Chapter

10 The Budgetary Approach to Adjustment Support

Author(s):
Claire Liuksila
Published Date:
December 1995
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Author(s)
Peter Harrold

There are several reasons why the “Budgetary Approach to Adjustment Support” as outlined in this seminar by Mr. Ireton makes sense.

The approach recognizes the de facto situation that balance of payments assistance generates budgetary support for the recipient government, via the counterpart to the foreign exchange, or by directly financing government imports. It permits a focus on public expenditure issues in Africa, which may be among the most important in the coming period, especially with respect to expenditure management. It would reduce the administrative burden on governments associated with import invoices required for balance of payments support, now that foreign exchange markets are much freer in many countries.

The question is how such assistance should be delivered. There seems in general to be limited scope for a macro approach to such lending: while public expenditure reviews can generate useful guidance for sector resource allocation, or fiscal system reforms, they are unlikely to generate the level of detail necessary to underpin a program of budgetary support.

There is also the question of the timeliness of such analyses. The one exception to this may be when severe fiscal imbalances constitute the major macroeconomic distortion. In such circumstances, general budgetary support for serious adjustment of public finances seems to be well worth considering. It should also be remembered that adjustment support is only about one-fourth to one-third of support to Africa, with the balance being project assistance of one kind or another.

The “Broad Sector Approach to Investment Lending” is one possible vehicle through which such budgetary support could be usefully incorporated, combining the detail of project lending with both support for recurrent spending and relevant policy change. This form of lending has to date manifested itself in only a handful of projects in Africa (notably in southern Africa),3 but it is likely to rapidly increase as a share of the World Bank’s activities in Africa. This approach—which usually results in “Sector Investment Programs” (SIPs)—responds to the following observed problems with the traditional approach to investment and adjustment operations.

  • Governments lack ownership of the projects, which tend to be donor driven;

  • Donors’ practices are not uniform and spread government effort;

  • Projects can lead to “islands of success” in a sea of failure by not being able to tackle the fundamental problems of the sector;

  • There is excessive reliance on expatriate personnel to run projects; and

  • Disbursement of adjustment assistance is not linked directly to the costs and timing of specific reforms.

The broad sector approach addresses these issues by putting local stakeholders at the center of a project process that is sector-wide in scope, implementing a full sector policy and including all expenditures in the sector. All main donors are asked to sign on to such programs, using common implementation arrangements, and the use of expatriate personnel is minimized. Such comprehensive operations are difficult and costly to prepare, but initial results indicate that the investment in program preparation is worth it.

By addressing all expenditures in the sector, the broad sector approach offers a vehicle through which budgetary support can be delivered. In priority sectors, such as education, health, roads, and agricultural services, the shortages of recurrent resources for the sector are frequently more serious than the shortage of investment funds. In countries where development indicators are unacceptably low, for example, in terms of education enrollment ratios, or access to maternal and child health care, these recurrent resources should be seen as investment expenditure. By associating budgetary support of this type with a program of sector policy reform, and a framework for delivering specific support to the sector, the SIP offers a vehicle in which expenditures can be channeled and monitored, while still encompassing the elements of expanding the resource envelope that are associated with balance of payments support for adjustment.

Are poor indicators enough to justify recurrent support? Clearly not, for the broad allocation of public expenditure must be judged to be appropriate, and, as Ms. Christensen has reminded us, the extent of revenue effort by government will need to be maintained. It will serve little good if donor resources for the budget replace public savings. After all, structural adjustment began in Africa because projects could not succeed without an appropriate macroeconomic framework. However, as Mr. Kanbur noted in his presentation, the news on the macroeconomic front in Africa is more encouraging than on the sector front. We are being reminded that a sound macroeconomic framework is necessary but by no means sufficient for development success.

The importance of the broad sector approach is that it provides a vehicle for the assessment of the necessary level of budgetary support for an appropriate set of sector polices as well as a vehicle through which such support is provided, in terms of detailed expenditure programs. The budgetary support component, that is, the support to the recurrent budget, can gradually play a role in providing support to the adjustment effort in Africa, as it grows and becomes a normal part of resource transfer. These SIPs would not replace broader adjustment lending in countries where distortions are severe, but would be a useful vehicle once the macroeconomic essentials have been restored.

A second possible vehicle for budgetary support would be to relate it to the direct costs associated with particular adjustment events. Some examples of this already exist: support to governments to fund redundancy payments related to civil service retrenchment, as in Uganda; and financing for demobilization grants to soldiers, as in Chad. A similar approach could be applied in privatization programs. Often, governments need to make expenditures to prepare public enterprises for privatization, such as for debt reduction or redundancy payments. At present, these actions are frequently used as conditions for tranche release in adjustment operations. It would seem more appropriate to “projectize” this support, delivering budgetary support at the time it is needed. Since such actions are frequently ones that have a longer-term positive impact on the budget, but whose achievement is constrained by an immediate shortage of funds in the budget,4 timely budgetary support for such actions seems entirely justified.

In conclusion, there seems to be sound justification for a shift from balance of payments to budgetary support. For those countries where the macroeconomic fundamentals have been addressed, but where there remain serious sectoral adjustment issues, we have suggested that either sector investment programs or “projectizing” specific adjustment action be used for delivering such support, and the World Bank intends to continue to explore these possibilities.

For example, the Tanzania Integrated Roads Project, Mozambique Roads and Coastal Shipping, Zambia Health, and Zambia Agriculture Sector Investment Program.

For example, the cost of retrenching a civil servant may be a multiple of one year’s salary.

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