Making Budget Reform Matter for Poverty Reduction

1. Making Budget Reform Matter for Poverty Reduction The case of Madagascar Günter Heidenhof Lead Specialist, AFTPR

2. Madagascar – Background • Before 2001 – Madagascar’s per capita income declined by 40 percent (1970-2001) - economic and political reforms with little results • December 2001 – general elections – two parallel governments • July 2002 – end of political crisis – new government operational in late 2002

3. Madagascar – Key Data • Population 17 million – 80 percent rural • GDP growth 9.8 (2003), 5.3 (2004), 4.6 (2005) • US$ 242 per capita income (2004) • Poverty incidence 72.1 percent (2004) against 69.7 in 2001 and more than 80 percent in 2002 • Poverty mostly rural • Literacy rate 71%, child malnutrition 33%, gross primary enrollment rate 120%, access to safe water 45% (2004)

4. Madagascar – Policy Strategy Phase 1 – until 2001 • 2001: draft full PRSP focusing on social sectors Phase 2 – 2002-05 • 2003: full PSRP focusing on governance and restoration of rule of law, on broad based economic growth, human development and social protection – goal: reduce poverty by 50 percent within 10 years, average growth 8 percent • 2004: Introduction of results framework “Politique Générale de l’Etat” • 2004: Introduction of annual “business plans” for sector ministries • 2005: New vision “Madagascar Naturellement” • 2005: Updated PRSP to reflect new vision, in particular with regard to private sector development • Regular progress reports confirm mixed results

5. Budget reforms Phase 1 – until 2001 Relatively modern institutional and legislative framework for public finance introduced but dual budget system New Chart of Accounts Phase 2 – 2002-05 IFMIS – partially operational Strengthening internal controls – partially successful Strengthening external controls - successful Revenue agency reform – partially successful Medium term perspective of the budget – partially successful Program budgeting – largely unsuccessful Procurement reforms – partially successful Greater transparency – partially successful Public Finance Action Plan - successful Madagascar – Budget Budget preparation and execution • Allocations are partially in line with PRSP priorities (yes for social sectors and infrastructure, no for decentralization and judiciary) • Revenues significantly below projections • Preparation process flawed by weak macro forecasting, lack of strategic discussions about priorities and trade-offs and limited implication of sector ministries • Recurrent and capital budgets are not consistent – prepared separately under different timelines and institutional responsibilities • Uneven budget execution rates • Serious liquidity problems because of low revenues and unpredictable inflows of donor funds • Capacity building needs seriously underestimated, in particular at the level of the sector ministries

6. Policy Strategy “This document reflects donor desire rather than government policy” Little results focus with too many indicators (4000), monitoring & evaluation weak Costing incomplete Implication of civil society limited Transitional arrangements insufficient because of (i) policies, results framework, sectoral programs and budget are not integrated, (ii) fragmented procedural arrangements and institutional responsibilities Madagascar – Some Conclusions Budget • Budget does not adequately reflect policy priorities of government • Little room for strategic decision making - budget is prepared behind closed doors between IMF and Ministry of Finance with little implication of the Cabinet • Budget is unreliable and consequently not a management instrument that facilitates implementation of government policies. • Public Finance Action Plan needs further prioritization and sequencing

7. Policy Strategy “Madagascar Action Plan” (MAP) to replace PRSP - is linked to the MDGs, sets out a results framework for 5 years with clear indicators, focuses on 8 “commitments“ in the areas of good governance, education, health, infrastructure, rural development, economic and private sector development environment and national solidarity. MAP integrates donor support under “national programs” with harmonized implementation and evaluation arrangements Costing ongoing Joint Government-donor monitoring & evaluation with clear institutional responsibilities for reporting and monitoring Madagascar – Phase 3 Budget • Budget 2007 and medium term perspective will reflect MAP priorities • Partnership agreement in 2005 of budget support donors to strengthen aid harmonization • Regular reports to Cabinet about budget execution AND progress of MAP implementation • Series of programmatic ESW jointly conducted by government and donors will provide analytical underpinnings for expenditure management reforms • Annual PEFA assessment (= independent review by donors) to evaluate impact of reforms

8. Madagascar – Challenges • Approach to policy development, implementation and evaluation remains technocratic with little implication of the outside world • MAP overly ambitious – lack of progress will question credibility • Communication within government is inefficient and negatively impacted by strong hierarchical culture • Decision making is highly centralized; role of Cabinet is limited; Presidency is dominating decision making • Procedural and institutional arrangements are often complex and bureaucratic – overall: administration has no focus on achieving results; substantial behavioral changes at all levels required • Implementation of public finance reforms slower than expected • Exogenous factors (cyclones, petrol prices) might constrain ability to implement ambitious program

9. Madagascar – Some Lessons • Overall: Madagascar is a case in point for a dysfunctional system where policies, sector strategies and budget are not adequately integrated. But: Government is adjusting rapidly if intended results do not materialize – MAP intends to address deficiencies • Degree of ownership should be carefully evaluated – competing policies and strategies are an indicator for problems • Integration efforts need to address existing political, cultural, procedural and institutional country context - technocratic approach does not yield intended results; effective communication is essential; genuine dialogue requires open debate and implication of relevant stakeholders • Consistency between policies and budget requires that budget is a somewhat reliable instrument • Demand for integration is weak in an environment where donors finance the bulk of the investment budget in sectors

10. Thank you very much!