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Public-finance management

In the fast lane

by Stephan Klingebiel, Timo Mahn
In the long run, Rwanda’s government wants to manage without donors’ aid: school near Kigali built by UNICEF

In the long run, Rwanda’s government wants to manage without donors’ aid: school near Kigali built by UNICEF

For a number of years, Rwanda has been trying to strengthen a challenging but important sector: public financial management. The reforms are proving remarkably successful. By Stephan Klingebiel and Timo Mahn

Reform in Rwanda is moving ahead at an astonishing pace. In only a few years, the country has considerably improved its system of public financial management (PFM), as was confirmed by the latest PEFA analysis. The acronym stands for Public ­Expenditure and Financial Accountability.

The reform impetus started in the country itself. Donors helped to mobilise reform forces, but no one questions Rwanda’s leading role. In this respect, this landlocked country in East Africa is an unusual ­example.

Rwanda still ranks among the poorest countries in Africa. But it is in a hurry. The government wants to achieve the status of a middle income country by 2020. Its scope for social and economic investment is severely limited, however. With a national budget worth around € 1.2 billion for a population of ten million, Rwanda only has the fiscal clout of a mid-sized German municipality.

Almost 50 % of the budget is donor-funded – and about half of that comes in the form of direct budget support. 46 % of the budget comes from tax revenues, with the remainder being funded through non-tax revenue (fees, fines et cetera) and through treasury bills. In recent years, Rwanda’s tax revenues were negatively affected by the global financial crisis. They took a further hit in mid-2010 as trade tax revenues went down after the start of the common external ­tariff regime of the East African Community. Since then, domestic revenues have bounced back. For the country to make efficient and effective use of its funds, it needs a solid PFM system. Such a system is equally important for attracting other funds, including – increasingly – private investment.

The following factors play a key role for Rwanda’s success:
– The “double development-cooperation strategy”: Rwanda’s government clearly states that it only wants external support temporarily. In the medium to long term, it wants to make the country indepen­dent of the donors on which it currently relies heavily. In the spirit of the Paris Declaration on Aid Effectiveness (2005) and the Accra Agenda for Action (2008), it is working on sustainably strengthening its own administrative capacities and actively soliciting the use of its national systems and procedures, for instance through budget support.
– The development and enhancement of PFM have been major priorities for the Rwandan government in recent years. It believes that sectoral policies cannot really succeed unless reliable financial management structures are in place. The PFM reform agenda was not imposed upon the country; it was developed by the Rwandan government itself.
– Budgets and budget responsibility are increasingly being shifted to the country’s 30 districts. Appropriate PFM provisions are therefore needed at the subnational level too. Around 30 % of the national ­budget is made available to the district authorities. This high share makes Rwanda a front-runner in Africa. The development of subnational PFM capacities is important for fiscal decentralisation.

The government considers the visible and measurable achievements of PFM reform in recent years proof of the fact that donors could and should use its national systems, but more work is needed to persuade them. Between 2005 and 2010, the percentage of partners ­using Rwandan systems rose from 39 % to around 50 %. Compared with other countries, that is a notable ratio – but the government wants more. Donors tend to be slow at turning pledges like the ones made at the Aid-Effectiveness summits in Paris and Accra into action.

Unfavourable starting position

At the beginning of PFM reforms, Rwanda’s situation was anything but favourable. Reform programmes of this kind normally build on administrative structures that are already in place. After the genocide of 1994, however, Rwanda had virtually zero administrative or institutional expertise. In 2007, it was estimated that there were only around 20 certified auditors in the country, only six of whom had Rwanda’s citizenship.

In recent years, the country has consciously moved away from its – typically Francophone – tradition of centralised administration. The government introduced a more Anglophone system of checks and balances, based on parliamentary authority. Central institutions such as an autonomous tax authority and an independent Office of the Auditor General (OAG) had to be built from scratch.

The 28 indicators of the PEFA analysis framework make international comparisons possible. With this goal in mind, a coalition of donors introduced the PEFA analytical instrument in 2005. The first PEFA analysis in Rwanda was conducted in 2006/07. It was a milestone on the road to a modern PFM system, allowing the government (and donors) to measure the quality and efficiency of Rwanda’s PFM system by the use of international benchmarks. The process also highlighted shortcomings. The adoption of the PEFA analysis strengthened the hand of reformers inside and outside a country, and helped reach agreement on a comprehensive reform programme (PFM reform strategy 2008–2012/13).

