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February 18, 2020

Budget Support and PFM in the Pacific Region

Pacifis;
Posted by Richard Neves and Virginia Horscroft[1]

From 2010 to 2019 direct budget support (DBS) from development partners to Pacific Islands Countries (PICs) has steadily increased not only in value terms but also the numbers involved.   DBS is provided by a variety of bilateral and multilateral partners to all PFTAC’s member countries in one shape or another.

For several countries DBS has been ongoing, thus providing governments with a reliable source of revenue to assist with their budgeting process and ultimately supporting expenditure. 

These financial resources flowing through government systems, avoid the need to create parallel administrative systems for the provision of development assistance. Given the low capacity of many PICs, this is welcome as it avoids a costly proliferation of parallel systems.  A further consideration is how development partners have worked together to pool their financial resources and coordinate the policy actions which are being supported.

The scaling up of DBS the region following the GFC was primarily about providing immediate fiscal support in the face of the expected short-term downturn in domestic revenue mobilization. The initial major focus was to incentivize countries to introduce several reforms aimed at improving PFM systems which would then ultimately lead to improved macro-fiscal outcomes.

Over time, the scope of policy dialogue expanded, and development partners commenced working with PICs to identify a small set of high-priority reforms in a broader range of policy areas that could be implemented in clearly defined stages over the medium term.   At the same time, DBS continued to serve as an effective means to fund the general priorities of the government through national systems, including public investment projects.   

Even with the expansion in scope of the supported policy reforms, in most if not all PICs the reforms have continued to include significant changes to PFM. Often, these PFM reforms may be initially intangible to many stakeholders, but over time they are expected to lead to improved outcomes.  The most common institutional reforms have covered: (i) improving overall macro-fiscal management; and (ii) the introduction of structural reforms.

After ten years, can we see success in the DBS approach?  We would say yes, both from an aid effectiveness point of view and the impact of the policy reforms supported. There are several specific reforms which are very important and which, in the absence of DBS, would have taken longer to implement, if at all. Notable reforms include reforming the management of the sovereign wealth fund (Kiribati), debt management reforms (Samoa), the introduction of a presumptive tax for SMEs (Tonga), restructuring of SOE debt to underpin energy utility reforms (Solomon Islands), legislating to liberalize the telecommunications sector (Kiribati), introduction of fee-free secondary education (Tuvalu), public sector remuneration and performance reforms (Tonga), implementation of disaster-responsive social protection (Fiji), introduction of NCD taxes (Tonga), and disaster-resilience reforms (Samoa).

Improvements in PFM have been slow to materialize, but multiple PEFA assessments conducted over this period have demonstrated a positive trend in PFM outcomes.

Although one should not be quick to say that the requirements in DBS policy matrices have been the only contributing factor towards these improvements, they have played a part. DBS policy matrices in a number of PICs have supported PFM reforms in areas like PFM legislation and regulations, FMIS systems, payroll systems, the chart of accounts, government banking and cash management arrangements, procurement systems, fiscal reporting, external audit, and SOE financial reporting.

DBS has appeared for the most part to have played a key role in helping governments prioritize, sequence and achieve their reform objectives. The fast-disbursing and relatively predictable resources that DBS provides, have been valued, particularly when provided in the context of a fiscal crisis.

There appears to be support for the coordinated approach towards budget support. Reducing the burden on country administrative systems is one positive aspect. Another is a more holistic approach towards the provision of technical assistance and reform advice. In some countries, the support this provides governments for prioritizing a coherent set of reforms has been critical to the success of joint DBS engagements. But even in PICs with strong internal mechanisms for policy development and reform, this more holistic approach by donors helps ensure that all key technical assistance gaps are filled and that countries receive consistent rather than contradictory advice from donors.

Going forward, budget support engagements in the region need to build on their existing strengths while addressing two key challenges. First, finding effective ways to support the step-by-step implementation of previously-adopted reforms, rather than focusing only on new reform areas. Second, moving beyond the lower hanging fruit and identifying effective ways to engage on tougher reform challenges as reform dialogues mature. Depending on the individual country, these tougher reforms might concern expenditure quality, or debt sustainability, or the aggregate tax take. They may require a narrowing of focus of the reform dialogue, since the tougher areas are unlikely to be effectively addressed if the dialogue and support are spread too thinly.

 

[1] Richard Neves is a PFM Advisor in the IMF’s Regional Technical Assistance Center (PFTAC) in Fiji; Virginia Horscroft is a Senior Economist in the World Bank’s office in Sydney, Australia. 

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.

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