Country PFM Systems — Monitoring Performance and Lessons for Reform

Bill Dorotinsky

December 10, 2007

Lessons from IMF-World Bank work with HIPCs, 2001-2005

Posted by Bill Dorotinsky

One of the many developments in public financial management (PFM) over the past several years, one of the more interesting was in the field of monitoring PFM system performance over time. From 2001-2005, the IMF and World Bank developed and applied a new instrument for assessing country PFM systems and monitoring their development over time. The work was undertaken in the context of Highly-Indebted Poor Country (HIPC) debt relief, and covered 26 countries in Africa and Latin America.

The work is worth highlighting  for many reasons, not least of which are the approach used, the tool itself, and the lessons that emerged for PFM reform. This post summarizes the instrument and results of this work, especially important lessons for PFM reform, and subsequent posts will summarize more recent developments in this field.

The work was documented in several joint IMF-World Bank Board papers, including

These papers can be downloaded by clicking on the links above.

The HIPC AAP (Assessment and Action Plan) instrument

The indicators were developed specifically for HIPC countries, particularly on the ability of their PFM systems to track and report on the use of public funds, including funds released through HIPC debt relief. Other instruments in use by donors either attempted to audit selected transactions and then generalize to the over-all country PFM system, or followed a think-description approach to describe PFM system procedures, laws, and operations. While some effort was made to link PFM systems to outcomes at a broad level (for example, in World Bank Public Expenditure Reviews), it was still difficult to gauge over-all PFM system performance or track progress over time. Reading numerous such reports for any given country over many years, rarely would two reports mention the same PFM issues, and assessing actual progress in system operation over time was simply not possible.

The HIPC AAP approach identified 16 critical points in the PFM system that, if functioning well, would imply that a country could track and report on spending with a reasonable degree of reliability. If these critical elements were weak, there was little likelihood spending could be reported reliably. So what was new was a systems approach, identification of some critical PFM system elements, and the ability to monitor changes in these elements over time.

Hipc_indicator_table_3 A summary of the 16 indicators, and the performance goal for each, is reproduced here (click on the image to enlarge), from page 7 of the 2005 joint Fund-Bank Board paper cited above. Details of the indicators, and guidance on their application, can be found in the Fund-Bank Staff Guidance.

In addition to reporting on the indicator results, the Bank-Fund work also developed with countries and collected information on country PFM action plan implementation and number of technical assistance providers actively supporting PFM reforms in country. Together this information provided a unique set of data, and some interesting conclusions.

The results through 2005

The general results, reported in the 2005 Board paper cited above, were encouraging.

Individual country reports from the 2004 assessment exercise are publicly available on the World Bank Public Finance website.

For individual PFM indicators, by 2005,

The results suggested that countries can make progress in improving their PFM systems, and the progress could be monitored over time.

Broader Lessons

Some of the most interesting results, while included in the paper, did not receive that much attention given the focus on over-all PFM system progress among the countries. These points can be summarized as:

The lessons of the HIPC work noted above, as well as lessons of PFM reform from the IMF, World Bank, and other donors, were used to develop the Strengthened Approach to PFM reform and associated PEFA (Public Expenditure and Financial Accountability) indicators. The HIPC indicators were formally no longer applied by the IMF and Bank as of the 2005 Board paper, in favor of the PEFA indicators. A future post will highlight the PEFA program, the Strengthened Approach and PEFA performance monitoring framework. For those who cannot wait, see the PEFA website.