A second analysis in December 2010 showed that the reforms had indeed achieved a lot. Rwanda improved in all phases of the budget cycle – preparation, execution, monitoring and auditing – and its ratings for 18 of 28 indicators were “good” to “very good”. Unlike other countries, Rwanda also showed a marked improvement in terms of external control mechanisms (like the OAG). The analysis also revealed, however, that donor practices had hardly improved – neither in terms of using national systems nor of providing timely information on development-cooperation projects for the government’s budget planning.

Reasons for success

Rwanda’s achievements are due to several factors:
– The government assumed a high sense of responsibility (“ownership”) throughout the reform process. Many PFM ­reform programmes in sub-­Saharan Africa are basically standardised reform packages driven by the donor community without sufficient involvement of the national government concerned. In the long run, it is detrimental to put donor interests – such as checking fiduciary risks, for instance – before the partner country’s interests. Expectations, moreover, tend to be too high. In many cases, instead of developing and strengthening existing systems, sights are set on radical systemic change designed to bring, in just a few years, public finance in line with the latest standards, including computerised integrated financial management information systems (IFMIS). In Rwanda, the fundamental revision of public financial management was not imposed by donors. Because the earlier PFM-system had been largely destroyed, moreover, there was ­little resistance to the reforms. The donor commu­nity could build on the existing desire for reform in government and administration. The PFM-reform programme serves the joint interests of donors and government.
– Reforms focused on “quick and easy wins”. Rwanda’s government gets good to very good ratings in major international comparative indices (such as PEFA or the World Bank’s Doing Business Index). Some of the reforms were specifically designed to score high marks on significant fronts. That not only served the country’s international reputation, but is likely to bring real advantages when donors like the US Millennium Challenge Corporation, for instance, base funding decisions on international rankings of developing countries.
– Good ratings in international rankings, moreover, create space for further reform and mobilise progressive forces. The PFM reform agenda in Rwanda, for instance, is closely linked to the aid-effectiveness debate. The Paris Declaration is one of the reasons PFM is getting more donor attention.

Donors’ support

Rwanda wants to make progressive improvements in PFM. Donors support these efforts in two different ways. In the budget support dialogue, they stress the importance of sticking to the current PFM course. Such dialogue involves not only the national government, but also other actors, including the parliamentary budget committee, the OAG, the district authorities and civil society organisations.

On top of that, donors provide direct support for the implementation of the PFM reforms. Instead of relying on fragmented projects, they share a common interest with the Rwandan government in a joint financing mechanism (“basket fund”), to which all rele­vant PFM donors are already contributing or will do so soon. A strong PFM steering committee has been set up for the oversight of the PFM reform strategy and the basket fund.

Germany has helped drive forward the process in a number of ways:
– On the donor side, Germany coordinated and financed the establishment of the PFM basket fund in 2008/2009. The involvement of all relevant PFM donors (which, apart from Germany, include the World Bank, the EU, Britain’s DfID and Sweden) resulted in more harmonisation and transparency.
– As one of the first to pay into the fund, Germany made the basket viable and thus sent a signal to ­other donors.
– Direct support for PEFA 2010 was important to help shape the process itself. An example was the initiative to add the analysis of the sub-national PFM capacities to the list of priorities.

The important thing in the future will be to consolidate what has been achieved and ensure sustainability in the long run. Because of the unique socio-political context of the Rwandan reform model, it cannot be simply transposed to other countries. But it can be an important source of ideas and food for thought.

PEFA analyses have proved an effective tool for monitoring the long-term PFM reform process in Rwanda. Donors and governments acknowledge this instrument’s scope for wide application and international comparison. As a diagnostic tool, PEFA helps to focus minds on practical action.

After Rwanda performed so well in 2010, debate must now focus on the “next generation” of PFM ­diagnostics. The donor community will face critical questions about its contribution to improving the budget processes in Rwanda. Too often, donors’ impact on the quality of budgetary processes in de­veloping countries is overlooked. They must disburse funds in a predictable and organised manner. By providing transparent information on cooperation projects, they help to include such activities in the budget and contribute to reducing imbalances in sectoral allocation. In Rwanda, former sceptics such as the USA and Japan are considering joint donor assistance programmes similar to budget support. This is a good sign.