Public Financial Management Reform:

Trends and Lessons

Bill DorotinskyFiscal Affairs Department

IMF

ICGFM

June 18, 2008

Washington, D.C.

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Outline

• Orientation– Objectives of PFM– PFM Cycle

• Popular Reforms

• Recent Reform Trends

• Observations

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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)

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Planningsystem

Medium termplans, e.g. three

year rolling plans

Annual budgetsDevelopment,recurrent and

revenue

Fund releaseprocedure, e.g...

warranting

Accounting forrevenue andexpenditure

Public expenditurereview Institutions

Reports andfinancial statements

Audit system

Project monitoring

Projectappraisal

Resourceallocation

Liquidity

managem

ent

Expen

ditur

e

contr

ol

Monitoring

& controlling

Post eventreview

Accountability

Expenditurereview

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 1997.

Expenditure Management Cycle

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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

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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

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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

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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

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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.

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Budget Execution

LIC(35)

LMIC(33)

UMIC(13)

Treasury/Cash management 51% 36% 31%

Commitment controls 26% 18% 15%

Debt management 11% 18% 8%

Accounting/classification 40% 42% 23%

Payroll/Personnel 17% 9% 15%

Internal audit/control 11% 12% na

Procurement 14% 12% na

Recent Reform Emphasis

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Other Reforms

LIC(35)

LMIC(33)

UMIC(13)

IFMIS 49% 36% 23%

MoF Reorganization 3% 18% 8%

Budget Law/Legal 26% 36% 23%

Transparency 20% 30% 15%

PPPs 3% 21% 15%

Decentralization 26% 15% 23%

Recent Reform Emphasis

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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