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April 08, 2013

Reforming PFM in Developing Countries

Posted by Richard Allen[i]

I recently had the pleasure of discussing PFM reform issues with senior officials of the Ministry of Finance in Jamaica and, a few days later, at a workshop in Trinidad for the member countries of the IMF’s Caribbean Technical Assistance Centre (CARTAC) which was attended by several Finance Secretaries from the region. In Jamaica, reform of the public sector is high on the government’s agenda as a result of the negative impact of the global financial crisis, high levels of indebtedness and a weak economy. Finance officials in other parts of the region are trying to reconcile the need to make important structural reforms with the day-to-day pressures of managing the budget and dealing with myriad other financial contingencies. 

What are the main messages that came out of these various interesting conversations?

First, countries should be highly selective in the PFM reforms they take on, focusing on no more than one or two major reform initiatives at any one time. Overstretching a country’s capacity for reform – which is very limited in practice - is a fatal mistake encouraged by donors who too frequently judge the success of their project managers more by their ability to disburse funds than whether or not the development impact of the spending is beneficial. This important message – tackle one important reform at a time – has not been lost on advanced countries, which have strong institutions and much higher capacity than developing countries. In the U.K, for example, it took more than ten years of effort together with a lot of “muddling through” for the government to complete the transition from cash to accrual-based accounting.

Second, Finance Secretaries should take the lead in preparing their country’s PFM reform strategy. This will put the finance ministry in the driver’s seat when it comes to negotiating the strategy with development partners. Donors will no longer be able to bully the government into accepting projects that they neither want nor need.  Finance Secretaries shouldn’t be afraid to say “no” to donors offering a juicy grant or technical assistance that doesn’t fit the ministry’s requirements or may be useful later but not now.

Third, Finance Secretaries should focus on the problems they actually face rather than picking from a shopping list of solutions – a brand new FMIS for example - recommended by the ‘traveling salesmen’ who know little of the country’s institutions and PFM systems. Such problems may include accumulating arrears, chronic overestimation of government revenues, cash rationing, or lack of credibility in the approved budget.  Strengthening macro-fiscal and treasury functions are likely to appear high on many developing countries’ list of problem areas. Once the main problems have been identified, an intensive discussion of potential solutions can take place. Such a dialog should reach out to all stakeholders – line ministries, the central bank, parliamentarians, CSOs, etc. – whose support will be required in achieving an effective solution. A sensible time frame should be set for designing and implementing reforms that are often more troublesome and complex than they seem at first sight. Matt Andrews proposes such a “problem-driven, iterative and adaptive” (PDIA) approach in an important new book.[1]

Finally, useful changes to the functions and organization of the finance ministry can be made that support the desired reform in PFM systems. Modern finance ministries have a strong policy-orientation. They carry out high-quality analytical work on fiscal, expenditure and tax policy, and monitoring budget developments (but not actually executing the budget). Over time, functions that are predominantly transactional in character – such as accounting, processing payments and managing cash flow – should be gradually devolved to line ministries whose capabilities in these areas, however, need to be developed. At the same time, finance ministries in developing countries can learn from the experience of more advanced countries in terms of slimming down the organization, reducing the number of layers of management, building effective human resource development strategies, and strengthening communications vertically and horizontally within the organization, and with external counterparts and stakeholders.



[i] This post is based on an article by the author published in the CARTAC Newsletter, March 2013.

[1] M. Andrews. 2013. The Limits of Institutional Reform in Development: Changing Rules for Realistic Solutions. Cambridge, England: Cambridge University Press.

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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Comments

Your first 2 points are becoming accepted in the PFM community. There's no question that we need to curb the enthusiasm of country governments to initiate too many reforms at once. Development partners can be the worst culprits at encouraging reforms. And, in some cases, slowing down the natural velocity of reform.

I'll have to take a slight issue with your 3rd observation.

You might be surprised about the extent to which FMIS suppliers are extremely aware of the country context in countries such as Jamaica and Trinidad. There are ICT snake oil salespeople and there are companies focused on technology-enabled PFM sequencing adjusted to the country context.

We've arrived at a point where country context through multiple governance indicators and PEFA assessments is well understood. The immediate FMIS benefits and the exponential impact of institutional changes are becoming more clear.

I quite agree..many times the national authorities 'push' reforms without any capacity maturity assessments. That makes them dependent on the TA from donors (and they anyways come with some 'carrots' like foreign tours/visits). It's true, that ideal conditions never exist; yet the baseline preparedness on political, functional and operational levels is very important. The 'need based' reforms in the right sequence and intent, with the coordinated approach, hold the key to the efficient and effective PFM reforms.

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