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June 22, 2001: 3:30 5 pm IFC Building 8-P-100

CURRENT ISSUES IN PUBLIC EXPENDITURE MANAGEMENT

SESSION 4: TRANSPARENCY AND GOVERNANCE

Speaking Notes

I’m very pleased to have the opportunity to lead the discussion on this topic, which is becoming central to the efforts of the international community in reforming public expenditure management.

I very much enjoyed the paper that has just been presented by Anand. In the case of Turkey, the Bank and the Fund have worked closely together in reviewing public expenditure management and Anand’s paper covers in great detail the many transparency and governance problems that have to be addressed.

I’m sorry Dani Kaufmann is not here. His paper in the World Bank Research Observer raises another set of questions regarding transparency in the financial markets. One of the key interactions that needs to be addressed, from an overall governance and transparency viewpoint, is the extent to which promotion or tolerance of quasi-fiscal activity by government through the financial sector can lead to financial and fiscal vulnerability over the long-term.

Whilst one would expect that the Asian Crisis would have heightened awareness of the potential problems that can arise in this latter area, I would like to give you a further example that we have recently seen of the continuing use of the financial system to pursue quasi-fiscal activities.

The example of Ghana

In Ghana, the previous government chose to hold petrol, electricity, and utility prices below the proper economic price and to allow the economic consequences of that choice to be reflected, not in the budget, but in the banking system, particularly of the State-owned Ghana Commercial Bank.

The Financial Sector Assessment Program Report (October 23, 2000), prepared jointly by the Fund and the Bank, reported that the banking system was seriously over-exposed to the country’s single oil refinery, and that if the security of these loans proved inefficient, the commercial banks could face serious losses, threatening the capital of the system’s banks. These difficulties were compounded by guarantees provided by the Bank of Ghana on various loans and foreign exchange transactions, and by poor investment policies in the nation’s public sector pension authority which is managed outside the budget.

As a consequence, the FSAP Report (page 7) concluded that the budget could face large contingent liabilities from: (i) the potential workout needs for several large troubled loans to the Ghana Commercial Bank; (ii) the potential bail out of depositors in other commercial banks and NBFIs; (iii) the need to assist the pension fund and other NBFIs to cover their obligations; and (iv) the possible need to cover large losses if the oil refinery loan went bad. In addition, the Report pointed out that the Bank of Ghana’s own financial position was poor and required recapitalization since it had such substantial obligations that it had to rely on the government to meet its underlying expenses.

It is worth noting that none of these financial sector contingent liabilities appear in the report of accounts prepared by the Accountant General nor did they attach comment from the Auditor General’s department, which is charged with auditing the government’s accounts. In short, at least in the year 2000 now past, most of the fiscal action did not take place within the budget of Ghana. Instead, it was being conducted nontransparently under the auspices of the Bank of Ghana.

Thus, the importance of this topic should be clear. However, since the overall theme of this workshop is public expenditure management, I’d like to take this opportunity

  • first, to say something of what the Fund is doing in this area and
  • second, to look at some ways in which the Bank and the Fund can work more closely together to promote transparency and governance in public expenditure management.

The two papers for this seminar some encouraging pointers to possible ways of improving cooperation between our two institutions and between different sectoral analyses

As most of you will know, the Fund has been very actively promoting fiscal transparency through its Fiscal Transparency Code and Manual. In the last two years, the primary vehicle that has been developed, not only in the fiscal area, but in a range of 11 standards being promoted by the Fund, the Bank, and a range of other international bodies, are the Reports on the Observance of Standards and Codes (ROSC). In the fiscal area, the ROSC provides a discussion on how well a country’s practices conform to the fiscal transparency code, based on the Manual. Indeed, the fiscal ROSC is now seen as one of the main instruments used by the Fund to highlight fiscal transparency issues in its annual Article IV discussions with member countries.

Although voluntary, there is value in a country undertaking the ROSC exercise. From a country’s point of view, the fiscal ROSC gives it an opportunity to commit to achieving the standards of fiscal transparency proposed in the code and to have its current status objectively assessed. From the Fund’s perspective, the work on a ROSC provides some indication of whether the fiscal data are soundly based—and of the steps that are being taken to remedy data deficiencies. I should note that not only the fiscal ROSC, but all other ROSC modules are available to the Bank board to inform discussion on transparency and governance on member countries.

