Planning and Budgeting in Developing Countries – “Shrinking the P”

Posted by Richard Allen[1]

In most advanced western countries, the use of a national development plan as the primary tool of policy-making died out two generations ago, as it largely did in countries of the former Soviet Union in the early 1990s. However, national development planning continues to be a dominant policy instrument in many low-income and emerging market economies. Similarly, public investment plans (PIPs), which were in vogue in the 1970s, then fell from grace as theories of economic development based on capital accumulation lost influence, are now fashionable once more. What explains these developments? Why is planning deemed useful and relevant for developing countries, but has become outmoded in more advanced countries?

It should be clarified that the planning functions and instruments have not truly disappeared in advanced countries; rather, they have been replaced by other processes and instruments of policy that are judged superior in terms of their flexibility and usefulness. In particular, in the last fifty years, developed countries have developed a broad-based approach to policy analysis and review that is based upon a medium-term expenditure framework (MTEF), program budgets, and performance evaluations. These tools are combined with regular discussion by ministers, often through the cabinet mechanism, of priorities for defense, education and health, social security, agriculture, and other key sector policies and programs.

Fiscal Affairs E-Newsletter, January 2011

 

 

January 2011	Fiscal Affairs Department (FAD) of the International Monetary Fund
Useful Links How to Bake a (Cr)edible Medium-term Fiscal Pie PFM Blog FAD at a Glance Contacts in FAD Previous newsletter     Coming Soon Policy Paper: Macro-Fiscal Implications of Health Care Reforms in Advanced and Emerging Economies Health care reform will be a key fiscal policy challenge in coming years in both advanced and emerging economies. This soon-to-be-published paper provides updated projections of public health spending and options to address the rising public cost of health care, drawing from country experiences in the past several decades.     Publication Updates    IMF Publications •         Getting Debt Under Control    more...   IMF Working Papers •         Restoring Debt Sustainability After Crises: Implications for the Fiscal Mix •         Is Social Spending Procyclical? •         A Historical Debt Database •         Structural Breaks in Fiscal Performance: Did Fiscal Responsibility Laws Have Anything to Do with Them? •         Riding the Roller Coaster: Fiscal Policies of Nonrenewable Resource Exporters in Latin America and the Caribbean •         Post-Crisis Fiscal Policy Priorities for the ASEAN-5 •         A Status Update on Fiscal Exit Strategies •         Macroeconomic Effects of Public Pension Reforms •         Capital Flows, Exchange Rate Flexibility, and the Real Exchange Rate •         Should Advanced Countries Adopt a Fiscal Responsibility Law?    more...   External Publications •         Dynamics of International Integration of Government Securities’ Markets •         Constricted, Lame and Pro-Cyclical? Fiscal Policy in the Euro Area Revisited •         Fiscal Costs of Financial Sector Support: Measures and Implications •         Fiscal Policy and Macroeconomic Stability: New Evidence and Policy Implications    more...   Technical Notes   and Manuals •         Revenue Administration: Developing a Taxpayer Compliance Program<br    more...		Fiscal Monitor Update: Strengthening Fiscal Credibility (January 2011) The first quarterly update of the Fiscal Monitor—published on January 27—assesses recent fiscal developments, which show a greater divergence across countries. Sovereign risks are elevated and have increased in some cases since the publication of the Fiscal Monitor in November. Market pressures remain intense in Europe. Moreover, the U.S. and Japan have adopted new fiscal stimulus measures, slowing the pace of fiscal consolidation in 2011. The underlying fiscal outlook has also weakened in some emerging markets. Heightened market scrutiny and delayed fiscal adjustment make it even more essential for governments to signal clear commitment to long-term sustainability through more robust and specific medium-term consolidation plans. The Update complements the fall 2010 full issue of the Fiscal Monitor, which was presented in November to policymakers, market participants, academics, and the media in Beijing, Brussels, Kampala, London, and Tokyo. The fall 2010 Fiscal Monitor reviewed fiscal and debt market developments in advanced, emerging, and low-income countries with a special focus on the analysis of countries’ medium-term strategies. Special topics included the growth impact of various pension reforms; the fiscal implications of addressing the environmental impact of carbon-based fuels; and how revenues from value-added taxes can be increased. FAD In The News The initial media coverage of the Fiscal Monitor Update publication yesterday has been extensive so far in the United States and Europe, including by Reuters, Bloomberg, AFP, Dow Jones, The Wall Street Journal Online, Xinhua, Agence France Presse, Europa Press, and EFE. Due to the time difference, evidence of media coverage further East was not yet available at the time this newsletter edition was closed. Publication of the November 2010 Fiscal Monitor was widely covered by the media, including articles and newswires by Wall Street Journal Europe, Dow Jones, and Reuters, and interviews of Carlo Cottarelli on CNBC Europe and other networks. The media