Public Information Notice No. 03/51

Public Information Notice: IMF Executive Board Reviews World Bank/IMF Collaboration on Public Expenditure Issues

April 11, 2003

On March 12, 2003, the Executive Board of the International Monetary Fund (IMF) considered a joint IMF/World Bank staff paper on Bank/Fund collaboration on public expenditure issues.

Background

Following the Monterrey Consensus, the Development Committee of the World Bank and the Fund indicated that the two institutions would scale up and intensify efforts to assist countries to mobilize domestic resources and improve the quality of public expenditure. Against the background of the mandates of the two institutions and existing guidelines issued to staff, the staff paper reviews the experience of collaboration of the Bank and Fund on public expenditure issues.

The role of the Bank and the Fund in country program design and policy advice is governed by their respective mandates. The IMF's Articles of Agreement entrust it with the mandate to promote macroeconomic stability of its members and financial stability at the international level. The Bank's Articles of Agreement give it a mandate to promote economic development, increase productivity, and thus raise the standard of living of the less developed areas of the world. To address the growing overlap created by Bank and Fund structural adjustment programs during the 1980s, the 1989 Concordat provided specific guidance on the division of activities between the institutions on the basis of their primary responsibilities. The Fund's primary responsibilities were defined to include aggregate aspects of macroeconomic policy and their related instruments including public sector spending and revenues; aggregate wage and price policies; money and credit; interest rates; and the exchange rate. Correspondingly, the Bank's primary responsibilities were defined to include development strategies; sector project investments; structural adjustment programs; policies which deal with the efficient allocation of resources in both public and private sectors; priorities in government expenditures; reforms of administrative systems, production, trade and financial sectors; the restructuring of public enterprises; and sector policies.

Specific guidelines for the coordination of work on public expenditure were issued by the two managements in 1995, and in1998, a joint memorandum of the Managing Director of the Fund and the President of the Bank reaffirmed the responsibilities of the Bank and Fund in public sector reforms. In 2000, the President of the Bank and the Managing Director of the Fund issued a joint statement on Fund/Bank partnership based on complementarities of the two institutions. In 2002, guidelines were proposed to strengthen the framework for Bank/Fund collaboration. Two key elements of this framework are (i) early engagement between the staff of the two institutions in program design and country assistance strategies and (ii) transparent and systematic reporting of each institution's views in Board documents.

The expansion of activities in public expenditure work in recent years reinforces the need for improved Bank/Fund collaboration. First, the scope of work in public expenditure has significantly expanded to address a broader range of institutional issues, from policy and budget formulation, through budget execution and accountability, to service delivery and development impact. Second, the creation of new diagnostic instruments in the Fund and Bank and other agencies (e.g., CFAAs, Public Expenditure Tracking Surveys (PETS), ROSCs, and EU audits) has created new areas of overlap. Third, the decentralization of the Bank has posed new logistical challenges for Fund/Bank coordination. Fourth, and most importantly, the shift to the Comprehensive Development Framework (CDF) and Poverty Reduction Strategy Paper approaches based on country ownership has underlined the need to update the old protocol and its narrow focus on Bank/Fund coordination, which largely excluded the perspectives of the country authorities and other donors.

Executive Board Assessment

Executive Directors welcomed the opportunity to discuss the Bank/Fund collaboration on expenditure issues, given the key role of sound public expenditure policies in enabling countries to achieve the Millennium Development Goals through the effective and efficient use of public resources, and the expansion of public expenditure work by the Bank and the Fund in recent years. While each country has primary responsibility for its own economic and social development, Directors emphasized that the Bank and Fund, guided by their respective mandates, have an important role to play in supporting country-led strategies on public expenditure reform.

Directors agreed with the staff assessment of the lessons learned from recent experience with Bank/Fund collaboration. While the Fund and the Bank have different approaches to public expenditure work, in reflection of their different mandates and time horizons, this experience suggests that a clear government vision of reform can help improve the complementarity of their approaches. At the same time, Directors stressed that this will need to be buttressed by close Bank/Fund collaboration to ensure that their assistance and policy advice are consistent and complementary. Directors underscored the importance of developing processes that enable a government and its development partners to formulate an agreed reform program and a common understanding of the sequencing of reforms.

