PUBLIC FINANCE

Requirements for Successful MTEFs and Implications for Development Support

Blanca Moreno-Dodson, Lead Economist The World Bank

May 1, 2012

Miami, USA

Outline
1. 2. World Banks Engagement with MTEFs Methodology for a Review of World Bank Operations Supporting MTEF Implementation Lessons from the MTEF Implementation Observable Impact of MTEFs in World Bank Projects Lessons about the Design of Lending Activities to Support MTEFs

3. 4.

5.

World Banks Engagement with MTEFs

World Bank is a significant player in supporting MTEF implementation in LICs and MICs since the late 1990s
Analytical and advisory assistance (AAA) (about 30%) Lending operations (about 70%)
WB MTEF-related AAA and Lending in 110 Countries
90 80

Number of Products

70 60 50 40 30 20 10 0

MTEF reforms are at different stages in client countries, but in some they are expected to deliver results by now Good opportunity to distill lessons from WB activities supporting MTEFs

19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 10
EMU WB PFM Handbook, HIPC Assessment Enhanced HIPC, PRSPs PEFA

AFR

EAP

ECA

LCR

MNA

SAR

Total

Review of World Bank Operations Supporting MTEFs Methodology

Objective: lessons for improving WB interventions to assist successful MTEF implementation Focus: lending projects because ex-post evaluation is available
Implementation Completion and Results Reports (ICRs) provide a complete and systematic

account of the performance and results of each operation Defining relevant operations: MTEF as part of project objectives or components

Reviewed Lending Operations

Sample: 104 ICRs 47 countries in all Bank regions
52 projects in LICs 49 projects in MICs 2 projects in HICs
Reviewed Countries by Income Group
30

25
25

Number fo Countries

20
20

15

10

Different country settings:

Nine fragile Twelve resource rich Eight in transition
Distribution of Reviewed Lending Operations
80 72.1 70 60

2
0

LICs

MICs

HICs

Reviewed Countries by Region

25

21
20

Number fo Countries

15

11
10

7 5
5

Percentage

50 40 30 20 10 0 27.9

2
0 East Asia & Pacific Europe & Central Asia

1
Latin America & Caribbean Middle East & North Africa South Asia Sub-Saharan Africa

Development Policy

Investment

MTEFs in Reviewed Countries

MTEF Adoption in 1992-2008 (47 countries)
45 40 35

Number of Countries

30 25 20 15 10 5 0 1992 1993 1994 1995 1996 1997 1998 1999 MTEF 2000 2001 2002 MTBF MTPF 2003 2004 2005 2006 2007 2008

MTFF

Note: MTEF is recorded according to the most advanced stage achieved with the complete or nearly complete government coverage. Some countries have had MTBF pilots in select sectors (i.e. Guinea, Kyrgyz Rep.) or subnational jurisdictions (i.e. Andhra Pradesh state in India).

Requirements for Successful MTEFs

Lesson 1

Country ownership is key: strong government

and bureaucratic support at the highest levels, including MOF and sectoral ministries
When ownership is weak, it is important to to foster a better understanding of the potential MTEF benefits (Zambia) Necessary but not sufficient condition for effective MTEF implementation Targeted and tailored engagement and communication with all stakeholders, in addition to the government, can contribute to deepening ownership and support for MTEF reforms (Bangladesh)

Requirements for Successful MTEFs

Lesson 2

Country context matters: design of MTEF

reforms needs to take into account initial preconditions, institutional capacity, and economic constraints
MTEF implementation is slightly more satisfactory in MICs and HICs than in LICs Thus simplicity and selectivity in defining MTEF objectives can contribute to smoother implementation in LICs fewer project conditionalities (Niger) Particular challenges: fragile and post-conflict states, resource rich countries, and countries in transition

Requirements for Successful MTEFs

Lesson 3

Need to address particular challenges varying across country settings: Fragile and post-conflict: MTEF reforms alone are unlikely to trigger systemic budget changes if national systems have insufficient policy and institutional capacity and lack well-performing agents of change
Budget Oversight Committee to assist in the determination of budget priorities and PETS to track the utilization of public resources (Sierra Leone)

Resource rich: spending decisions are not fully integrated with MTEFs Transition: strong resistance to change in PFM practices

Requirements for Successful MTEFs

Lesson 4

Sequencing and pace of MTEF reforms is important: Gradual approach is usually appropriate:
Consolidation of an MTFF before moving to an MTBF and MTPF MTEF pilots in sectors before covering the whole (Mali, Vietnam) MTEF at one level of government before expanding (Vietnam, Andhra Pradesh state in India)

