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December 2010

December 30, 2010

A Wealth of Information

Posted by Tim Irwin

The US federal government has recently issued its financial report for the year ending September 2010. As in earlier years, the report fails to get a clean bill of health from its auditor, the GAO (and on a superficial note isn’t typeset and formatted with the care that might be thought appropriate for the report of the world’s largest reporting entity). But it is also extremely impressive for the kind of information it contains, including—among much else—an accrual-based measure of the fiscal deficit to supplement the mainly cash-based budget measures, a balance sheet, and a statement of social insurance, showing an estimate of the net present cost of projected cash flows for Social Security and Medicare. For the first time, the report also includes comprehensive 75-year fiscal projections, which take account of not just social insurance but all government spending and revenue.

As for the numbers, the accrual deficit is $2.1 trillion, compared to $1.4 trillion for the cash-based budget deficit. Net worth is a negative $13.5 trillion, compared with negative $11.5 trillion the year before. The estimated net present cost of social insurance (on which GAO this year declined to express an opinion) is $30.8 trillion, a reduction of $15.0 trillion compared to the previous year—“much of this decrease” being “attributable to the estimated effects of the Affordable Care Act (ACA) on the Medicare program.” There is much to analyze and discuss in this report in the coming months.

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December 28, 2010

Earmarking in Central American Countries

Posted by Juan-Ramon Ruiz

Earmarking is a very common PFM practice in Latin American countries. In Central America it has caused extensive problems for the management of public resources. Earmarking is the practice of assigning revenue, generally through statute or constitutional clauses, from specific taxes or general revenue, to specific government activities or areas. Earmarks are often defined as fixed percentages of general revenues or GDP. In Central America earmarks are used to finance areas like education, road maintenance and sports, but also to assign resources to autonomous entities, such as the judiciary, universities and local governments. The base used to determine earmarks in these countries is usually linked to internal revenues, or the amount collected from certain taxes, as the Value Added Tax,  taxes derived from petroleum, sin taxes (on alcohol and tobacco), or gaming taxes. The table below presents an overview of important earmarks in a number of Central American countries, including the share of the budget which is determined by earmarks.   

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December 23, 2010

IPSAS Board Issues Conceptual Framework for Public Sector Financial Reporting

Posted by Abdul Khan

As part of its project to develop a conceptual framework for general purpose financial reporting by public sector entities, the International Public Sector Accounting Standards Board (IPSASB) recently issued the attached exposure draft (ED) [here] and four consultation papers (CPs) [here, here, here and here] for comments from interested parties. The ED deals with:

• Role, Authority and Scope of the conceptual framework;
• Objectives and Users of general purpose financial reports (GPFR) in the public sector;
• Qualitative Characteristics of, and constraints on, information included in GPFR; and
• The definition and use of the concept of Reporting Entity and the Group Reporting Entity.

The two CPs deal with, respectively:

• definition and recognition of the elements of financial statements; and
• measurement of assets and liabilities in financial statements.

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December 21, 2010

Korea Hosts International Workshop on Fiscal Policy Issues

Posted by Ian Lienert

Against the backdrop of a severe fiscal crisis in some European countries, the Korean Institute of Public Finance (KIPF) hosted an International Fiscal Experts Forum in early December 2010. A major aim was to promote an exchange of views on fiscal policy issues, countries’ responses to the crisis, and relevant issues for Korea. The workshop brought together a number of prominent speakers, scholars, and practitioners from various countries. The topics covered included: fiscal policies after the crisis, budget performance management, accrual accounting, the impact of the crisis on subnational governments, and recent issues in legal frameworks for budget systems.

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December 17, 2010

Fiscal Stimulus, Aussie style

Posted by Jason Harris[1]

The Australian economy escaped from the global financial crisis relatively unscathed. Growth continued almost unabated, the unemployment rate topped out at only 5.8 per cent, and there was no significant loss of productive capacity. In fact, even while the crisis continues, Australia’s major economic challenges centre around managing an economy at full-employment with emerging inflationary pressures and dealing with the structural changes associated with a resurgent terms of trade, issues that many other economies would look upon with envy.

