Partnership General Budget Support System and Their Existing Strategies - Research Paper Example

 Introduction There are various ways of offering international aid to nations. Some of them are balance of payment support, project aid, and budget support. While balance of payment support refers to giving money to the central bank of the recipient country for the purpose of foreign exchange, project aid aims to offer development assistance through implementing a particular project. In this case, the project management and financing is totally controlled by the donor. Unlike the first two, budget support is given directly to the government or the recipient country and the government has the right to spend the money on public infrastructure development. This work critically analyses the claim that general budget support is the most effective way to offer international aid. Types of budget support Admittedly, there are several forms of budget support. The main difference occurs between general budget support and sectoral budget support. In the former, money is transferred from an external financing agency to the recipient government’s national treasury. The recipient government then uses the fund in accordance with its own budgetary procedures. This money is often spent on macro-economic reforms like poverty alleviation and education. The latter, sectoral support is very similar in nature. However, there is difference in the fact that it is supposed to be spent on certain specific sectors. One of the latest additions in this class is the partnership general budget support. This is different from other forms of budget support in the fact that this only offers assistance in the macro-economic reform measures taken by governments. Instead of imposing preconditions on the recipient nations, which are not in the best interest of the recipient nations and which are very difficult to meet, this partnership general support only intends to promote poverty reduction strategies adopted by recipient nations by providing funds. The beauty of this system is that the fund is utilised only through the existing governmental channels. Thus, it is claimed that it ensures active participation of the recipient governments. In addition, as the governments and their mechanisms are actively involved, the feeling of accountability is retained and strengthened. Also, as the money comes through the existing system of government, the democratic systems are not shaken. Furthermore, there is the claim that when the existing systems are used, it is possible to reduce transaction costs. Why general budget support is superior to others – the perceived advantages At this juncture, it is necessary to start with the shortcomings of the other forms of offering international aid in order to understand the benefits of adopting general budget support. The first problem as identified by Lawson and Booth (2004) is that in the case of other ways of aid like project aid, there is a complex web of reporting and accounting requirements which makes the system slow and ineffective. Another problem as Wapenhans (1992) identifies is that most of the time, the programmes are set solely according to the interests of the donor agency; not the requirements of the receiving nations. Yet another problem as identified by Dollar and Pritchett (1998) is that the value of state system is seriously undermined as they are often not involved in the implementation and supervision of the projects. It happens because such projects are often conducted through special staffing arrangements and parallel structures (ibid). Furthermore, Dollar & Pritchett (1998) point out that the governments of the recipient counties often lose their feeling of accountability towards their own people’s welfare when they are freed from the responsibility of implementing the improvement measures. Thus, over time, there is a corrosion of democratic responsibilities in the recipient nation. As a result, such measures only result in the creation of governments which are totally reliant on international aid and infrastructure. Another point to be admitted, according to General Budget Support Evaluability Study Phase I is that though projects tend to be totally free from governmental control, there are issues like rent-seeking and fraud which cannot be overcome (Naschold & Booth 2002). In fact, it becomes more difficult when there is no support from the recipient government. Thus, it becomes evident that the general budget support has the potential to become the most effective way of offering aid to ensure macro-economic improvement in a poor nation. According to Joint Evaluation of General Budget Support (2006), general budget support offers a wide range of benefits, ranging from better harmonisation and renewed coordination among doors, friction-free collaboration with the systems and procedures of the partner country, reduced costs of fund transaction, better use of the existing state infrastructure, increased state accountability, and reduced reliance on foreign aid in future. Now, it is necessary to look whether these benefits are seen in practical situations. A look into the practical effectiveness of general budget support Admittedly, a look into ‘Budget Support: A Reformed Approach or Old Wine in New Skins?’ by Knoll (2008) proves that the claim of reduced reliance on foreign aid and increased self-reliance of the recipient governments is clearly a myth. It is seen that the overall share of GBS in the overall ODA of most of the African nations only increased in the period from 2002 to 2005. It remained more or less stable at around 30 percent (ibid). If the claims of self-reliance were correct, this amount would have gone down. Another vital point to assess in the quality of support is volatility and predictability. This is assessed by checking whether the budget or committed funds are provided in time. In fact, delayed or cancelled disbursal of the committed funds will have serious impact on the predictability. This leads to large degree of uncertainty in the national budget. When this happens, the budget of the nation fails to keep up its reliability as an instrument for implementing the PRSP. A look into the UN Report (p. 12) shows that in most of the African general budget support recipient countries, the general budget support disbursal highly volatile due to the gap between committed and actually disbursed budget support. To illustrate, when nations like Benin, Burkina Faso, Burundi, Cameroon, Cape Verde, Ethiopia, Ghana, and some other African nations are collectively considered, it can be seen that throughout the period from 1995 to 2005, the disbursal of general budget support remained much les than the committed general budget support. The committed general budget support ranged between 1.5 billion and 3 billion, and the disbursed general budget support ranged from 0.5 billion to 1.5 billion (Knoll 2008). The first point identified here is that in all the cases, the actually disbursed fund was nearly half of the committed funds. The second identifiable fact is that there was high volatility in the funds offered and given in all the years. The last point noticed is that the committed funds only increased over the years. Thus, the given information only shows that general budget support has not helped to reduce volatility or to improve predictability. At this juncture, it seems a useful step to look into the various reasons for non-disbursement as claimed by the donor countries. They range from the recipient governments’ inability to meet conditionality, the recipient governments’ delay in administrative processing procedures, administrative difficulties faced by the donor countries and political problems from the donor side (ibid). When these reasons are weighed according to their frequency of occurring, it is seen that the most overwhelming reason is the recipient nation’s inability to meet the conditions set by the donor. This reason is reported in nearly 40% of all the cases. It is closely followed by administrative and political difficulties faced by the donor country, and political problems from the donor side, which affected nearly 30% of the cases in the year 2003. In fact, this information makes people believe that the recipients’ inability to meet the conditionality imposed by the donor governments is the main reason behind the non-disbursement and improper disbursement of funds. One such donor known for imposing conditionality is the World Bank. In the year 2001, it introduced the Poverty Reduction Strategy Credit (PRSC). This money is offered to low income countries but there are a large number of ‘prior actions’ to be fulfilled to get the aid. In a study conducted by the Debt and Development Coalition Ireland (DDCI) about World Bank conditionality, it is found that nearly 13 nations which benefited from PRSC had to meet a minimum of 7 prior conditions and a maximum of 23 conditions. Though the World Bank has tried to answer this criticism by replacing prior conditions with benchmarks, the number of benchmarks is too high, that is from 16 to 118, thus making it more difficult for the recipients to meet the criteria. Furthermore, the World Bank has made thins too complicated not clarifying which benchmarks are more important. Very similar is the case of International Monetary Fund. In 1999, IMF introduced the Poverty Reduction and Growth Facilities. It was claimed by IMF at the inception of the new programme that the new facility intends to promote sustainable growth through providing better living standards and reducing poverty. Also, it was claimed that the programme would be in harmony with the poverty reduction strategies adopted by the recipient nations. However, an analysis of the PRGF in 2007 proved that in order to reduce fiduciary risks, IMF often imposes even tighter conditions on the borrowers. This was especially true in the case of those borrowers who exhibited a poor performance in the pervious fiscal. It is reported by Knoll (2008) that in Malawi and Zambia, the tighter conditions by PRGF resulted in a decline in the quality of social service offered to the poor people. It happened because there was PRGF restriction on the amount of money that can be spent on central government staff wages. As a result, it became impossible to recruit and train additional people in health and education services. Similarly, in Malawi, IMF insisted the government to privatise the commercial bank. In fact, this bank was set up by the government to ensure loans to the farmers at lower interests. As the bank was privatised, many small accounts were closed and so many people lost access to the bank. Similarly, in Zambia, PRGF disbursement in 2001 was accompanied by the demand for the privatisation and liberalisation of energy sector. This strengthens the allegation that genera budget support is not free from the influence of the donor nations depending on their areas of interest and expertise. Another vital area to be discussed, in the opinion of the United Nations report (Knoll 2008), is the degree of harmonisation and alignment. Harmonisation and alignment indicate the degree to which the donor manages to align the procedures with the development strategies, priorities, and procedures of the recipient. According to reports, only one out of the ten sub-Saharan countries which receive general budget support managed to achieve full harmonisation to be able to receive total disbursement. The situation becomes worse when there are multi-donor groups. In the Overseas Development Institute report (Lawson & Booth 2005), it was pointed out that though there was an increase in recipient satisfaction about improved harmonisation and donor efforts for coordinating conditionality, the efforts to minimise conditionality were considered insufficient by the recipient nations. When alignment is considered, it is important to take to ways of alignment into consideration. The first one is the donor alignment with recipient government objectives and strategies according to the PRSP, and the second dimension is the donor alignment with the governmental and