Budget Institutions in Low-Income Countries
Lessons from G-20
  • 1 https://isni.org/isni/0000000404811396, International Monetary Fund

Contributor Notes

Author’s E-mail address: sgupata@imf.org; sami.ylaoutinen@vm.fi

This paper presents twelve budget institutions that can support planning and delivery of credible fiscal strategies in the fiscal policy-making process. The resulting framework is applied to seven low-income countries and the status of their budget institutions compared to the G-20 advanced and emerging market economies. The paper then presents recommendations for designing and implementing appropriate fiscal strategy for low- income countries. Particular attention is paid to prioritization and sequencing of reform efforts.

Abstract

This paper presents twelve budget institutions that can support planning and delivery of credible fiscal strategies in the fiscal policy-making process. The resulting framework is applied to seven low-income countries and the status of their budget institutions compared to the G-20 advanced and emerging market economies. The paper then presents recommendations for designing and implementing appropriate fiscal strategy for low- income countries. Particular attention is paid to prioritization and sequencing of reform efforts.

I. Introduction1

1. All countries need to ensure fiscal credibility and sustainability. This note presents a framework of budget institutions needed to support countries’ fiscal efforts at three key stages of policy making (i) understanding the fiscal outlook and challenges; (ii) formulating a credible fiscal strategy; and (iii) implementing that strategy. 2 3 While originally developed to analyze budget institutions in the G-20 countries, this framework has been subsequently applied to a wider group of countries seeking either fiscal consolidation or overall fiscal discipline.

2. The note is structured as follows. Section II presents twelve budget institutions that can support planning and delivery of credible fiscal strategies at three key stages of the fiscal policy-making process. Section III applies the framework to seven low-income countries and compares the status of their budget institutions to the G-20 advanced and emerging market countries.4 This allows a comparison of weaknesses and strengths of country groups’ budget institutions across country groups.5 Section IV presents recommendations for designing and implementing appropriate fiscal strategy across countries, particularly in low-income countries. Particular attention is paid to prioritization and sequencing of reform efforts. Appendix I presents the full details of the institutional framework.

II. Budget Institutions for Credible Fiscal Strategy

3. While many factors affect the behavior of public finances, a well established body of theoretical and empirical analysis shows that budget institutions are important determinants of fiscal outcomes. This evidence covers different geographical regions and countries with varing political set-ups and income levels.6

4. Strong institutions can improve fiscal performance by highlighting the need for sustainable policies, exposing the full cost of public interventions, emphasizing collective responsibility over sectoral interests, and raising the cost of deviating from stated fiscal objectives. This suggests that governments should, as part of their fiscal strategy, consider the adequacy of the structures, rules and procedures that govern the formulation, passage, and execution of their budgets

5. Since the strength of budget institutions impacts fiscal outcomes, institutional gaps are likely to be associated with weaknesses in fiscal outcomes. Figure 1 presents the extent to which the low-income countries have seen differences between the final outturn and the original, approved budget in (i) aggregate expenditure, (ii) composition of expenditure and (iii) aggregate revenues. Score “A” means that the deviations from the original budget have been rare and small, whereas score “D” means that deviations have been frequent and large.7

6. As perhaps expected, the deviations from the original budget have been substantial in low-income countries. This is particularly the case with the allocation of expenditure, although the size of final expenditure seems to have differed quite markedly from the original budgets. This implies shortcomings both in the budget planning and execution which, in turn, may have a link to institutional weaknesses.

Figure 1.
Figure 1.

Budget Planning and Execution in Low-Income Countries

Citation: IMF Working Papers 2014, 164; 10.5089/9781498329439.001.A001

Source: PEFA Database (50 countries). Percentages show the share of countries who received the score in question.

7. The framework presented here allows identification of such institutional weaknesses lie. This section identifies twelve budgetary institutions and their key design features that can support planning and delivery of credible fiscal strategies at three key stages of the fiscal policy-making process (Box 1)8:

  • understanding the fiscal outlook and challenges;

  • formulating a credible fiscal strategy; and

  • implementing that strategy through the budget process.

