Public Financial Management Reform: Trends and Lessons Bill Dorotinsky Fiscal Affairs Department IMF ICGFM June 18, 2008 Washington, D.C.

2 Outline Orientation –Objectives of PFM –PFM Cycle Popular Reforms Recent Reform Trends Observations

3 Objectives of PFM and Budgeting Three-level PFM Framework Macrofiscal discipline Strategic allocation of resources Technical efficiency Source: Public Expenditure Handbook World Bank (1998) Three functions of Government and budgeting Strategic Planning Management Control Operational Control Source: Planning and Control Systems: A Framework for Analysis. Robert Anthony (Boston, 1965)

4 Planning system Medium term plans, e.g. three year rolling plans Annual budgets Development, recurrent and revenue Fund release procedure, e.g... warranting Accounting for revenue and expenditure Public expenditure review Institutions Reports and financial statements Audit system Project monitoring Project appraisal Resource allocation Liquidity management Expenditure control Monitoring & controlling Post event review Accountability Expenditure review Financial management system boundaries Source: Adapted from Integrated Financial Management. Michael Parry, International Management Consultants Limited. Training Workshop on Government Budgeting in Developing Countries. THE UNITED NATIONS. December Expenditure Management Cycle

5 Popular Reforms Macrofiscal Discipline Strategic Allocation Operational Efficiency Medium-Term Expenditure Frameworks  Performance, Program budgeting  IFMIS, automation  Fiscal Responsibility Laws  Treasury Single Account  Budget classification, chart of account  Reporting/ Transparency  Procurement  Internal control/audit  External audit  Accrual Accounting??? Recommended reforms generally try to change incentives to better meet objectives by changing rules, roles and information

6 And other popular themes …. Anti-corruption –Anti-corruption commissions Decentralization Deconcentration Demand-side –Legislative oversight, involvement –Civil society oversight, participation Sovereign wealth funds Public-Private Partnerships Monitoring and Evaluation Sectoral measures (e.g. road funds) Long-term planning Debt sustainability analysis

7 Anglophone OECD Model? Changing role of MoF –From control to monitoring/oversight and advisory role –Risk management: analysis of emerging issues, problems, and health of decision-making and finance system –From excessive budget detail to policy analysis and development –Shifting authority and accountability towards line ministries Emphasizing MoF training and guidance Performance over compliance New Public Management –Separating policy from implementation –Contractual relationships, agency model Empowering line ministries for efficiency –Caution: advanced industrial economies, to solve efficiency problems, not macrofiscal stability or sectoral allocation issues; good control structures, high transparency

8 And other practices ….. Fragmenting MoF –Separate debt agency –Separate procurement function –Separate treasury –Separate budget –Separate revenue authority –Separate planning and policy processes (persistent state rather than trend) All tend to weaken the MoF –Effect on financial management unclear –Frequently done to improve pay or improve independence

9 Budget Formulation LIC* (35) LMIC* (33) UMIC* (13) MT Fiscal Framework 29%45% 31% MT Expenditure Framework 37%39% 46% Performance/Program Budgeting 23%15%38% Capital-Investment Bdgts 9%21%23% Recent Reform Emphasis Different drivers of reforms confuse the picture. Which are donor-driven? Which country driven? Which address real need? Which are simply fashionable? If higher income enables more self-direction, interesting that performance budgeting of greater interest in upper-middle income countries. * 2006 gross national income (GNI) per capita. The groups are: low income (LIC) US$905 or less; lower middle income (LMIC) US$906–3,595; upper middle income (UMIC) US$3,596–11,115.

10 Budget Execution LIC (35) LMIC (33) UMIC (13) Treasury/Cash management51%36%31% Commitment controls26%18%15% Debt management11%18%8% Accounting/classi fication40%42%23% Payroll/Personnel17%9%15% Internal audit/control11%12%na Procurement14%12% na Recent Reform Emphasis

11 Other Reforms LIC (35) LMIC (33) UMIC (13) IFMIS49%36%23% MoF Reorganization3%18%8% Budget Law/Legal26%36%23% Transparency20%30%15% PPPs3%21%15% Decentralization26%15%23% Recent Reform Emphasis

12 Observations LICs struggle to get basics in place –Do advanced reforms may detract from this objective? LMICs and UMICs frequently struggle to overcome legacy systems Recently, slight movement away from larger reforms, towards pragmatic reforms linked to country problems –IFMIS to FMIS –Unbundling MTEFs, better sequencing Challenges remain on –Holistic views of PFM systems, focus on weakest links –Sequencing reforms –Limiting adverse impact of supply-push, transplanting of advanced reforms to weak environments –Realistic time horizons –Redefining ownership as helping the country solve practical financial management challenges simply, directly –Right-sizing reforms, measures