Sound public finance management is critical to informing and implementing fiscal policy and to achieving the World Bank Group’s goals of eradicating extreme poverty and promoting shared prosperity. Public finance management is a necessary condition for fiscal sustainability, a stable macroeconomic environment, public sector accountability, and the provision of basic public goods and services. It includes (i) public financial management—and its subcomponents of public expenditure management, public investment management (PIM), and integrated financial management information systems (IFMIS)—and (ii) public sector debt management. These two areas are the subject of this evaluation and will be referred to hereafter as public financial and debt management (PFDM). Robust PFDM institutions and practices are critical to the efficient and effective use of scarce public resources. With the onset of the coronavirus (COVID-19) pandemic, and the unprecedented slowdown in economic growth, the importance of sound PFDM will only increase.
During fiscal years (FY)08–17, the World Bank invested significantly to strengthen PFDM capacity in International Development Association (IDA)–eligible clients through lending and nonlending support. This included 126 investment project loans amounting to $6.8 billion, 260 development policy operations (DPOs) amounting to $19.4 billion (through 714 policy actions), and 598 advisory services and analytics activities. This reflects the importance of PFDM in IDA-eligible countries, which can also be seen within the 19th Replenishment of IDA (IDA19), in which core aspects of PFDM were highlighted as policy commitments: promotion of debt transparency and debt management; strengthening of infrastructure governance; and support of investments in human capital that promote growth, people, and resilience.
But data on the quality of some major pillars of PFDM are not regularly and systematically produced or scrutinized. Available country-level data consist of valuable diagnostic assessments—for example, Debt Management Performance Assessments and Public Expenditure and Financial Accountability assessments—that are irregularly conducted. Independent Evaluation Group validations of staff self-assessments of PFDM-related projects and operations provide additional insights, but these often lack sufficient granularity or depth to provide a clear picture of the factors that determine the success of PFDM support; furthermore, nonlending PFDM-related support (including training, peer-to-peer learning, and analytical work) and many trust funded activities are not systematically evaluated.
Nevertheless, and drawing on a wide range of sources, this evaluation concludes that resources allocated to improving PFDM in IDA-eligible countries have yielded many positive results. This includes improving debt management capacity and strategies, and establishing and strengthening systems of accountability for budget management, PIM, and financial accounting and reporting. Support has also strengthened countries’ institutional capacity by improving the regulatory framework for sovereign borrowing.
But there remains scope to improve results by addressing several shortcomings in the World Bank’s support for PFDM in IDA-eligible countries. For example, support for PIM has sometimes relied excessively on World Bank instruments not well suited for longer-term capacity building (for example, DPOs). Additionally, although IFMIS implementation is a longer-term endeavor that lends itself to investment lending support, DPO prior actions can provide complementary support to extend coverage to all major financial transactions and to enforce ex ante compliance. However, of the 714 PFDM-related prior actions supported by DPOs in IDA-eligible countries, just 22 were IFMIS implementation related and, of those, only 2 specifically targeted IFMIS coverage. And as recognized in the context of the World Bank / International Monetary Fund Multipronged Approach to address emerging debt vulnerabilities and the recently adopted Sustainable Development Finance Policy, there is a need to enhance the transparency of several aspects of debt and debt management.
There is also scope to more fully exploit complementarities among the pillars of PFDM. The importance of this complementarity—and the need to ensure that scarce resources are used effectively and efficiently—was recognized by IDA Deputies. They noted in IDA19 that “the first challenge is to assist IDA countries to ensure that the benefits exceed the costs of servicing their debt. IDA and other partners can help by supporting initiatives that enhance capacity in areas such as public finance management, public investment management … and debt management” (IDA 2020a, 19). It is therefore noteworthy that IDA-eligible countries that were in debt distress or at high risk of debt distress in 2020 were less likely to have benefited from World Bank support for PIM than those that were not in debt distress or at high risk of debt distress. Although the direction of causality is unclear and improvements in PIM are no guarantee of debt sustainability, rigorous and transparent PIM systems and processes can reduce the likelihood that countries will undertake expensive or noncritical investment projects that do not generate the returns needed to justify their costs.
