Strengthening Public Finance Management (PFM) in Post-Conflict ---

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Strengthening Public Finance Management (PFM) in Post-Conflict ---

    Public Finance Management in Post-Conflict Countries:

     The African Development Bank’s Enhanced Engagement

    The Horn Economic and Social Policy Institute

     Principal contributor: Ali I. Abdi

    May 2008

     Executive Summary

    The study aims to provide an operational framework for the African Development Bank (ADB) to strengthen its engagement in Public Finance Management (PFM) in post-conflict regional 1member countries. The development of the enhanced engagement of the Bank in a new

    operational framework for PFM in Post-Conflict Countries (PCCs) has been assigned a high priority, with recognition that economic growth and poverty reduction in many regional member countries have been set back by protracted conflicts, and that the Bank needs to urgently address the consequences of conflicts.

    A principal objective of the study has been to assess (i) the main needs and requirements of PCCs in as far as PFM is concerned; (ii) institutional capacity to formulate and implement appropriate government policies, ensure accountability and transparency in public finance management, and implement effective measures to fight misuse of public resources and corruption; (iii) the role of ADB and other providers of financial and technical assistance in strengthening PFM in post conflict situations, including the placement of long-term advisors and (iv) the prioritization of future Bank projects and programs to enhance its engagement and ensure its effective support for sound PFM in post-conflict regional member countries.

The findings of the study re-confirm that conflicts have set back economic and social

    development in many African countries during the past three decades. Besides large losses

    of human lives and displacement of millions of people, conflicts have destroyed economic and social infrastructure and stunted growth. The negative consequences associated with conflicts have included loss of productive capacity, interruption in the delivery of economic and social services, and depletion of social and economic capital. The management of public finances has been adversely impacted in all conflict situations, as domestic revenues declined, expenditure allocations were distorted, access to international development assistance was limited, and overall fiscal and other macroeconomic accounts deteriorated. Protracted conflicts also led to damaged institutions and distorted priorities.

    The study presents clear evidence of the adverse economic consequences of conflict in a dozen African countries in terms of loss of real output, higher inflation, fiscal deterioration, and weakening of monetary and external accounts during the conflict years. Pervasive weakness of the capacity of state institutions to formulate and execute sound public finance management has been another common feature of post-conflict countries. The capacity constraints, in particular loss of technical skills in PFM, translate to diminished domestic resources for reconstruction and recovery, weak allocation and execution of expenditures, and ill governance in general. In this context, there is an urgent need for the ADB to actively engage in rebuilding PFM institutional capacity, to support the strengthening of sound legal and

     1 In this study, post-conflict countries comprise those that have emerged from protracted crises and civil conflict, and that have achieved a peace agreement and cessation of major and sustained hostilities among warring factions, and are transitioning from deteriorating governance environment. PCCs do not signify total absence of conflict as indicated by Burundi since 2005 or Uganda, where low grade insurgency has continued in the North long after the rest of the country achieved stability


    regulatory framework for fiscal management; and to assist in the design and implementation of appropriate revenue policies and public expenditure management.

    There is broad consensus among the providers of financial and technical assistance, as declared in the principles of engagement of the Development Assistance Committee (DAC), that efforts

    should be focused on state capacity and accountability as a critical requirement if fragile states are ever to find a durable exit from crisis. There are many demands on the ADB from

    its regional member countries and it has finite human and financial resources. Consequently, the Bank must focus its efforts on a set of priorities based on it mandate and institutional capabilities, as well as on what can contribute most to the development goals of its regional members. In fragile and post-conflict states, such priorities should entail programs and projects that promote capable institutions, and help deliver sound economic and financial governance.

    While there is an urgent need for the Bank to focus on a core set of issues where it has a comparative advantage and can add most value for regional member countries, the study recognizes that no two post-conflict countries are identical and that the country specific priorities should be determined case by case. A country emerging from conflict with “failed”

    institutions demands more urgent Bank contribution in rebuilding the institutions and human skills, while the focus of the Bank should be on formulation and execution of significant reform policies in a post-conflict state with functional institutions.

    The study finds that, with effective and accountable institutions essential for poverty reduction and sustained economic development, enhancing the Bank’s engagement in post-conflict PFM

    should include: (i) rebuilding local capacity for sound PFM, in covering institutional gaps and critical skill shortages for policy formulation and execution; (ii) strengthening treasury operations, by supporting strong and centralized expenditure management and assets protection capabilities; (iii) enhancing audit and external controls to ensure credible scrutiny and sanctions for misuse and abuse of public resources, as well as to institutionalize financial discipline: and (iv) providing world-class advisory services for management of natural resources, to assist regional member countries avoid “resource-curse” outcomes. In order for the Bank to

    effectively enhance its engagement and leadership role in the recommended core areas, there is an urgent need for it to build high competence and gain the confidence of the beneficiary states and collaborating partners.

    The study recommends that the enhanced operational framework of the Bank in PFM be built on a more analytical assessment of the needs of the post-conflict member countries; by ability to lead rather than follow other important providers of assistance in all cases, and by willingness to innovate and advocate for sound PFM in regional member countries in pre-conflict fragile status, in conflict periods, and once post-conflict situation is fully realized. The role of the Bank to strengthen PFM in all phases of fragile member states demands the following:

    ; Flexibility in the conception, design, implementation and follow through of programs

    and projects in PFM for individual countries, as no two post-conflict situations are



    ; Coordination of efforts in the Banks core areas of interest with strategic partners that

    should be led by the Bank when feasible. In the critical areas of strengthening PFM and

    building good financial and economic governance, the Bank as the primer regional

    development institutions has a clear advantage in setting a strategic and coordinated

    response by the international development community.

    ; Early engagement and delivery of essential financial and technical support for PCCs

    are important factors for the success of strengthened PFM in post-conflict situations.

    Providing critical support when assistance is needed most and before normal lending is

    feasible is evidently more demanding and more rewarding.

    ; Sustained Bank commitment for long-term engagement is required to support

    complex and multi-dimensional PFM reforms through out the post-conflict

    transition. Successful PFM reforms depend much on long-term engagement and

    predictable financial support that should be conditional on measurable

    monitoring and performance targets designed jointly with the relevant authorities

    and development partners.


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