Big ban: can result in severe disruptions in the

functioning of the budget systems and jeopardize the quality of public services provided (Ghana)

External shocks: may trigger readjustments in the

MTEF implementation (Armenia)

Packaging of PFM reforms: too many reforms

distract government and strain capacity

Observable Impact of MTEFs in Bank Projects

Lesson 5

Balance between policy and institutional objectives:

Strong emphasis on the role of institutions without adequate attention to fundamental economic policy issues, affecting fiscal discipline and spending efficiency, can lead to unsatisfactory outcomes If fiscal policy rules are not effective, it is difficult to expect that an MTEF alone will support fiscal discipline Strong budget execution clearly contributes to a wellfunctioning MTEF
Clarifying relationships and lines of accountability (Malawi) Weak auditing function and parliamentary scrutiny of the budget can undermine an MTEF (Malawi , Benin)

Observable Impact of MTEFs in Bank Projects

Lesson 6

Evidence on improvements in fiscal discipline and allocative efficiency:

Increased budget predictability within fiscal sustainability framework (Burkina Faso, Pakistan) Also helped to improve credibility of the annual budget (Nepal) Stronger commitment to maintaining pro-poor spending in social sectors (Nepal, Pakistan, Tanzania)

But technical efficiency at sectoral level is a formidable challenge, as it requires:

an overall MTBF some degree of reliability with respect to fiscal stability goals overall budget envelopes allocated to sectors

Banks Instruments to Support MTEFs

Lesson 7

Bank has used a variety of instruments to support MTEF implementation:

Lending Development Policy
3-5 years direct budget support for policy and institutional reforms aimed at achieving a set of specific development results

Development Policy Investment

5-10 years cover specific expenditures related to economic and social development projects in a broad range of sectors (sectoral and TA loans)

Majority of lending projects supporting MTEFs are rated satisfactory (70%)

Banks Instruments to Support MTEFs

Lesson 8

Development policy lending appears more conducive to supporting cross-cutting MTEF implementation:
To some extent stronger ownership of MTEF reforms Building on PRSP intervention, an MTEF is more likely to succeed combining DPLs and PRSCs (Armenia) MTEFs constitute a suitable anchor for sector budget support (DPLs or Performance for Results) by providing an adequate framework to measure sector outputs and outcomes against inputs, which facilitates Banks operations and disbursements

Banks Instruments to Support MTEFs

Lesson 9

When combined with basic pre-existing institutional capacity for planning and implementation, and strong political support, Bank operations grounded on MTEFs can also focus on specific sector wide reforms (SWAPs):
A sectoral program combining sector-specific and crosscutting fiscal and fiduciary interventions is more likely to yield results that can be sustained
Uganda SWAP allowed explicitly linking conditionalities for tranche releases to agreements in the education sector policy incorporated in an MTBF Lesotho successfully introduced an MTBF in health sector with strong leadership at the highest levels and a firm commitment to achieve better health outcomes In Pakistan, an MTBF in education helped to increase pro-poor spending and contributed to reducing its volatility

Banks Instruments to Support MTEFs

Lesson 10

Synergy

Development Policy Loans

Investment Technical Assistance Loans

More Successful MTEF Implementation

gradual institutionalization of MTEF mechanisms in all government agencies adequate leverage for policy reforms

Banks Instruments to Support MTEFs

Lesson 11

A pragmatic and incremental approach to TA in support of an MTEF works better than large multiyear TA programs:
Less rigid in design and is less likely to strain the limited implementation capacity of a borrowing government Institutional capacity needs cannot be sufficiently addressed through budget support alone (Uganda) Helps standardize MTEF tools across government agencies and mainstream them in the budget preparation and execution processes

Banks Instruments to Support MTEFs

Lesson 12
Political Commitment
to adoption and implementation

PFM Analytical Work

Technical advice to MOF (Albania, Slovakia) PERs expenditure prioritization (Lesotho, Niger,
Tanzania)

Synergy

Development Policy Loans

Investment Technical Assistance Loans

More Successful MTEF Implementation gradual institutionalization of MTEF mechanisms in all government agencies adequate leverage for policy reforms

Conclusions
Development lending projects need to better tailor design of MTEF reforms to country settings Balance between MTEF policy and institutional objectives is important More careful choice of lending and advisory instruments may be more conducive for MTEF implementation
A medium-term rather than long-term horizon Instruments with more flexibility Fewer conditionalities

MTEFs can be facilitators of monitoring and evaluation culture in program performance:

Shift more resources from investment projects to mediumterm budget support programs (Mauritius) and performance-based loans (P4R)