budgetary systems of the recipient country (Joint Evaluation of General Budget Support 2006). An important problem is that the review mechanisms which are set up for the purpose of general budget support often fall short of the minimum quality. As a result, it takes a lot of time to prepare reports; and when prepared, these reports are often inefficient and inaccurate. It is pointed out that such reports often do not contain adequate information about budget planning and execution. As a result, the donors have to rely on other reports from government officials or other servicers for accurate information. According to the UN Report (Knoll 2008), in the year 2006, the number of agencies which totally relied on the Annual Progress Review (APR) was les than 40% in the case of sub-Saharan countries. Thus, one gains the insight that there are various shortcomings from the part of both donors and recipients, which lead to the failure of the general budget support system. Before concluding, there is one more point to be addressed, that is transaction costs. Admittedly, there is the claim that general budget support will reduce transaction costs. However, the USAID 2005 report points out that in practice, the transaction costs can grow considerably, especially in the initial stages of the implementation (USAID 2005). Thus, it becomes evident that the conditions, procedures for dialogue, and issues of harmonising and aligning have all resulted in the ineffectiveness of general budget support in practice. However, it is still too early to claim that general budget support is not superior to other forms of offering aid. This is so because the Joint Evaluation of General Budget Support 1994-2004 report gives some factors which will prove why general budget support is still the most effective way. This report, in fact, looks into the impact of partnership general budget support, which took birth as an answer to the risks associated with the imposed conditionality in the general budget support. The new partnership general budget support does not impose conditionality but supports the partner countries in their poverty reduction strategies. The report prepared by 24 aid agencies and 7 partner governments admits the fact that the impact of partnership general budget support on poverty reduction cannot be established due to the absence of clear data. However, the report points out that there are some identifiable links between general budget support and basic services. However, the report points out that as the funds are disbursed through regular government channels, the budget process of the recipient nations become strong and effective. Furthermore, it is pointed out that this funding through the regular governmental financial channels lead to better transparency of the public finance management system. In addition, the report claims that unlike general budget support, partnership general budget support ensures that there is better harmonisation and alignment because the dialogue and review structures in this system offer various forums and opportunities to tackle important issues through discussion. Moreover, there is the finding that the transaction costs can be considerably reduced as the state mechanisms are used to the maximum extent. Findings Thus, one reaches a number of conclusions. First of all, partnership general budget support is the most effective way of ensuring macro-economic development in low income nations. This form of budget support can function well in harmony with the national poverty reduction strategies of the nations without imposing additional conditionality. Moreover, it is clear that as the funds are channellised through the existing governmental mechanisms, the national budget system becomes stronger and more reliable. However, there are a number of problems too. First of all, there is a degree of unpredictability due to the political situations in some donor nations and also due to the political situations in the recipient nations. The second important issue associated with partnership general budget support is the destruction of private sector. It is seen that there is a general trend to expand public sector in the recipient nations. Admittedly, it is highly necessary at this juncture to ensure proper separation and protection of both private sector and public sector. Another important problem is corruption. Though it is possible to claim that government control ensures reduced corruption, there is high degree of corruption in all the recipient countries which come under observation. This happens not because of the deficiency of the system but because of the inability of the governments of the recipient nations. In order to solve this issue, it is highly necessary to have monitoring at various levels. Another shortcoming of partnership general budget support is its inability to function when there is deterioration in the political situation in the recipient nations. In other words, partnership general budget support fails when the partner governments are not strong enough. Conclusion In total, it becomes evident that partnership general budget support is much better than other forms of providing aid. First of all, while other systems neglect the national governments of the recipient nations and result in their deterioration, the general budget support system ensures that the governments and their existing strategies are well protected. Secondly, while other forms of aid often try to promote the interests of the donor agencies or governments by concentrating on certain specific areas which are not in the best interests of the recipient nations, the partnership general budget support ensures that no new conditionality is imposed on the governments. Instead, it only offers support to the existing state initiatives to reduce poverty and introduce macro-economic reforms. However, the system is deficient in the fact that it can function only when the recipient governments are strong enough to continue with the efforts. 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