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May 04, 2017

Managing Budgetary Pressures

CABRI

Posted by Neil Cole and Alta Folscher[1]

Budget managers are frequently confronted with changing circumstances during the fiscal year that disrupt even the best prepared budgets. Some routine pressures require no more than regular adjustments to plans, while others become chronic and have a great impact on public finances. Then there are extraordinary shocks, which can be sudden and significantly threaten budget stability and service delivery. The 2017 CABRI Conference, held in Burkina Faso in March and attended by 69 officials from 26 African countries, examined how governments can better prepare for and manage such budgetary pressures without disrupting service delivery and incurring unsustainable debt.

The conference sessions drew on the experience of African countries in responding to extraordinary pressures. These pressures arose from macro-economic shocks, as well as shocks resulting from natural or ‘man-made’ disasters. The country case-studies included the following experiences in managing the impact of: oil price shocks in Nigeria; the global financial crisis in Lesotho; the outbreak of Ebola in Liberia; cyclones in Madagascar; political conflict in the Central African Republic; the wage bill crises in Cote d’Ivoire and Burkina Faso; and the tertiary education financing crisis in South Africa. The experience of these countries drew out insights from other participants.

Countries reported that pressures usually coincide, pushing them into budgetary crises. In Burkina Faso for example, the cost of agreed increases in public sector salaries coincided with decreased revenue due to lower gold and cotton prices, political instability and the impact of Ebola in neighboring countries on tourism. While budgets are often able to absorb a series of pressures, in many cases one additional crisis can present a tipping point at which the public finances are destablised. Building resilience therefore must involve identifying and analysing sources of fiscal risk as part of budget preparation. These risks need to be monitored and assessed continuously, and be publicly disclosed.

Countries reported that budget crises resulting from extraordinary pressures exposed their institutional weaknesses. In Liberia for example, the Ebola crisis laid bare the country’s dependence on donor-supported human resources in the health sector, and weak co-ordination between the center and the outlying areas. Crises however, also create the opportunity and political space to address these weaknesses.

Across countries, the response to budgetary crises was multi-faceted, including efforts to increase available resources, cut expenditure elsewhere, and postpone or minimise the effects of the crisis. Countries emphasized the need for good data and analysis so that finance ministers are presented with realistic options for managing the crisis.

In the short-term, countries found fiscal space by rebalancing their debt portfolios, cutting non-essential spending, and mopping up idle cash balances. These short-term measures however, were complemented by longer-term interventions to prevent a recurrence or deepening of the crisis, and to build fiscal resilience. Lesotho’s fiscal crisis, for example, led to efforts to diversify its revenue base and strengthen revenue collection. Besides strengthening budgeting and disaster risk management, Madagascar has opted to take out disaster risk insurance.

Finally, seminar participants discussed the important role of finance ministries in mitigating the effects of budgetary pressures, given political pressure on budgetary decisions. The consensus was that finance technocrats have a duty to communicate trade-offs so that political decision makers are forced to confront pressures, make informed choices, and be held accountable for the decisions they make. Politicians, however, can only be held accountable if the trade-offs and choices are also communicated to those who hold them to account. At the same time, participants agreed that finance ministries cannot act alone. Identifying and collaborating with key players helps finance ministries to see the full picture, analyse and discuss available options, and bring players together to implement a unified approach.

Overall, while the conference discussed various policy response options in times of crisis, it also emphasized that good public financial management systems are essential to preventing or mitigating the impact of extraordinary pressures, particularly those largely within a country’s control, and to managing crises when they occur.

[1] Neil Cole is the Executive Secretary and Alta Folscher a consultant with the Collaborative Africa Budget Reform Initiative (CABRI) in South Africa.

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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