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Stefan Leiderer et al. ety may have an influence on the budget cycle by lobbying parliamentarians to increase budget allocations in their priority areas. An independent media also plays a crucial role in the external scrutiny of the budget. It is the role of the media to assess the budget process and its outcomes and to inform the public about the government’s performance. 2.2.3 Common weaknesses of PFM systems in developing countries PFM systems in developing countries quite often face a number of similar problems that prevent budgets from working effectively and delivering the desired outcomes. These problems are above all weak institutions, capacity constraints (financial, technical, human resources) and inadequate budgeting techniques, together with unfavourable external factors such as macroeconomic instability and dependency on donor funding. Especially when countries face several of these problems simultaneously, the result is often poor budgetary performance. However, it needs to be emphasised that this observed poor performance does not necessarily stem primarily from poor formal PFM systems. On the contrary, many developing countries (usually under pressure from international donors, in particular the World Bank and the IMF) have introduced modern PFM legislation and institutional set-ups over the years. Consequently, the formal framework for PFM is often well designed in principle. However, in many cases, these formal frameworks are not adhered to in practice because informal rules and procedures tend to dominate the management of public finances. In these cases, the effectiveness of multi-year plans and annual budgeting as key instruments for implementing national strategic policies, such as poverty reduction strategies, are severely compromised as well as the prospects for effective public policy for development and poverty reduction. Box 6 contrasts good budgeting principles with typical poor practices often observed in developing countries. 38 German Development Institute
Public Financial Management for PRSP Implementation in Malawi Box 6: The Theory and Practice of PFM in Developing Countries Good Budgeting Principles… … and Poor Budgeting Practices 1. Comprehensiveness: the budget must encompass all the fiscal operations of the government 2. Discipline: policy decisions with financial implications must be made against the background of a hard budget constraint and in competition with other demands 3. Legitimacy: decision makers who can change policies during implementation must take part in and agree to the original policy decision 4. Flexibility: decisions must be pushed to the point where all relevant information is available 5. Predictability: fiscal policy must take account of the need to ensure the timely flow of funds to spending units 6. Contestability: existing policies are subject to constant review and evaluation 7. Honesty: budgets are based on unbiased projections of both revenue and expenditure 8. Information: accurate and timely information on costs, outputs and outcomes is essential 1. Unrealistic planning/ budgeting: both plans and budgets are not a statement of intentions, but a wish list of political promises 2. Short-term budgeting: no consideration of medium-term implications of budgets, such as the recurring operating costs of new investments 3. Repetitive budgeting: the budget is frequently remade during the year, in response to economic or political conditions 4. Cashbox budgeting: government spends as cash becomes available, not according to preset budget priorities 5. Deferred budgeting: arrears build up as expenditures are pushed into subsequent years 6. Distorted priorities: scarce resources are spent on ‘showcase’ projects that produce meagre social returns 7. Declining productivity: the size of the civil service expands in response to unemployment, but ghost workers, German Development Institute 39
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Public Financial Management for PRS
Page 5 and 6: Studies Deutsches Institut für Ent
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Annexes
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Stefan Leiderer et al. are employed
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Publications of the German Developm
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Discussion Paper 16/2007 Schirm, St
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