New Index Measures Strength of Budget Institutions

SUMMARY

IMF economists have devised a new index to measure the effectiveness of budget institutions in low-income countries, which could point to ways to strengthen budget processes and improve fiscal performance in these countries.

 
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The Budget Institutions Index, outlined in an IMF Working Paper, measures the institutions of low-income countries across the entire budget process from planning and negotiation, through approval, to implementation. Those institutions are assessed against a list of wide-ranging criteria that measure key characteristics of the budget process.

"The strength of this index is that, while building on existing indicators such as the Public Expenditure and Financial Accountability framework and other budget databases, it is broader in scope than others that have come before it. It captures the complex and multifaceted nature of the budget process," said Era Dabla-Norris, one of the coauthors of the report.

"The index provides a simple and effective tool for benchmarking low-income countries against each other and against other country groups," she added.

The criteria contained within the index reflect many of the specific characteristics of the budget process in low-income countries The criteria are used to determine, for example, the comprehensiveness of budget coverage, as measured by inclusion of information on donor-financed projects, and the size of off-budget expenditures; the degree of centralization of budgetary decision-making; whether the budget is subject to effective rules and operational controls; the ability of the legislature to scrutinize the budget; and whether there is an effective system of internal and external audit.

Differences in budget institutions

A total of 72 low- and middle-income countries were assessed against the criteria. Despite significant differences between economies at similar stages of development, the authors find that transition economies, and countries in the Latin America and Caribbean region, have relatively more developed budget institutions than countries in other regions.

Budget institutions in sub-Saharan Africa were particularly weak in areas of budget planning and implementation, reflecting fewer checks and balances in the budget process, and less public dissemination of information on the budget. Overall, budget institutions in low-income countries were significantly weaker than in middle-income countries.

"Weak capacity, poor institutions of civil society, and political economy factors act as a severe constraint on the progress of modernizing budget institutions in many low-income countries," said Richard Allen, a coauthor...

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