generally highlighted the projected sharp increase in debt ratios among advanced economies, but also the view that markets might be overreacting due to excessively pessimist sentiment. The blog by O. Blanchard and C. Cottarelli “How to Bake a (Cr)edible Medium-Term Fiscal Pie” also proved popular in the blogosphere, particularly among financial websites and blogs. IMF-Japan High-Level Tax Seminar for Asia and Pacific Countries (Tokyo on January 11–14, 2011) Organized by FAD and the IMF Regional Office for Asia and the Pacific with support from the Japanese Ministry of Finance and attended by academics and officials from 19 Asian countries, this seminar focused on “Tax Policy and Tax Administration Challenges for Restoring Fiscal Sustainability.” The topics covered included fiscal challenges for Asia in the post-crisis world, taxation of the financial sector, tax policy and tax administration options for fiscal sustainability, and resource taxation. The seminar was opened by IMF Deputy Managing Director Mr. Shinohara. Conference on Fragile States FAD and the Overseas Development Institute (ODI) organized a high-level conference on “Accelerating the Transition Out of Fragility: the Role of Finance and Public Financial Management Reforms” (London, November 15–16, 2010). The conference was attended by ministers of finance, government officials, academics, and civil society organizations. The conference focused on the practical and policy aspects of financing fragile states and the associated implications for public financial management. The main conclusions and issues discussed in the conference were summarized in an IMF Survey Magazine article. Large Fiscal Adjustments As advanced economies face major fiscal consolidation needs, a one-day conference organized by FAD analyzed past fiscal adjustment plans and their outcomes. Caroline Atkinson (Director, EXR) chaired a panel discussion comprising Alan Auerbach (UC Berkeley), Carlo Cottarelli (Director, FAD), Carmen Reinhart (Peterson Institute of International Economics), and Vito Tanzi (former Director, FAD). Participants presented case studies based on fiscal adjustment in G-7 countries and a broader cross-country analysis, identifying key factors underlying both failures and successes. The studies will be published as a book, “Chipping Away at Public Debt”(Wiley), in early 2011. Recent Staff Position Notes "Lifting Euro Area Growth: Priorities for Structural Reforms and Governance” by C. Allard and L. Everaert with A. Annett, A. Chopra, J. Escolano, D. Hardy, M. Mühleisen, and B. Yontcheva. The note argues that the euro area needs to make better use of its labor resources and lift productivity in Southern Europe. It proposes a series of product and labor market reforms as well as fiscal initiatives and strengthened governance structures. Recent Working Papers E. Baldacci, S. Gupta, and C. Mulas-Granados discuss the appropriate fiscal policy mix in the aftermath of the “Great Recession” in their Finance & Development article Getting Debt Under Control—a topic they also analyze in their recent Working Paper “Restoring Debt Sustainability after Crises: Implications for the Fiscal Mix.” In “A Status Update on Fiscal Exit Strategies” F. Bornhorst, N. Budina, G. Callegari, A.A. El-Ganainy, R. Gomez Sirera, A. Lemgruber, A. Schaechter, and J.B. Shin, review the medium-term fiscal consolidation plans of 25 countries. In “A Historical Public Debt Database” A.M.A. Abbas, N. Belhocine, A.A. El-Ganainy, and M. Horton compile the first comprehensive historical public debt database (HPDD) covering gross government debt-to-GDP ratios for 174 countries, nearly the entire IMF country membership, and spanning a long time period. The database is publicly available on the Fiscal Monitor webpage. Technical Notes and Manuals "Revenue Administration: Developing a Taxpayer Compliance Program” by B. Russell discusses steps to improve taxpayer compliance through development, implementation, and periodic updating of a taxpayer compliance program. Technical Assistance Activities IMF Launches Two Topical Trust Funds The launch of two new topical trust funds—Managing Natural Resource Wealth (MNRW) and Tax Policy and Administration (TPA)—will help FAD meet a substantial and increasing demand for its capacity building activities. Their launch is a result of a partnership with a number of donors, including: Belgium, Germany, Luxembourg, the Netherlands, Norway, and Switzerland. The trust funds will support low and lower-middle-income member countries’ capacity building to derive maximum benefits from their natural resources and raise domestic revenues. Both trust funds are expected be operational by May 1, 2011. During October– December 2010, FAD provided technical assistance to 37 IMF member countries and multicountry organizations. Career Opportunities The Fiscal Affairs Department (FAD) seeks talented and dedicated professionals with a background in different areas of public finance, to work on macro-fiscal policy issues and to provide technical assistance advice to IMF member countries on public financial management, tax policy reform, revenue administration, and different expenditure policy issues. Vacancies in FAD for staff and long-term expert positions are posted on http://www.imf.org/jobs. FAD also seeks experts who are interested in occasional short-term (2-3 week) assignments; interested candidates may send their CVs to FADexperts@imf.org.
To unsuscribe, send an email to FADUnSubscribe@imf.org For new readers who would like to subscribe to the newsletter, send an email to FADSubscribe@imf.org. Copyright © 2011 International Monetary Fund    All Rights Reserved