The quality and impact of PFDM can be enhanced by improving the coordination and prioritization of World Bank support to IDA-eligible clients. For example, the World Bank has provided significant and well-coordinated support to improve public debt management in many IDA-eligible countries facing rising debt vulnerabilities. But this support has not been systematically accompanied by efforts to improve public financial management (and PIM in particular), despite widely recognized synergies among borrowing, fiscal transparency, and the quality of public investment. As a result, opportunities to enhance the growth and development impact of development spending and debt-financed public investment have likely been missed, with potentially negative consequences for debt sustainability.
The decentralized way PFDM diagnostics have been applied and supported within the World Bank suggests that there is scope to further realize synergies among PFDM pillars. Performance and policy actions under the new Sustainable Development Finance Policy provide such an opportunity. With the growing importance to IDA clients of improving the efficiency of their use of scarce public resources in the face of rising debt levels, a more deliberate and coordinated approach to PFDM capacity building is warranted. A first step in this direction is to have a clear and up-to-date picture of PFDM strengths and weaknesses for each IDA-eligible country, drawing on assessments of the key pillars of PFDM. This has been addressed to some extent within each pillar of PFDM, but synergies among pillars remain underexploited. The second step is for the World Bank to more systematically support the priority needs of IDA-eligible countries with better sequenced and complementary lending and nonlending support to improve the quality of PFDM more broadly.
In support of such an approach, the following recommendations are proposed, which, if adopted, could contribute meaningfully to achieving the IDA19 objective of helping client countries ensure that their debt burdens do not overwhelm their ability to reduce poverty or provide essential government functions:
- World Bank should regularly monitor the quality of the key pillars of PFDM for each IDA-eligible country, possibly through a centralized, country-specific PFDM assessment. The purpose of such an assessment would be to provide the basis for a coordinated, medium-term PFDM capacity-building work program that addresses the most critical shortcomings while maximizing complementarities among the main pillars of PFDM. The assessment would be overseen by the World Bank’s Equitable Growth, Finance, and Institutions Vice Presidency, given its responsibility for the two Global Practices leading much of the World Bank’s work on PFDM. This assessment could be undertaken in the context of various other Bank products (for example, in the preparation of Systematic Country Diagnostics or their updates, or Country Economic Memorandums or Updates) or through a periodic stand-alone report. Such an integrated PFDM assessment would draw from the full range of existing PFDM diagnostics including data on financial reporting standards, the use of sound practices in public sector accounting, IFMIS coverage, PIM assessment indicators, Public Expenditure and Financial Accountability indicators, and Debt Management Facility monitoring and diagnostic frameworks and tools.The assessment would provide a comprehensive picture of a country’s capacity to manage its scarce public resources. It would also draw attention to progress in improving key dimensions of PFDM and would highlight areas that are lagging and in need of greater attention and support. Periodic publication of the results of each country’s PFDM assessment (either alone or in the context of another report) could highlight the links among the various dimensions of PFDM and draw attention to areas in need of improvement.
- Actively use the previously described assessment to prioritize and sequence World Bank support for PFDM capacity building and reform in IDA-eligible countries. Such a framework could inform the design of budget support operations, investment projects, and country-specific performance and policy actions under the newly adopted Sustainable Development Finance Policy (for example, by prioritizing improvements in PIM alongside measures to improve debt transparency and debt management). Coordinated support for such a work program would be embedded in Country Partnership Frameworks. This would require that the Equitable Growth, Finance, and Institutions Vice Presidency better coordinate and sequence interventions by the Macroeconomics, Trade, and Investment and Governance Global Practices to tackle PFDM challenges. If published, these assessments could guide development partners that are active, or seeking to be active, in this area, and could inform the domestic policy debate on priorities for enhancing public sector transparency and accountability.