Twelve Budget Institutions

A. Understanding the Fiscal Outlook and Challenges

1. Fiscal Reporting

2. Macroeconomic and Fiscal Forecasting

3. Fiscal Risk Management

4. Independent Fiscal Agency

B. Formulating a Credible Fiscal Strategy

5. Fiscal Objectives and Rules

6. Medium-term Budget Framework

7. Performance Orientation

8. Intergovernmental Fiscal Arrangements

C. Implementing the Fiscal Strategy

9. Budget Unity

10. Top-down Budgeting

11. Parliamentary Budget Approval

12. Budget Execution

Source: IMF (2014)

8. The institutions included in the framework have been identified on the basis of their ability to support planning and implementing a credible fiscal strategy. However, while this framework presents an informative way to analyze shortcomings and related reform needs in countries’ fiscal frameworks, it should not be viewed as a generic guide to budget institution reforms. When applying this approach to low-income countries, attention has to be paid to sequencing of reforms, which depends on country specific circumstances, including on their capacity to implement them. These issues will be discussed in detail in section IV.

A. Understanding the Fiscal Outlook and Challenges

9. A pre-requisite for a credible fiscal strategy is a clear understanding of the current fiscal position and a realistic view of the medium-term fiscal outlook. Full awareness of the current state and future evolution of the public finances is particularly important today when many countries face a complex and uncertain macroeconomic and fiscal outlook. In this context, the following institutions are important:

  • Fiscal reporting. Fiscal reporting arrangements that provide comprehensive, timely, credible, and transparent information are central to inform decision makers and the public about the state and outlook of the economy. This should include comprehensive and accurate fiscal reporting, including financial statements audited by an independent audit institution and fiscal statistics produced by an independent statistics agency;

  • Macroeconomic and fiscal forecasting. A realistic and credible medium-term macroeconomic and fiscal forecast is a starting point for the formulation of a credible fiscal strategy. Ideally, macro-fiscal forecasts should have a multi-year focus, be updated on a frequent basis and cover all fiscal aggregates together with a range of realistic economic assumptions.

  • Disclosure and management of fiscal risks. The government’s fiscal strategy needs to be robust and take account of risks that threaten the fiscal position. Main fiscal risks (macro-fiscal, guarantees, international commitments, social commitments, public-private partnerships, and legal claims) should therefore be disclosed in budget documents together with alternative medium-term budget scenarios. New risks (contingent liabilities in particular) should be subject to similar scrutiny and approval as regular budget appropriations. This is particularly important during times of fiscal stress when the temptation to circumvent expenditure restrictions by resorting to guarantees and other contingent liabilities could become stronger.

  • Independent fiscal agencies. Independent fiscal agencies with a clear mandate can help to support the overall credibility of a government’s fiscal strategy by assessing the credibility of the forecasts and the government’s fiscal performance on a regular basis.

B. Formulating a Credible Fiscal Strategy

10. The formulation of a credible fiscal strategy can benefit from strong institutional arrangements. In particular, the credibility of a fiscal strategy is enhanced if it is based on comprehensive fiscal objectives, takes a medium-term perspective, connects the funds provided to public entities to their outcomes or outputs and connects together different levels of government. The following four budget institutions are important:

  • Fiscal objectives and rules. Comprehensive, transparent and stable fiscal objectives connect the medium-term fiscal strategy with numerical targets that will guide future decisions and against which performance can be monitored. Some flexibility, either by accounting for the cycle or by including explicit escape clauses can enhance the credibility of fiscal rules.

  • Medium-term budget frameworks. Medium-term budget frameworks are crucial to convert those targets into detailed and documented revenue and expenditure plans. Successful medium-term budget frameworks provide binding restrictions on multi-year expenditure and a clear and consistent statement of the government’s medium-term priorities within a total expenditure ceiling. Such frameworks should cover most central government expenditure.

  • Performance-oriented budgeting. Performance budgeting – defined as the procedures that strengthen the links between spending on programs and projects and the outcomes or outputs of these programs – provides decision makers with information on how the budget contributes to the government’s overall policies. Regular spending reviews can help to provide a strong evidence base for expenditure rationalization

  • Intergovernmental fiscal arrangements. Intergovernmental financial arrangements ensure the consistency of the fiscal stance within the different levels of government, and allow coordinating and burden sharing of fiscal policy and spending between layers of government.

C. Implementing the Fiscal Strategy

11. Even the most robust consolidation plan can be derailed when confronted with the pressures and realities of the annual budget process. Unless supported by strong institutional arrangements for the preparation, approval, and execution of the budget, there is a risk that actual expenditure will turn out to be higher than forecast, or actual revenue lower than forecast. Four institutions are central in this regard:

  • Budget unity. A high degree of budget unity ensures that central government expenditures are authorized under one decision-making process, which consequently makes the control over budget execution more effective. Most central government expenditure should be covered by the central government budget and authorized annually. Also major tax expenditures should be quantified and published.

