COVID-19 Context

The COVID-19 pandemic highlights the importance of strong PFDM to help countries make more efficient use of increasingly scarce resources. To respond to the crisis, countries need strong and flexible PFDM to efficiently and effectively reallocate resources, control spending, improve targeting, and avoid arrears when the private sector is strained. To the extent that the pandemic increases the need to borrow, this needs to be done in a prudent and measured manner to control both fiscal cost and risk.

As governments rapidly shift policy and spending in the face of the pandemic, robust, responsive, and flexible PFDM systems are crucial. Such systems are important for (i) using scarce resources efficiently for both current and capital spending, (ii) accelerating budget execution and funds release to help ensure the ongoing delivery of essential and emergency public services, and (iii) managing the costs and risks associated with inevitable increases in indebtedness. Critical in this flexibility is the maintenance of accountability and transparency to ensure value for money and prevent the unauthorized use of funds (box 7.1). Creditors—both bilateral and multilateral—will expect this as they extend essential debt relief (G-20 Finance Ministers and Central Bank Governors 2020).

Reflecting the rapid increase in the level of external debt distress among IDA-eligible countries even pre-COVID-19, the World Bank recently adopted the Sustainable Development Finance Policy. Although outside the scope of this evaluation, the Sustainable Development Finance Policy aims to support IDA-eligible clients’ efforts to strengthen policies, institutions, and practices for transparent and sustainable financing of development goals; enhance coordination among borrowers, creditors, and other development partners; and introduce a more robust monitoring and accountability framework (box 7.2). IEG plans to prepare an evaluation of the Sustainable Development Finance Policy, which will be delivered in FY22.

Main Findings

Over the course of 10 years, the World Bank, and its implementing partners and client countries, developed an extensive work agenda to help build the capacity of IDA-eligible countries to manage scarce public financial resources. This work was motivated by a combination of events and developments, including the need to avoid a reemergence of excessive debt burdens; a commitment to ensuring that scarce resources freed up from major debt-relief initiatives were channeled to productive purposes; the declining importance of official development assistance (and the increasing importance of domestic resources); recognition of the importance of infrastructure development to enable growth; and the need to make more effective and efficient use of scarce public resources if the Sustainable Development Goals were to be achieved. The importance of this work has only grown over time, including in the wake of the COVID-19 pandemic, and as an increasing number of IDA-eligible countries find themselves again at high risk of debt distress or in debt distress.

The World Bank has invested considerable resources in PFDM capacity building for IDA-eligible countries, with mixed results:

• Diagnostic tools developed by the World Bank show tangible improvements in arrears prevention but reveal more limited improvement in the credibility of budgets.
• Improvements were registered in the production and structuring of budget data with the help of BOOST, although there is scope to enhance support to help countries use expenditure data more effectively for improved planning and budgeting.
• World Bank support for public sector accounting practices has been effective, with several countries having taken preliminary steps toward the adoption of accrual basis accounting. However, less than a third of IDA-eligible countries received such support during the evaluation period.
• The World Bank has contributed to the rollout of IFMIS solutions to lower-capacity IDA-eligible countries, but the expansion of IFMIS coverage to high-value transactions has received limited attention.
• The World Bank’s modest lending and diagnostic support to IDA-eligible countries to improve PIM has bypassed many slower-growing countries at high risk of debt distress or already in distress.
• There is evidence of modest improvements in several aspects of PDM—in particular, debt reporting and debt management strategies—with more countries now meeting minimum requirements for most of these aspects.
• PDM support was found to have made a positive contribution to improving countries’ technical capacity to prepare their own MTDSs and debt sustainability analyses.

Although technical improvements alone will not guarantee improved PFDM, the World Bank can be more effective. Effective institutional and technical capacity building and associated change management takes time and is difficult to establish over the short term. Capacity building requires sustained effort, often over several years. For this reason, World Bank instruments with a longer-term time horizon need to be part of country strategies to build PFDM. This is not to say that investment lending and programmatic ASA alone are always the preferred instruments; there may be policy, legal, or structural impediments that are better addressed through prior actions in DPOs. This points to the importance of using a mix of instruments in support of PFDM. However, this evaluation has identified that some areas of PFDM—PIM, for example—may not have drawn on the optimal mix of instruments to have the desired impact on PFDM over the longer term.

Delivery of the World Bank’s support was not always coordinated, particularly between PFM and PDM, despite the explicit recognition of complementarities by IDA Deputies. Separately, PDM and PFM support were often internally coordinated, with country-specific prioritization of technical assistance and capacity building; however, coordination across the two areas was limited. This reflects several factors such as infrequent or irregular diagnostic assessments of PFDM capacity and a lack of awareness of diagnostic findings (due to, for example, limited disclosure of diagnostics). One consequence of the distribution of responsibility for PFDM among global units (across the Governance and the Macroeconomics, Trade, and Investment Global Practices) is modest or infrequent efforts to realize complementarities among dimensions of PFDM, even within the organizational umbrella of the Equitable Growth, Finance, and Institutions Vice Presidency. This finding is consistent with the independent external Universalia evaluation (2018) conclusion that the World Bank is not fully realizing complementarities and synergies between debt management and PFM support.

