COVID-19: IMF Notes on Fiscal Issues

The IMF has published a series of notes in its Special Series on COVID-19. The notes discuss PFM issues and other fiscal topics. The Special Series notes are produced by IMF experts to help member countries address the economic effects of COVID-19.

 In addition, you can find all of the PFM Blog articles covering the COVID-19 crisis  on our PFM Blog Coronavirus Articles page.

Analysing Financial Bottlenecks in the Social Sectors

By Nicholas Travis, Manisha Marulasiddappa and Tim Cammack [1]

There is increasing recognition by practitioners that PFM systems have an important role to play in supporting service delivery outcomes. This is reflected by a recent conference on the topic and has accelerated as a result of Covid-19, with numerous articles published on the importance of budget flexibility, particularly in the health sector.

The focus on service delivery outcomes represents a welcome shift towards a more developmental approach to designing PFM reforms. However, the complexity of service delivery makes it difficult to pinpoint specific PFM components that are most relevant to sectoral goals.

To overcome these challenges, recent diagnostic studies have attempted to identify and assess financial bottlenecks (FBNs) which inhibit service delivery. Our recently published working paper explores this approach in detail based on recent experience in Myanmar.

The methodology seeks to understand how PFM systems inhibit the transformation of financial inputs into sector outputs. The identification of FBNs depends on two criteria: (i) their significance for the delivery of sector outputs; and (ii) the extent to which they can be resolved by improvements in financial management. Figure 1 explains these criteria further with application to the education sector. Critically, FBNs are not defined by the typical measures of value-for-money (i.e., efficiency, effectiveness and equity) but by the underlying causes of why such outcomes may be suboptimal. For instance, time-consuming procurement processes that result in inefficiencies in school construction.

Figure 1: Identifying financial bottlenecks in the education sector – a suggested typology (click on the figure for a better image resolution)

In practice, there are many possible FBNs and it is often difficult to quantify their impact on service delivery. For example, is excessive rigidity in virement rules a more significant bottleneck than the absence of a medium-term budgeting perspective? The challenge for assessors is to develop a manageable list of bottlenecks using the criteria above and to identify solutions that generate ownership among key stakeholders. The matrix in Figure 2 below may be helpful in achieving this. It distinguishes FBNs by understanding the extent to which the agency has control over them, making the resulting reform action plan more realistic.

Figure 2: Prioritising FBNs according to their relative ease of resolution (click on the figure for a better image resolution)

The key contribution of FBN studies is their emphasis on the nexus between financial management and sector outputs. This explicitly problem-driven and bottom-up approach demands intensive engagement with stakeholders at central and sub-national level to analyse the functionality of the PFM system as viewed by budget users. The end goal is improvements in service delivery rather than in financial management. Furthermore, the depth of analysis needed to verify and prioritise FBNs requires extensive stakeholder consultation, enhancing buy-in to the resulting action plan. As such, the approach shares many of the characteristics of contemporary methods such as Problem-Driven Iterative Adaptation (PDIA).

FBN studies focus on underlying systemic problems that impact service delivery. They can, therefore, serve as a complement to Public Expenditure Reviews (PERs) which focus more on the efficiency and effectiveness of resource use. Also, FBN studies with their demand-driven approach to identifying bottlenecks and solutions may be more welcome than tools such as Public Expenditure Tracking Surveys (PETS) which have a relatively narrow focus.

Our experience in Myanmar identified several unresolved methodological issues:

• First, how can we define ‘financial bottleneck’ in order to maximise the value added by the FBN method? The focus on budgetary systems seems appropriate, but what about related systems that impact value-for-money? For instance, human resource management systems that impact the efficiency of salary expenditure. An agreed definition is needed if the term is to be the lynchpin of an effective diagnostic.

• Second, what determines the ‘significant outputs’ for a sector to create a starting point for the identification of FBNs? Is there a consensus amongst sector specialists about which outputs are critical to outcomes? How should these be ranked?

• Third, how do we judge which PFM weaknesses are the most important for outputs? Some, such as short releases of funding, are relatively straightforward. But what of those weaknesses whose impact on sectoral outputs is indirect, such as failures in reporting or internal controls?

• Fourth, how can we address FBNs not identified by budget users themselves? These might include the lack of a results focus in the budget; or an absence of transparency/accountability. What is the appropriate trade-off between a problem-driven and top-down approach?

• Finally, do we need to accept that FBN studies cannot cover all potential issues? A sector-wide search for FBNs requires extensive research. Should studies focus just on particularly troublesome sectoral issues? Or perhaps the method should limit itself to problems that are actionable by the sector ministry alone?

