Low-income Countries need to Upgrade Financial Management

• Author: Richard Allen/Duncan Last
• Position: IMF Fiscal Affairs Department
• Pages: 170-171

Page 170

Sound fiscal institutions and public financial management (PFM) systems are essential if low-income countries are to benefit from scaled-up aid. Weaknesses in PFM systems can undermine budgetary planning, execution, and reporting; reduce fiscal transparency; and result in leakage of scarce public resources. Low-income countries, particularly those that will benefit from scaled-up aid, should prepare an action plan for strengthening their PFM systems.

Weaknesses in existing PFM systems

Public financial management comprises the institutional framework, systems, and procedures that govern the preparation, execution, and reporting of the budget.

PFM systems in most low-income countries require substantial upgrading, and in many cases have not improved significantly in recent years: Assessments and action plans prepared jointly by the World Bank and the IMF for 23 heavily indebted poor countries in 2001 and for 26 in 2004 provided the first opportunity for periodic PFM assessments to measure progress over time. Nineteen of the 26 countries were assessed as still requiring substantial upgrading (see Chart 1). Budget execution and the ability of countries to track poverty-reducing expenditures were especially weak.

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Assessments under the multipartner Public Expenditure and Financial Accountability (PEFA) Program, in which the IMF participates, suggest a similar pattern of relatively poor performance in key areas of budget preparation and execution.

Countries assessed in seven budget categories showed a median score of around 2.0 against the international good practice standard of 4.0 (see Chart 2).

Recent evaluations of the IMF's technical assistance activities in low-income countries reached a similar conclusion.

One evaluation concluded that in many countries, budget plans were based on unrealistic assumptions, were not comprehensive, and lacked a medium-term focus; accounting and payments systems and other areas of budget execution were weak; budgetary institutions were fragmented; and broader institutional problems such as weak legislative oversight and poor accountability of senior budget officials were common. In some countries reviewed, civil conflict had added to these problems. Countries that are emerging from conflicts or have suffered major disasters face special...