Sound institutions improve prospects of maintaining fiscal stability, meeting social development, say authors of IMF Working Paper on budget institutions (IMF photo)
FISCAL POLICY
The Budget Institutions Index, outlined in an IMF Working Paper, measures the institutions of low-income countries across the entire budget process from planning and negotiation, through approval, to implementation. Those institutions are assessed against a list of wide-ranging criteria that measure key characteristics of the budget process.
“The strength of this index is that, while building on existing indicators such as the Public Expenditure and Financial Accountability framework and other budget databases, it is broader in scope than others that have come before it. It captures the complex and multifaceted nature of the budget process,” said Era Dabla-Norris, one of the coauthors of the report.
“The index provides a simple and effective tool for benchmarking low-income countries against each other and against other country groups,” she added.
The criteria contained within the index reflect many of the specific characteristics of the budget process in low-income countries The criteria are used to determine, for example, the comprehensiveness of budget coverage, as measured by inclusion of information on donor-financed projects, and the size of off-budget expenditures; the degree of centralization of budgetary decision-making; whether the budget is subject to effective rules and operational controls; the ability of the legislature to scrutinize the budget; and whether there is an effective system of internal and external audit.
Differences in budget institutions
A total of 72 low- and middle-income countries were assessed against the criteria. Despite significant differences between economies at similar stages of development, the authors find that transition economies, and countries in the Latin America and Caribbean region, have relatively more developed budget institutions than countries in other regions.
Budget institutions in sub-Saharan Africa were particularly weak in areas of budget planning and implementation, reflecting fewer checks and balances in the budget process, and less public dissemination of information on the budget. Overall, budget institutions in low-income countries were significantly weaker than in middle-income countries.
“Weak capacity, poor institutions of civil society, and political economy factors act as a severe constraint on the progress of modernizing budget institutions in many low-income countries,” said Richard Allen, a coauthor of the paper.
Desirable fiscal outcomes
The authors suggest that the recent global crisis demonstrated how the strength of budget institutions can determine the scope to use fiscal policy as a stabilization tool. As countries exit from the crisis, sound institutions can support the consolidation process and help countries maintain sustainable fiscal policies.
The index is used to statistically examine whether strong budget institutions are associated with better fiscal performance. The analysis suggests that countries with sound budget institutions that promoted fiscal discipline were more likely to have higher primary balances and lower debt in the period running up to the crisis, and could pursue more accommodative fiscal policies during the crisis.
However, for low-income countries, the importance of sound budget institutions transcends the current crisis. Strong institutions are vital for the long-term development of a country as they enable effective implementation of policies to reduce poverty and achieve fiscal sustainability.
“Sound institutions help ensure government accountability and prevent leakage of public funds; increase efficiency of scarce public resources; and improve the prospects of maintaining fiscal stability and meeting social development,” said Dabla-Norris.
The paper concludes that further strengthening transparency and comprehensiveness of the budget process in low-income countries are particularly important; and that well developed procedures for external monitoring and audit of the budget are likely to be more effective than those which rely on government self-monitoring.
“The indicators may also be useful in guiding countries towards areas of the budget process that require technical assistance for building strong institutions,” said Dabla-Norris.
