An overview of PEFA 2022 Global Report
What has changed since 2020?
DECEMBER / 2022
The end of 2022 is just a short walking distance away so it is a good time to review the highlights of the year before waving it a firm goodbye. One of these highlights was the 2022 PEFA Global Report released in June, which is as good as it gets for trying to figure out the state of global Public Financial Management (PFM). The last report came out in 2020 so doing a bit of a compare and contrast exercise provides a colourful Polaroid of how the turmoil of the last two years affected the PFM landscape.
Methodological intricacies
Before delving into the depths of PEFA’s PFM assessments it is useful to know that 2022 and 2020 Global Reports include both the 2011 and 2016 Frameworks which are quite distinct in what they measure. The reports disaggregate data based on the framework used but this does mean that comparing performance over time is a little difficult for some countries.
A PEFA assessment is a cross-section of the PFM health of a country at a point in time. If a country repeats the assessment at a later date, the progress can be monitored but not every country does that and the time gap between initial and repeat assessments are not uniform within and across countries. This means that when looking at the changes in the PFM landscape in the 2020 and 2022 reports, what we are really seeing is the impact of country level repeat assessments where they have been carried out in the two years between the reports and any first-time assessments performed in the same timeframe.
Ultimately the overview of the changes in PFM between 2020 and 2022 gives us a very high-level global average (with a bias towards LMICs) of what was happening to PFM systems during the rage of COVID-19. It’s a great report to get a feel for the direction of travel but for specific issues to base country reforms on, one would really need to go through individual country assessments from the very first to present day. Nevertheless, the fact that COVID-19 has unearthed many countries’ PFM systems’ weaknesses and incapacity to withstand such shocks is an easy deduction when flicking through both reports.
Before delving into the depths of PEFA’s PFM assessments it is useful to know that 2022 and 2020 Global Reports include both the 2011 and 2016 Frameworks which are quite distinct in what they measure. The reports disaggregate data based on the framework used but this does mean that comparing performance over time is a little difficult for some countries.
A PEFA assessment is a cross-section of the PFM health of a country at a point in time. If a country repeats the assessment at a later date, the progress can be monitored but not every country does that and the time gap between initial and repeat assessments are not uniform within and across countries. This means that when looking at the changes in the PFM landscape in the 2020 and 2022 reports, what we are really seeing is the impact of country level repeat assessments where they have been carried out in the two years between the reports and any first-time assessments performed in the same timeframe.
Ultimately the overview of the changes in PFM between 2020 and 2022 gives us a very high-level global average (with a bias towards LMICs) of what was happening to PFM systems during the rage of COVID-19. It’s a great report to get a feel for the direction of travel but for specific issues to base country reforms on, one would really need to go through individual country assessments from the very first to present day. Nevertheless, the fact that COVID-19 has unearthed many countries’ PFM systems’ weaknesses and incapacity to withstand such shocks is an easy deduction when flicking through both reports.
Diagnosing PFM systems in 2022
As there are a number of dimensions to the PEFA assessments such as different frameworks, government levels and geographical regions the overview below will focus on national level assessments only and 2016 Framework with references to 2011 Framework where relevant.
As there are a number of dimensions to the PEFA assessments such as different frameworks, government levels and geographical regions the overview below will focus on national level assessments only and 2016 Framework with references to 2011 Framework where relevant.
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Good PFM is “the linchpin that ties together available resources, delivery of services, and achievement of government policy objectives. If it is done well, PFM ensures that revenue is collected efficiently and used appropriately and sustainably”
Worst performers
In 2022 countries performed worst on Pillar III Management of Assets and Liabilities which is new in 2016 Framework. Fiscal risk reporting (PI-10), Public investment management (PI-11) and Public asset management (PI-12) are the poorest performers and this has not changed since the 2020 report.
The weakness in this area would generally mean that governments struggle to keep tabs on their SOEs, non-financial assets and capital projects which carries risks such as SOEs defaults, underserved communities and broken roads. For a good score SOEs and subnational governments need to provide audited financial statements on time and all assets should be recorded which is largely not the case. Countries also struggle accounting for capital project costs where information on project lifetime costs and year-by-year cost breakdowns are not usually available. Project selection and monitoring in many cases is not transparent and inconsistent.
Surprisingly Debt management (PI-13) has shown very good results both in 2022 and 2020, worsening only slightly during this period. This one is a bit of a dilemma as globally public debt is rising and one would expect debt management to worsen post-pandemic but this has not. Either governments were well leveraged before the pandemic and so borrowing was kept to a minimum until the recent recovery or tight restrictions on external debt have encouraged governments to develop robust debt management strategies which are keeping this indicator performing well in the medium term.
Another consistently poorly performing is Pillar VII External Scrutiny and Audit (under both 2016 and 2011 Frameworks) with very slight improvement since 2020. The problem lies in low effectiveness of financial audits in terms of either scope or independence of Supreme Audit Institutions and lack of follow up on audit report recommendations.
Reasons behind poor performance could be many. If record-keeping is usually not a problem, access to information and independent review is. Whether through limitation of scope or lack of capacity audit effectiveness is negatively impacted.
