Timing is Everything: Why Delays in Budget Approval are Undermining Fiscal Policy in Africa…And What Can Be Done About It

Posted by Camille Karamaga

A number of serious public financial management (PFM) problems in Africa can be traced back to a single, simple issue – late submission to and approval of the budget by the legislature. Limited legislative scrutiny of fiscal and budgetary policies undermines transparency and accountability in resource allocation and utilization which form the cornerstone of a good PFM system. Failure to provide the legislature with adequate time to scrutinize the budget reduces their ability to undertake critical analysis of fiscal policies and service delivery objectives. Late approval of the budget also prevents government entities from initiating procurement processes at the start of the financial year based on the approved budget, especially where special warrants or pro forma rules rather than systematic cash plans prepared by spending agencies are used to release funds.

The need to provide adequate time for parliament to scrutinize the budget and for line ministries to plan for the year ahead is recognized in both international standards and national laws. International experience recommends that the annual budget estimates be tabled in the legislature at least three months before the beginning of the new financial year in order to allow meaningful scrutiny. Guidelines on good practice in this area are provided in documents such as the IMF’s Code of Fiscal Transparency, the OECD’s Guidelines on Transparency, and the PEFA Performance Measurement Framework.

Budget Institutions Supporting Fiscal Consolidation

Posted by David Nummy

 
Countries around the world are struggling to devise the policies that will best address the challenges resulting from the financial crisis. In a book to be issued by the Fiscal Affairs Department of the International Monetary Fund, the case is made that key budget institutions will be necessary to both devise and execute those policies.

Previewing the book that will be issued later this year, Marco Cangiano kicked off the International Consortium on Governmental Financial Management (ICGFM) fall season by presenting on Budget Institutions for the 21^st Century at the monthly DC Forum held at the Carnegie Endowment for Peace in Washington, DC on September 7, 2011. Mr. Cangiano, an Assistant Director of the IMF Fiscal Affairs Department, outlined ten budget institutions that will be key to countries around the world in addressing the challenges of dealing with the post-financial crisis environment in the three typical phases of a fiscal consolidation (but the same would apply in designing a stimulus package): understanding the fiscal challenge; developing a strategy; and implementation of the strategy though the budget process.

Legislatures and the Budget Process – New Book Published

Posted by Ian Lienert

 
Are legislatures in control of budget processes?  Or is fiscal control a myth?  Professor Joachim Wehner of London School of Economics addresses these and other questions in a new book on the role of the legislature in annual budget decision-making. The book’s recent publication is very timely, given the need for many advanced countries to implement credible fiscal plans, which may be proposed by governments but rejected by parliaments.

There is a dearth of theory-based studies that explain the observed wide variation in the legislature’s role in budget processes in different institutional settings. Most studies focus on the well known polar cases of very strong legislatures (notably the United States) and those where fiscal control is largely a myth (notably the United Kingdom). In contrast, the new book’s empirical work is based on a large sample of countries and provides strong evidence for the importance of legislatures’ budget amendment powers in determining fiscal outcomes.

Fiscal Transparency in Cameroon: a Top Concern for the Government

Posted by Manal Fouad and Edouard Martin (IMF's Fiscal Affairs Department)

Cameroon's dialogue with the Fund on fiscal transparency issues goes far back. Hence, Cameroon was one of the two pilot countries to experiment with the fiscal module of Reports on the Observance of Standards and Codes (ROSC), when the Fund launched the initiative in 1999.

Eleven years later, a ROSC reassessment shows that Cameroon has made important strides to comply with the principles of the IMF Code of Good Practices on Fiscal Transparency. Such progress is the result of an active government engagement towards improving public financial management and transparency, which is now set as one of the objectives of the budgetary process. Consistent with this engagement, numerous reforms have been implemented to improve transparency, some with the help of development partners and with technical assistance from the IMF. For instance, Cameroon joined the Extractive Industries Transparency Initiative (EITI) in March 2005, creating in the process a platform for dialogue on public finance involving representatives of government, donors and lenders, and civil society. Also, a new budget system law, encompassing modern PFM techniques and generally in line with international good practices was promulgated in 2007; its provisions are expected to be fully in place by 2012. During its discussions in Yaoundé, the authors of the report met with the community of NGOs, journalists, and other stakeholders, who were outspoken and keenly interested in transparency issues and in working toward high standards for their country.

