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August 06, 2020

Ensuring Better PFM Outcomes from Countries’ FMIS

FMIS-blog
Posted by Moritz Piatti-Fünfkirchen, Ali Hashim, and Khuram Farooq[1]

Ensuring efficiency and continuity of service delivery in a fiscally sustainable environment is critical for budget management generally and especially in providing an effective response to COVID-19. An efficient Financial Management Information System (FMIS) is central to this. It allows line ministries that deliver key public services to spend their allocated budget in an expedited manner whilst ensuring that budget rules are complied with. Despite substantial FMIS investments in recent years, many countries still face challenges in achieving these twin objectives.

A recent World Bank Discussion Paper[2] synthesizes the available literature and explores what it might take for FMIS systems to lead to tangible PFM improvements. The paper offers a set of practical suggestions to address issues that have been found to be critical for success or failure of the various phases of FMIS design  and implementation. These recommendations relate to identifying and correcting issues in the policy and institutional framework for FMIS, political economy questions, training and change management, the sequencing of implementation, and procurement. The paper also presents a candid discussion of the pros and cons of customized systems and products that are available off-the shelf. A dedicated annex contains a survey with questions for practitioners to review their current FMIS processes and identify improvements or modifications that may be required.

A central argument in the paper is that utilization of the core budget execution functionality[3] in the FMIS in conjunction with wide budget coverage should facilitate adequate expenditure control. If these two conditions are met, the FMIS should support prudent fiscal behavior by only allowing transactions to proceed if they have been budgeted for and funds are available.

The authors analyze FMIS utilization patterns in several countries (and states in federal settings) and find large differences. Countries or states that use their FMIS to process individual payments to suppliers and other beneficiaries, rather than transferring funds to bank accounts from which payments are then transacted outside of the system, can expect the FMIS to contribute to better PFM outcomes. A policy of bringing more FMIS transactions within the payments net can therefore bring significant benefits.

The analysis of the transaction profiles in an FMIS reveals that in many countries relatively few transactions (less than 10% of the total number) make up most of the spending (typically more than 85% of the total amount processed). At the same time, low value transactions typically make up more than half of the transactions processed, yet their cumulative amount remains very low (approximately 1-2% of total spending). Therefore, to facilitate better expenditure control and service delivery through FMIS investment the paper recommends that:

  • Targeting the high value transactions in the deployment of the FMIS, and ensuring that they represent individual payments and not bulk transfers, will mean that most of the expenditure is subjected to rigorous internal control. This should strengthen fiscal discipline.
  • A purposeful decision to subject low-value transactions to less stringent (but still adequate) controls than high-value transactions would provide spending agencies with easier access to small amounts of money without compromising overall fiscal control or accountability. This would preempt a situation where health clinics or schools struggle to access small amounts of funds in a timely manner because of excessively rigid controls and would assist in improving service delivery. Such an approach also has relevance in the COVID-19 environment when governments give priority to releasing money rapidly for emergency needs.
  • Such payments can be routed via a “green corridor” in the FMIS with less stringent ex- ante payment controls. However, they can be subjected to ex-post controls, and disbursed through innovative FinTech products such as mobile money or smart cards.[4] This approach can be informed by a data analysis of the expenditure transaction profile to determinate a low-value threshold for spending transactions so that the country’s overall “exposure or risk” from processing these transactions can be minimized.

 

[1]  Moritz Piatti-Fünfkirchen is a Senior Economist, Ali Hashim a former Lead Treasury Systems Specialist and Khuram Farooq a Senior Financial Management Specialist at the World Bank.

[2] Hashim, Ali, Khuram Farooq, and Moritz Piatti-Fünfkirchen. 2020. "Ensuring Better PFM Outcomes with FMIS Investments: An Operational Guidance Note for FMIS Project Teams Designing and Implementing FMIS Solutions." The World Bank, 2020.

[3] A useful description of core functionalities is provided by Uña, G., R. Allen, and N. Botton, "How to Design a Financial Management Information System; a Modular Approach". International Monetary Fund, 2019.

[4] A more detailed discussion on how to use FinTech solutions in FMIS deployment to facilitate service delivery is provided in Piatti-Fünfkirchen et al (2019) or Uña et al (2020).

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.

Comments

Excellent ideas! The prospect of moving away from a "one size fits all" mentality and providing less stringent, alternative channels for the bulk of low value transactions can have a significant impact on red-tapism and bring process efficiencies as well. It can also help improve the responsiveness of service delivery.

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