 

IMF's Fiscal Monitor Update: Strengthening Fiscal Credibility

 

 On January 27, 2011, the IMF released an update to its flagship publication on fiscal issues: The Fiscal Monitor. We are posting here the beginning of the text of this update titled "Strengthening Fiscal Credibility". We provide at the end of this post, a pdf copy of the full text (and corresponding data tables), as well as a link to the relevant IMF web page.

 

Despite the improving global outlook, the pace of fiscal consolidation this year is slowing in some key countries. The United States and Japan are adopting new stimulus measures and delaying consolidation relative to the pace envisaged in the November 2010 Fiscal Monitor. The underlying fiscal outlook has also weakened in some emerging markets—among them are several that need to build larger fiscal buffers, particularly in the face of surging capital inflows, overheating, and possible contagion from advanced countries. By contrast, advanced economies in Europe are projected to continue tightening policies amid heightened market scrutiny in several countries. Altogether, sovereign risks remain elevated and in some cases have increased since November, underlining the need for more robust and specific medium-term consolidation plans.

Fiscal outturns in 2010 were slightly better than projected, but some large emerging economies underperformed

 
While advanced economies maintained expansionary fiscal policies on average in 2010, outturns were generally slightly better than projected in the November 2010 Fiscal Monitor. Revenue collection exceeded expectations across most major economies—both output growth and, in some countries, the responsiveness of revenues to output were larger than expected—and spending was lower (Table 1). Overall, the average deficit of advanced economies fell compared with 2009 by about 1 percentage point, to about 8 percent of GDP (0.3 percent better than projected). Excluding the impact of growth and financial sector support, the cyclically adjusted balance widened slightly. Deficits in Germany and the United States were lower than in the November Monitor, reflecting good revenue performance and lower spending—due in Germany to the strong labor market and in the United States to some legislative delays in approving spending and lower financial sector support. Euro-area countries that had targeted large fiscal consolidations generally succeeded in posting marked deficit reductions. Meanwhile, advanced economy gross general government debt continued to rise rapidly in 2010, topping 96 percent of GDP.

Jamaicans Make Headway With a Realistic Approach To Treasury Management Reform

Posted by Devon Rowe (Director General – Ministry of Finance of Jamaica) and Eileen Browne (Consultant for CARTAC and IMF Fiscal Affairs Department)

Inroads...

Jamaica has instituted centralized treasury processes that are expected to save J$140,000,000  (or approximately 1.6 mln US $) annually while demonstrating its commitment to continuing migration to modern centralized treasury management using a treasury single account. The changes are high profile – salary and utilities payments for all ministries are to be released directly by the treasurer (the Accountant General in Jamaica), avoiding four days of lost float going to other government bank accounts before issuing paper checks. The transactions cost less, employ more electronic banking, are more transparent and end electricity shut-offs, as well as save money.

Armed with an action plan designed by some of the world’s most respected treasury experts, Jamaica focused on results to design an alternate path to reach its goal. Early in 2010, IMF experts reaffirmed the findings of an EU-sponsored PEFA in 2007: Jamaica’s ambitious reform agenda must begin by getting control over cash.

Accountability Results from a Broad Range of Stakeholders: ICGFM Issues Call for Speakers at its 25th International Conference

Posted by David Nummy, member of the ICGFM Programs Committee and Executive Director at Grant Thornton Global Public Sector.