A Stock-Take on African PFM

Posted by Matt Andrews

How strong has African PFM become? How do African public financial management (PFM) systems in place now facilitate effective public financial management? Where are the next challenges and how can they be met? A recent paper of mine addresses these questions, using PEFA analyses to identify central themes of the continent’s recent PFM story. The themes emerge from quantitative and qualitative data in 31 central government PEFAs completed prior to mid-2008 and tell a story in two parts: (i) across PFM processes, and (ii) across countries.

Commitment Controls: IMF Fiscal Affairs Department Publishes "Technical Notes and Manuals" Number 4

Posted by Michel Lazare.

On October 6, 2009, the IMF's Fiscal Affairs Department (FAD) published the fourth issue in the new series Technical Notes and Manuals. This document, authored by our FAD colleagues Dimitar Radev and Pokar Khemani, adresses the following key issues:

• What are the objectives of commitment controls?
• What are the preconditions for successful implementation of commitment controls?
• What are the main institutional forms and operational arrangements of commitment controls?
• What are the implications for the IMF’s operational work and technical assistance?

The full text can be accessed by clicking here: Download Commitment controls_tnm0904[1] or by visiting the IMF.org website.

It is also accesible through our Technical Notes and Manuals tab above.

A New IMF Fiscal Affairs Department's Publication: the Technical Notes and Manuals

Posted by Michel Lazare and Richard Allen.

The IMF has just launched a new series called: Technical Notes and Manuals.The first three issues have been authored by the IMF's Fiscal Affairs Department.

They deal with:

1. A Basic Model of Performance-Based Budgeting by Marc Robinson and Duncan Last  Download FAD Technical Manual 1
2. Transition to Accrual Accounting by by Abdul Khan and Stephen Mayes                     Download FAD Technical Manual 2
3. Modernizing Cash Management by Ian Lienert                                                              Download FAD Technical Manual 3

Earlier versions of these Technical Notes and Manuals were previously issued as part of a series of technical notes on our PFM blog.

Future issues will include topics in revenue administration, tax and expenditure
policy, and public financial management. Other IMF departments may also contribute notes to these series.

These notes and manuals aim at raising awareness among practitioners,
officials and academics of contemporary fiscal topics; and improving the dissemination of
FAD's TA advice. In particular, they will allow us to disseminate to a broader audience the advice now included in our TA reports, or provided through other advisory services.

Top-Down Setting of Sectoral Ceilings Problematic

Posted by Marc Robinson

 Countries are often advised to set firm ministry (or sectoral) budget ceilings right at the start of the budget preparation process, as an entirely “top-down” process prior to any budget bids or other bottom-up input from spending ministries. This, they are told, should happen immediately following a government decision on the level of aggregate expenditure ceiling.

This raises an important question: is such an early decision on ministry ceilings compatible with good expenditure prioritization?

Good expenditure prioritization is a crucial part of good budgeting. This has never been more true than at the present time when in most countries, the scope to fund new initiatives from additional revenues is limited or non-existent and when economic recovery will demand fiscal consolidation, with tough choices about what spending is to be cut. Good expenditure prioritization requires flexibility in the allocation of the budget between ministries. It means that ministries running ineffective or inefficient programs have money taken away from them. It also means – although the scope for this is clearly very limited at present – that ministries with new policy initiatives with high political priority should be able, as far as possible, to access additional funding. So we would want to be sure that setting ceilings early does not obstruct such reallocation of resources.

Norway’s Government Pension Fund–Global

Posted by Thomas Ekeli

A recent post by Mauricio Villafuerte and Jon Shields described newly established guidelines for sovereign wealth funds (SWFs). One of the best known SWFs is the Norwegian Government Pension Fund–Global, formerly known as the Government Petroleum Fund. The Petroleum Fund was established in 1990 as a fiscal policy tool to support a long-term management of the petroleum revenues. Renaming the Fund the Government Pension Fund–Global in 2006 was part of a broader pension reform, highlighting also the Fund’s role in facilitating government savings necessary to meet the rapid rise in public pension expenditures in the coming years. However, the Fund is not earmarked for pension expenditures.