  • A top-down approach to budget preparation. Under a top-down approach, limits on both aggregate and sectoral spending are agreed by the government at an early stage in the budget preparation process. This approach increases the likelihood that the outcome of the annual budget discussions will be consistent with the government’s ex ante fiscal objectives and fiscal plan. The earmarking of revenue should be limited and all major revenue and expenditure decisions should be taken as a part of the annual budget process.

  • Constraints on parliamentary budget approval. While parliament’s formal powers over the allocation of public resources varies greatly across countries, experience suggests that pre-budget or budget orientation debates can help create parliamentary ownership of medium-term fiscal objectives in a range of legislative contexts. The political legitimacy of the overall fiscal strategy is further enhanced when parliament endorses the government’s medium-term fiscal objectives before considering the government’s annual budget proposal. However, greater parliamentary input into the overall fiscal strategy needs to be combined with legislative procedures that promote collective responsibility for its delivery. As in cabinet, voting on the budget in parliament should follow a top-down sequence in which the legislature first approves the main fiscal aggregates, such as the budget balance, total expenditure and total revenue, before voting the allocation of resources to different sectors, ministries, programs, or line items.

  • Discipline in budget execution. Effective implementation of a consolidation program requires budget execution procedures that maintain overall fiscal discipline, while recognizing that unexpected events will occur during the course of the budget year. Open-ended or standing appropriations should be kept to a minimum. Overspending against budget totals should require the government to introduce a supplementary budget and, ideally, propose offsetting expenditure cuts.9 Carry-over of expenditure—enabling budget agencies to exceed annual appropriations—should also be subject to restrictions. To avoid future expenditure room being taken up by binding contracts or future promises, controls on multi-annual commitments should also be in place.

III. Evaluation of Budget Institutions

12. This section includes a discussion on the extent to which the twelve budget institutions identified in the previous section are in place. This is done by applying an evaluation methodology which allows transforming the institutional features of countries’ fiscal frameworks into a set of ratings (see box 2 and appendix I). As mentioned earlier, these ratings are not reported in the paper.10 In this context, few caveats are worth mentioning:

  • The analysis presents only a snapshot of the state of countries’ current budget institutions. Many countries under review are engaged in ambitious reform agendas to strengthen their frameworks. Due to the static nature of the analysis, the discussion below does not do justice to these efforts.

  • Each institution included in the framework is treated with equal importance, that is, assigned uniform weights. A case could be made that not all institutions are necessarily equally important, particularly from a country-specific point of view. While this is justified, the approach is meant to keep the framework as transparent and simple as possible.

  • Finally, the sample of countries under a review is small, only seven low-income countries. While the discussion below gives a good overview on the state of these countries’ budget institutions, the results are not necessarily representative of all low-income countries.

Methodology for the Evaluation

The twelve budget institutions and their key features described in previous section are used to evaluate the institutional strength of each country in the sample. Each key feature is translated into a specific evaluation question. The number of questions by institution varies from three to six, and the assessment consists of 52 questions in total. The questions have been formulated in such a way that they are factually verifiable. A country is given a rating of 0 if the criterion is not met; 1 if the criterion is partly met; and 2 if the criterion is fully met. The evaluation questions and basis for each rating are set out in Appendix 1. For every country, the ratings against each question are averaged to produce an overall score of the strength of each of the twelve institutions. Each of the twelve institutions has the same weight in these averages, regardless of the number of questions used to rate the institution.

Source: Olden et al. (2010)

13. Based on the institutional scores, the following general observations can be made (see Figures 1-3):

  • As one might expect, the budget institution scores, are lower in low-income countries, compared to emerging market and advanced countries. This applies particularly to understanding and planning stages, where the largest institutional gaps for low-income countries seem to be.11

  • There seems to be a link between strength of institutions and economic development; institutional scores and GDP per capita broadly speaking move together in the country sample.12

  • Low-income countries score, on average, are the lowest among country-groups in all categories except three, namely top-down budgeting (slightly higher than emerging), parliamentary approval (tied with emerging) and budget unity (tied with emerging markets and advanced), whereas advanced countries score, on average, higher than others in all other categories.