In this era of social media, rapidly expanding access to a variety of information outlets, greater activism by civil society groups, and a greater demand for results, public sector accountability has grown beyond the traditional institutions that exercised oversight of public expenditure. While auditors and legislative oversight continue to play a key role, anyone with the ability to create or read a blog can be part of the growing intertwined mechanisms to hold government accountable for how it spends public funds and what outcomes result.

The International Consortium on Governmental Financial Management (ICGFM) has issued a call for speakers, panel members, and presentations to be made at its 25^th Annual International Conference which will be held in Miami from May 15-20. The theme of the conference will be: Achieving Real Accountability: A Balancing Act Among Stakeholders.

Gulliver Tied Down by the Lilliputians

Posted by Eric Brintet, Resident Advisor at the IMF’s Technical Assistance Center for Central Africa (AFRITAC Central), based in Libreville, Gabon

When you tell skeptics that you work as a Public Financial Management (PFM) advisor in Africa, you run the risk of an unflattering reaction: “It’s a waste of time! There is no political will for PFM reforms!” To be fair, they may have a point in many countries. The speed of implementation in the PFM area can often be disappointing, sometimes bringing the advisor close to despair (say when you are being stood up for the xth time in a row by the Minister you wanted to meet).

Yet, in these early days of 2011, I want to take up the daunting challenge of conveying a message of hope on this blog and give you food for (positive) thought. So let me use a few examples of how a bottom-up, technical approach can eventually bring the political Gulliver to adopt the best practices painstakingly sponsored by us, PFM Lilliputians.

FAD is Seeking Public Financial Management Advisors

Posted by Marco Cangiano

The Fiscal Affairs Department (FAD) of the International Monetary Fund is looking for qualified candidates to fill positions as Public Financial Management (PFM) Advisors to be based in Africa, Central America, and the Middle East.[1] The initial appointment term would be for a period of one year, on a renewable basis, subject to satisfactory performance.

PFM Performance Measurement Framework -- Revision of Three Indicators

Posted by the PEFA Secretariat

1.  Background and process

The PEFA program has made adjustments to three indicators where experience over the five years since the PFM Performance Measurement Framework was launched has shown that ratings do not always correctly reflect the level of system performance. In June 2010, the PEFA Steering Committee sought comments from any interested party on proposed revisions to:

• PI-2 Composition of expenditure out-turn compared to original approved budget;
• PI-3 Aggregate revenue out-turn compared to original approved budget;
• PI-19 Transparency, competition and complaints mechanisms in procurement;

Comments were received from the PEFA partners, other donor organizations, partner governments, consultants and individuals. Some of the twenty specific comments made more than one point, but none rejected the proposals (and several comments were really discussions emphasizing a particular aspect).

The proposed revisions were tested against data from earlier assessments during the design phase. This was straightforward for PIs 2 and 3, but more difficult for PI-19 (as the new rating criteria specify evidence that was not required in earlier assessments): however, the revised indicator produces results that are compatible with those obtained from the OECD DAC ‘Methodology for Assessing Procurement Systems’ tool, as had been intended.

The PEFA Steering Committee has approved final versions of three revised indicators for use. The Steering Committee wishes to bring these revised indicators into use as soon as is practicable, which may mean that some assessments currently underway are able to use them. However, all Concept Notes/Terms of Reference for proposed assessments issued after 28 February 2011 should refer to use of the revised indicators.

Structural Breaks in Fiscal Performance: Did Fiscal Responsibility Laws Have Anything to do With Them?

By Carlos Caceres (IMF), Ana Corbacho (IADB, ex-IMF), and Leandro Medina (IMF),

Fiscal Responsibility Laws (FRLs) are permanent institutional devices that aim to enhance the credibility, predictability, and transparency of fiscal policy. They generally combine procedural rules to strengthen fiscal transparency and budget management, with numerical fiscal rules such as ceilings on fiscal deficits and public debt to impose fiscal discipline. In contrast to standalone fiscal rules, FRLs seek to provide a comprehensive framework to govern fiscal policy in a single piece of legislation.

FRLs are a relatively new fiscal institution and their empirical effects on fiscal performance remain to be documented and analyzed systematically. New Zealand was at the forefront of these reforms, adopting an FRL in 1994. Since then, FRLs have been implemented in several countries in Latin America, Europe, and Asia. In some countries, FRLs seem to have signaled a regime change towards fiscal responsibility. In other countries, fiscal performance has not shown meaningful improvement, also due to implementation problems.

