What about transparency of budget and financial accountability?

What about transparency of budget and financial accountability?

Civil society cannot solve the budget transparency and accountability problem alone. Ultimately, the solution is to build an oversight system, with civil society as one actor supported by effective media, legislatures and professionals.

The core of public finances is that

some people spend other people’s money. In democracies, voters delegate the power over public spending and taxes to elected politicians. Two aspects of this delegation arrangement are particularly important for the conduct of fiscal policy. The first is the principal-agent relationship between voters (the principals) and politicians (the agents). The second is the common pool problem of public finances.

The delegation of power to elected politicians implies that politicians can extract rents from being in office and spend public moneys on projects other than those the voters desire. Voters might wish to limit these opportunities by subjecting politicians to strict and detailed rules that prescribe what they can and cannot do under specific circumstances. However, the uncertainty and complexity of the economic and political environment render the writing of such complete contracts impossible.

Deviations from the forecast of the key economic assumptions underlying the budget are the government’s key fiscal risk. All key economic assumptions should be disclosed explicitly. This includes the forecast for GDP growth, the composition of GDP growth, the rate of employment and unemployment, the current account, inflation and interest rates (monetary policy).

A sensitivity analysis should be made of what impact changes in the key economic assumptions would have on the budget.

All financial liabilities and financial assets should be disclosed in the budget, the mid-year report, and the year-end report. Monthly borrowing activity should be disclosed in the monthly reports, or related documents.

Borrowings should be classified by the currency denomination of the debt, the maturity profile of the debt, whether the debt carries a fixed or variable rate of interest, and whether it is callable.

Financial assets should be classified by major type, including cash, marketable securities, investments in enterprises and loans advanced to other entities. Investments in enterprises should be listed individually. Loans advanced to other entities should be listed by major category reflecting their nature; historical information on defaults for each category should be disclosed where available. Financial assets should be valued at market value.

Debt management instruments, such as forward contracts and swaps, should be disclosed.

In the budget, a sensitivity analysis should be made showing what impact changes in interest rates and foreign exchange rates would have on financing costs.

Albania has highlighted in several public consultations the importance of paying attention to public financial accountability. With regard to public sector performance and integrity and their impact on the poorest half of the population, waste and inefficiency can be as detrimental as leakages and diversion of public funds. The professional and non-governmental organzations and public emphasis on clean and good government.

The actual experience suggests that economists are increasingly realizing that financial accountability and development effectiveness are more closely linked than they previously thought. The advent of significant programmatic lending helps focus this relationship.

A summary of relevant accounting policies should accompany all reports. These should describe the basis of accounting applied (e.g. cash, accrual) in preparing the reports and disclose any deviations from generally accepted accounting practices.

The same accounting policies should be used for all fiscal reports. If a change in accounting policies is required, then the nature of the change and the reasons for the change should be fully disclosed.

There is a need for open and wide staff discussion of the adverse consequences of weaknesses in financial accountability in many countries. There is an urgent need to strengthen institutional capacity in the country.

The narrow focus on financial accounting and auditing as a way to strengthen financial accountability has limitations. It is time for a broader focus on country governance for legislative oversight, management control, and performance reporting. While the Government has taken several steps to strengthen its own ability to assess gaps in its clients’ capacity to manage projects, it has done little to strengthen their capacity to be financially accountable in the larger governmental context.

Good governance is a central issue, and even yet remains unclear. Many task managers are asking for help in understanding what is required of them and how they should design a strategy for building capacity in this area. It is time to support the institutions that are acting as public bodies to build institutional capacity and to be tough but fair with countries that consistently refuse to reform their systems of public financial accountability

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