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Governance: Sound Development Management : Promoting the elements of good governance in Bank operations : Building governance capacity
Public financial managementImprovements in accounting and auditing procedures are the first line of reforms in the public finance system. The Bank’s loan agreements routinely incorporate covenants on accounting and auditing requirements, and executing agencies are encouraged to strengthen financial management practices (for example, through performance-based budgeting and external audits). Going beyond the level of individual executing agencies, the focus of attention has to be the government budget, and the need for fiscal discipline. Given the concern with sustainability of programs and projects (e.g., allocations for operation and maintenance), what is of interest is not just public investment plans, but public expenditure as a whole (i.e., both capital and recurrent expenditures). Also important in this context are budgetary allocations within and between sectors, and the overall adequacy of the government’s development expenditures. Although the Bank endeavors to analyze these budgetary issues in DMCs, and to raise them in policy dialogue as appropriate (e.g., during country programming), it needs to be recognized that its capacity for full-blown public expenditure reviews is still limited. An aspect that has been receiving increasing attention from donor countries is excessive “nonproductive” (e.g., military) expenditures by some recipient countries. The concern is twofold: first, budgetary allocations for military purposes should not crowd out development activities; and second, since money is fungible, external assistance for economic development should not have the effect of freeing up resources for unreasonably high military-related expenditure. These concerns are understandable and valid (although, to some extent, military expenditures may be supply-driven by armaments exporters from donor countries). At the same time, governments have a sovereign duty to protect their citizens and territories, and they act in accordance with their own perceptions of threat, rather than those of outsiders. To address these issues in a balanced, coordinated, and effective manner, funding agencies have used the forum provided by country aid groups or consortia (usually organized by the World Bank). Thus, in recipient countries where the military budget seems unduly large, the aid community usually expresses its concern at the annual consortium meeting, with the clear implication that the level of the overall aid commitments reflects that concern. As a member of such aid consortia, the Bank associates itself fully with such expressions of concern, provided the economic effect of military expenditure on the development process in the DMC concerned is unequivocal and demonstrable. In addition to expenditure matters, the Bank also looks at ways to help DMC governments improve their domestic resource mobilization efforts, more directly through enhanced cost recovery by public utilities, but also including TA for policy reforms. Taxation is another aspect. Indeed, in many ways, the manner and effectiveness with which a government collects taxes are reflective of the standard of governance that prevails. Hence, the Bank provides training for tax policymakers, as well as TA for improving tax collection and administration. Box 3 provides a flavor of the Bank’s activities for helping improve public financial management in DMCs.
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