What recent trends suggest for PFM performance in a COVID-19 impacted world

Last week, we looked at trends in Public Finance Management (PFM) reforms and how they have changed since 2017 by examining recent trends in Public Expenditure and Financial Accountability (PEFA) and Country Policy And Institutional Assessment (CPIA) data, and factors that are assumed to influence PFM performance. Global average performance by countries completing more than one PEFA assessment shows an improvement from C to C+ on the D to A scale. Influencing drivers such as incomes, natural resource dependence and political stability continue to account for around 35-40% of the variation across countries and over time – so they ‘set the scene’ of likely PFM quality, although individual countries can deviate significantly from the average estimate towards higher or lower performance trends.

Given that we appear to have reached a ’middling’ C+ PEFA rating for PFM performance across the world, can we continue to see further improvement – and how is this prospect affected by the massive challenges created by COVID-19? In the 2017 study, we used case studies to drill down into the puzzle of where and how PFM improvements happen and found that political interest in such reforms -- often as an instrument to reach wider goals -- was most important. The study also emphasized the importance of embedding reform tools and paying stronger attention to their full utilization – including through the results frameworks of projects.  

One of the most direct impacts of COVID-19 are much higher deficits, at least in 2020, but likely to persist in 2021  due to the combined effects of increased spending needs and lower revenue. When fiscal space shrinks, decision makers should become more interested in ensuring that every shilling, peso or dirham is well used and accounted for. However, both our quantitative and the case study research showed a varied picture: in some countries, fiscal crises have been followed by significant PFM reform efforts–especially reforms that helped to ease liquidity pressures through introduction of  (partial) single treasury accounts and similar measures -- but ‘overwhelming’ deficits and associated expenditure arrears have also been associated with increased ad hoc cash management outside of prescribed systems and processes. With this mixed picture, the quantitative analysis does not show a significant relationship between fiscal crisis and PFM reforms. 

We also re-examined whether better PFM leads to better fiscal outcomes. As we discussed in an initial paper in 2014, this is more challenging to assess. Countries with better PFM performance show less variance in aggregate and sector-by-sector government spending when comparing outturns to budgets. So improved PFM performance, as measures by PEFA, enhances budget predictability. 

But this does not necessarily lead to improved service delivery. We assessed this relationship by examining the link between PFM performance and education achievement. Here, even with presently available expanded numbers of observations, there are no discernable effects of better PFM on education results (see Fritz et al. 2014 for the original analysis). 

This suggests two key points for supporting PFM in a COVID-19 impacted world. One, for the coming 2-3 years, those who support PFM may need to triage more between countries where PFM systems may be at risk of slipping backwards . This would require dedicated efforts at countervailing support, those that manage to ‘hold steady’ while managing fiscal stresses, and those where the impacts of COVID-19 and increased urgency to use funds is likely to open new windows of opportunity for strengthening performance.  

Second, sectoral impacts remain a puzzle that really merits further investigation and consideration in support for PFM reforms. Given the lack of a direct and unequivocal relationship between better PFM and service delivery, we need to deepen our understanding of sector governance and performance challenges . One way of approaching this is by combining our focus on public funds more closely with considering critical complementary factors such as HRM practices (also emphasized by a recent NYU report on PFM reforms). Another way forward is to, rethink PFM and public sector reforms from the perspective of service delivery providers and what they need in terms of system improvements (see also). 

Editor's Note: You can read the first part of this blog here.