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Citizens have for many years demanded the right to scrutinise public budgets and play a part in how public money is allocated. In developing countries that are aid dependent there is an extra dimension to this budget work – decisions made by international financial institutions and bilateral donors. These decisions
are crucial for government spending, and this briefing sets out some current aid planning issues which are relevant for civil society organisations that monitor government budgets in aid dependent countries.1 A recent Afrodad study found that: “Mozambique still suffers from distortions in domestic accountability due to heavy reliance on external assistance, the fragmentation of instruments used by donors, and the extent of donor involvement in central policy processes, including the poverty reduction strategy and the budget”.2
Foreign aid makes up a significant percentage of government income for low-income countries, in some cases half of the budget. Aid is likely to rise as a proportion of the budget if richer countries fulfil their commitments to increase their foreign assistance towards reaching the Millennium Development Goals (MDGs). At the same time as the expected rise in aid volumes governments have pledged a series of important changes in how aid is delivered, notably a trend towards donors providing money as direct budget support. This briefing describes how budget tracking organisations can understand these trends and build aid decision-making into their strategies.
Aid money has traditionally been spent primarily through projects with specific procedures, and much still is. Recipient governments spend large amounts of time and resources reporting demands to donor agencies. Of the 35,000 aid transactions that take place every year over 80% are worth less than US$1million. The government of Mozambique has approximately 1,000 bank accounts for donors’ administrative requirements and Tanzania’s Ministry of International Cooperation prepares 2,400 donor reports every quarter and hosts 1,000 meetings a year with donors.
In recent years several donor governments and multilateral organizations have begun to channel more aid money not as projects but as either sector support or general budget support. Providing money that governments can allocate through their national budget cycles is intended to build more efficient and accountable governance in recipient countries. This practice is commonly known as “budget support”. So far only 5% of total aid is spent through budget support, but in some countries as much as 20% of aid money is provided in this way.
The major advantages of budget support are that it creates the conditions for governments to plan for the medium-term, to reduce the transaction costs of dealing with multiple donors and multiple projects, and to strengthen their accountability to their people rather than to outside agencies. Official evaluations of budget support also show that it can contribute to increased pro-poor expenditure such as spending on basic services. In Ghana for example, budget support has helped direct more money to spending on health and education, with access to education improving in particular. There is also evidence that budget support has helped to improve public financial management systems, even in countries like Sierra Leone and East Timor which have weak institutions.3
Budget support is meant to give greater discretion to the recipient country and reduce the amount of donor conditionality and control. Citizens should obtain a
clearer idea of medium-term government revenue and be able to more easily make claims on public funds, through advocacy to national decision-makers. But
for this potential to be realised, donors need to make their budget support aid more predictable and governments need to allow popular scrutiny. Citizens groups need to build up the necessary analytical and advocacy skills.
Budget support carries risks. Corruption and human rights scandals have made many donor governments more cautious about budget support. Most do not
give budget support to countries where there is very poor transparency and accountability. Where budget support is provided donors often accompany it with programmes or initiatives to improve governance in that country. To meet their concerns that money may go astray they invest considerable efforts into making financial systems more transparent.
Another risk is that the budget may be insufficiently funded if donors fail to provide their aid as predicted. A recent report by Save the Children UK found that budget support may in some cases be less likely than project funding to arrive on time and in full.4 One reason is that if a country does not fulfil conditions within an International Monetary Fund programme, donors normally make a collective decision not to release their money. Withholding funds can have disastrous impacts on poor people, particularly if recurrent expenditure on teachers, health workers or medicines is partially reliant on external aid. The government of Mozambique perceives negotiating with a united block of donors to be a major risk of budget support. In a recent negotiation forced donors to cut a paragraph in the Memorandum of Understanding between the donors and the government which said that in the case of disagreement donors would first discuss amongst themselves and only approach the government with an agreed position.5
Budget support is not a magic bullet. Channeling money directly through national budgets assumes that there are domestic accountability structures – such as parliamentary oversight and audit procedures – to ensure that money gets spent well. In the rest of this brief we consider what donors and civil society can do to make the budget support approach help reduce poverty and enhance accountability.
Footnotes:
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"There are still many significant gaps. One of the most obvious ones, very relevant for low-income countries, is the absence of work monitoring
international donor assistance; an important omission giving the large share of developing country budgets financed by aid.” De Renzio and Krafchik (2007),
Lessons from the Field: The Impact of Civil Society Budget Analysis and Advocacy in Six Countries Practitioners Guide, p. 28.
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Afrodad, 2007, A Critical Assessment of Aid Management and Donor Harmonisation, The case of Mozambique, p. 21. Available at:
www.afrodad.org/downloads/publications/Aid%20Mgmt%20Mozambique%20%20Final.pdf.
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Herrling and Radelet (2006). Should the MCC Provide Financing Through Recipient Country's Budgets? An Issues and Options Paper. Available at:
http://www.cgdev.org/content/publications/detail/14130.
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Save the Children (2006).
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Gerster (2006).
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