Directors welcomed the survey of stakeholders undertaken in preparation of today's paper. While the collaboration between the Bank and the Fund is rated as between adequate and effective, Directors noted that there is scope for improvement. They highlighted, in particular, the need to better plan missions so as to reduce the burden on country authorities, better coordinate the different timeframes of Fund and Bank work on public expenditure issues, and strengthen the collaboration with donors on country-led reform strategies. Directors observed, however, that in the absence of adequate government commitment, even significantly enhanced collaboration between the Fund and the Bank would not ensure substantial progress on expenditure reform.

Directors endorsed the new framework for enhanced collaboration among development partners on public expenditure as an appropriate response to the lessons learned and a promising initiative to strengthen the support provided to countries in this area. Centered on strong country ownership, the framework focuses on the articulation by the government of public expenditure reform strategies in PRSPs or other country-owned documents; an integrated and well-sequenced program of technical and financial assistance from development partners (including diagnostic work), to support countries' public expenditure reform strategies; and periodic reporting by countries of their performance in public expenditure policy, financial management and procurement.

Directors underscored that, within their available resources, the Bank, the Fund, and other development partners should stand ready to respond to requests to support both the design and implementation of such country-led strategies. While for low-income countries PRSPs would be the natural instrument to articulate--with Bank and Fund staff support--public expenditure reform strategies, a flexible approach will continue to be needed to efficiently respond to the country-specific situations faced by middle-income countries. Directors stressed the importance of organizing the periodic reporting on progress in a manner that would minimize the administrative burden on country authorities. They underscored that the new framework should proactively address problems that may arise from the differing timeframes of the Bank and the Fund. Nonetheless, senior staff accountability will be necessary to ensure that the appropriate incentives are generated for the staffs of the two institutions to coordinate effectively, thereby reducing the likelihood of conflicting advice to country authorities. Directors hoped that consistent implementation of the framework would further improve the predictability of donor flows in aid-dependent countries.

Directors welcomed the procedural reforms proposed to strengthen Fund/Bank collaboration in support of the new framework. This will be achieved through: early consultation of country teams on work plans; improved communication of needs for expenditure work between the two institutions; formalization of the exchange of information on mission planning between the Bank and the Fund; increased cross-participation in missions; and strengthened collaboration on work on fiscal Reports on the Observance of Standards and Codes (ROSCs) and the Bank's Country Financial Accountability Assessments (CFAAs). In this connection, Directors welcomed the intention of both institutions to seek, to the extent possible, to share common databases from this work, with the objective of minimizing the burden on country authorities. They expected that the new framework would result in effective streamlining in this area. Directors also welcomed the proposed systematic sharing of draft technical assistance reports and analytical work for review and comment and improved information sharing with external partners, consistent with the relevant policies on confidentiality.

Directors stressed that strengthened collaboration between the Fund and the Bank should maintain a clear division of labor between the two institutions. The Fund should be the lead agency on the aggregate aspects of macroeconomic policy and their related instruments, and the Bank on issues relating to public expenditure composition and efficiency, while close coordination between both in areas of joint responsibility should help ensure complementarity and avoid conflicting policy advice to country authorities. Directors recognized that, as reforms in different areas of public expenditure management (PEM) are closely interlinked, it would not be practical to rigidly allocate specific responsibilities to the Bank or the Fund in different areas of PEM. It was, nevertheless, suggested that the designation by individual countries of a lead agency in their PEM-reform efforts would usefully help ensure coordination. Directors welcomed the proposed steps by the Fund and the Bank--including the development of a modular approach--to further strengthen their internal coordination of public expenditure work and facilitate implementation of the new framework.

Going forward, Directors stressed that effective implementation of the new framework will be key to ensuring that Bank/Fund collaboration on public expenditures is strengthened on a sustained basis. Close monitoring of implementation, along with adequate procedures for resolving any differences of views, will therefore be of essence.