  • The variance of scores by institution is generally speaking larger for low-income and emerging market countries, compared to advanced countries indicating large differences between and among countries.13 Particularly for understanding and planning stages, many low-income countries scored zero on number of individual institutions indicating that these countries do not have basic arrangements in place.

Figure 2.
Figure 2.

Overall Scores

Citation: IMF Working Papers 2014, 164; 10.5089/9781498329439.001.A001

Figure 3.
Figure 3.

Budget Institution Scores by Country and Country Group

Citation: IMF Working Papers 2014, 164; 10.5089/9781498329439.001.A001

Figure 4.
Figure 4.

Average and Range of Scores by Institution

Citation: IMF Working Papers 2014, 164; 10.5089/9781498329439.001.A001

A. Understanding the Fiscal Outlook and Challenges

14. Most low-income countries in the sample seem to have basic fiscal reporting practices in place which should give them reasonable information about the present financial position. However, arrangements related to forecasting future fiscal developments and related risks are less robust. These are the areas where the gaps in the G-20 advanced countries are also most pronounced.

Figure 5.
Figure 5.

Understanding the Fiscal Outlook and Challenges

Citation: IMF Working Papers 2014, 164; 10.5089/9781498329439.001.A001

  • Fiscal Reporting: All low-income countries produce financial statements which cover at least the budget, and in most countries financial statements are audited by external auditor. Most countries produce a balance sheet, but generally speaking without including all assets and liabilities. About half of the countries produce financial statistics for central and general government but generally not for the whole of the public sector. In almost all countries financial statistics are produced by an independent office but generally not in line with international standards.

  • Macroeconomic and Fiscal Forecasting: About a half of the low-income countries publish medium term forecasts in the budget documents with related assumptions but generally speaking without any quality control through ex post comparison of previous forecasts with actual outturn of key macroeconomic and fiscal aggregates. Also an update half-way through the budget year, with updated projections of key fiscal variables is missing in almost all countries. Long-term fiscal projections are also a rarity.

  • Fiscal Risk Management: Main fiscal risks (macro-fiscal, guarantees, international commitments, social commitments, PPPs, legal claims) are not discussed nor quantified in the budget documents. Also alternative medium-term budget scenarios are not produced. In majority of the countries, the government prepares a medium-term debt management strategy, including analysis of debt-related risks, but without including asset-related risks (for example changes in the asset values or cash-flow they provide). In almost all countries, parliamentary approval is sought for new guarantees and in very few, for other significant contingent liabilities.

  • Independent Fiscal Agency: With some exceptions, countries do not have independent agencies to assess the credibility of the forecasts and the government’s fiscal performance on a regular basis.

B. Developing a Credible Fiscal Strategy

15. Many institutions related to formulation of a fiscal strategy are relatively underdeveloped. Most countries have taken first steps in introducing some medium-term elements in their fiscal management but many challenges remain to be addressed; fiscal objectives and medium-term budget frameworks receive the lowest scores on average among the low-income countries. Also performance orientation is still at its infancy. Finally, intergovernmental financial arrangements are not clearly specified in many countries.

  • Fiscal Objectives and Rules: About half of the countries have specified some type of medium-term fiscal objective and regularly report performance against the stated objective. In very few countries, the objective has been enshrined in the law, and in almost all countries, exceptions to the rule are frequent. Fiscal objectives do not accommodate the impact of the business cycle.

  • Medium-term Budget Framework: About half of the countries have some type of multi-year estimates for major categories of revenue and expenditure but they constitute only a non-binding restriction to future budgets. No reconciliation of changes in sectoral allocations from year to year is currently produced. Furthermore, budget documents do not present any consolidated summary of the fiscal impact of proposed new revenue and expenditure measures.

  • Performance Orientation: About half of the countries include a program classification for information, and only in very few of these form the basis for legislative appropriation. Many countries have established some type of performance targets or objectives but typically these are not systematically monitored. Comprehensive and systematic expenditure reviews are rare among the low-income countries in the sample.

  • Intergovernmental Fiscal Arrangements: About a half of the countries produce a year-ahead or a medium-term forecast of the budget or the central or federal government but it is typically not broken down into the respective contribution of individual sectors/level of government (budget, social security funds, extra-budgetary funds, local government and state-owned enterprises). Majority of the countries have fiscal rules for sub-national governments in place but without centralized sanctions or enforcement mechanisms. Again, about a half of the countries have a legal framework for coordinating and sharing the burden of fiscal policy between layers of government.