The fiscal ROSC, it can be added, explores data quality issues beyond those relating to published budget and accounts documents—covering aspects such as quasi-fiscal activity, tax expenditures, and contingent liabilities. In addition, fiscal ROSCs place considerable emphasis on institutional responsibilities and accountability as integral elements of fiscal transparency .

Yet all of this work may seem somewhat oriented to the Fund’s interests. But I recognize that the Bank has its own concerns and its own instruments. It is precisely my understanding of these concerns that leads me to take a few minutes to address the linkage between the work of the two institutions in this area. Clearly, the Bank does have its own instruments: the Public Expenditure Review (PER)—which was the basis for Anand’s paper. And, at an earlier session of this workshop, the Bank’s approach to Country Financial Accountability Assessment (CFAA) was discussed. There are others. Even within the Bank, there is a perceived need to examine how these various instruments relate to one another, particularly in relation to common concerns like transparency and governance issues that cut across a number of areas of public expenditure management.

However, to address fiscal transparency concerns, I would advance the view that, although the fiscal ROSC has been developed as an instrument primarily by the Fund and is being integrated with Fund surveillance, this should not preclude the fiscal code’s methodology from being applied by the Bank and other institutions.Indeed, the fact that the ROSC is a public statement by a member country that has been subject to independent review should enhance its usefulness. The more that other institutions can use this framework and objectively comment on the judgments made, the stronger the fiscal ROSC will become, and the stronger the incentives for countries to be seen to improve transparency.

I want to emphasize: the code and the methodology underlying the ROSCs are much more important than any individual ROSC document. In relation to Bank PERs, therefore, I suggest that discussion of transparency elements should refer explicitly to the code definition of transparency and to the ROSC assessments against the code.

Of course, there are several levels at which independent analysts may disagree with the approach being taken toward promoting fiscal transparency. We assume, however, that at this stage, there is no fundamental disagreement between the Bank and the Fund on the fiscal transparency code (although clearly, we will continue to adjust the code and manual in light of experience and comments received; indeed, the code and manual have, in fact, just been revised—mainly by way of streamlining and emphasis—and this will continue to be done from time to time).

We recognize, of course, that PERS will go into much more detail in both analysis and prescription than the ROSC and will cover many elements beyond transparency. The fiscal ROSC for Turkey, for instance, goes into considerable detail on the problems of disaggregated budgeting and measures to remedy these over the medium-to long term.

Undoubtedly such extensive treatment of technical issues will be useful to the authorities. We do think, however, that particular emphasis should be given to establishing clearly defined objectives for PEM system reform in a way that is clearly understood by both the authorities and the international community.The fiscal transparency code, we suggest, provides a framework for doing just that, and the fiscal ROSC attempts to define the important weaknesses and priorities for improvement.

We doubt that there was major disagreement between the fiscal ROSC and the PER in these terms. But the Turkish PER could have referred more extensively to the fiscal ROSC and indicated those areas where the additional analysis of the PER indicated differences or confirmed the judgments of the ROSCs. Ideally, references to fiscal transparency in Bank documents could explicitly use the fiscal transparency code framework. This observation applies equally to CFAA's.

Application of these principles would convey a sense of cooperation and mutual support between the Bank and the Fund—while allowing professional differences to be recognized. It would provide a strong signal to the country and the international community that fiscal transparency as defined in the fiscal transparency code is seen as important—and this in itself should contribute to strengthening capacity for governance.

Finally I’d like to return to the questions raised by Dani’s paper, particularly the linkages between fiscal and financial transparency and establishing priorities on measures to improve transparency. On the first point, the fiscal code and the monetary and financial codes all place great emphasis on the need to define any agency roles carried out by central banks or financial institutions on behalf of the government. In many countries, it appears to be poorly defined quasi-fiscal roles of financial institutions and public enterprises rather than the public budget per se that creates long-term budget and financial sector problems.

One of the main values of the transparency/ROSC framework is that it allows a broad survey of all sources of fiscal and financial problems from a transparency perspective. This allows weaknesses to be seen in a broad perspective. If we can all agree to weave this framework into our analytical instruments, there should be a much better chance of coordinated action to address problems of transparency and governance. This should allow us to move, over the long term, toward more integrated PEM systems in developing countries.