The IMF Hosts the Second Annual Seminar and Annual General Assembly of the AIST

Posted by Jean-Luc Hélis

On October 14 and 15, 2008, on the heels of its Annual Meetings, the IMF hosted the second annual seminar and Annual General Assembly of AIST. The International Association of Public Treasury (AIST--its French acronym) is an international association of treasuries officially created in May 2007. Its objectives are as follows: (1) promoting the sharing of information and experience, and cooperation among public treasury services; (2) organizing conferences and seminars, and publishing reports, studies, and documents relating to treasury issues; and (3) developing partnerships with international organizations. The AIST is currently presided by Morocco (the president is M. Ibrahimi, General Treasurer of the Kingdom of Morocco) with the French Public Finance General Directorate holding the Secretariat. The membership is composed of treasuries from many French speaking countries in Africa, the Middle East, or Asia, but also includes treasuries from many other countries (e.g., Hungary, Ghana, Russia, Ukraine, etc.) Other countries, not yet members of the association, can be invited to participate to the AIST’s activities. The IMF, as well as the World Bank, are members.

State Budget Control at your Fingertips--Financial Management Information Systems Have Modified Public Finance Management in the State of Sao Paulo - Brazil

Posted by Mario Pessoa

The Brazilian State of Sao Paulo has implemented a set of financial information systems in the 1990s and 2000s to enhance transparency and reliability of fiscal data. Two of the most relevant systems are: SIAFEM and SIGEO.

The first one is a typical integrated financial management information system (IFMIS) that encompasses all fiscal transactions from the budget preparation and execution to the preparation of the financial statements. SIAFEM is used by more than 5,000 civil servants of 800 entities. All budgetary transactions have to be done using the system. Additionally, SIAFEM is linked to a treasury single account. The general ledger is the core of the system that uses the same economic classification for both budget and accounting purposes. All reports regarding the fiscal responsibility law and the financial statements are generated by the system.

Extending Research on Corruption to Specific Features of PFM Systems

Posted by Francois Michel

If one wanted to summarize briefly how research on corruption has evolved in recent years, one could say that it has made progress in four different areas:

• The search for determinants of corruption and its transmission mechanism to growth and the exploration of linkages between corruption and other economic—GDP per capita, capital flows, aid, income distribution, inflation, etc.—or political variables. This is often achieved through panel data analyses;
• The improvement of transparency indexes—see Daniel Kaufmann and Aart Kraay’s recent article on "Governance Indicators: Where Are We, Where Should We Be Going?";
• Efforts to leverage insights from the corruption literature into sectoral, country-specific reform plans, and that have formed the core of the World Bank’s strategy in recent years. As the Bank’s recent flagship publication on corruption makes clear, public financial management reform are instrumental in tackling corruption;
• New microeconomic models explaining how corruption can originate in auctions of procurement contracts—e.g. on allowing ex-post collusion opportunities between the bureaucrat and one bidder.

Egypt hosts OECD Budget Law Seminar

Posted by Ian Lienert

On May 28–29, Egypt’s Ministry of Finance hosted an OECD seminar on legal frameworks for budget and financial management in OECD countries. The main objective was to learn more of good international practices in budget law. At present, Egypt’s two main budget-related laws are: a 1973 Budget Law and a 1981 Accounting Law. [Download egypt_budget_law_1973.pdf ]

All aspects of the legal framework for budget and financial management systems were covered in the seminar. Difference in budget laws in OECD countries are very marked, reflecting not only differences in budget systems, but institutional differences in the role of parliaments and governments in budget-making, the extent of delegation of authority for budget management to ministers and senior officials in ministries and government agencies, as well as sharp differences in countries’ attitudes towards using law for reforming budget processes and public financial management.

New EU-Supported Financial Information Management System Public Finance in Serbia

Posted by Michel Lazare

Here is a YouTube video presenting the key features of a new financial management information system introduced in Serbia with the support of the EU-European Reconstruction Agency.

Bill Dorotinsky on Public Financial Management Reform -- Trends and Challenges (Video 3)

Posted by Michel Lazare

You liked Bill Dorotinsky's post of June 27 "Public Financial Management Reform -- Trends and Challenges"?

Well, you'll then love the video of this presentation delivered at the ICGFM meeting. Here is the third part of this YouTube video; parts 1 and 2 appear in other posts published today.

Bill Dorotinsky on Public Financial Management Reform -- Trends and Challenges ( Video 2)

Posted by Michel Lazare

You liked Bill Dorotinsky's post of June 27 "Public Financial Management Reform -- Trends and Challenges"?

Well, you'll then love the video of this presentation delivered at the ICGFM meeting. Here is the second part of this YouTube video; parts 1 and 3 appear in other posts published today.

Bill Dorotinsky on Public Financial Management Reform -- Trends and Challenges (Video 1)

Posted by Michel Lazare

You liked Bill Dorotinsky's post of June 27 "Public Financial Management Reform -- Trends and Challenges"?

