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International Monetary Fund

This Selected Issues paper reviews how Australia’s economy has adapted to a flexible Australian Dollar. The paper provides a background on the float and the initial policy challenges. It discusses the main elements of the Future Fund proposal, and estimates how much Australia and other countries in the Asia-Pacific region would gain from greater financial integration. The results suggest that these welfare gains are large, giving an argument in favor of a progressive capital account liberalization across the region, once the needed supporting measures are in place.

Mr. Jack Diamond

Abstract

With increasing frequency, the IMF has assisted middle-income countries, especially emerging economies, in adopting the types of budget reforms that have been introduced in many Organization for Economic Cooperation and Development (OECD) countries - reforms that emphasize performance and results achieved from the use of public resources. This paper examines the experience of OECD countries in introducing such reforms and assesses whether the same reform strategy be applied to non-OECD countries. It examines how emerging economies should begin such reforms, and how they should be sequenced thereafter. Based on a thorough review of the technical assistance provided by the IMF's Fiscal Affairs Department (FAD) to middle-income countries, this paper will be useful to policymakers and administrators in emerging economies who are contemplating such reforms.

Herman Kamil, Bennett W. Sutton, and Chris Walker

'Crisis Shakes Europe: Stark Choices Ahead' looks at the harsh toll of the crisis on both Europe's advanced and emerging economies because of the global nature of the shocks that have hit both the financial sector and the real economy, and because of Europe's strong regional and global trade links. Marek Belka, Director of the IMF's European Department, writes in our lead article that beyond the immediate need for crisis management, Europe must revisit the frameworks on which the European Union is based because many have been revealed to be flawed or missing. But in many respects, one key European institution has proved its mettle—the euro. Both Charles Wyplosz and Barry Eichengreen discuss the future of the common currency. Also in this issue, IMF economists rank the current recession as the most severe in the postwar period; John Lipsky, the Fund's First Deputy Managing Director, examines the IMF's role in a postcrisis world; and Giovanni Dell'Ariccia assesses what we have learned about how to manage asset price booms to prevent the bust that has caused such havoc. In addition, we talk to Oxford economist Paul Collier about how to help low-income countries during the current crisis, while Donald Kaberuka, President of the African Development Bank, writes about how African policymakers can prepare to take advantage of a global economic recovery. 'Picture This' looks at what happens when aggressive monetary policy combats a crisis; 'Back to Basics' gives a primer on fiscal policy; and 'Data Spotlight' takes a look at the recent large swings in commodity prices.

Mr. Jack Diamond

Abstract

Among the major challenges faced by transitional and emerging market economies is the need to adjust institutions to function in an increasingly market-oriented and global environment. Among the reforms that middle-income countries have looked to emulate are the budget reforms that have been introduced in OECD member countries since the 1980s. These reforms have reoriented budgeting from the traditional focus on inputs to a new focus on the results derived from these inputs. This latter focus has often been termed performance or results-based budgeting. However, the resulting budget systems embody more than a change in the process of budgeting. They reflect a fundamental change in budget management, away from traditional, centralized control systems to more decentralized management models.

Mr. Jack Diamond

Abstract

This section examines the process of budget system reform required to move from traditional, centralized input-oriented systems to more modern, devolved, performance-based systems. It identifies a strategy based on recent attempts at this reform in emerging market economies and stresses the required sequencing of steps in this process. The strategy outlined involves a three-pronged approach, requiring measures first to increase the flexibility in the agency operating environment, then to provide more certain resourcing for spending agencies, and finally to exert pressure on agencies to improve their performance. This section stresses the need to progress on all three fronts simultaneously and to base these reforms on a firm platform of agency management skills. It highlights the need to attain some basic PEM thresholds in the area of restructuring the budget and its classification system, to improve the accounting system, to develop a financial management information system (FMIS), and to strengthen internal financial management skills. At the same time, it explains that it may also be necessary to introduce changes to the institutional and regulatory framework in which budget managers operate.

Mr. Jack Diamond

Abstract

Many emerging economies are trying to improve their budget processes and move to performance-based budgeting modeled on OECD-type reforms. This section first presents a brief historical perspective of these reforms by reviewing the evolution of the “new” performance budgeting model being applied in industrial countries. It identifies the main components of this budget management model as a means to determine the challenges facing emerging economies when converting their existing budget systems to this model. This review highlights the critical importance of a good program basis for budgeting, which is not easy and typically requires four important reform elements to be in place. First, any existing program structure must be set in the wider context of strategic budget planning. Second, such strategic planning should be anchored on a medium-term budget framework. Third, this usually implies redesigning and refining existing program structures. Fourth, and perhaps most difficult, a new system of accountability and budget incentives needs to be introduced. For emerging economies, these four elements should be viewed as the prerequisites for a successful introduction of performance budgeting.

Mr. Richard I Allen and Mr. Miguel A Alves
Many studies have highlighted how failures of public corporations (otherwise known as state-owned enterprises) can result in huge economic and fiscal costs. To contain the risks associated with these costs, an effective regime for the financial supervision and oversight of public corporations should be put in place. This note discusses the legal, institutional, and procedural arrangements that governments need to oversee the financial operations of their public corporations, ensure accountability for their performance, and manage the fiscal risks they present. In particular, it recommends that governments should focus their surveillance on public corporations that are large in relation to the economy, create fiscal risks, are not profitable, are unstable financially, or are heavily dependent on government subsidies or guarantees.
International Monetary Fund
This technical note focuses on recent developments to the Report on the Observance of Standards and Codes (ROSC) on Fiscal Transparency and Data Modules for Sweden. The authorities are implementing recommendations of the fiscal ROSC module. The government has decided to reform the state audit organization (RRV) as recommended by the report. Effective 2003, the RRV will be transformed from a government agency to an audit office under parliament, staffed by independent officials. The authorities are also following up on recommendations regarding data-related standards and codes.
International Monetary Fund
This paper describes the application of contingent claims analysis (CCA) and systemic CCA to the top four commercial banks in Sweden. The balance sheet stress tests for four major banks were complemented with tests based on the CCA framework, a risk-adjusted balance sheet relating bank asset values to equity value, default risk, and bank funding costs. Even though the results show that banks are found to be resilient to shocks, more work on systemic risk models could help analyze systemic risk under stress scenarios.
International Monetary Fund
This Selected Issues paper of Portugal highlights the discussions on the requirement of policies to overcome structural and cyclical impediments to growth, and secure fiscal consolidation. It analyzes the strength of the company balance sheets in supporting the rebound from recession, and also the links between corporate balance sheet strength and investment. It reviews the challenges in the Portuguese economy, the impact of European Union enlargement on Portuguese trade, the pension prospects, and the implications of various policy reform scenarios.