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November 05, 2020

Building Strong PFM Foundations to Support Resilient Recovery

Covid
Posted by Bonnie Ann Sirois[1]

The IMF recently reported that a whopping $9 trillion of fiscal support has been deployed globally during the COVID-19 crisis. Direct budget support is estimated at $4.4 trillion, and additional public sector loans and equity injections, guarantees, and other quasi-fiscal operations amount to another $4.6 trillion.[2]  Advanced and emerging market economies account for the vast majority of this support, while about $1 trillion is directed toward developing economies.

However, many economies simply don’t have the financial architecture to track and report the use of these funds and related commitments. Never has there been a time when the fundamental need for reliable financial reporting in the public sector has been so apparent and the challenges to achieve transparency so great. The global nature of the COVID-19 crisis and the sheer magnitude of fiscal support being deployed exacerbates this challenge both in scope and in scale. Just as a hurricane reveals the structural weaknesses of buildings in its path, COVID-19 has highlighted the weak architecture of fiscal reporting in many countries’ PFM functions.

Many developing countries use cash basis or cash-like systems for accounting and reporting.  Charts of accounts (CoA) are rudimentary, often without modern coding structures that capture essential elements of spending transactions such as the funding source, projects, activities, and programs. The use of technology in these systems tends to be nascent, fragmented, and suboptimal.  Government Finance Statistics (GFS) reports, which are accrual based, are put together with much supplemental data gathering, analysis and crosswalk tables. The government’s financial statements, prepared for accountability purposes, are often based on budget execution reports rather than internationally recognized financial reporting frameworks.  Though subject to audit, the information provided therein is often limited to cash in, cash out. In most developing countries, there is little or no information on the huge assets and liabilities controlled by the state.

In the absence of an established and reliable accrual accounting system, countries often fall back on bespoke and oftentimes manual systems to track and report COVID-19 related expenditures and commitments. These solutions, if properly employed, may help attain a degree of budget tracking and debt transparency.  Nevertheless, they only serve to highlight the critical need to improve the underlying architecture of PFM systems. Without a stable foundation, PFM systems - just like buildings - are prone to faults and other structural weaknesses. When compounded with the dynamic force of a natural disaster or pandemic, the systems will not carry the weight of the structures they are intended to support.

A comprehensive accrual-based accounting system based on IPSAS and supported by a unified CoA allows for seamless preparation of GFS estimates, budget execution reports, and (ultimately in advanced systems) whole of government financial statements. Such reports use a single reliable data source and provide valuable information for debt management and disclosure.  They capture all reliable financial estimates of present and future economic benefits and obligations on a consistent basis. Further, they can provide a wide variety of information that would otherwise not necessarily be captured, such as derivative financial instruments, guarantees of unconsolidated debt, and the fair value of debt obligations (as well as disclosing the face value).

A recent survey[3] indicated that 65% of countries intend to publish their accounts on an accrual-basis in the next five years, primarily using the IPSAS methodology. Building strong PFM foundations are especially important to inform decision making, provide accountability, and enable an effective response to the present crisis.  From where we stand now, five years in the future seems light years away. When that time comes and COVID-19 is (hopefully) nothing more than a memory, will we be able to look back and see the all the good work done with that $9 trillion of fiscal support?  Or will we look back and say…  so, where did all the money go?

This article is part of a series related to the Coronavirus Crisis. All of our articles covering the topic can be found on our PFM Blog Coronavirus Articles page.

 

[1] Senior Governance Specialist – Financial Management, World Bank.

[2] Tracking the $9 Trillion Global Fiscal Support to Fight COVID-19, IMF Blog, May 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.

[3] https://www.ifac.org/system/files/uploads/IFAC/IFAC-CIPFA-Public-Sector-Index-2018-Status.pdf

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