Well, you'll then love the video of this presentation delivered at the ICGFM meeting. Here is the first part of this YouTube video; parts 2 and 3 appear in other posts published today.

Public Financial Management Reform -- Trends and Challenges

Posted by Bill Dorotinsky

On June 18, 2008, I spoke on Public Financial Management Reform: Trends at the the International Consortium on Government Financial Management (ICGFM) monthly speaker series in Washington, D.C.

I took the opportunity to share my personal views on current trends and challenges in public financial management (PFM) reform, drawing on my experience across the globe and multiple institutions. (As I noted, these are not the views of the IMF, or any other institutions with which I have been associated.)

The presentation covered three broad areas:

1. Common PFM reform recommendations, seen across all donors, consultants, etc.
2. Information on what reforms countries have been implementing in recent years
3. Challenges ahead for improving PFM

The PowerPoint can be downloaded here Download public_financial_reform_trends_icgfm_June_2008.ppt

The ICGFM Blog also posted a summary and video of the presentation on their Blog (CLICK HERE).

e-Government in Africa (Dr. Schuppan's Interview with the GTZ Newsletter)

Posted by Christian Schiller

That information and communication technologies can help enhance the delivery of public services and "make public money count" has by now been widely recognized. Clearly, the industrialized and emerging countries are at the forefront of these developments. But, interestingly, there is also a great potential for e-government in the developing world. The most recent GTZ Newsletter (No. 11/April 2008) contains an interesting interview with Dr. Schuppan on the importance of e-government for development policy in Sub-Saharan Africa.

Dr. Schuppan is co-founder of the Institute for e-Government at the University of Postdam (Germany).

The study has been undertaken for the German Parliament and has unfortunately not yet been published. But the interview in the GTZ newsletter already provides an interesting overview of the study. In short, Dr. Schuppan feels that ";e-government undoubtedly has an enormous potential for Africa south of the Sahara," for revenue administration and expenditure management, but also for other government activities. He warns, however, that in order to fully exploit its potential, e-government solutions need to be introduced hand in hand with reforms of the administrative processes and systems that currently exist in Sub-Saharan countries. While overall important progress has been made with regard to the latter, there is still a long way to go, at least for a considerable number of Sub-Saharan African countries. In addition, Dr. Schuppan points out that education and training is critical, not only of the managers of the e-government solutions but also of the users, including, for example, tax payers. Finally, and this should not come as a surprise, Dr. Schuppan suggests that "e-government projects in African countries call for ...much more time to be implemented than is required in industrial countries." To read the interview and receive the newsletter, send an e-mail to public-finance@gtz.de

Reforming the Management of Public Expenditures on Forests: Some Thoughts

Posted by Anand P. Gupta, Director, Economic Management Institute, New Delhi, India

The article "Reforming the Management of Public Expenditures on Forests: Some Thoughts" (Full text:Download gupta1.pdf) published in Social and Public Policy Review, Volume 2, Number 1 (2008) reviews the available data on forest expenditures of all public entities in India, identifies and articulates the weaknesses in the management of these expenditures, and argues that, with these entities not spending even their current allocations for the forestry sector, inadequacy of financial resources can not be regarded as much a reason for the current dismal state of India’s forest sector as it is made out to be. The article asserts that a good part of the solution to India’s forest problems lies in reforming the management of its public expenditures on forests, with the focus on strengthening the expenditure-outcome link.

Improving Government Financial Management Systems -- Lessons from a U.S. GAO Report

Posted by Bill Dorotinsky

Countries around the world are working to improve their public financial management (PFM) systems, and the U.S. is no exception. While for many countries the U.S. example may seem remote --- too unique in the authority of the Congress or too economically developed --- the similarities and lessons are more relevant than might appear at first glance. A recent GAO report, Highlights of a Forum: Improving The Federal Government's Financial Management Systems (GAO-08-447SP, April 2008), provides some fascinating insights into the state of PFM in the U.S.

Post-conflict PFM -- IMF Lessons of Experience

Summary of lessons from FAD support

Posted by Bill Dorotinsky

The challenges of rebuilding fiscal institutions in post-conflict settings are daunting. An April 23, 2008, post summarized some lessons from USAID experience. The IMF Fiscal Affairs Department (FAD) has been directly involved in rebuilding fiscal institutions. Work done in 2004 summarized FAD's experience and some key lessons --- lessons reinforced by the recent USAID paper.

