PUBLIC FINANCIAL MANAGEMENT REFORM IN THE MIDDLE EAST AND NORTH AFRICA: AN OVERVIEW OF REGIONAL EXPERIENCE
BY ROBERT P. BESCHEL AND MARK AHERN
In June 2010, the World Bank completed a new study of public financial management (PFM) reform experience over the past decade within the Middle East and North Africa (MENA) region. The report, which combines comparative cross-country analysis using data from various Public Expenditure and Financial Accountability (PEFA) surveys along with more detailed case studies of ten MENA countries, seeks to benchmark MENA PFM practices against other countries at comparable income levels as well as to address a number of important questions.
Regarding the substance of PFM reforms, the analysis also seeks to understand the type of PFM reforms that have been implemented across the region in the last decade, including where these reforms have gone well, where they have not, and why. The study seeks to see if any broader conclusions can be drawn regarding the way in which these reforms have been implemented and how that has affected their success (or lack thereof). In what ways do political and bureaucratic considerations shape PFM reform in MENA? Are there tactical lessons about what works best during implementation from which future reformers can benefit?
Comparisons with Other Regions. The analysis utilizes the PEFA framework to provide a common approach towards evaluating PFM reforms in MENA. At an aggregate level, MENA's PFM systems are roughly comparable to those of other countries at similar income levels. As a whole, the region tends to do a bit better on accounting, recording, and reporting, and a bit worse on credibility of the budget.
A more detailed review presents a more complex and nuanced picture. There are four areas where MENA countries as a whole tend to perform better than global norms. The first is aggregate revenue outturn compared to the original approved budget, which is a subset of the broader category on budget credibility. On average, MENA countries tend to adopt conservative assumptions with regard to revenue projections—particularly with regard to oil revenues. Ironically, on the other side of the ledger, they tend to do significantly worse with regard to expenditures when compared to budget projections. Other areas where they do well include the comprehensiveness of information included in budget documentation; orderliness and participation in the budget process; and the transparency of taxpayer obligations. In contrast, they tend to perform worse in a variety of areas relating to audit and financial accountability, including the effectiveness of internal audit, the quality and timeliness of annual financial statements, and external scrutiny and audit. These problems, in turn, are often linked to the relatively weak position that parliament plays vis-à-vis the executive throughout the region.
The Substance of Reform. Throughout the past decade, MENA countries have sought to implement a variety of reforms covering all phases of the budget cycle – developing a budget strategy and preparing the budget, through resource management, internal control and accounting, and finally reporting and external audit. The report sets out the rationale for the different reforms in area and then with reference to the ten case studies reflects on the experience in the region. In doing so it identifies which reforms have made progress and which have disappointed. As the table above indicates, some general themes emerge.
The PFM reforms that have been most successful in MENA fall into two types: efforts to improve budget transparency and classification, and the reform of revenues, particularly tax and customs. Ironically, these represent two very different reforms. The first are relatively straightforward and technocratic in nature. An existing body of accepted practice exists to reform economic classification, such as in the form of the IMF’s GFSM 2001, and there are incentives to align accounts along standard international practice to facilitate the production of comparable fiscal and economic data. While there may be some resistance to such reforms stemming from basic bureaucratic inertia, no fundamental interests are challenged or mandates threatened. Once implementation is complete, the reform becomes part of the fabric of the system and endures.
This is not true for reforms in tax and customs, where the stakes are much higher. Revenue agencies are often among the entities in government where problems of corruption are most pronounced, since their function places them in a position to extract rents from both firms and the general public. Efforts to restructure and reorganize such functions often encounter fierce resistance from both those on the inside and some on the outside. Yet if the challenges are great, the gains are often significant as well. For governments facing significant fiscal deficits, it is often more politically palatable to raise revenues—difficult as that may be—than to engage in painful cuts in expenditure. Such reforms are therefore able to garner the requisite high-level political support to see them through in spite of considerable opposition.
Unfortunately, on the other side of the spectrum are a host of reforms that are neither particularly easy to implement nor which bring the promise of substantial fiscal gains, at least in the short-term. Some, such as improving the scope and comprehensiveness of the budget, are not technically difficult to implement. However, as noted above, unless significant political capital is invested in overcoming bureaucratic resistance, these reforms are unlikely to move forward. Other reforms, such as the development of MTEFs and greater performance orientation into the budget, are often both technically demanding and run up against powerful vested interests. In many cases, their successful implementation may depend upon underlying systems, procedures and practices being in place that may not exist. It is therefore not surprising that their implementation is frequently delayed or halted.
Lessons from How PFM Reforms were Implemented. Beyond these substantive lessons, the report also seeks to identify some more general conclusions regarding how such reforms were implemented and if there are ways in which potential reformers can revise their tactics and increase their chances for success. These lessons are captured in "Ten Principles of Implementation for PFM Reforms in MENA."
At the crux of these lessons is the notion that PFM reforms tend to work best when they are not pursued as ends in themselves or because “emerging best practice” is moving in that direction, but because they are seen as an important contributing factor in resolving some broader fiscal or developmental challenge. Their success is often just as dependent upon adroit tactical maneuvering as it is upon careful strategic planning—taking advantage of opportunities that present themselves within a broader strategic vision of what needs to get done. As a general rule, reformers should try to keep reforms quick, simple and mutually reinforcing, for complex programs can overtax managerial and staff capacity and momentum can dissipate if reforms drag on for too long. The most successful reforms have often relied upon the judicious combination of internal and external expertise, but care needs to be taken in getting the balance right and developing appropriate structures for managing change.
In Conclusion. The Bank PFM report should be required reading for any government contemplating PFM reforms in both the MENA region and beyond. The Bank report can be found in two volumes. Volume 1 contains the overview and conclusions, and Volume 2 contains the individual country studies. Both are available on-line at the following link: http://go.worldbank.org/4GEBLW99O0