In a recent IMF Working Paper, we study whether there was a structural break in fiscal performance following the adoption of an FRL, measured as an improvement in the level or the volatility of fiscal balances after the adoption of the law. Our sample covers a wide ranging group of Latin American and advanced economies. The empirical model controls for the effect of business and commodity cycles to capture changes in fiscal performance beyond those explained by economic conditions.

IMF Job Offer: PFTAC Urgently Seeking Two PFM Advisors

Posted by Xavier Rame

The IMF’s Fiscal Affairs Department is looking for up to two Public Financial Management (PFM) specialists to fill Resident Advisor positions at the Pacific Financial Technical Assistance Center (PFTAC), based in Suva, Fiji. The appointment term would be for a period of one year, on a renewable basis, subject to satisfactory performance.

The advisors’ work will cover all aspects of PFM including legal and regulatory environment; budget preparation; budget execution; internal control and audit; fiscal reporting, accounting, and treasury management; it may include using the PEFA Performance Measurement Framework.

Parliamentary Budget Powers: Should Korea Adopt Practices of the United States Congress?

Posted by Ian Lienert

 In early December 2010 I had the privilege of speaking to staff of the world’s second-largest parliamentary budget office in Seoul, Korea. My topic was “Role of the Legislature in Budget Processes—An International Perspective”. Using a 2005 IMF Working Paper, I indicated that the budgetary powers of Korea’s National Assembly are positioned at about the average for OECD countries. I then asked a leading question: Should the Korean National Assembly be given more budgetary power or should there be little change from present institutional arrangements?

Dr. Ilho Yoo, the first discussant, and Member of the National Assembly, argued strongly for more budgetary powers for the legislature, taking into consideration the finding that the United States Congress has very strong budgetary authority. I cautioned against an approach that imitates many of the legislative budgetary practices of the U.S. Other “presidential” countries, such as Brazil, may have better congressional budgetary procedures and therefore be more worthy to examine closely.

Basics First: Developing Accounting and Financial Reporting in Liberia

Posted by Camille Karamaga; IMF PFM Advisor, Ministry of Finance, Liberia

The Government of Liberia started improving its budgetary classifications with the modernization of the economic or object classification for the FY 2007/08 budget.The former Bureau of the Budget introduced new economic classifications for the budget, based on the GFS 2001 framework under a USAID funded project. This reform marked a major improvement over the previous fiscal years, with a greater level of analytical detail for both revenues and expenditures. Since then, the Ministry of Finance (MoF) has been producing quarterly and annual reports of expenditure and revenues on a cash basis. To date, these reports do not include any statements of assets and liabilities, even as annexes. Transactions are recorded against the administrative and object classifications of the budget, with no accounting codes for the other key elements contributing towards producing a comprehensive set of financial statements for Government—assets, liabilities, and reserves. In effect the government operates a single entry accounting system, which does not allow for reconciliation of accounts. The inability of government to produce timely and reliable financial statements poses a serious challenge for a satisfactory review of government finances by Liberian institutions and public as well as the country’s development partners.

The Top Ten Blog Posts of 2010

Posted by Holger van Eden

On behalf of the staff of the Public Financial Management Divisions I and II of the IMF’s Fiscal Affairs Department, I would like to wish our readers—budget and treasury officials from around the around the world,  PFM practitioners, our dear colleagues from the World Bank, students and academics, and counterparts in the donor community—a happy and prosperous New Year. The list of blog posts below presents the best read posts published in 2010 on the PFM Blog. A post by Michel Lazare on our department’s new flagship publication, the IMF Fiscal Monitor, drove the most web traffic last year. This reflects the prominent position the Fiscal Monitor has achieved in a relatively short time span next to other significant IMF publications such as the World Economic Outlook. Among the other posts a significant number focus on government accounting. The ongoing discussion on the extent to which accrual accounting should be integrated into PFM practices is still raising much interest it seems. For the PFM Blog itself 2010 was a very good year. We passed the half million pages viewed since our start-up three years ago. The readership grew with a healthy 31 percent per year. We hope that our readers will continue using the Blog in the coming year as an information source and discussion medium on PFM issues, and we invite readers to share their insights and experience through own postings.