One of the key factors behind this is the aggressiveness of the fiscal stimulus adopted in response to the crisis. This post will focus on the make-up and design of the fiscal stimulus, which was very much in alignment with the IMF’s adage of timely, targeted, and temporary. Going into the crisis, Australia could have been considered a prime candidate for collateral damage.  With a large current account deficit, and heavy reliance on global capital markets for wholesale bank financing, Australia was exposed to the freezing of financial markets. Further, as the crisis developed, there was a sharp slowdown amongst Australia’s major trading partners, and a large decline in the hitherto booming terms of trade.  But Australia avoided the sharp contractions experienced by most other advanced economies.  With the exception of one quarter of slightly negative growth, GDP continued to grow throughout 2008 and 2009.

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December 15, 2010

Fanning Out The Risk: Assessing Fiscal Sustainability Under Uncertainty in Indonesia

Posted by Nina Budina

Indonesia’s public debt outlook is stronger than in many advanced and emerging economies. Nevertheless, Indonesia, like many other emerging economies with relatively low debt levels, is still exposed to shocks. Increased volatility in macroeconomic variables has the potential to increase uncertainty around projected public debt paths. For example, recent econometric evidence suggest that higher debt levels in advanced countries are likely to be accompanied by higher long˗term real interest rates, which could adversely affect emerging markets financing conditions.[1] In Indonesia, like in many oil exporting countries, volatile natural resource revenue can further add to vulnerabilities and risks. Finally, with rising fuel consumption, volatile oil prices, and oil production uncertainties, delaying subsidy reforms could also increase fiscal risks in the future. The attached paper presents considerations for a medium-term fiscal strategy in Indonesia, aimed at maintaining sustainability, while managing uncertainties and risks.

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December 13, 2010

Elements of a New CARTAC TA Program Designed to Help Strengthen Debt Strategy and Management Capacity in Member States

Posted by Michel Marion, Macro-Fiscal Advisor, and Michele Robinson, Debt Management Consultant, CARTAC

Caribbean countries are among the most heavily-indebted, middle-income countries in the world.  Indeed, more than half of the ten most heavily-indebted, middle-income countries in the world are Caribbean countries.  In addition, for many of the moderately indebted countries in the region, the weaker economic performance which accompanied the global recession and financial crisis has led to a worsening of debt indicators. The trend in the region has been towards higher debt burdens and worrying levels of debt to GDP.

The IMF’s regional technical assistance center in Barbados, CARTAC, has been supporting members’ efforts to strengthen their capacity to formulate and execute sound debt management strategies for some time through two distinct paths. TA has been provided to members in the preparation of target-based Medium-Term Fiscal Frameworks and Debt Sustainability Assessments. These two outputs combined to help fiscal authorities determine if they are on a sustainable fiscal path, which is the foundation of a sound debt strategy and prudent debt management. CARTAC has also been assisting members in a second, and more indirect way:  sponsoring the participation of representatives of member states at events put on by the Inter-American Development Bank for Debt Office managers operating in the Caribbean and Latin American regions, which has provided members a venue to network with their counterpart, compare experiences and learn about the capital markets environment they are operating in and about good regional practices.

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December 10, 2010

The “Accounting First” Approach to PFM Reform Sequencing: The Case of the Democratic Republic of Congo

Posted by Franck Bessette

In a recent and much commented on PFM blog post, Sanjay Vani introduced what could be called the “Accounting First” approach to PFM reform sequencing. The naming is a reference to the widely-known “Basics First” approach to PFM sequencing originated by Allen Schick. The “Accounting First” hypothesis is this: NO significant PFM reforms are likely to succeed unless a robust and functioning accounting and reporting system is in place. This approach is bound to be controversial as there is a strong body of opinion among PFM experts that the budget formulation process is the core of any well-functioning PFM system, as it necessitates high value inputs, strategic thinking and coordination between various actors, and constitutes the channel through which policies have a chance to be implemented. In comparison, public accounting is often considered a low-value activity, passive by nature and void of any strategic function. It is even sometimes considered that some good software could take care of it all. In 1995, A. Premchand could write “although government accounting has existed for more than two millennia, it has not received its due. In fact, accounting has been looked down upon and viewed by nonusers as a set of archaic rules that have long since ceased to be relevant or effective.” This viewpoint is probably still prevalent today.