Figure 6.
Figure 6.

Formulating a Credible Fiscal Strategy

Citation: IMF Working Papers 2014, 164; 10.5089/9781498329439.001.A001

C. Implementing the Fiscal Strategy

16. Institutions related to implementing the fiscal strategy emerge as the strongest among the three key stages of the fiscal policy-making process included in the framework. Gaps in relation to the advanced G-20 countries still persist particularly in top-down budgeting and budget execution. In particular, while it is common to fix the ceilings at the early stages of the budget process, it is equally common that these restrictions are overlooked at the subsequent stages.

Figure 7.
Figure 7.

Implementing the Fiscal Strategy through the Budget Process

Citation: IMF Working Papers 2014, 164; 10.5089/9781498329439.001.A001

  • Budget Unity: Low-income countries receive equal scores on average on budget unity when compared to emerging market and advanced countries. In all of the countries, the budget, unemployment and social security funds or spending cover at least 80 percent, and in many, more than 90 percent of central government expenditure. In all countries more than 90 percent of the budget spending requires annual authorization by parliament. However, arrangements regarding tax expenditures are less advanced; while most countries produce an annual quantification of tax expenditures, there is no control on their size.

  • Top-down Budgeting: In almost all countries, there are ex ante limits on both aggregate and sectoral or ministerial spending provided in budget submissions, but importantly, in about half of the countries there ceilings are rarely respected. In almost all countries less than 10 percent of central government revenue is subject to earmarking or standing spending commitments. In about half of the countries, major revenue and expenditure decisions are often or sometimes taken outside the budget process.

  • Parliamentary Budget Approval: Typically, the parliament does not endorse a medium-term fiscal target or objective. With some exceptions, there are limits on the legislature’s right to amend the government’s draft budget. In about a half of the countries, the annual budget is not approved in a top-down sequence (i.e. parliament does not first approve an overall annual budget framework for total revenues and total expenditures). Typically, the legislature’s right to amend the executive’s budget proposal is rather limited. In majority of the countries, there is a legal requirement in place that a budget has to be approved before the start of the fiscal year.

  • Budget Execution: Most countries have restrictions in place on overspending during the execution of the annual budget. In particular, most countries require a submission of a supplementary budget to parliament. Typically, carry-overs are not allowed or the government imposes a ceiling on the size of annual carry-over or on carry-over draw-downs. Contingency arrangements for specific expenditure categories exist in all countries but in some cases access criteria to such funds could be specified more clearly. In most countries, the finance minister (the executive) can defer or cut expenditure, without prior approval of parliament, at least up to a certain limit. Finally, all countries lack comprehensive limits or controls on multi-annual expenditure commitments.

IV. Strengthening Budget Institutions in low-income countries: Priorities for Institutional Reform

A. Prioritizing Reform Efforts

17. As is apparent from the discussion above, low-income countries have substantial shortcomings in their budget institutions, which call for continuous reform efforts. Based on the institutional review, the largest institutional gaps currently can be found from understanding and planning stages of the fiscal policy-making process, although some important challenges remain also in the implementation stage. This is in line with the observation made earlier that the composition as well as size of expenditure outturns have deviated substantially from the original, approved budgets in low-income countries, indicating problems with budget planning (see figure 1 in Section II). Higher relative scores in the implementation stage may reflect a tradition of administrative and fiscal centralization among the countries in this group.

18. However, designing a reform agenda for low-income countries is a balancing act between ambition and realism. On the one hand, the reinforcing nature of the different institutions underlines the importance of taking a comprehensive approach to institutional reform. Indeed, institutional reforms in the above areas need to be coordinated across the budget stages and between branches and levels of government to maximize their impact on fiscal decision-making and performance. The impact of reform at any one stage of the process on fiscal behavior depends on the integrity of the system as a whole. But on the other hand, the design of a reform agenda has to take into account the low capacity of many low-income countries to implement reforms, as well as political economy constraints and weak governance systems. Therefore it is not realistic to assume that all deficiencies identified above could be addressed simultaneously. Some prioritization and sequencing will be needed.

