Bringing Public Financial Management into the 21st century

Editor's Note: Check out PEFA's Global Report on Public Financial Management, Public Financial Management in the 21st Century: "Harnessing Data for Better Policy Making" today.

For the past 20 years, the international development community has been investing in reforming public financial management (PFM) systems to ensure effective and efficient service delivery and good governance. This is now more important than ever, as countries battle the health, social and economic fallouts from the COVID-19 crisis. We have seen firsthand how countries with stronger and modern PFM systems were able to respond with ease when the pandemic broke out while others struggled.

The Public Expenditure and Financial Accountability (PEFA) program, which provides a framework for assessing and reporting on the strengths and weaknesses of public financial management, has produced for the first time a comprehensive global report drawing on two decades of over 675 assessments in 154 countries at the national and sub-national levels. 

The Global Report on Public Financial Management, available now on PEFA's website, uses PEFA’s extensive database to provide a comprehensive global view of PFM trends and performance, across seven key areas of the budget cycle. It also presents ideas on how the data analysis and findings could influence future research on PFM. The interactive report contains data visualizations accompanied by short analyses across regions, country income levels and time periods. It explores country case studies to learn more about PFM institutions and processes and to compare performance across countries and regions.

Below are some key findings from the report:

• Countries are better at preparing budgets than executing them. 
• Internal audit, management of fiscal risks, external audit, and scrutiny by Supreme Audit Institutions and the legislature are the weakest areas of PFM.
• The budget preparation process, predictability of in-year resource allocation, internal controls on non-salary expenditure, and debt management are the strongest aspects of PFM.
•  Gender considerations in the design, implementation and evaluation of budget policies are not yet mainstreamed in most countries , though some countries have made while others are in the process of making important advances in this area. For example, Indonesia is using the results of the recent PEFA gender-responsive PFM assessment to strengthen their systems.

The report also draws on country case studies from Argentina, Ethiopia, Ukraine, and West Bank and Gaza to highlight specific country performance. This analysis reveals for instance that Argentina’s PFM system is reasonably aligned with international standards and good practices. In particular, it is advanced in “transparency of public finances” and performs solidly on “policy-based fiscal strategy and budgeting”. Also, Ukraine has made recent improvements in many aspects of PFM, including more robust cash forecasting which has allowed budget allocations to match available cash as well as the introduction of an open budget portal which has strengthened the public’s access to fiscal information. Finally, West Bank and Gaza developed publicly available performance indicators for many services to improve fiscal transparency while the Ethiopian federal government uses a tight macro-fiscal framework to set the tone for expenditure management and ensure budget credibility. 

Against this backdrop, the report reveals several important challenges and opportunities for strengthening PFM in a COVID-19 impacted world. For one, the report’s finding on budgeting execution implies that many governments may struggle to efficiently spend billions of dollars being programmed to manage the current COVID-19 pandemic. 

Most countries have room to improve on budget execution by focusing on PFM good practices, as may be established in the country, backed by political will.  There is also room to improve the efficacy of audits and legislative scrutiny. Regardless of the unavoidable circumstances to dilute or circumvent standard control procedures to expedite emergency spending, country authorities need to ensure that audit trail is maintained and reasons for noncompliance with standard procedures recorded. 

All emergency PFM procedures need to have sunset clauses to revert to normal controls, as countries move out of pandemic. Without robust PFM, including mechanisms to hold governments accountable, heightened urgency to spend may lead to an increased risk of corruption. Going forward, governments and development partners may need to, as a matter of urgency, pay attention to strengthening budget oversight processes to ensure timely and transparent fund disbursement and efficient spending.

The report recognizes that PFM performance can have widespread effects on the reach, quality, and effectiveness of essential public services, such as how and when to fund hospitals and vaccination distributions. 

Looking ahead, the unique PEFA PFM data are a valuable resource for various stakeholders, including practitioners, policymakers and researchers. The data can be harnessed for better policymaking, and can contribute to building the much-needed trust in governments during and after the COVID-19 crisis.