The struggle to follow up on auditor recommendations or legislature comments can be a sign of both political unwillingness and lack of resources to do so.
In 2022 countries performed worst on Pillar III Management of Assets and Liabilities which is new in 2016 Framework. Fiscal risk reporting (PI-10), Public investment management (PI-11) and Public asset management (PI-12) are the poorest performers and this has not changed since the 2020 report.
The weakness in this area would generally mean that governments struggle to keep tabs on their SOEs, non-financial assets and capital projects which carries risks such as SOEs defaults, underserved communities and broken roads. For a good score SOEs and subnational governments need to provide audited financial statements on time and all assets should be recorded which is largely not the case. Countries also struggle accounting for capital project costs where information on project lifetime costs and year-by-year cost breakdowns are not usually available. Project selection and monitoring in many cases is not transparent and inconsistent.
Surprisingly Debt management (PI-13) has shown very good results both in 2022 and 2020, worsening only slightly during this period. This one is a bit of a dilemma as globally public debt is rising and one would expect debt management to worsen post-pandemic but this has not. Either governments were well leveraged before the pandemic and so borrowing was kept to a minimum until the recent recovery or tight restrictions on external debt have encouraged governments to develop robust debt management strategies which are keeping this indicator performing well in the medium term.
Another consistently poorly performing is Pillar VII External Scrutiny and Audit (under both 2016 and 2011 Frameworks) with very slight improvement since 2020. The problem lies in low effectiveness of financial audits in terms of either scope or independence of Supreme Audit Institutions and lack of follow up on audit report recommendations.
Reasons behind poor performance could be many. If record-keeping is usually not a problem, access to information and independent review is. Whether through limitation of scope or lack of capacity audit effectiveness is negatively impacted.
The struggle to follow up on auditor recommendations or legislature comments can be a sign of both political unwillingness and lack of resources to do so.
There is still a bright side
It is not all doom and gloom though. Countries performed best on Pillar IV Policy-based fiscal strategy and budgeting (under both 2016 and 2011 Frameworks) and specifically Budget preparation process (PI-17) and this is a consistent trend from 2020. This means that on average countries are fairly good at planning, scrutinizing and sticking to the budget calendar but only one year at a time. Multi-year budgeting still has room for improvement through better alignment to policy strategies.
Internal controls on non-salary expenditure (PI-25) under Pillar V Predictability and control in budget execution, has shown the best performance of all indicators in 2020 and 2022. The scope of this indicator includes policy compliance, segregation of duties and controls over payments. This result is a good sign as weak controls are an invitation for fraud and misuse of power. Surprisingly though Internal audit (PI-26) is continuously an area of weakness.
It is not all doom and gloom though. Countries performed best on Pillar IV Policy-based fiscal strategy and budgeting (under both 2016 and 2011 Frameworks) and specifically Budget preparation process (PI-17) and this is a consistent trend from 2020. This means that on average countries are fairly good at planning, scrutinizing and sticking to the budget calendar but only one year at a time. Multi-year budgeting still has room for improvement through better alignment to policy strategies.
Internal controls on non-salary expenditure (PI-25) under Pillar V Predictability and control in budget execution, has shown the best performance of all indicators in 2020 and 2022. The scope of this indicator includes policy compliance, segregation of duties and controls over payments. This result is a good sign as weak controls are an invitation for fraud and misuse of power. Surprisingly though Internal audit (PI-26) is continuously an area of weakness.
Finding opportunities
A review of 2020 and 2022 Global Reports produces a picture of consistency. There are no surprising dynamics in the longitudinal trends and it is unlikely there could be in such a short period of time when only 26 national assessments were performed. It is calming to know though that at least somewhere there is stability.
Nevertheless, the pandemic did highlight weaknesses in PFM systems such as procurement, expenditure arrears, asset management and raised questions on the resilience of PFM systems to crises and justification for relaxing of rules in emergencies. In responding to these existential questions, there are some topics governments should consider:
A review of 2020 and 2022 Global Reports produces a picture of consistency. There are no surprising dynamics in the longitudinal trends and it is unlikely there could be in such a short period of time when only 26 national assessments were performed. It is calming to know though that at least somewhere there is stability.
Nevertheless, the pandemic did highlight weaknesses in PFM systems such as procurement, expenditure arrears, asset management and raised questions on the resilience of PFM systems to crises and justification for relaxing of rules in emergencies. In responding to these existential questions, there are some topics governments should consider:
- Building capacity of public sector accountants in order to support quality accounting and reporting, the move from cash to accrual and the building of more resilient PFM systems;
- Developing and implementing robust internal control frameworks that can absorb impacts of external shocks without undermining the effectiveness of internal processes;
- Taking a “whole of government” approach to public finances by integrating its elements for a holistic take on PFM.
Resources
PEFA Global Reports in their entirety can be found on the PEFA website.
PEFA 2022 Global report
PEFA 2020 Global report
PEFA Global Reports in their entirety can be found on the PEFA website.
PEFA 2022 Global report
PEFA 2020 Global report
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- lmc@lynceusconsulting.com
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