Latin American Countries Praise PEFA

The Public Expenditure and Financial Accountability Framework (PEFA) has been praised as a useful tool to underpin Public Finance Management (PFM) reforms by representatives of Latin American countries at a recent seminar in Brussels.

PEFA is based on 31 indicators that provide a high-level overview of the public financial management system of a given country. The assessment is normally carried out by a small team of experts in close collaboration with officials from the Ministry of Finance amongst other key stakeholders, and uses an evidence-based methodology to rate features of the system - for example, whether the budget presented to the legislature is comprehensive, or how long after the end of the fiscal year financial statements made available to citizens are audited - against predetermined criteria.

“Understanding how public money is managed is crucial to understanding government policies. The big advantage of PEFA is that it provides evidence-based information on strengths and weaknesses of a country's public finance system. In addition, it allows tracking of progress of the system over time,” said Juana Aristizabal Pinto, policy officer with the Budget Support Public Finance and Macroeconomic Analysis Unit of EuropeAid.

“PEFA tells the country whether they have the tools that will allow them to achieve the three main budgetary outcomes: fiscal discipline, appropriate allocation of resources and efficient delivery of services," said PEFA’s Head of Secretariat, Philip Sinnett.

Mr Sinnett stressed that the use of PEFA allows a country to lead its own reform programmes, as opposed to public financial management systems being reformed by donors who may have a particular view on how this should be done. Moreover, it harmonises the way donors engage in a specific country, he said.

Since its inception in 2001, PEFA has been used on almost 300 occasions in 140 countries at both national and sub-national levels. However, in Latin America, the publication rate of PEFA results has remained “relatively low”, Mr Sinnett said, as some governments fear that if a weakness is identified in the report, it can affect their capacities for borrowing money on the credit market.

Still, one of the benefits of the PEFA methodology is having government officials share their experiences during peer-learning activities, Mr Sinnett said. However, he stressed that getting PEFA assessments to lead to reform programs is an area to be investigated in the next couple of years. He also said he hoped that research institutes would start using the “massive amount” of data collected through the PEFA mechanism, in fields such as health and education, among others. “For example, does an improvement in the financial management system impact on the way health services are delivered to the communities? This is the type of study that PEFA data could sustain," Mr Sinnett said.

As a member of the PEFA partnership, the European Commission has led more than 100 assessments including 32 in Latin America and the Caribbean, usually sending a team of two to four PFM experts to the assessed country. 

“PEFA assessments are crucial for the implementation of the new EU Guidelines on Budget Support. The PEFA framework is the Commission’s preferred tool for diagnosing strengths and weaknesses of Public Finance Management systems,” said Juana Aristizabal Pinto of EuropeAid. PEFA assessments are used as the starting point when assessing the eligibility of budget support and discussing PFM reforms with partner governments. This has been the case in several countries, including Paraguay, where the EU has cooperated with authorities to support tax reform since the end of 2009. This collaboration contributed to the adoption of the Personal Tax on Income in June 2012, a historical first step towards the formalization of the economy, Ms Aristizabal added.

Another example comes from Central America, which was badly hit by the Hurricane Mitch disaster that claimed 2000 lives and destroyed US$ 6 billion worth of infrastructures in 1998. Honduras - the worst hit country in the region – also faced a military coup in 2009 which impaired its reconstruction efforts. However, the internationally praised 2010 electoral process eventually allowed Honduras to start reshaping its economy, using PEFA as a key tool to lead economic reforms and change the face of the country’s economy.

“PEFA has helped us control our costs and has even shaped a political dialogue in our country,” said Ms Rocio Tabora, Director of the Presidential Secretariat in Honduras.

During the 2008-2009 PEFA evaluation, Honduras identified 18 indicators of slow yield, which have since been improved. “To establish order in our public finance has been a priority in our country,” Ms Tabora said, stressing that “improved transparency” and the publication of PEFA results has also helped build trust in the Honduran economy. Ms Tabora said she was therefore all in favour of publishing Honduras’ PEFA’s indicators - such position is not shared by all Latin American countries.

For instance, Michael Borchardt, director of the Ministry of Economy & Finance  in Uruguay said PEFA was an “intense” exercise that helped to foster the economic reform process. However, he pointed out that Uruguay’s economy is based on a five year plan which does not always match PEFA’s annual data model. He also said that PEFA’s method was sometimes “too rigid” but it remains interesting for Uruguay “as a process, rather than regarding the results it delivers.”  As for the publication of the PEFA results, Mr Borchardt said this should be “carefully evaluated” and should remain at the discretion of each country.

PEFA initiatives have existed since 2001 and involve seven partners: the World Bank, the IMF, the European Commission and bilateral donors such as France, United Kingdom, Switzerland and Norway and have since been used by various other partners.

The initiative is managed and implemented through a structure involving the PEFA Steering Committee, which directs and monitors the PEFA Program and funds a PEFA Secretariat responsible for implementing the program’s activities. For more information, visit the website www.pefa.org



This collaborative piece was drafted with input from Philip Sinnett, Head of Secretariat of PEFA and Juana Aristizabal Pinto, policy officer with the Budget Support Public Finance and Macroeconomic Analysis Unit of EuropeAid, with support from the capacity4dev.eu Coordination Team.