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Vivian Hon Economic Policy, PREM March 26, 2002

Supporting Subnational Fiscal Reform: Presentation for the Decentralization and Intergovernmental Fiscal Reform Course. Vivian Hon Economic Policy, PREM March 26, 2002. Outline. Background of Subnational TG Objectives of the TG Rationale for Involvement at the SN level

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Vivian Hon Economic Policy, PREM March 26, 2002

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  1. Supporting Subnational Fiscal Reform:Presentation for the Decentralization and Intergovernmental Fiscal Reform Course Vivian Hon Economic Policy, PREM March 26, 2002

  2. Outline • Background of Subnational TG • Objectives of the TG • Rationale for Involvement at the SN level • Subnational Portfolio • SN Fiscal Reform • Some Preliminary Findings

  3. Subnational (SN) TG: Background • Formed in 1997; 150 members (PREM, FPSI, ESSD, HD) • Motivation (2nd tier governments- province/states/regions and oblasts) • Following Board paper on subnational lending • Increased direct involvement with subnational governments

  4. Objectives of the TG • Forum for discussion and knowledge sharing in key areas: • Improving subnational fiscal performance • Encouraging growth and poverty reduction in backward/lagging regions • Providing tools to assist in Bank operations and ESW at SN level • Some synergies with Decentralization TG

  5. Rationale for Involvement at the SN level • Fiscal problems at SN can have significant BOP effects (previous session by Rosenblatt) • Fiscal problems can impact service delivery, particularly in key social services (e.g. education, health) • Economic/size justification • Uttar Pradesh in India (166 mil) almost equal to Brazil’s population (169 mil). • Population of Rio de Janeiro, Brazil population is larger than Chile.

  6. Rationale for Involvement at the SN level (cont.) • In large federalized countries, reforms cannot be implemented centrally • lack authority - formal (Constitution) and political • lack financial resources to leverage reforms at SN level

  7. Adjustment Lending for Subnational Reform i [1] This loan did not materialize due to commitment from government

  8. Adjustment Lending to SNGsby Country % of total

  9. Fiscal Problems at the Subnational Level • SNGs are generally more profligate than the center • Mismatch between SN revenues and expenditures • Lack of clarity in assignments • Revenue uncertainties- greater dependence on transfers which are not always reliable or timely • Unfunded mandates • Budget rigidities, problems of prioritization • Weak capacity at subnational level

  10. Instruments to Support Subnational Fiscal Reform • Lending instruments • National Reform loans • Subnational Adjustment Loans (SNALs) • Investment loans • Non-lending instruments • ESW • SN-level core diagnostic reports

  11. Lending Instruments • Fiscal Reform funds - national level funds with rules of accessibility and incentives for reform • Argentina Provincial Reform Loan, Russia Regional Fiscal Reform Fund • Reforms: intergovernmental relations (Russia) and management of SN fiscal obligations (privatization of utilities, state banks – Argentina).

  12. Subnational Adjustment Loans (SNALs) • SNALs - adjustment loans made directly to a SNG with the fed. Govt. as the guarantor. • In cases where SNG does not have the legal authority to borrow internationally (e.g. Mexico and India), the loan was made to the fed. Govt. which then onlends to the SNG.

  13. Some characteristics of SNALs • Demand AAA/ESW upfront • Conditionality upfront • Medium term expenditure framework (MTEF) provides med-term path • Complemented by multi-sectoral approach and portfolio presence • Pillars of Reform Program • Fiscal Sustainability/Stabilization • Public Expenditure Management • Service Delivery

  14. More on SNALs • SNALs can increase the leverage of reform. • By providing greater financial incentives to SNGs. SNALs are large operations. Furthermore, in countries like India, they are additionality. • Selectivity allows the Bank to focus resources where commitment and reform readiness is the strongest. • Can have demonstration effects.

  15. Investment loans • Primarily to support TA at the SN level. • Often are complementary to other adjustment loans • E.g. Russia Fiscal Technical Assistance Project • However, countries tend not to borrow for TA

  16. Some Risks

  17. Non-lending instruments • ESW/AAA • ESW • Brazil - State Economic Memorandums (SEMs) • India - state fiscal studies • Argentina - provincial finances study • SN-level core diagnostic reports • PERs – Indonesia, Mexico, Pakistan • CFAAs – 6 to date • CPARs

  18. Some Preliminary Findings/Lessons • National framework for fiscal reform is critical. • Sequencing is important –fiscal adjustments need to be taken upfront. • Flexibility of support can be important in the process of reform. • ESW while usually judged to be of high quality sometimes have limited impact because of relevance (timing issue, dissemination).

  19. Some Preliminary Findings/Lessons(cont.) • Data at SN level is weak in most countries. • Loan design needs to incorporate country context, political cycles and reform objectives. • Institutional development is still the weakest area of Bank support. • Participatory approaches can facilitate implementation and support sustainability

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