FAQs on Public Financial Management (PFM)The World Bank Group
What is Public Financial Management?"PFM is concerned with thelaws, organizations, systems and proceduresavailable to governments wanting to secureand use resources effectively, efficiently andtransparently. While PFM encompassestaxation, borrowing and debtmanagement, its main focus is expendituremanagement, especially in the context ofpublic budgeting.“ Allen, R., Hemming, R., an d Potter, B., (eds.), 2012, An International Handbook of Public Financial Management, Palgrave Macmillan, forthcoming.
Why is PFM important?“PFM links fiscal policy and its implementation and PFMsystems enable other state institutions and citizens to holdgovernments accountable for their use of public resources”
What are the critical dimensions for PFM?• Budget planning and preparation• Predictability and control in budget execution• Credibility of the budget• Comprehensiveness of the budget and transparency• Accounting, recording and reporting• Audit and external scrutiny
What are the objectives of PFM and Fiscal Policy Good PFM systems contribute to the following four pillars of fiscal policy: – Macroeconomic stability – Align allocation of resources with policy priorities and objectives – Efficiency in delivering public services: value for money – Transparency and accountability for public financial decisions
Is PFM only concerned with managing the budget?No. The budget cycle is the core element, but PFMincludes other important topics in public sectorgovernance:o Public procuremento Debt managemento Tax and customs administrationo Local government financeo Public investment managemento Management of State-owned enterpriseso Management of overseas development assistance
Is PFM the responsibility of the ministry of finance?Primarily yes, in many countries, but notexclusively• Other state institutions such as the Cabinet and President’s Office, other ministries, the central bank, local governments, legislature, and audit institutions are also part of the PFM system of a country.• Often, as countries develop, technical functions (such as procurement, revenue collection) tend to be devolved out of the finance ministry to spending agencies and semi-autonomous agencies.
Is PFM a purely technical topic? No. Recent research shows the importance of non- technical, institutional or political economy factors in determining whether fiscal policies are efficiently implemented.• There is often a contrast between formal PFM rules and processes (laws, regulations and official rules of procedure) and informal PFM processes (rules of behavior that determine whether and to what extent formal laws are actually implemented).
What are the challenges of reforming PFM systems?The challenges facing less-advanced countries are considerable• Informal rules and weak institutions tend to dominate• IFIs have focused on analyzing technical PFM systems (e.g., through the PEFA instrument), not institutions, and similarly solutions proposed are mainly technical in nature.• The common practice of identifying “good practice” solutions from advanced countries, and attempting to import them to developing countries is generally mistaken.• PFM reform “action plans” should be built around institutional strengthening, and the development of country-specific technical solutions.
Additional reading• Richard Allen and Daniel Tommasi (eds.), 2001, Managing Public Expenditure: A Reference Book for Transition Countries, Paris: OECD.• Anwar Shah (ed.), 2007, Budgeting and Budgetary Institutions, Washington DC: World Bank.• International Monetary Fund, Public Financial Management Blog, Washington DC: IMF. http://blog-pfm.imf.org.• International Monetary Fund, Technical Notes and Manuals, includes several notes on PFM topics since 2009. http://www.imf.org/external/pubind.htm.• Public Expenditure and Financial Accountability (PEFA) website – http://www.pefa.org.• Richard Allen and Francesco Grigoli, January 2012, “Enhancing the Capability of Central Finance Agencies’, Economic Premise, World Bank.