FAD experience was summarized in a 2005 Occasional Paper 247, Rebuilding Fiscal Institutions in Postconflict Countries, by Messrs. Gupta, Tareq, et. al. The work draws on background papers prepared in 2004, including a December 2004 paper "Rebuilding Fiscal Institutions in Post-Conflict Countries," and October 2004 case study summary Background Paper for "Rebuilding Fiscal Institutions in Post-Conflict Countries" (both available electronically).

Post-conflict PFM -- USAID Paper Summary of Lessons

Posted by Bill Dorotinsky

Public financial management (PFM) has moved onto center-stage in country macroeconomic management, development planning, and international development fora, as has a focus on fragile and post-conflict states. The intersection of these fields has itself become a very current topic, particularly with respect to what specific areas of PFM to address in the short-run and how to sequence reform and capacity-building interventions.

A November 2007, USAID-funded paper, Building Fiscal Infrastructure in Post-Conflict Societies, prepared by Dr. Mark Gallagher, DAI, is worth a read. The paper is a summary of seven country case studies (Afghanistan, Angola, Bosnia and Herzegovina, El Salvador, Guatemala, Kosovo, and Liberia) and some general lessons he draws from them.

An Official Primer on the US Budget System

Posted by Michel Lazare

The US budget system presents many peculiarities and very few countries around the world share similar features. One striking example is the wide ranging power of the US Congress in shaping the budget. While the UK Parliament, for instance, rarely changes the budget prepared by the UK government, the "Congress considers the President's budget proposals and approves, modifies, or disapproves them, it can change funding levels, eliminate programs, or add programs not requested by the President. It can add or eliminate taxes and other sources of receipts, or make other changes that affect the amount of receipts collected." 1/

There are many excellent (text)books describing the US budget system. One example is the recent book by Allen Schick on The Federal Budget, Third Edition: Politics, Policy, Process.

But there is also an official source: the "Budget System and Concepts"

Download us_budget_system_and_concepts.pdf

A Comparative Review of Financial Control in African Countries – an IMF Technical Guidance Note

Posted By Lubin Doe and Sailendra Pattanayak

Is effective control and stewardship exercised in the use of public funds? Are public resources being used for intended purposes and in compliance with respective laws and regulations? Can private sector suppliers of goods and services have reasonable confidence in transacting with the government?

These questions have always been of considerable concern to parliamentarians, government civil servants, the public at large and other stake holders (such as foreign aid providers) in countries with weak public financial management systems. There is a close relationship between the quality of financial control during budget execution and budgetary outcome. Weak financial control in many African countries have led to unbudgeted expenditure, emergence of expenditure arrears, concealment of excess spending, non-compliance with financial regulations, and recourse to exceptional spending procedures. However, the financial control architecture varies across the countries in Africa reflecting the traditions of their former colonial powers and changes introduced over the years.

Poverty Reduction Budget Support -- A DFID Policy Paper

Posted by Michel Lazare

Further to our March 17 post: Is Providing Budget Support to Developing Countries Effective? -- Evaluation of DFID's Direct Budget Support by UK's National Audit Office, which discussed NAO's assessment of effectiveness of budget support, it is important to note that the UK's Department for International Development (DFID) has recently published a policy paper on budget support.

This paper updates DFID's previous policy (dating back to 2004). It draws on the conclusions of a May 2006 multi-donor Joint Evaluation of General Budget Support -- which provided new evidence about the effectiveness of general budget support -- and on the implications of the 2005 Paris Declaration on aid effectiveness.

It "reaffirms DFID's commitment's to using budget support -- alongside other aid instruments -- where it is appropriate to deliver aid to partner governments to reduce poverty. "

Sri Lanka: Improving Transparency and Accountability in Budget Processes

Posted by Justin Tyson

A TV report posted on YouTube in September 2007 provides a short, but interesting, introduction to debates about improving the transparency and accountability of budget-making in Sri Lanka. Topics covered by the video include: the move away from incremental annual budgets towards Activity-Based Budgeting; the need to have more in depth review of expenditure purposes and outcomes; and, the role of parliament in scrutinizing the budget process.

Fiscal Discipline and Subnational Borrowing: the Case Study of Brazil

Posted by Mario Pessoa

Decentralization of borrowing authority to local government and fiscal sustainability are two issues in permanent tension in public financial management. On the one hand, it is positive to give local authorities room for raising financial resources in order to finance investment and provision of goods and services to local communities. On the other hand, the lack of institutional capacity, history of defaults, and lack of controls pose to the central government an argument to restrict autonomy. In other words, there is a fear that decentralization can weaken fiscal discipline. Therefore, is it possible to built a safe net in order to prevent problems? Can both objectives be met?