19. Indeed, reforms in budget institutions should address particular country-specific problems and should be placed in an appropriate order, i.e., be given the correct priority and sequence. The literature sets out some general principles (e.g., Diamond, 2012, Allen, 2013) but recognizes the difficulty of developing a set of operational rules that is applicable in all countries, in all contexts, and at all times. However, some guidance can be sought from the advanced country experiences (see box 3).

What Can Be Learned from Advanced Countries About the Prioritization and Sequencing of Reform of Budgetary Institutions?

First, reform of budgetary institutions does not proceed on a recognizably predictable path: it is incremental, usually not governed by a grand design, and generally takes a long time (Andrews, 2013). Table below shows how in all three countries – France, the United Kingdom, and the United States – a similar pattern can be observed. First, basic systems of accounting, budgeting, and financial reporting were established according to a uniform set of standards and procedures. After these basic budget elements were in place, countries’ moved on to develop more sophisticated PFM practices, such as medium term budget frameworks, performance budgeting and accrual accounting.

Second, advanced countries have tended to approach reform in a logical order, namely that the more basic reforms have been carried out first, and once these procedures have been firmly established, more advanced reform are built on top of them. Such a process may take many years to implement, but by allowing adjustments to be made at all stages is more likely to succeed.

Third, reform is driven by a range of factors and influences, internal and external. The most important factor historically has probably been the influence of economic and financial crises, or sizeable political changes triggered by a change in constitution or new elections. Another critical element is the strength of political leadership. If such strong drivers are absent, reforms are likely to be slower, more cautious and more incremental in nature.

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Fourth, reforms that are driven by powerful external or internal forces can often take place more rapidly but still require considerable time for their design and implementation. For example, in South Africa, the reforms to the public finance and budgeting system, including establishing a new financial relationship between central, provincial and local governments, took at least 10 years to implement, and are still being developed and refined 20 years later.

Fourth, reforms that are driven by powerful external or internal forces can often take place more rapidly but still require considerable time for their design and implementation. For example, in South Africa, the reforms to the public finance and budgeting system, including establishing a new financial relationship between central, provincial and local governments, took at least 10 years to implement, and are still being developed and refined 20 years later.

Fifth, as Andrews (2013) has pointed out, most reforms are iterative and adaptive, namely they proceed by a series of initiatives and steps, then require adaptation, as experience in implementing the new system is gained, and lessons learned, or if changes in technology require further changes to be made (such as FMIS or debt management systems). Sometimes reform initiatives have not been sufficiently well thought through or run out of political support have been reversed. A dramatic example was the zero-based budgeting reforms in the U.S in the 1960s, and the partial abandonment of the performance-based assessment framework (PART) under the Clinton Administration.

Finally, advanced countries have made adjustments to the organization of their central finance agencies in parallel with and in support of the reforms they have made. Corporate restructuring of the British Treasury, for example, was carried out in the 1960s, early 1990s and early 2010s; and smaller modular or incremental changes in between (Allen, 2013). This has enabled the government to ensure that (i) the core functions of the finance ministry are appropriate to the economic and financial conditions of the time; and (ii) sufficient resources – human and IT – are available to carry out these functions and tasks.

Source: Allen (2013), Note: Measures that established the basic framework of accounting and budgeting are shown above the broken lines; items shown below the lines were introduced later.

20. Most advanced countries have reached decisions about the sequencing of reform in a non-structured fashion, but some important guiding principles can be identified:

  • It is important to distinguish two kinds of sequencing—first, the order in which different initiatives within an overall PFM reform strategy (e.g., establishing a macro-fiscal forecasting unit, a treasury single account; a modern debt management agency) are introduced; and, second, the sequencing of individual tasks and activities within a single component of such a strategy—for example, the steps that are needed to convert the government’s accounting and reporting system from a cash basis to an accrual basis, or to establish and make fully operational a unified revenue authority.

  • Countries should not attempt too many reforms at one time. If too many reforms are attempted simultaneously, they are unlikely to succeed, e.g., because sufficient resources (human and financial) are not available, or the management capacity of the finance ministry is overstretched.

  • Important basic elements of a budgeting system need to be put in place first before more advanced elements are incorporated.

