Transcript The Challenge of Reforming Budgetary

The Challenge of Reforming Budgetary
Institutions in Developing Countries
Richard Allen
Fiscal Affairs Department
Presentation to AFR, October 22, 2009
Why strong budgetary institutions are
important …
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Enhance efficiency of public spending
Promote transparency and enhance governance
Allocate budgetary resources to priority economic
and social areas
Exit from current crisis: unwinding stimulus
measures, restraining deficits, and reducing debt
Public sector resource management
and accountability is by far the most
widely featured category in LIC
program conditionality
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Sound budgetary institutions support
sustainable and credible
fiscal/expenditure policies by …
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Robust macroeconomic and fiscal
forecasting that helps eliminate “optimism
bias” in budget planning
Effective medium-term fiscal/budget
frameworks linking short-term objectives
with medium-term resource availability
Comprehensive legislative oversight
Credible fiscal reporting and timely
information on fiscal risks
And facilitate the work of AFR country
teams by …
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Providing reliable fiscal data, improved
coverage , and capacity to understand where
fiscal problems may arise
Allowing authorities and country teams to
analyze better the causes of fiscal problems
and explore policy options
Substantial evidence that budgetary
institutions in LICs are very weak
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Following two slides illustrate data from an
ongoing study by SPR/FAD/AFR on budget
institutions and fiscal performance in lowincome countries
This study has attempted to construct an
index for measuring the quality of budget
institutions (47 LICs and 28 emerging market
countries)
The data come from PEFA assessments,
fiscal ROSCs, OECD, FAD and other sources
Rating of PFM Systems: Sub-Saharan Africa vs. Rest of LICs
1.2
1.1
1.0
0.9
Average Score
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
Budget Planning and Negotiation
Budget Approval
Sub-Saharan Africa
* Score for each criterion ranges from 0 (lowest) to 2 (highest).
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Budget Implementation
Other LICs
Rating of PFM Systems: Sub-Saharan Africa vs. Other LICs
1.4
1.3
1.2
1.1
1.0
Average Score
0.9
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0.0
Centralization
Rules and Controls
Sustainability and
Credibility
Sub-Saharan Africa
* Score for each criterion ranges from 0 (lowest) to 2 (highest).
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Comprehensiveness
Other LICs
Transparency
And little evidence that budget
institutions are getting stronger
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HIPC (2000-2004) and PEFA data (since 2005)
not conclusive
Some relative success stories, e.g.,
Botswana, Liberia, Mozambique, Namibia,
but these are few, and will progress be
maintained as donor support is withdrawn?
Also progress in some of the shining stars of
the 1990s, e.g., Ghana, Tanzania, Uganda has
flattened out or reversed
Some technical areas of the budget
system (e.g., classification, accounting)
may be easier to reform than others
(e.g., budget allocations, TSA) directly
affected by rent-seeking and patronage
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Evidence from FAD TA suggests that
revenue administration is often easier
to upgrade than expenditure side of the
budget
Historical evidence confirms that
reforming budgetary institutions is a
very slow process ….
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Selected Dates in the Development of Budget Systems:
France, the United Kingdom, and the United States*
France
The United Kingdom
The United States (Federal)
1791: Accounting Office
reporting to parliament
1787: Consolidated Fund
Established
1776: Treasury Office of Accounts established 1809: Appropriations
Act (modified in 1870 and 1874)
1807: Independent “Cour des
comptes”
1866: Exchequer and Audit
Departments Act (established
modern budgeting and
accounting system)
1887–89: Consolidated accounting, bookkeeping, reporting
procedures (Cockrill Commission)
1814–1819: First Restoration—
Baron Louis’ reforms
1862: Imperial decree on rules
for budgeting and treasury
single
Account
__________________
1959: Medium-term budget
framework for investments
1866: Comptroller and Auditor
General established
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1960s: Public Expenditure
Survey (PES) and Program
Assessment Review (PAR)
1980s: Next Steps Program
1968: “Rationalisation des
choix budgetaires” (RCB)
1990s: Comprehensive
multiannual budgeting
2001–06: Program budgeting
1991: Citizen’s Charter
From 2006: Accrual accounting
1998: Public Service
Agreements
2008: Full medium-term
expenditure framework (MTEF)
1894: “Dockery Act” established Comptroller of the Treasury;
consolidated annual statement of revenues and expenditures
1921: Budgeting and Accounting Act established Bureau of the
Budget and General Accounting Office
1940: Consolidation of uniform standards and procedures for
accounting and reporting
1950: Accounting and Auditing Act
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1982: Federal Managers Financial Integrity Act
1990: Chief Financial Officers Act
1993: Government Performance and Results Act
1994: Government Management Reform Act
2000–04: Resource (accrual)
budgeting
* Measures that established the basic framework of accounting and budgeting are shown above the line; items shown below the line
are subsequent (“new wave”) reforms.