A recent article by C.R. Martell entitled "Fiscal Institutions of Brazilian Municipal Borrowing" (Public Administration and Development 28, 30-41; 2008) examines the effectiveness of Brazilian fiscal institutions (constitution, fiscal responsibility law, and borrowing arrangements) in light of 2001 policy recommendations for strengthening efficiency and fiscal discipline in subnational borrowing by means of fiscal policies that encourage efficiency, discipline, and controls.

Cash management -- IMF Technical Guidance Note

Posted by Ian Lienert

Do you manage your own cash well? Can you always pay your bills on time? Do you borrow unnecessarily? Do you have balances in bank accounts that are not receiving the best interest rate? Just as individuals are concerned about managing their cash well, so are governments. In practice, however, not all governments manage cash well. Some countries have unremunerated balances in thousands of bank accounts, yet at the same, they are borrowing from domestic or external creditors at market interest rates. Commercial banks and other purchasers of government bonds are very happy with such arrangements.

A new IMF FAD Technical Guidance Note on Cash Management, prepared by Ian Lienert of the Fiscal Affairs Department, explores how countries can improve their cash management practices and eliminate some of the inefficiencies in current practices. [Download cash_management_guidance_note__lienert_.pdf ]

Is Providing Budget Support to Developing Countries Effective? -- Evaluation of DFID's Direct Budget Support by UK's National Audit Office

Posted by Michel Lazare

One of the main changes in development aid policy over the last decade was the decision made by the international community to move away from project aid in favor of direct budget support. This meant shifting away from aid financing specific projects and disbursed outside of the beneficiary country's public financial management (PFM) system (e.g., money deposited on projects' accounts in the commercial banks) to favor generally unearmarked aid funds directly disbursed using the beneficiary country's  PFM system (e.g., direct budget support deposited on the treasury's account at the central bank).

Evaluation of the efficiency and effectiveness of this new aid policy is a key issue for the international community. Just a few weeks before the upcoming Fourth High Level Forum on Aid Effectivemess to be held in Accra (Ghana), the UK's National Audit Office (NAO) has published, on February 8, 2008, a report evaluating DFID's (the UK's development agency) performance in providing budget support. This report titled: "Department for International Development -- Providing Support to Developing Countries", concludes in a nuanced way:

"Evidence on whether budget support has yielded better value for money than other forms of aid is not conclusive. While budget support has some advantages compared to other forms of aid, it also carries significant risks which need to be better managed."

A Hitchiker's Guide to Budget Classification....

... or how to recognize a budget classification from quite a long ways away.

Posted by Jean-Luc Helis and Davina Jacobs

Why should countries care about budget classification? Who cares about budget classification? These questions appear at first glance to be of concern only to economists doing research on public finance and budgets or to officials in the ministry of finance in a country. However, everyone-from members of parliament or congress and yes, also the proverbial "man in the street", should be interested in budget classification. Properly defined revenues and expenditures give us information on the intimate workings of the budget and government. Do you want to now how much was spent last year on education? Or health? How much company income taxes were collected by the government? To get the answers to these questions, the budget has to be appropriately classified.

Extrabudgetary Funds -- Removing the 'Extra' and Minimizing the Risks

Posted by Bill Dorotinsky

Extra-budgetary funds (EBFs) are a large and persistent issue in developed and developing countries. An October 26, 2007, blog post highlighted the magnitude of such funds, offered a taxonomy of EBFs, and suggested some questions for evaluating them. This post offers a similar perspective, drawing on a draft World Bank policy note prepared for the Polish authorities in 2001.

Public finance professionals generally oppose creation or continuation of 'extra-budgetary funds' because they undermine comprehensive budgeting, fragment financial reporting and cash management, and frequently there are transparency, oversight, and accountability concerns for the EBF's directly. But there are principles that, if followed, can minimize the risks from EBF’s, effectively removing their ‘extra-budgetary’ character.

The Value of PETS

Public Expenditure Tracking Surveys: Detecting Leakages in Public Service Delivery Chains

Posted by Francois Michel

The major argument of the World Development Report 2004 : Making services work for poor people was that developing public services is fundamental for achieving the eight Millennium Development Goals and, beyond, creating conditions for sustainable growth. In addition, the report convincingly showed that the issue was not only one of funding. In most sectors and developing countries, there is a weak association between spending and outputs—more money does not translate directly into better “front-line” services. Associating inputs with outcomes appears to be an even thornier issue.