  • Many countries have tended to underestimate the complexity of the reform process, and the need for careful handling of the implications for resources and staffing and supporting IT systems. A reform that is demanding in terms of skills and resources—such as introducing an MTBF, an accrual accounting system, or a TSA—requires strong leadership, the development of a detailed action plan, a dedicated project management and communications team to implement the reform, and the active management of the human resource aspects of the reform. If these factors are given insufficient attention it is possible, if not likely, that the reform will (i) meet with substantial resistance inside and outside the finance ministry; (ii) take longer than expected to implement; (iii) cost more than necessary; and (iv) deliver less than the full expected benefits, or fail completely.

  • Reforms also need to take into account the views of stakeholders external to the finance ministry. Strong opposition may build up to reforms from line ministries, the president’s office, or consumers of public services. There may also be opposition from managers and staff within the finance ministry.

B. Priorities for Institutional Reform for Low-Income Countries

21. In the context of the framework used in this paper, many budget institutions included in the framework can be seen as prerequisites to others. For example, binding medium term budget frameworks have proved to be a useful and efficient tool for fiscal management in many advanced economies. However, implementing such frameworks is not an easy task: preconditions to a successful binding medium term budget framework include credible and predictable annual budget, accurate medium-term macroeconomic and demographic projections, medium-term fiscal objectives and rules and comprehensive, unified, top-down budget process (Harris et al, 2013).

22. Indeed, low-income countries should ensure that the basic PFM systems are in place before attempting to implement more sophisticated arrangements. Given what has been discussed above, what institutional reforms should be seen as a priority? The analysis presented above shows considerable variance in the strengths and weaknesses of budget institutions across and within the low-income countries. Appropriate reform strategies therefore require country-specific reform programs and any generic advice is bound to be incomplete. With this limitation in mind, one can nevertheless highlight some common areas of institutional shortcomings countries should seek to address.

Understanding the Fiscal Outlook and Challenges

23. The analysis above revealed that most low-income countries in the sample seem to have basic fiscal reporting practices in place but arrangements related to forecasting future fiscal developments and related risks are less robust. In order to improve understanding of the current and future fiscal position, low-income countries could consider:

  • expanding the coverage of their annual financial statements to central government, and further to general government, and ensure that there is a published external audit;

  • producing financial statistics by an independent office, in line with international standards;

  • including comprehensive information about fiscal risks in their budget documentation, particularly in countries where PPPs, for example, are being used;

  • producing and publishing macroeconomic forecasts alongside related assumptions; and updating the forecasts in line with the budget process, and;

  • once the forecasting capacity improves, introducing medium-term forecasts with alternative medium-term budget scenarios which would provide policymakers with a better sense of the country-specific vulnerability to uncertainty.

Formulating a Credible Fiscal Strategy

24. Based on the discussion above, many of the institutions related to formulation of a fiscal strategy seem to be relatively underdeveloped. While most countries have taken first steps in introducing some medium-term elements in their fiscal management, many challenges remain to be addressed. Where appropriate, the low-income countries could consider:

  • adopting a medium-term objective, in countries currently without such objective to provide guidance to fiscal planning, and once such objective is in place, regularly report on the fiscal performance against the stated objective;

  • in countries without any medium-term fiscal or budget framework, developing a simple framework, which would provide a projection of the fiscal balance, include estimates of government revenues and spending at a more aggregate level, and at the second stage providing guidelines (envelopes) to line ministries to prepare medium-term spending plans;

  • once the prerequisites, such as solid macro-fiscal forecasting, credible budget, top-down budget process and medium-term fiscal objectives are in place, developing the framework into a more binding direction; and

  • ensuring proper interaction between central or federal government and subnational governments, at least by exchanging information regularly on fiscal policy, or ideally putting in place a legal framework for coordinating and sharing the burden of fiscal policy between layers of government.

Implementing the Fiscal Strategy

25. While the institutions related to implementing the fiscal strategy seem to be the strongest among the three key stages reviewed, important challenges remain. These relate mainly to top-down budgeting and budget execution. In this context, low-income countries could consider

  • issuing ex ante limits on both aggregate and sectoral or ministerial spending at an early stage in the budget preparation process, making sure that the size of the limits is realistic;

  • changing parliamentary procedures to follow a top-down sequence where the parliament first approves an overall annual budget framework for total revenues and total expenditures, and then discusses the allocation within these totals;

  • putting in place appropriate restrictions for overspending during the execution of the budget, and gradually introducing limits on multi-annual expenditure commitments.

Budget Institutions in Low-Income Countries: Lessons from G-20
Author: Mr. Sanjeev Gupta and Mr. Sami Yläoutinen