Last week, the print media reported on certain 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 various topics of interest, including public financial management (PFM) and its related components such as revenue management and debt management; sovereign wealth funds; pension systems; monetary 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 to a certain extent 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 concerned with the management of the national budget in its various stages which include design, approval, execution, monitoring, reporting, ex post evaluation and legislative oversight and review. It includes both revenue and expenditure management. PFM has since evolved to cover all aspects of public resources, including resource mobilization, debt management, and linkages to medium- and long-term implications and associated risks. PFM has become an institutional framework or instrument for macro-fiscal policy and analysis and has broadened from pure central government operations to the wider public sector that includes, in the case of Guyana, public corporations, statutory bodies and other agencies in which controlling interest vests in the State.
A key to the understanding of PFM relates to its objectives which are to: (i) maintain a sustainable fiscal position; (ii) effectively allocate resources; (iii) efficiently deliver public goods and services; and (iv) support the above three objectives with transparency, including timeliness, availability and public access to financial information.
Looked at from a macroeconomic perspective, PFM is about fiscal policy, particularly on how levels of taxation and government expenditure affect macroeconomic stability and efficiency as well as economic growth. The central focus is on:
(a) Generating financial resources through taxation and other means;
(b) Allocating such resources in a manner consistent with policies and priorities set out in a strategic framework;
(c) Utilizing the resources in the most economical, efficient and effective manner to achieve expected outputs, outcomes and impact; and
(d) Periodic, full, timely and transparent reporting in all stages of the process.
According to the International Handbook on Public Financial Management, PFM is about designing and implementing well-crafted policies for the use of public funds with the central focus on budgeting for both revenue and expenditure. It is concerned with the laws, organisations, systems and procedures available to governments to secure and use resources effectively, efficiently and transparently. While PFM encompasses taxes and other government revenue, borrowing and debt management, its main focus is on expenditure management. PFM has evolved as an academic discipline due mainly to the increased role of the State in the second half of the 20th century, and more recently because of the 2008 global financial crisis and the need to reinforce fiscal discipline.
Sound PFM systems and practices provide the means for the prudent, accountable, and effective utilisation of public resources. On the other hand, poor PFM systems often result in misallocations, corrupt behaviour, misappropriations, and waste of financial resources.
A sound PFM system involves the whole range of systems and procedures designed to ensure the efficient and effective delivery of a national budget in the context of a strategic framework that outlines priorities of the government over the medium term. Key elements include:
(a) Having adequate procedures in place for allocating 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) Crafting a budget that reflects the above and making it available to all key stakeholders and the public at large;
(c) Presenting the budget in a timely manner to the Legislature for detailed scrutiny, and ensuring legislative approval with appropriate amendments that reflect the merits of well-articulated arguments in favour of any modifications;
(d) Ensuring government departments and agencies execute their budgetary allocations in strict compliance with established procedures, updated from time to time;
(e) Providing for procedures for in-year modifications to budgetary allocations due to unforeseen circumstances, and ensuring strict observations of these procedures;
(f) Maintaining adequate accounting records for actual revenue assessed and collected, expenditure incurred, and assets and liabilities, using the latest information technology tools as well as internationally recognized accounting standards;
(g) Monitoring continuously actual performance vis-à-vis planned performance, identifying variances and taking appropriate measures to bring actual performance in line planned performance, or where it is not possible to do so, modifying planned performance;
(h) In-year and end-of-year reporting of not only of the results of the budget execution but also of all assets and liabilities to ensure full and timely fiscal accountability;
(i) Ensuring best value for money is achieved in terms of outputs, outcomes and impacts;
(j) Independent ex post evaluation and reporting the results to the legislature in a timely manner;
(k) Timely legislative review of the results and using the results of such reviews to take corrective action and to assist in the crafting of the next budget; and
(l) Continuous monitoring of debt obligations to ensure that they are within the prescribed limits.
The above procedures are normally reflected in a general way in the constitutional provisions of a country and elaborated on more fully in its financial and budget laws, related regulations and circular instructions. 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 gained wide acceptance 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, Department for International Development (DFID) and other bilateral donors. Launched in 2005, a total of 549 PFM assessments have been undertaken worldwide as at 31 December 2019. About 60 percent of which were at the national level while the rest were at the sub-national level. Guyana has had two assessments, one in 2007 which is in draft and other in 2019 which is final. Neither of these assessments was made public.
Maintaining a fiscal sustainability
Maintaining fiscal stability to a large extent depends on the state of the Treasury; government’s medium-term objectives; the need to balance expenditure and revenue with a view to minimizing the extent of deficit budgeting; and the level of debt that can be incurred and sustained in the medium- and long-term. A government budget should not be a one-off annual exercise in isolation of medium term budget and expenditure frameworks. Rather, it should be an integral part of such frameworks that include long-term sustainability analysis projections; fiscal risk analyses; consideration of contingent liabilities; fiscal 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 programme effectiveness rather than on historical trends. Each programme, sub-programme and activity must be justified in terms of their outputs, outcomes and impacts within the framework of government priorities. All past programmes should be eliminated 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 formulated. The MTBF is flexible enough to accommodate changes based on past experiences as well as government’s revised priorities.
Efficient provision of public services
The success of PFM depends on the quality of public services rendered. Public servants need to be motivated so as to enable them to rise to the highest level of their potential. They must be fairly treated 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 adequately compensated for their services. The need for a professional and politically neutral public service cannot be over-emphasised. As the authors of the above-mentioned report have stated, ‘[o]ne important element in support of effective PFM is to have an effective public management, especially of staff, by moving away from politically motivated employment’.
Transparency of information
Transparency of information is critical to achieving the objectives of PFM. There should be the highest degree of transparency in the use of public resources, especially in the area of public procurement. The authors refer to fiscal transparency as the clarity, reliability, frequency, timeliness and relevance of fiscal reporting and the openness of government’s policymaking process. They argue that fiscal transparency:
(a) Helps ensure that government’s economic decisions are based on shared assessment of the current fiscal position, costs and benefits of policy changes, and potential risks to the fiscal outlook;
(b) Provides information needed for efficient financial decisions and accountability by the government for fiscal performance and in the use of public resources;
(c) Facilitates external understanding and cooperation on fiscal developments.
Concluding remarks
Despite the best of intentions, PFM is only an instrument and cannot by itself guarantee success in managing public finances. It therefore requires strong political will and commitment to ensure its success in safeguarding public resources and in ensuring enhanced economic and fiscal performance.
Next week we will continue our examination of the above-mentioned IDB report.
