You guessed it: increasing and unsustainable public debt
The good news, however, is that there were a number of Public Financial Management (PFM) lessons about Resilience, Recovery and Reform that were shared and which need to be headed if we wish to avert the worst of the current global crisis.
FreeBalance took part in the Annual Meetings and has a number of recommendations on the implications for Government Resource Planning (GRP) solutions such as Integrated Financial Management Information Systems (IFMIS).
The Elephant in the Room
Lurking behind every session at the Annual Meetings was the impact of the global public debt crisis on citizens. The question being asked by everyone was: how can governments and the international community deal with poverty, food insecurity, inflation, and climate change with disappearing fiscal space?
The Bretton Woods Institutions faced criticism for perceived:
1. Forced government austerity, by cutting spending, when citizens most need social protection and spending. “Countries should prioritize protecting the vulnerable through targeted support while keeping a tight fiscal stance to help fight inflation.”1 The balance between fiscal stewardship and supporting the vulnerable did not seem to satisfy many in the development community.
2. “Loan sharking” by Development Finance Institutions with activists disrupting to demand that the that the IMF and World Bank cancel all debt.
3. Unfairness of voting quota system that favours developed country interests. Famed economist Larry Summers suggested: “The World Bank should be a major vehicle for crisis response, post-conflict reconstruction, and, most importantly, for supporting the huge investments necessary for sustainable and healthy global development. But currently it is not.”2
4. Losing the poverty plot: many of the detailed non-plenary sessions provided technical insight. But, attendees wanted more asking more questions about how to solve high level problems than in previous years.
There are no easy answers…
…but some PFM solution themes emerged:
- Resilience: why some countries that have managed crises better
- Recovery: how countries can recover economically and socially from crises
- Reform: what lessons were learned to inform public finance modernization to improve future resilience to crises
1. Fiscal Rules: governments with fiscal rules were more able to manage social expenditure requirements and leverage fiscal space. Many developing countries faced with spending more for debt re-payments than education.
- PFM implication: IMF recommendations to return to fiscal rules
- IFMIS implication: fiscal rule controls built into budget formulation ceilings and integrated for budget execution – such as the unified and integrated FreeBalance Accountability Suite™
2. Fiscal Transparency: governments with fiscal transparency took on more sustainable debt before crises, while enjoying lower corruption levels during crises
- PFM implication: support debt and budget transparency
- IFMIS implication: integration of debt in budget formulation, automate fiscal transparency through portals integrated with back-office systems – such as the Transparency Portals of the FreeBalance Accountability Suite™
1. Debt relief: widespread agreement that developing countries need debt relief.
- PFM implication: negotiations for debt restructuring based on needed fiscal space
- IFMIS implication: scenario planning based on historical data within financial systems to determine appropriate debt envelopes – such as the functionality of FreeBalance’s (GTDM) Debt Management module
2. Social public investments: recognition that citizen wellbeing is threatened. Governments realize that debt sustainability needs to be balanced by social cohesion sustainability.
- PFM implication: model implications of any debt restructuring on needed social spending
- IFMIS implication: support program budgeting methods to better track expenditures for priorities while showing potential savings by reducing non-priority spending – such as FreeBalance’s (PEM) Public Expenditure Management modules
1. Wellbeing: the need for shared prosperity was analyzed in a recent World Bank paper that analyzed the toll on from the pandemic on poverty in developing countries.
- PFM implication: public policy focus beyond GDP to what matters most to citizens [links?] within national development strategies
- IFMIS implication: support program budgeting methods during formulation, including output and outcome performance targets, enabling tracking results against government objectives – such as the functionality of FreeBalance’s (GPM) Government Performance Management modules.
2. Transparency and statistical reform: integration of fiscal transparency with statistical information provides governments, civil society, and credit rating agencies with early warning.
- PFM implication: support for international standards like Government Financial Statistics (GFS) for fiscal transparency while improving statistical and public finance capacity to enable accrual accounting to better understand true government fiscal situations
- IFMIS implication: enable international standards within budget classifications, while transitioning from cash to modified cash to modified accrual to full accrual accounting – as FreeBalance does for customers through progressive activation
3. Fiscal rules: reform beyond traditional fiscal rules to anticipate unusual shocks with sufficient flexibility tied to more than to debt targets
- PFM implication: need for fiscal rules reform, particularly for defining when financial shocks end
- IFMIS implication: built-in controls across the budget cycle supporting fiscal rules – such as the (PFM) Public Financials Management modules of the FreeBalance Accountability Suite™
4. Corruption: state capture operates during good times while fiscal crisis often introduces temptations as controls loosened for needed purchases and new donor funds materialize. Corruption vulnerability analysis helps governments to use a risk-based approach.
- PFM implication: temporarily loosen controls where corruption risk is low, provide full spending transparency, while tracking all crisis spending for auditing
- IFMIS implication: provide automated and searchable fiscal transaction data – not just PDFs, to enable civil society oversight, while leveraging audit trails to identify suspicious activity – as is available with FreeBalance’s Transparency Portals
GovTech Lessons Learned
The pandemic encouraged governments to accelerate digital service delivery. Government inefficiencies across the budget cycle were identified – many of which can be addressed through GovTech digital government technologies.
1. GovTech and PFM linkages: support of back-office FMIS systems of record were critical for fiscal transparency and financial service delivery during the pandemic. Domestic Revenue Mobilization was improved. Effective systems of record improve data quality and timeliness for more effective decision-making. This makes FMIS back-office systems a cornerstone for effective government digital transformation.
2. Integration and interoperability: the lack of integration among government financial management systems had significant negative consequences including the lack of:
- Controls in e-procurement systems not tightly integrated with IFMIS commitment and segregation of duties functions
- Consolidated revenue, expenditure, and debt information for decision-makers
- Timely and trusted government fiscal transparency
- Civil service delivery quality
- Asset and inventory availability and locations to inform purchasing spend management across the health procurement lifecycle
Was the public debt “elephant in the room” addressed during the IMF and World Bank meetings?
Partly, at best. We need to recognize that these events are as much about arranging loans and grants as addressing global problems. Donor countries are lobbied to provide more funding. Recipient country representatives are encouraged to accept loans and grants with conditions. There is wining and dining in much the same way that large private sector enterprises seek more sales.
This leads to some final observations:
- Unrealistic expectations: Some observers believe that DFIs are out-of-touch with realities, although it’s beyond difficult to map the network causes with effects, and the instruments necessary for recovery. Perhaps DFIs understand the development crisis but have institutional limitations.
- Changing landscape: The week in Washington may be seen as an important milestone, but the public debt and social crisis evolves, requiring flexibility.
- Never waste a perfectly good crisis: Development Financial Institutions leverage crises to recommend reforms because change is more politically palatable. It’s time for these institutions to do the same.
- PFM reform is part of the solution: Effective stewardship of public finances supported early fiscal warning, and more effective crisis responses. Budget credibility is a key PFM objective for fiscal crisis management.