Budget Support in Situations of Fragility: Emerging Issues Nicola Pontara International Parliamentary Conference on State Building: Tackling State Fragility London, February 2, 2010

Outline of Presentation 1. Introduction 2. Definitions 3. Budget support in situations of fragility: key issues 4. Evidence from budget support retrospectives 5. Strengthening the case for ‘budget aid’: some ideas 2

1. Introduction Focus on the needs of fragile situations Development assistance is inherently risky in these contexts Strong rationale for engagement (high returns, regional dimension) Need for coordination: donors can’t exert a significant influence over outcomes single-handedly Paris Declaration (2005) and the AAA (2008) on budget support ‘Budget aid’ can be deployed to strengthen the transition to resilience Emerging issues from recent work (focus on the talk today) 3

2. Definitions Fragile situations. Weak institutional capacity, poor governance, political instability, ongoing violence or the legacy of past violence (wide spectrum). ▫Composite WB, AfDB and ADB CPIA rating of 3.2 or less; or b) the presence of UN and/or regional peace-keeping or peace-building mission (e.g. AU, EU), with the exclusion of border monitoring operations, in the past 3 years. Budget support. Move away from project support (parallel systems); emphasis on country ownership, systems and capacity; medium-term support to reform. ▫Foreign exchange, placed with the central bank to be converted in local currency and credited to the government account (treasury account) at the central bank. General vs. sector, PBL or grants against progress in PRS, TF. Trust funds have grown into a significant source of support in post-conflict (or post-disaster) situations where capacity is extremely low (MDTFs). ‘Budget aid’: ensemble to instruments and sources of budget financing (PBL vs. support to recurrent cost with strict fiduciary arrangements). 4

3. Budget support in situations of fragility: key Issues Reservations by some donors (or WB and AfDB shareholders, as well as a number of member states in the EU) on the undertaking of BSOs in fragile environments. Budget support may raise fiduciary risk in countries with weak public financial management (PFM); or the volatility of aid flows in countries where the policy environment is poor. Evidence shows that budget support has been used effectively even in fragile situations with extremely weak fiduciary systems, such as Timor Leste and Afghanistan. In these cases, clear expenditure priorities and a strong government commitment to address institutional weaknesses reduced the risk to an acceptable level. What are the emerging issues? Initial results from research on budget support in situations of fragility (collaborative effort: WB, AfDB and EC, with IMF involvement). 5

4. Evidence from budget support retrospectives Decisions to engage in the provision of budget support in situations of fragility are usually taken on an ad hoc basis. Fiscal transfer vs. ‘package’ to stabilize the macro-budgetary framework, support peace and state-building, and strengthen capacity. BSOs focus largely on economic governance (PFM, procurement, anti- corruption). What about non traditional sectors? Delays continue to hamper the delivery of funds channeled through budget support, jeopardizing predictability. A more comprehensive treatment of risk elements and benefits of engagement would be desirable. Insufficient attention continues to be paid to M&E systems. Importance of measuring progress toward peace- and state-building. 6

5. Strengthening the case for ‘budget aid’: some ideas Highlight the benefits of budget aid: stabilize the macro- framework, support peace- and state-building, strengthen state capacity. Pay more attention to risk elements (risk typology, risk trade-offs,, risk of not-engaging, political risk, going beyond fiduciary risk). Discuss the trade-offs between aid predictability and aid effectiveness (country performance vs. need for stable flow of resources) => Budget aid. Focus on non-traditional areas, which may be key to strengthen state legitimacy and reduce the chances of conflict relapse (grievances, horizontal inequalities). Improve donor coordination in fragile situations (design of operations, measurement of progress, disbursement on the basis of prior actions vs. outcomes). 7

Thank you 8

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