Resolving these challenges will clarify the purpose and method of the FBN approach. However, our experience in Myanmar suggests they do add significant value, particularly in generating greater awareness of PFM challenges among sector officials and in securing ownership of reforms. It also suggests that the approach is replicable across countries and sectors, as the methodology is flexible enough to accommodate differing levels of emphasis and customisation. FBN studies may have most value when prepared together with sector policy specialists, human resource management experts and others.

 

[1] The authors are all Associate Consultants in Public Finance for Oxford Policy Management.

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.

Cash Management has Helped Manage the COVID-19 Crisis in Georgia

Posted by David Gamkrelidze[1]

The expression “cash is the king” becomes even more relevant during times of high uncertainty. Georgia’s response to COVID outbreak is recognized as one of the most efficient worldwide. The emergency response measures have included support to the health sector, businesses and vulnerable households; and spending to repatriate Georgian Citizens from abroad and to shelter thousands of quarantined people. The Ministry of Finance did a great deal of mobilizing donor funding. And the Treasury’s role in ensuring that enough cash is available to fund the emergency measures was critical.

4 Simple Steps to Implement Beneficial Ownership Under COVID-19

Posted by Thom Townsend^[1]

At least ten countries, including Gabon, Nigeria and Pakistan have committed to the IMF in the context of the coronavirus response to disclose the beneficial owners of contracts awarded to companies. The task now is to ensure these commitments are implemented effectively.

PFM Legal Responses to the Pandemic – Be Fast, but Wise

Posted by Ozlem Aydin Sakrak, Alessandro Gullo and Karla Vasquez[1]

Amid the unprecedented disruption brought by the pandemic, many countries have swiftly adopted legislation to preserve their economies. The crisis is testing how PFM legal frameworks can strike the right balance between the two key principles– flexibility and accountability. Fast legislative action is necessary to mobilize funds expeditiously. On the other hand, proper checks and balances between the legislative and the executive should be maintained to prevent irregular fiscal practices and to adequately account for the use of the funds that are mobilized.

How to Manage and Measure the Risks of Government Guarantees

Posted by Lilia Razlog, Tim Irwin, and Chris Marrison[1]

The World Bank has just published two papers on government guarantees that may be of interest to the PFM community. The first sets out a checklist of ideas to consider when reviewing a government’s framework for managing guarantees. The second shows how scenario analysis (stress testing) can help governments quantify the guarantees’ risks.

Expenditure Arrears and the COVID-19 Pandemic

Posted by Paul Seeds and Suzanne Flynn[1]

During the global financial crisis (2008) and the Ebola crisis in West Africa (2014) spending arrears presented significant problems. In Sierra Leone, after the Ebola crisis, arrears rose from 1 percent of expenditures to over 17 percent in 2016[2]. The 2008 crisis demonstrated that the accumulation of arrears can be a problem in advanced economies, such as Portugal, Greece, Spain, and Italy. Similar issues arise today. As the COVID-19 pandemic develops and downturns in economies deepen, many countries are setting their budgets for the upcoming fiscal year without fully recognizing the risk of substantial revenue shortfalls and escalating spending arrears. Enhanced diligence on the part of Ministries of Finance can mitigate the risk of burgeoning arrears.

Is Cash Still King?

Posted by Sagé de Clerck[1]

"Pensioners without pensions. Schools without students. Wells without water. These are just a few human consequences that can result – and do result – when governments don’t have the financial information necessary to make the best long-term decisions for their citizens."

Three proposals for Mineral-Dependent Countries during the COVID Crisis

Posted by Andrew Bauer[1]

COVID-19 containment measures have hit economies hard—and with them, government revenues.  Most natural resource-dependent countries are experiencing a double shock as their main source of foreign currency has crashed along with fiscal revenues. The situation is most severe in oil-dependent countries; oil prices have declined by more than 60 percent on average since the start of the year. Mineral-dependent countries have been affected too, but in more surprising ways.

Nigeria’s Targeted Credit Facility for COVID–19

 
Posted by Chukwuemeka O. ONYIMADU[1]

The world economy is enduring a staggering downturn amidst the spread of COVID-19. Individuals and corporate organizations are already suffering from immediate losses of income, profits and employment status. The downturn has had a particularly harsh impact on workers in unstable and informal types of employment. The imposed economic slowdown has left many workers and entrepreneurs confined to their homes. In many developing countries, the nature of the labor market constrains the ability of these people to earn income.

No Calm after the Storm: Retooling PFM in the Health Sector

Posted by Helene Barroy, Srinivas Gurazada, Moritz Piatti-Fünfkirchen, and Joseph Kutzin[1]

The country response to COVID-19 has been extensively studied from a fiscal perspective. The speed and effectiveness of each country’s health response has varied widely, often due to pre-existing weaknesses and bottlenecks in their public financial management (PFM) systems. To better understand how PFM processes supported the allocation and utilization of public funds for the health response, the World Health Organization (WHO) conducted a quick review of 183 countries. Five key learning points are emerging: