Last week, the print media reported on some aspects of the recently released Inter-American Development Bank (IDB) report as they relate to Guyana. The report, entitled “Economic Institutions for a Resilient Carib-Bean”, contains 12 chapters covering topics of variable interest, including public financial management (PFM) and its related components such as revenue management and debt management; sovereign wealth funds; pension systems; financial policies; and financial regulations and supervision. (See https://publications.iadb.org/publications/english/document/Economic-Institutions-for-a-Resilient-Caribbean.pdf.)
Today’s article focuses on the important topic of public financial management, drawing in part on the contents of Chapter 3 of the above report as well as our views based on our experience on the subject.
PFM in perspective
Traditionally, PFM has been involved in managing the national budget in its various stages which include designing, approving, implementing, monitoring, reporting, ex post evaluation and overseeing and reviewing legislation. It includes revenue and expenditure management. Since then, PFM has evolved to cover all aspects of public resources, including resource mobilization, debt management, and links to medium and long-term implications and associated risks. PFM has become an institutional framework or tool for macro-fiscal policy and analysis and has expanded from pure central government operations to the wider public sector which includes, in the case of Guyana, public corporations, statutory bodies and agencies others in whom interest management vests. in the State.
A key to understanding PFM relates to its objectives of: (i) maintaining a sustainable financial position; (ii) the effective allocation of resources; (iii) efficient delivery of public goods and services; and (iv) support the above three objectives with transparency, including timeliness, availability and public access to financial information.
Viewed from a macroeconomic perspective, PFM is concerned with fiscal policy, particularly on how taxation and government spending levels affect macroeconomic stability and efficiency as well as economic growth. The central focus is on:
(a) Generate financial resources through taxation and other means;
(b) Allocate such resources in a manner consistent with policies and priorities set out in a strategic framework;
(c) Use the resources most economically, efficiently and effectively to achieve the expected outputs, outcomes and impact; a
(d) Periodic, full, timely and transparent reporting at all stages of the process.
According to the International Handbook on Public Financial Management, PFM is concerned with designing and implementing sound policies for the use of public funds with the central focus on budgeting for revenue and expenditure. It is concerned with the laws, institutions, systems and procedures available to governments to secure, use and use resources effectively, efficiently and transparently. While PFM covers taxes and other government revenues, borrowing and debt management, its primary focus is on spending control. PFM has evolved as an academic discipline largely due to the increasing role of the State in the second half of the 20th century, and more recently due to the 2008 global financial crisis and the need to strengthen financial discipline.
Robust PFM systems and practices provide a means for prudent, accountable and effective use of public resources. On the other hand, poor PFM systems often lead to misallocations, corrupt behavior, malpractice, and wasted financial resources.
A robust PFM system includes the whole range of systems and procedures designed to ensure the efficient and effective delivery of a national budget within the context of a strategic framework that outlines government priorities over the term medium. Key elements include:
(a) To have adequate procedures in place for the allocation of resources consistent with government policy objectives and priorities within the framework of a medium and long term plan, and through meaningful consultations with all key stakeholders;
(b) Draw up a budget that reflects the above and make it available to all key stakeholders and the general public;
(c) Timely submission of the budget to the Legislature for detailed scrutiny, and securing legislative approval with appropriate amendments reflecting the merits of articulated arguments in favor of any modifications;
(d) To ensure that government departments and agencies implement their budget allocations in strict compliance with established procedures, which are updated from time to time;
(e) Provide for procedures for in-year adjustments to budgetary allocations due to unforeseen circumstances, and ensure strict observance of these procedures;
(f) To maintain adequate accounting records for actual assessed and collected revenue, expenditure incurred, and assets and liabilities, using the latest information technology equipment as well as internationally recognized accounting standards;
(e) Continually monitor actual actual performance against planned performance, identify variances and take appropriate measures to bring actual performance in line with planned performance, or where it is not possible to modify planned performance;
(f) To report during the year and year-end not only the results of the implementation of the budget but also of all assets and liabilities to ensure full and timely fiscal accountability;
(i) Ensuring that best value for money is achieved in terms of outputs, outcomes and impacts;
(g) Evaluating independent ex post and reporting the results to the legislature in a timely manner;
(k) A timely legislative review of the results and use of the results of such reviews to take corrective action and assist in the creation of the next budget; a
(h) To continuously monitor debt obligations to ensure they are within the prescribed limits.
The above procedures are generally reflected in a country’s constitutional provisions and are more fully elaborated in its financial and budgetary laws, related regulations and recurring directions. In some countries, there are audit laws that guide the work of the legislative auditor.
PFM assessment tools
There are several tools that can be used to assess the effectiveness of a PFM system. The one that has been widely accepted over the last decade or so is the PEFA Performance Measurement Framework, developed by the World Bank and the International Monetary Fund (IMF), in conjunction with the EU, the Department for International Development. (DFID) and other bilateral. donors. Launched in 2005, a total of 549 PFM assessments were conducted worldwide as of December 31, 2019. About 60 percent of them were at the national level while the rest were at the sub-national level. Guyana has had two assessments, one in 2007 in draft and another in 2019 which is final. None of these assessments were made public.
Maintaining financial sustainability
Maintaining fiscal stability is largely dependent on the state of the Treasury; medium-term government objectives; the need to balance expenditure and revenue with a view to reducing the size of deficit budgeting; and the level of debt that can be paid and sustained in the medium to long term. The government budget should not be a one-off annual exercise apart from medium-term budgets and spending frameworks. Rather, it should be an integral part of such frameworks that include long-term sustainability analysis projections; financial risk analyzes; consider contingent liabilities; financial projections and evaluations; fiscal rules; and an appropriate accounting and financial reporting framework based on international best practice.
Effective allocation of resources
Public resources should be allocated based on documented evidence of program effectiveness rather than historical trends. All programs, sub-programs and activities must be justified in terms of their outputs, outcomes and impacts within the framework of government priorities. All past programs should be deleted if their continuation cannot be justified. It is a form of zero-based budgeting rather than an incremental one.
The use of a medium term budget framework (MTBF) will facilitate such an approach. Out of the MTBF, the annual budget is drawn up. The MTBF is flexible enough to accommodate changes based on past experiences as well as revised government priorities.
Efficient delivery of public services
The success of PFM depends on the quality of public services provided. Public servants need to be incentivized to enable them to rise to their highest potential. They must be treated fairly in terms of opportunities for their elevation as well as for training, and their remuneration packages must be such that they feel satisfied that they are being adequately compensated for their services. The need for a politically neutral professional and public service cannot be overstated. As the authors of the above report have noted, ‘[o]another important element in supporting effective PFM is to have effective public management, especially staff, by moving away from politically motivated employment ‘.
Transparency of information
Transparency of information is essential to achieving the objectives of PFM. Transparency should have the highest level of use of public resources, particularly in public procurement. The authors refer to fiscal transparency as clarity, reliability, frequency, timeliness and relevance of fiscal reporting and the openness of government policy-making. They argue that fiscal transparency:
(a) Helps ensure that government economic decisions are based on a joint assessment of the current financial position, the costs and benefits of policy changes, and potential risks to the fiscal outlook;
(b) Provides information needed for efficient financial decisions and government accountability for fiscal performance and the use of public resources;
(c) Facilitate external understanding and co-operation on financial developments.
Despite the best intentions, PFM is only a tool and cannot in itself guarantee success in managing public finances. It therefore requires strong political will and commitment to ensure its success in protecting public resources and in securing better economic and fiscal performance.
Next week we will continue our audit of the IDB report above.