Getting serious about Budget Support

Mar 13, 2008

Budget support is meant to build democratic accountability for public funds and reduce the amount of red tape involved with donor transactions.

The challenge of budget support is to change the relationship between donors and recipient government as well as between governments and their citizens.

If this is not done, budget support is doomed to be no more than project support by a new name.

Recent research by the International Budget Partnership and Eurodad shows that there is a lot more that donors can do to make Budget Support succeed. They argue that:

  • Donors frustrate the objective of budget support by imposing policy conditions and performance targets.
  • Democratic accountability be an automatic result of budget support – it has to be built.
  • Donor don’t do enough to build democratic accountability.
  • Donors still have better and earlier access to budget information than citizens.
  • Donors participate in the budget process earlier than citizens and their representatives.
  • By the time citizens and legislatures enter the budget process, donor agreements have large been finalized.

Read the full document here in English, Espagnol ou Francais.

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3 comments:

  1. The IMF Blog (http://blog-pfm.imf.org/pfmblog/) recently posted about the findings of the Evaluation of DFID’s Direct Budget Support by the UK’s National Audit Office. Read the post here: http://blog-pfm.imf.org/pfmblog/2008/03/is-providing-bu.html

    Sadly, but unsurprisingly, the NAO report has little to say about domestic accountability.

    One of the other Blogs that are worth reading if you are interested in this issue is the Better Aid Blog: http://www.betteraid.org/blog/

  2. I found the Brief very clear and interesting.

    I just wanted to add a couple of short comments. At one point, you state that “donors should move to providing ever more of their aid as budget support”. Although in principle I agree with your statement, given that budget support has many desirable characteristics, both governments and civil society in recipient countries should be aware of the fact that donors’ main accountability lies with their domestic constituency. In many countries, budget support is not seen in a very favourable light by parliaments and public opinion, who deem most recipient governments weak and corrupt. Recent reports by the audit institutions of Germany, the United Kingdom and the European Commission stressed the need for additional fiduciary safeguards in budget support operations. In a sense, no donor will ever give all its aid as budget support, considering it only as one of many possible instruments. This might be better for recipient governments as well, given the vulnerability of budget support to political crises (see the cases of Uganda and Ethiopia, for example). In order to favour transparency and local accountability, it is much better to stress the need for all aid, regardless of which modality it is channeled through, to satisfy some basic principles and minimum requirements which make it easier to be captured in budget documents, at formulation, execution and reporting stage. In this sense, it might be more important for all aid to be ‘on-budget’, meaning recorded in budget proposals and reports, rather than insist that all aid be delivered as budget support.

    Another important issue, related to civil society’s role in monitoring aid flows as part of public spending, is that of accountability. If the same donors that provide aid to the government also provide most of the core funding for civil society monitoring of public spending, civil society groups might be reluctant to criticize the role that donors play, and the modalities that they use. Independent funding of civil society monitoring and advocacy work, clear agreements on the independence of civil society activities and positions, or multi-donor funding arrangements that limit direct interference are some of the possible avenues that could be explored.

    Congratulations for a job well done!

    Paolo

  3. Like Paolo de Renzio, I found this brief clear and interesting. However, I think it misses a crucial point: IMF policies and their negative impact on the use of budget support.

    To illustrate this, let me quote the study done by Paolo de Renzio and David Goldsbrough on ‘IMF Programs and Health Spending: the case of Mozambique’:

    “The key fiscal conditionality in the 2004-2006 programs was a ceiling on the domestic primary deficit (defined as revenue minus non-interest current expenditure minus locally-financed capital expenditure and net lending). Foreign-financed project lending and related expenditures were not subject to the ceiling, so the program automatically allowed for fluctuations in aid-financed project spending. However, spending financed by program aid (general budgetary support or sector-level support such as that provided to the health sector) was subject to the ceiling.”

    See http://www.cgdev.org/doc/IMF/Mozambique.pdf, page 15.

    What is this about? The IMF uses the concept of ‘fiscal space’. Fiscal space for any given sector can be roughly defined as the future domestic envelope for that sector. If the combination of present domestic resources plus foreign assistance exceeds the fiscal space, the IMF does not allow it to be spent.

    Let’s say, for example, that based on assumptions about economic growth, government revenue and government priorities, Mozambique can spend US$500 million domestic resources on health in 2020. The fiscal space for the health sector would thus be US$500 million. If, at present, the Government of Mozambique allocates US$200 million domestic resources to the health sector, while donors are providing US$400 million, there is US$100 million in excess of fiscal space. This US$100 million will not be spent; it will be saved.

    As the IMF is not very transparent about this practice, we don’t know exactly how much foreign assistance is affected by fiscal space constraints. The IMF’s own Independent Evaluation Office estimated it as 73% of all additional foreign assistance since the agreement on the Millennium Development Goals. 73%! Only 27 cent out of every additional aid dollar was spent (‘net fiscal expansion’).

    See http://www.imf.org/external/np/ieo/2007/ssa/eng/pdf/report.pdf, page 42.

    We also know, as confirmed by the de Renzio and Goldsbrough study mentioned above, that the tools used by the IMF to impose these limitations affect general budget support and sector budget support, not project support.

    This is, sadly, a very strong argument against budget support. While transactional costs of project support can be high, they are unlikely to exceed this 73% ‘tax’ on budget support.

    Budget support certainly has many advantages, but this is a serious disadvantage. Having researched this quite intensively, I came tot the conclusion that the only way to make sure that increased budget support leads to increased spending, is by making budget support commitments sufficiently predictable and reliable in the (very) long run, preferable 10 years or more. However, for the time being, no donor makes such long-term commitments. Only if many different donors pool their budget support, their combined effort becomes sufficiently reliable in the long run (because reduced contributions from one donor can be compensated by increased contributions from another donor). This is how the Global Fund to fight AIDS, TB and Malaria works, but unfortunately it is limited to three diseases. We would need a much bigger Global Health Fund to overcome this restriction.

    If you want to find out more about the impact of fiscal space constraints on health expenditure, and the proposal to create a Global Health Fund, you can download my thesis from http://www.icrh.org/files/academia-doctoraat%20Gorik%20Ooms.pdf.

    I therefore believe it would be important for civil society groups to monitor how fiscal space is hampering the use of foreign assistance in the form of budget support. A good indicator is the level of dollar reserves of the country. If this level increases substantially, while there is no economic boom to explain it, it is likely to be caused by saved budget support. Mozambique, for example, increased its net dollar reserves from US$960 million in 2004 to US$1,300 million in 2007: that makes US$340 million in only three years, or more than US$100 million per year. The IMF explains this as the result of “strong exports, along with sustained foreign aid inflows”.

    See http://www.imf.org/external/pubs/ft/scr/2007/cr07262.pdf, pages and 34.

    Of course, if donors want their budget support to increase dollar reserves, it is their choice. However, if they want to increase expenditure on education or health, budget support might not always be the best solution.

    Gorik

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