What Is PFM?

Aug 20, 2014

This post was written by Paolo de Renzio, Senior Research Fellow for the Open Budget Initiative at the International Budget Partnership

Public Financial Management (PFM) is a term often thrown about when talking budgets and budgeting. Just as often its definition remains somewhat mysterious. A heterogeneous group of experts from academia, multilateral institutions, and think tanks—including yours truly from IBP, representing civil society views on the matter—collaborated on a recently published paper that tries to “demystify the concept.” It aims to present a simple yet innovative way to think about what PFM is, what it does, and question some common assumptions about budget reforms around the world.

We start by describing a typical PFM system, dividing it into the typical four main stages of the budget cycle: formulation, approval, execution, evaluation. We show that some stages can in turn be further subdivided into more specific constituent parts. For example, the budget formulation stage usually contains a more strategic component that is linked to broader policy directives, as part of the more mechanic budget preparation process. Similarly, budget execution comprises processes for managing resources, ensuring compliance with established rules and procedures, and keeping records and producing reports. Despite these similarities, PFM systems in different countries will exhibit differences and particularities, with a varying constellation of actors involved at different stages, and agendas and interests that are often conflicting.

These more procedural aspects of PFM systems are often given a lot of attention . We argue, however, that there is a need to move away from a focus on process (or form) and think more directly about the goals (or functions) that PFM systems aim to achieve. Four main categories of goals are proposed:

      1. prudent fiscal decisions;
      2. credible budgets;
      3. reliable and efficient resource flows and transactions; and
      4. institutionalized accountability.

To monitor the extent to which PFM systems are able to promote and achieve these goals, rather than their conformity to widely accepted “good practice” forms, there is a need to review existing assessment frameworks (such as the PEFA framework and its related assessments). In other words, it shouldn’t matter what a PFM system looks like as long as it delivers on its key goals. And, in order to deliver, it may in fact have to look different from country to country, based on local history, institutions, norms, and practices.

A similar argument can be applied to the type of PFM reforms that several international agencies have promoted over the years throughout the developing world. Many are based on the assumption that specific PFM tools and processes—such as medium-term frameworks, performance budgeting, and IT-based financial management packages—can and should be replicated across countries to bring about better PFM system “functionality,” without paying attention to the local context. It’s no surprise that many end up failing. We argue that the purpose of reforms should instead be “to help fit a ‘good practice’ to a local context, so that PFM institutions may more directly respond to locally defined issues and problems, and match local capacity and political realities.”

Some of the arguments in the paper are not new. But, we have tried to distill and summarize them in a short and easy-to-read document that, we hope, will spur further discussion and bring new voices and actors into the debate. Most important, this includes the voices of domestic actors and civil society groups in developing countries, where donor agencies often wield too much influence and end up shaping (what should be) local reform agendas.

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