Public Expenditure Tracking Surveys (PETS) are one of the tools developed by the World Bank to grapple with the issue, as Doris Voorbraak and Kai Kaiser (respectively Senior Public Sector Specialist and Senior Economist, Poverty Reduction and Economic Management, World Bank) presented at an FAD seminar on December 20, 2007 (Download public_expenditure_tracking_surveys.ppt ).

Introducing Financial Management Information Systems in Developing Countries

–  serious delays and limited success

Posted by Pokar Khemani

In the past decade, developing countries have increasingly embarked on major projects to computerize government budgeting, accounting and payment operations, by introducing a financial management information system (FMIS). An October 2005, IMF FAD Working paper, "Introducing Financial Management Information Systems in Developing Countries," by IMF staff Jack Diamond and Pokar Khemani  investigates the reason for serious delays and frequent failure to implement and sustain FMISs in developing countries.

[Click here to donwload Download introducing_financial_management_information_systems_in_developing_countries.DOC ]

The paper starts with a review of the “received wisdom” in implementing these projects, and then analyzes problems in its application in the developing country context to identify key factors to explain why FMIS projects have been so problematic. Based on the identified negative factors, suggestions for addressing them are offered in the hope of improving success rates.

PFM Reform Lessons – Building a Treasury in Indonesia

Posted by Bill Dorotinsky

Public financial management (PFM) is at the center of the development agenda. Sound PFM systems are essential for countries to maintain macrofiscal discipline, achieve national objectives, and use resources efficiently – regardless of the source of financing. Sound PFM systems are an essential component for giving substance to the 2002 Monterrey Consensus (proposal for a new partnership of mutual accountability between countries and development partners), the Paris Declaration on Aid Effectiveness (2005), and for countries to achieve their national objectives and the Millennium Development Goals.

Despite the centrality of PFM, there is still much to learn in terms of improving PFM reform outcomes, building capacity, and strengthening country systems durably. The process of learning what works and how best to support reforms is an on-going effort, with some important lessons emerging (see December 21 post on Mozambique). A recent IMF Survey On-line post on Indonesia cash management reform by FAD staff member Ian Lienert adds to our understanding, providing some useful lessons of PFM reform.

Update on: Public Cash Management and the Subprime Loan Crisis: Be Aware of Financial Investment Risks

Posted by Michel Lazare

Last week, PFM Blog published a post on "Public Cash Management and the Subprime Loan Crisis: Be Aware of Financial Investment Risks."

Since then, PFM Blog learned that limits on cash withdrawals from the Florida investment pool will soon be somewhat relaxed.

The Palm Beach Post reported that "local government officials across Florida were told [on January 3] that by the end of [January] they can expect to freely remove up to 21 percent of their balance from the state-run investment pool that is either frozen or subject to withdrawal penalties."

See the full Palm Beach Post article for further details.

Public Cash Management and the Subprime Loan Crisis: Be Aware of Financial Investment Risks

Posted by Michel Lazare

Effective cash management is one of the basic pillars of sound public financial management. The essence of effective cash management is conservation of cash. This includes minimizing idle cash balances by: (a) keeping on the government's account only the working cash balances needed to face day-to-day routine expenditures and the cash needed to face immediate financial obligations; (b) investing the remaining cash on liquid and interest-earning financial assets.

So far, so good. But, like any other financial investment, investing cash may present risks. A January 1, 2008, article in the New York Times provides a good illustration of the potential risks involved: municipalities in Florida have become victims of the subprime loan crisis.

Automating Public Financial Management Systems for Results

Posted by Bill Dorotinsky

Over the past few decades, governments and development agencies alike have invested enormous financial and human resources into automating public financial management (PFM) systems, and often the results have been less than hoped. Governments have had difficulty implementing systems, and not achieved desired functionality. And development partners have invested large sums of money, only to find systems delayed in implementation, having limited impact, and often with real challenges to the sustainability of the systems. On December 2-4, 2007, the International Consortium of Governmental Financial Management (ICGFM) held a two-day workshop entitled "Use of Financial Management Information Systems (FMIS) to Improve Financial Management and Accountability in the Public Sector".  While the conference title and topic might cause eyes to glaze over with visions of technical issues, the conference was a useful glimpse into current thinking on PFM system automation, and full of practical advice to those concerned with PFM system automation.

