Public financial management and budget support are key to achieving better development results

Budget support remains an important aid modality. It provides unearmarked contributions to a government’s budget to support policy reforms. Total commitments from development partners average about $30 billion per year and spike to 20% of total overseas development assistance during times of crises.

Adequate Public Financial Management plays an important role in providing budget support

Alongside the macro-fiscal framework, good public financial management (PFM) has been seen as a sine qua non for budget support eligibility. This was covered in the seminal book Budget support as more effective aid two decades ago and has subsequently been introduced in various policy and operational guidance documents of MDBs and other partners. Since budget support goes in a country’s general budget, it is not possible to track what programs it funds. Therefore, there needs to be a consensus on broad policy directions and budget priorities, underpinned by analytical work. Good PFM ensures that funds are put to good use and plays a catalytical role between aid agencies and recipient countries. PEFA’s Global report on Public Financial Management offers suggestions where quick progress can be achieved in this area.

Where do things stand today on sound public financial management?

A recent book Retooling development aid in the 21^st century: the importance of budget support cautions that budget support is increasingly given to countries with nascent PFM capacity and institutional performance. The average budget support score in a country policy and institutional assessment (CPIA) is almost a half-point below what it used to be 15 years ago. Similarly, the budget reliability is significantly below what it used to be (see figure 2). 

Figure 1: Trend in CPIA and PFM performance of budget support recipients.

Source: Fardoust et al (2023).

Making the case for PFM policy engagement

The last decade has seen a notable downward trend by over 15 percentage points of total prior actions relating to public sector management in budget support, relative to other priorities like human and social development, which have become increasingly prominent (see figure 2). Similarly, the share of public expenditure management conditions in the public administration category fell from 36% to only 15% over a similar timeframe.  

Figure 2: World Bank budget support by policy area

Source: World Bank 2021.

In our experience, budget support interventions by development partners and PFM reforms mutually reinforce each other and are an effective combination to deliver better services to people. Smets and Knack (2018) find that budget support can have a statistically significant effect on the quality of public sector management and institutions. This is consistent with and Fardoust et al (2023) who find a similar effect on economic management and public sector governance. A recent review of MDB experience with budget support notes that ‘PFM vastly improved as evidenced by repeat PEFA assessments' and that ‘budget support played an important role in these improvements’.

It is time to revisit the development compact with greater focus on PFM.

Yes! The Paris principles remain as relevant today as they have ever been. We share four reasons below why budget support is an important aid instrument when it has a greater focus on PFM:  

1. Budget support is used to deploy a large share of development assistance to address today’s compounding crises.
2. Budget support uses country PFM systems and is increasingly used in countries with weak institutional and public financial management capacity. This carries significant risks including inappropriate allocation of resources and suboptimal service delivery to citizens.
3. There is a notable trend away from using budget support to facilitate reform actions in public sector management.
4. There is clear evidence suggesting that budget support can have a transformative effect on PFM reforms, which are particularly relevant in fragile countries with weak institutional capacity.

In conclusion, budget support interventions based on strong institutional and public financial management reforms enables greater development outcomes and better services to people. Budget support and strong PFM are stronger than the sum of their parts. It is evident that we can do better to foster this symbiotic relationship for greater development outcomes.