy provided on commodities such as food and fuel appropriate? Do these subsidies reach their intended beneficiaries? How much is the military apparatus spending on its wages, pensions and equipment? How much do loss-making public enterprises cost the budget? Is the government paying its salaries and bills to public and private suppliers on time? And more fundamentally: what is the government’s medium-term vision and objectives for the country? Does the budget reflect the country’s and society’s priorities? Is the budget constructed on the basis of realistic assumptions on the availability of resources and costs of programs, and does it include contingencies for unexpected economic conditions or uncertain events? Is public debt sustainable?

New IMF Code of Fiscal Transparency

The IMF Fiscal Affairs Department (FAD) has recently published a Paper on Fiscal Transparency, Accountability, and Risk, and plans to continue work to revitalize the global fiscal transparency effort. The existing fiscal Report on the Observance of Standards and Codes (ROSC), together with the accompanying Code of Good Practices for Fiscal Transparency and Manual, will be revamped and replaced by a new instrument, on which FAD is consulting widely. The revamping of the fiscal ROSC was motivated by developments in public financial management (PFM) practices during the past decade and a half, and recognition that transparency is a key institution to ensure good fiscal outcomes. The new work also stems from the lessons learnt from the recent financial crisis on shortcomings in fiscal reporting which has led many governments to underestimate their true fiscal problems.

The new fiscal transparency agenda advocates that “fiscal transparency...provides legislatures, markets, and citizens with the information they need to make efficient financial decisions and to hold governments to account for their fiscal performance and utilization of public resources.” The revamped ROSC/Code will evaluate countries’ fiscal transparency practices by introducing two main innovations: first, the new evaluation framework will be modular and include a graduated scale that comprises “basic”, “good” and “advanced” practices; and second, a full action plan will be provided to help countries address the shortcomings found in the evaluation.

What would this imply for MENA countries?

Fiscal transparency is defined as the “clarity, reliability, frequency, timeliness, and relevance of public fiscal reporting and the openness to the public of the government’s fiscal policy-making process”. Ministries of finance in most MENA countries have websites in which they publish their budget laws and other documents and reports related to the state of public finances. But this definition of transparency raises several challenges, which have seen mixed progress in the region.

  • Clarity. Is the detailed budget supplemented by summaries that can easily be understood by the public?
  • Reliability. Are data reflecting the adequate coverage of the government’s fiscal position, including operations outside central government, implicit liabilities that allow effective fiscal monitoring?
  • Frequency. How often are reports updated and published?
  • Timeliness. How soon are updated reports published and disseminated?
  • Relevance.  Do published documents cover the appropriate information that allows the public to assess whether policy makers are taking effective decisions to meet the objectives intended?

Another important aspect of fiscal reporting is that it refers to “the production of summary information about the past, present, and future state of the public finances for both internal (management) and external (accountability) uses”. A number of countries in the region need to make efforts to strengthen their practices in this area, for example, by disseminating their medium-term fiscal forecasts and budget framework, and publishing comprehensive data on their contingent liabilities (e.g., fiscal risks stemming from changes in commodity prices, or from public-private partnerships). Another group of countries need to report transparently on off-budget accounts, agencies, and public enterprises that conduct public policies on behalf of the government (e.g., subsidized prices for fuel, or electricity that weigh on the accounts of the utility or national oil companies). Publishing detailed and up-to-date information on expenditure classified according to functions is also important to show the public how funds are allocated to the various functions of government (education, health, defense, etc.). And disclosure of information on long-term fiscal and debt sustainability analysis will reassure (or not!) the public on the government’s indebtedness strategy.  Finally, fiscal transparency also emphasizes the role of institutions such as the parliament and independent audit agencies to strengthen external accountability, both of which are notably weak in some MENA countries.

Will MENA countries participate in the new exercise? 

Out of 93 countries that participated in the old fiscal ROSC exercise and published the ensuing reports, only 5 countries are from the MENA region (Algeria, Jordan, Lebanon, Morocco, and Tunisia). Can the new ROSC be more successful in the region? The answer is yes on more than one count:

  • The Arab revolutions and new open media (internet and social media) have brought about new political dynamics, holding governments more accountable towards legislatures, civil society, and markets. A transparency assessment will signal that governments are committed to more openness as required by the public.
  • The graduated approach to the new evaluation tool will be better tailored to countries’ situation and administrative capacity and will therefore be more helpful in assessing practices.
  • The action plan that will be included in the revamped fiscal ROSC will be useful for countries to set milestones that are adapted to their specificities and national objectives while pushing them to strive for best practices.
  • Finally, for governments, more transparency will also help them make the case for their own policies if it helps them gain public and markets confidence, and counter certain misconceptions of the public by revealing the exact facts. 

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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