Fragile States Need Better Local Financial Management

Conference held in London with countries and donors to discuss fragile states

More transparent, accountable government budgets needed to improve economic conditions

Countries’ ownership of effective reforms key to absorption of donor funds

The role of development finance and public financial management reform to help fragile states to achieve stability and sustainable growth was the focus of the 6^th annual Centre for Aid and Public Expenditure (CAPE) conference in London in November, co-hosted by the IMF’s Fiscal Affairs Department and the Overseas Development Institute (ODI) of the United Kingdom.

Buy-in for reforms from a wide range of stakeholders in the country is key, as are less complex procurement procedures that still provide transparency and accountability to donors, the participants said. As many of these countries strengthen their democracies, the role of parliaments in the budget process is increasingly important.

Individual country needs and circumstances also should be understood to get finance flowing, according to participants.

While a country’s status as a fragile state remains open for debate, as a group they share some basic characteristics, such as very low domestic revenue, few human resources available to help develop the economy, and a lack of physical infrastructure, such as good roads and power grids. Many have also been affected by armed conflict and suffer from poor performance caused by weak institutions.

Ministers of finance from Afghanistan, Liberia, Sierra Leone, and Timor-Leste attended the conference along with representatives from the Democratic Republic of Congo, Haiti, Kosovo, Solomon Islands, Tajikistan, West Bank & Gaza, Zimbabwe, donor organizations including the African Development Bank and World Bank, academia, and civil society organizations.

Government deficits on decline in low-income countries

In general, low-income countries weathered the global economic crisis thanks to good policies and reforms that were begun before the worst recession in 80 years spread around the world in 2008.

According to the latest issue of the IMF’s Fiscal Monitor, deficits in low-income countries are expected to decline this year and next, after expanding rapidly in 2009 when fiscal policy was loosened in response to the global crisis.

More accountability, less repeating history

With as many views as participants at the conference, a consensus was developed around three key areas of work to help...