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December 08, 2010

PFM Reform – A Messy Process!

Posted by Peter Murphy

Change processes—in society, business, or at the personal level—are often messy and experience suggests that the area of Public Financial Management Reform is no exception. Technical reform strategies and methodologies can guide reforms but more essential is that they are grounded in the situational and institutional context. Contingency theory[1] tells us that organizations are bounded social entities, constituted by a number of overlapping internal sub-systems that interact with the external environment with the objective of delivering a specific range of goods and services. Public sector organizations bring their own complexity (adherence to bureaucratic norms, multiple levels of decision-making, accountabilities and stakeholders, and the influence of politics) and different national cultures further add to complexity.

However, whether in stable or crises situations, the debate on prescriptions for strengthening PFM in developing countries, continues to focus primarily on the incremental evolution of the legal and technical systems framework of PFM, with fairly limited attention (typically in the area of skills development) being given to context, situational analysis, organizational factors, and building change management capacity. The current PFM reform dialogue appears to be focused on the relative merits of particular technical approaches (e.g., MTEF, Program Budgeting, and IFMIS development), sequencing options (e.g., return to basics first, weakest link, platforms approach) or the merits of various technical diagnostic instruments (PEFA). There is little doubt that these techniques and methodologies represent important instruments for the PFM reform toolkit, but in reality they are not enough, perhaps not even the most crucial part of the reform process. 

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December 07, 2010

Consultants Needed for Country Case Studies: Joint Evaluation of Public Financial Management Reform in Selected African Countries

The evaluation departments of two Nordic international development agencies, DANIDA (Denmark) and SIDA (Sweden), and the AfDB (African Development Bank) are seeking consultants to undertake country case studies in Burkina Faso, Ghana, and Malawi on the reform of public financial management systems, the results achieved, the role played by donors, and other institutional and contextual factors that may contribute to or hinder PFM reform outcomes. 

Terms of Reference and details of the tender can be found at the SIDA website.

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.

December 03, 2010

The PEFA Framework: 5 Years of Implementation, A Stocktaking

by Frans Ronsholt[1] and Charles Seibert[2]

Pefa logo 
Last month, the PEFA program, which this blog has already referenced on various occasions, celebrated Five Years of Successful Implementation of the PEFA Framework by hosting a reception in Washington DC, timed to coincide with the World Bank/IMF Annual Meetings to allow delegates to participate. Part of the celebration included the roll out of a new brochure available on the PEFA website. Apart from an overview of some of our activities, it contains some success stories on PEFA applications (Zambia, Norway, India, and Mozambique).

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December 01, 2010

What Do Public Financial Management Assessments Tell Us About PFM Reform?

Posted by Ian Lienert

What do we know about the factors affecting the quality of PFM reforms? Is it possible to measure the quality of the PFM system as a whole? If these questions can be answered, what are the implications for the design of a country-specific PFM reform? And how would donors that support PFM reforms benefit from such knowledge?

In a Background Note of the Overseas Development Institute (ODI), authors Edward Hedger and Paolo de Renzio grapple with these questions by analyzing PFM assessments. Although the available data do not yet allow unambiguous operational guidance for the design and implementation of PFM reform programs, existing evidence confirms the validity of certain approaches and measures.

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Elephants, Blind Men, and the Problems of Specialization in PFM

Posted by David Gentry

Everyone has heard of the Indian fable of the blind men and the elephant. The blind men touch different parts of the animal and draw very different conclusions on what they are facing from that part. The 19th century American poet John Godfrey Saxe popularized the legend in the West through his poem of the same name. The legend was applied metaphorically to describe public debates of the time on religion, which the last stanza of the poem makes explicit:

So oft in theologic wars,
The disputants, I ween,
Rail on in utter ignorance
Of what each other mean,
And prate about an Elephant
Not one of them has seen!

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