Reflecting on the PEFA 2022 Global Report on Public Financial Management

We have seen over the last two and a half years that governments faced multiple challenges in managing fiscal demands to respond to the COVID-19 pandemic. Many public financial management (PFM) systems were not sufficiently resilient, which contributed to the widespread adoption of crisis budgeting measures. The 2022 Global Report on Public Financial Management highlights that efforts made by various governments to improve PFM systems are yielding results with a trajectory of improvements across countries , but much more needs to be done. The report which was just released by the Public Expenditure and Financial Accountability (PEFA) Secretariat provides a valuable basis for conducting broad assessments of the readiness of countries’ PFM systems to respond to crises. It grade-scores thirty-one performance indicators from A (the highest) to D (the lowest). The report also flagged several areas where PFM aspects are still at the basic level or below, indicating the need for urgent action.  Here are some key messages from the report:  

1. PFM systems lag where it matters the most for service delivery - Budget Execution.  A budget cycle consists of preparation, execution and evaluation and all three are important for public finances to work for people. Globally, PFM systems perform well on the budget preparation, however, budget execution aspects lag significantly, thereby limiting the ability of public finances to ensure optimal delivery of services to citizens. Also, budget evaluation, ie. accountability and transparency aspects remain weak in many countries thereby negatively impacting the accountability of governments to the people.
    
2. Composition of revenue collections and expenditure varies from planned – budget credibility issues. Although at an aggregate level, more than half of governments maintained limited deviation from planned budget overtime (less than 10% variation from plans), more countries struggled in maintaining discipline. Two out of three governments struggle to maintain the planned composition of their expenditure throughout the fiscal year, with significant (10% or more) variance in expenditure composition by both function (eg: Ministry of Health, Education, etc.) and economic type (capital, revenue, etc). Similar limitations are also observed at revenue composition, as projections of revenues in budget estimates varied from actual by types of revenues / taxes.
    
3. Good Public Debt Management processes are essential but not sufficient to maintain debts at an acceptable level. The global report brought to light some paradoxes. It indicates that debt management systems are strong in many countries, with robust processes in terms of recording, reporting, approval and strategic planning. However, these processes are not sufficient for governments to maintain debt at an acceptable level. Weaknesses in public investment management, asset management, cash management, and political economy issues lead to unsustainable debt level and risk of debt distress. Therefore, a holistic approach is needed to tackle the debt problem.
    
4. Use of Non-competitive measures of public procurement is a major challenge. Public procurement accounts for as high as 12% of global GDP. Weak public procurement practices adversely affect the quality of budget execution and the efficiency of government expenditure.  For example, the use of non-competitive methods is prevalent, which has serious implications for the quality and efficiency of government expenditure. Nearly 63% of countries awarded contracts (amounting to more than 40% of the total value of contracts) use non-competitive procurement methods.
    
5. Government accounting and financial reporting aspects of PFM have a huge scope for improvement in several countries. Government accounting and financial reporting arguably is one of the most technical aspect of PFM, that are to a large extent insulated against serious extraneous factors which can impact performance. Still, many countries struggle at accounting and preparing comprehensive and timely financial reports. In as many as 80% of cases, governments did not submit financial reports for external audit within three months of the end of the fiscal year. Only one country achieved the highest attainable PEFA score for the completeness, timeliness and consistency of annual financial reports.

The COVID-19 crisis and related shocks have brought PFM into focus. At the onset of the crisis, many countries made some changes to their PFM systems to deal with the emergencies. Emergency practices need to end and revert to normal PFM practices with established controls. At the same time, there were some innovations during the crisis, and these need to be re-examined as they could define the direction of PFM reforms. The global report on PFM, prepared by the PEFA Secretariat, is designed to help governments and development partners understand global and regional trends and to define a fit for purpose path of PFM reforms for countries.