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Other evidence of slow progress is
quoted in my Working Paper, e.g., World
Bank Economic Development Reports
from 1950s and 1960s identify similar
problem areas of PFM compared to
recent FAD TA reports and World Bank
diagnostic assessments
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Why is reform so difficult?
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Political economy factors are dominant
– see North (1991) and North, Wallis
and Weingast (2006).
Incentives for change are weak
Most AFR countries are at a similar
position in developing their budgetary
institutions as now advanced counties
150-200 years ago.
In addition, there are technical reasons
why the budget is especially difficult to
reform ….
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The budget is a prime source of rent-seeking and political
patronage
Ministries of finance are typically quite weak in most lowincome countries
Ministries of planning often have more weight than MoF
Central banks often responsible for macrofiscal functions
The annual budget competes with the national plan and the
PRSP as the primary policy statement of government
Lots of off-budget accounts and funds
Responsibilities for preparing and implementing capital
investment and recurrent budgets are often divided (“dual
budgeting”)
Donor aid is frequently off-budget, and poorly coordinated
Donors and the international community
are often part of the problem rather than
part of the solution ….
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Conflicted incentives - loan driven culture that oversells the
possibility of rapid reform
Failure to learn from lessons of the past
Territorialism – competition between donors to divide up the TA
cake
Weak evaluation and follow-up on implementation of TA
recommendations
Recipient governments often play one donor off against the
other in order to gain access to generous loan finance with few
strings attached
Paris Declaration (2005) and Accra Agenda for Action push
countries (and donors) to use country PFM systems before
they are ready
And medium-term PFM reform plans are
not well suited to the needs of recipient
countries…
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Far too complex, too many measures – e.g.,
“platform approach” in Uganda and Kenya
Over-mechanistic approach, with too much weight
placed on PEFA scores
Unrealistically short time frame for implementation
Insufficient focus on political economy factors
Little attention to building local capacity (as opposed
to filing key line positions with expensive
international consultants)
A better approach might include the
following elements:
Focus on the ultimate goals of budget reform
 Avoid complex designs (however seemingly intelligent) –
adaptation and evolution are the key concepts
 Avoid importing solutions from advanced countries that don’t
fit LICs
 Choosing rather than sequencing is the right approach
But, for each individual reform sequencing IS important
 Focus on Schick’s half-forgotten notion of “getting the basics
right” (1998)
 Don’t let donors (and high paid consultants) run the show, they
should be servants not masters
 Follow-up by monitoring and evaluating outcomes, and hold
officials to account for success/failure of reform initiatives
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Getting the Basics Right (Illustrative)
Initiative
Budget calendar
Budget classification
MTFF
Cash planning
Control of arrears
Comprehensive data
on donor aid
Unified budget law
TSA
Independent external
audit
Transparency, EITI
Core fiscal risks
(guarantees, PPPs)
GFMIS
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Years 1-2
Years 3-5
Years 6-X
But note that …
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None of these basic elements should be as
sophisticated as in a developed country
Sequencing the basics is actually quite complex, and
will need many years to complete – “X” in the
diagram could be 10, 20 or more years.
Some reforms, e.g., MTEF, TSA, external audit, may
never be fully completed for political economy
reasons
Enabling reforms need to take place in parallel, e.g,
civil service, consolidating planning and finance
functions, rule of law, strengthening local capacity
And what should (generally) NOT be
included in a reform action plan for an
LIC …
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MTEF (MTFF however IS among the basics) –
existing MTEFs in AFR countries have not been
successful
Fiscal rules/FRL without MTFF
Accrual accounting and accrual budgeting
Performance-related or program budgets, except in
rudimentary form, e.g., tracking PRSP spending
State-of-the-art fiscal risk analysis (but record
guarantees, main contingent liabilities, etc.)
Fiscal decentralization (unless supported by strong
central oversight and control)
Thank you!
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