Conference presentations from government authorities, international organizations, and consultants covered topics such as how FMIS fits within the over-all PFM reform agenda, planning for FMIS development, FMIS design components, IT alternatives, project management, procurement, and capacity building. The conference program and all the presentations made are available on-line at the ICGFM website under Winter Conference.

Germany: Ministry of Finance's Task Force Recommends Introduction of Performance Budgeting and Accrual Accounting

Posted by Michel Lazare

A few days ago, our FAD colleague and PFM Blog author Marc Robinson published a short article in IMFSurvey Magazine titled "Major Reforms for German Budget System." Here is a summary of the key points; the full text of the article is accessible by clicking here.

The German Ministry of Finance's Budget and Accounting Reform Task Force, who was assisted by staff of FAD, recently recommended "the introduction of product budgets--often known elsewhere as programs. The intention is to focus greater attention in the budget formulation stage on choices about how much money is allocated to" various outputs.

"Under the task force's proposals, the product budgets would not in the first instance be used for parliamentary budget appropriations. The idea is that they would initially be used [...] in formulating the budget. The logical next step would, however, be to shift the annual budget law also onto programmatic basis."

PFM Reforms and Public Expenditure Efficiency: Key PFM Reforms Playing a Role in Effectively Controlling Public Expenditure

Posted by Michel Lazare

There are seven key institutional arrangements for budgeting that play a key role in effectively controlling public expenditures in OECD countries.

This is at least the view presented in 2005 by Jon Blondal (the then Acting Head of the Budgeting and Management Division of the OECD) on the occasion of the 7th Banca d'Italia Workshop on Public Finance. In Jon Blöndal's view, there are three major determinants of the fiscal outcomes of OECD member countries: (1) the general performance of the economy (which is the main driver), (2) the political commitment to fiscal discipline, and (3) the institutional arrangements for budgeting. The presence of the two first factors being insufficient to experience a successful fiscal outcome.

France's National Audit Office ("Cour des Comptes"): 200 years and counting!

Posted by Michel Lazare and Dominique Bouley

On November 5, 2007, the French National Audit Office (La Cour des Comptes) celebrates its 200th anniversary with a re-enactment of its 1807 inaugural session. The current Cour des Comptes was created by Emperor Napoleon I (in a September 16, 1807 law).

Its historical roots are even much older: a royal ordinance in 1256 prescribed that mayors in Normandy had to report their financial accounts to a royal commission once a year; and an institution called chambre des comptes was created in 1303.

Expenditure Commitment Controls, the essence of fiscal discipline – IMF Technical Guidance Note

Posted by Dimitar Radev and Pokar Khemani

Fiscal discipline, one of the key objectives of good public financial management (PFM), requires a well developed expenditure control framework, including at the commitment level, to prevent accumulation of payment arrears. A July 2006 IMF FAD Technical Guidance Note, "Commitment Controls," by FAD staff members Dimitar Radev and Pokar Khemani, provides technical advice on a number of areas related to commitment controls, including objectives, preconditions for successful implementation, and institutional design. These guidelines are intended to apply primarily to IMF operational work and technical assistance but have also implications for the relevant government departments and agencies within national, provincial/state and local jurisdictions.

Budget practices and procedures --- everything you'd want to know about OECD countries

Posted by Bill Dorotinsky

Ever lay sleepless at night, wondering how far in advance of the new fiscal year OECD country legislatures receive the budget from the executive? Or if ministers in OECD countries are allowed to reallocate/vire funds between line items within their responsibility? For PFM specialists and country PFM officials, these can be important guideposts for reform directions.

Well, wonder no more, and sleep peacefully. The OECD just released publicly their Budget Process and Procedures database for 2007, featuring 30 OECD and 8 non-OECD countries. As the OECD web page itself says: "The purpose ... is to provide budget practitioners and academics the opportunity to compare and contrast national budgeting and financial management practices with a view to share experiences and best practices. It is a unique, comprehensive and free resource that covers the entire budget cycle: preparation, approval, execution, accounting and audit, and performance information."

Public Investment: Good Project Management is an Issue of ...Capital Importance

"Unexpected changes to payment schedules related to capital projects can create significant difficulties for finance officers responsible for cash management" remarks Steven R. Kreklow (*) in his short article ("Capital Project Cash Flow Management") of the August 2007 issue of the Government Finance Review, the membership magazine of the US-based Government Finance Officers Association.

This adverse impact on cash management and more generally budget execution can be mitigated by good budget and project management techniques described in Steven R. Krelow's article.