Describes how good budget planning and execution practices can help with risk management for developing countries

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Role of Public Financial Management in
Government Risk Management
Doug Hadden

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Risk Management is complex, requiring the coordination of many
government entities, but is rarely coordinated in developing country
governments

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National budgets are typically coordinated, involve all government
entities and designed to follow policy and …

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…goals – including risk management goals

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Public Financial Management (PFM) refers to legislation, practices and
technology to support the budget cycle of planning, and execution
(revenue & expenditures)
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Government Budget Cycle

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Effective PFM can reduce government risks, act as early warning

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Paris Declaration and the Accra Agenda for Action has goals of increased
use of country systems by donors to reduce transaction costs and
increase country-led reform
Paris Declaration and Accra Agenda for Action
Foreign Aid Transaction Costs

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THE ROLE OF BUDGET PLANNING IN RISK MANAGEMENT

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Budget planning is about the future and should include risk mitigation
and monitoring mechanisms

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Scenario planning can run expenditure and revenue models based on
risks such as natural disasters, financial crisis, pandemics
Scenario Planning

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The classification of risks and objectives within the chart of accounts
shows spending on risks linked to macroeconomic analysis and
probabilities
Government Chart of Accounts

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Multiple year public investment planning tied to critical infrastructure is
supported through the Medium Term Expenditure Frameworks (MTEF)
practice in PFM
Medium-Term Expenditure Frameworks

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Counter-cyclical mechanisms can be triggered in budget planning that
creates appropriate budget controls in execution
Counter-cyclical and pro-cyclical

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Sustainability has increasingly become mainstream in government
budgeting to reduce likelihood & impact of environmental crises
Uganda and environmental budgeting

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Effective incentives for public servants and the private sector to better
manage risk can be funded through the budget

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ROLE OF BUDGET EXECUTION IN RISK MANAGEMENT

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Automated internal controls reduces corruption and fiduciary risks while
ensuring compliance to fiscal rules
Controls and automating governance

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The use of PFM standards like Government Financial Statistics (GFS)
provides governments with critical risk-related information that can be
compared with other countries to help decision-making
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Accrual accounting in government

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The move to accrual accounting by governments provides a better
method to determine long-term value for risk investments
Accrual accounting in government

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Debt and liquidity management and the use of the Treasury Single
Account (TSA) enables reducing debt and taking advantage of reserves
to increase fiscal space to respond to crises
Treasury Single Account

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Financial information from revenue and expenditures provides early
warning for decision-makers to make adjustments…

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… for example, monitoring public
finances enables predicting crisis
related to revenue reductions well in
advance

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Physical execution of infrastructure and other critical risk mitigation
investments can be tracked

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Internal and external audit can include financial risk assessment to
enable improving financial resilience
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CONCLUSION: ROLE OF PUBLIC FINANCIAL MANAGEMENT IN RISK
MANAGEMENT FOR DEVELOPING COUNTRY GOVERNMENTS

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Risk: it comes down the money properly invested

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Budget planning and execution enables governments to invest in
innovation and track results

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Planning and monitoring reduces risk
and enables investing in risk mitigation
mechanisms

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Good PFM overcomes donor risks of using country systems – increasing
development assistance effectiveness, increasing the fiscal space
Fiscal Space

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PFM systems are used to increase transparency of government plans,
procurement, execution and audit - to reduce the perception of risk
by businesses and credit agencies
Fiscal transparency in Timor-Leste

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Therefore, PFM has a critical risk management role for developing
country governments
Government Risk Management Return on Investment