Making more systematic use of analyses and diagnostics to inform country strategies, investment projects, and DPO prior actions can help improve the effectiveness of PFDM support. For example, PFDM diagnostic assessments can help with the identification of prior actions for DPOs or with the articulation of performance and policy actions under the new Sustainable Development Finance Policy. The World Bank could more systematically and consistently reinforce the need for IFMIS to capture all large transactions and promote more comprehensive coverage of financial transactions and debt monitoring across the public sector. Support to improve PDM could be more explicitly linked with support to improve PIM to ensure that investments for which debt is incurred are productive enough to enhance the country’s capacity to service debt.

Although technical improvements in PFDM are necessary to achieve the desired outcomes, a lack of progress may also be a symptom of low compliance or inappropriate policy. Failure to achieve the objectives of support for PFDM may reflect an underlying political economy characterized by pervasive rent seeking by political insiders. This suggests the need to adapt the content of World Bank support to local conditions and enhance its impact by more effectively leveraging the World Bank’s instruments—both lending and nonlending.

Conclusions and Recommendations

There is scope to increase the effectiveness of the significant World Bank support to improve PFDM. Many IDA-eligible countries still do not meet minimum standards for debt management institutions and practices, suggesting that stronger links between diagnostics and capacity building may be needed. And although considerable support has been channeled to designing and rolling out IFMIS solutions, the World Bank needs to more routinely pay attention to budget coverage within IFMISs.

A more systematic approach to PFDM, coordinated at the vice-presidential level in Equitable Growth, Finance, and Institutions, can make PFDM capacity-building efforts mutually reinforcing. This approach aligns with the independent external Universalia evaluation (2018) recommendation that, to ensure the relevance of its inputs, the DMF should increase its role in strategic coordination at the country level with public debt management and PFM service providers. With a more coordinated approach, the efficiency of public resource management can be enhanced, debt sustainability improved, and the debt service burden reduced to create space for more critical development spending. A more integrated approach to PFDM could also contribute to a greater understanding of the political economy challenges that PFDM practitioners face. The onset of the COVID-19 pandemic makes it even more critical that the institutional underpinnings of PFDM are in place to allow countries to “build back better” through more efficient and impactful use of scarce resources.1 The newly adopted Sustainable Development Finance Policy can provide a platform for greater integration and reinforcement by including complementary PFDM actions in the performance and policy actions agreed on with IDA-eligible countries.

Countries with high and rising debt burdens require—in addition to help with debt management—support to increase the efficiency of their public investment, but they currently receive little. PIM is crucial to increasing the efficiency of public investment to ensure that countries are not accruing additional debt from investments (including for basic infrastructure) that will not pay for themselves or otherwise generate economic growth. However, countries with high debt burdens or in debt distress do not seem to have been prioritized in receiving World Bank support to improve PIM. Of the 30 countries with high levels of debt or in debt distress in 2018, only 13 had received PIM support from the World Bank over the evaluation period.

PFDM reform and capacity building tend to have greater success when they are supported with the coordinated use of a combination of World Bank instruments. This was the case in several DPOs that supported improvements in PIM during the evaluation period. The design of prior actions in DPOs could be more systematically informed by the often-extensive country-level diagnostic and analytical work on PFDM. This work can provide a ready palette of valuable PFDM reforms in need of support. However, DPO prior actions are a complement to, not a substitute for, the longer-term capacity building that is required for sound and sustainable PFDM.

Even in the context of emergency budget support, resource scarcity requires that operations take on a longer-term line of sight to “build back better.” This can be facilitated by more widespread knowledge of PFDM priorities among World Bank staff, including through better dissemination of the findings of PFDM diagnostics. There should be a presumption, for example, that diagnostics like the DeMPA be publicly available to help inform domestic policy deliberations and build support for reform.

On the basis of the above findings, IEG puts forward two recommendations (table 7.1). The recommendations recognize that improvements in PFDM will be increasingly necessary if IDA-eligible countries are to make the best use of scarce resources during and in the wake of the COVID-19 pandemic. They seek first to derive a transparent, comprehensive, and easily digestible picture of a country’s PFDM strengths and weaknesses to raise the profile of resource management adequacy. This information could help build demand for better PFDM within client countries and guide development partners (including the World Bank) in setting priorities for providing development support. It would also allow the World Bank to obtain a sound and more systematic basis to leverage its various PFDM engagements both at the level of country strategy and in the design of individual operations, including DPOs and performance and policy actions. The consolidated nature of the proposed exercise would draw together the various dimensions of PFDM operating under Equitable Growth, Finance, and Institutions to enhance coherence, sequencing, complementarity, and impact. Such an approach would be consistent with the findings of the recently published report “Advice, Money, Results—Rethinking International Support for Managing Public Finance,” which calls for a broader view of PFM that sees the concept through not only processes and systems but also government policy choices (International Working Group 2020).2