Download Presentation to the EP Sector Board

Supporting Subnational Fiscal Reform:
Presentation for the Decentralization and
Intergovernmental Fiscal Reform Course
Vivian Hon
Economic Policy, PREM
March 26, 2002
1
Outline
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Background of Subnational TG
Objectives of the TG
Rationale for Involvement at the SN
level
Subnational Portfolio
SN Fiscal Reform
Some Preliminary Findings
2
Subnational (SN) TG: Background
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Formed in 1997; 150 members (PREM,
FPSI, ESSD, HD)
Motivation (2nd tier governmentsprovince/states/regions and oblasts)
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Following Board paper on subnational
lending
Increased direct involvement with
subnational governments
3
Objectives of the TG
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Forum for discussion and knowledge
sharing in key areas:
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Improving subnational fiscal performance
Encouraging growth and poverty reduction in
backward/lagging regions
Providing tools to assist in Bank operations
and ESW at SN level
Some synergies with Decentralization TG
4
Rationale for Involvement at the
SN level
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Fiscal problems at SN can have significant
BOP effects (previous session by Rosenblatt)
Fiscal problems can impact service delivery,
particularly in key social services (e.g.
education, health)
Economic/size justification
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Uttar Pradesh in India (166 mil) almost equal to
Brazil’s population (169 mil).
Population of Rio de Janeiro, Brazil population is
larger than Chile.
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Rationale for Involvement at the
SN level (cont.)
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In large federalized countries, reforms cannot
be implemented centrally
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lack authority - formal (Constitution) and political
lack financial resources to leverage reforms at SN
level
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Adjustment Lending for
Subnational Reform
IBRD
FY
2002
2002
1995
1998
1998
1998
1998
2001
2001
2002
2001
1998
1998
1997
1998
2000
2001
2003
1998
Country
Russian
Russian
Argentina
Argentina
Argentina
Argentina
Argentina
Argentina
Argentina
Argentina
Argentina
Brazil
Brazil
Brazil
Brazil
Mexico
Mexico
Mexico
India
Proje ct Name
Fiscal Federalism & Regional Fiscal Reform
St. Petersburg Economic Development
Provincial Reform Loan
Argentina Second Provincial Reform (Rio Negro)
Argentina Second Provincial Reform (Salta)
Argentina Second Provincial Reform (San Juan)
Argentina Second Provincial Reform (T ucuman)
i
Catamarca Provincial Reform
Cordoba Provincial Reform Loan
Santa Fe Provincial Reform
Catamarca Provincial Reform
Minas Gerais State Privatization.[1]
Mato Grosso State Privatization
Rio Grande do Sul State Reform
Rio de Janeiro State Privatization.
Mexico Decentralization SAL
Edo.de Mexico SAL
State Adjustment Loan
Andhra Pradesh Economic Restructuring
2000
2001
2002
2002
2003
2003
2003
India
India
India
India
India
Pakistan
Pakistan
Uttar Pradesh Fiscal Reform & Public Sector Restructuring
Karnataka SAL I
Andhra Pradesh SAL
Karnataka SAL II
Orissa Fiscal and Administrative Reform for Economic Revival
Sindh Structural Adjustment Credit
North West Frontier Province Structural Adjustment Credit
Total
[1] This loan did not materialize due to commitment from government
IDA
Commitme Commitme
nt Amount nt Amount
120
161
300
75
75
50
100
71
303
330
170
45
125
250
606
505
300
301
126
75
125
50
75
4344
242
125
75
125
50
75
100
90
881.9
Total
Commit
me nt
Amount
120
161
300
75
75
50
100
71
303
330
0
170
45
125
250
606
505
300
543
251
150
250
100
150
100
90
5225.4
7
Adjustment Lending to SNGs
by Country
% of total
19.6%
20.0%
18.0%
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
15.7%
13.4%
7.1%
6.3%
RUS
7.1%
ARG
BRA
MEX
IND
PAK
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Fiscal Problems at the
Subnational Level
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SNGs are generally more profligate than the
center
Mismatch between SN revenues and expenditures
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Lack of clarity in assignments
Revenue uncertainties- greater dependence on
transfers which are not always reliable or timely
Unfunded mandates
Budget rigidities, problems of prioritization
Weak capacity at subnational level
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Instruments to Support
Subnational Fiscal Reform
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Lending instruments
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National Reform loans
Subnational Adjustment Loans (SNALs)
Investment loans
Non-lending instruments
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ESW
SN-level core diagnostic reports
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Lending Instruments
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Fiscal Reform funds - national level funds
with rules of accessibility and incentives
for reform
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Argentina Provincial Reform Loan, Russia
Regional Fiscal Reform Fund
Reforms: intergovernmental relations
(Russia) and management of SN fiscal
obligations (privatization of utilities, state
banks – Argentina).
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Subnational Adjustment Loans
(SNALs)
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SNALs - adjustment loans made directly to
a SNG with the fed. Govt. as the
guarantor.
In cases where SNG does not have the
legal authority to borrow internationally
(e.g. Mexico and India), the loan was
made to the fed. Govt. which then onlends
to the SNG.
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Some characteristics of SNALs
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Demand AAA/ESW upfront
Conditionality upfront
Medium term expenditure framework (MTEF)
provides med-term path
Complemented by multi-sectoral approach
and portfolio presence
Pillars of Reform Program
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Fiscal Sustainability/Stabilization
Public Expenditure Management
Service Delivery
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More on SNALs
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SNALs can increase the leverage of reform.
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By providing greater financial incentives to SNGs.
SNALs are large operations. Furthermore, in
countries like India, they are additionality.
Selectivity allows the Bank to focus resources
where commitment and reform readiness is the
strongest.
Can have demonstration effects.
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Investment loans
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Primarily to support TA at the SN level.
Often are complementary to other
adjustment loans
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E.g. Russia Fiscal Technical Assistance
Project
However, countries tend not to borrow
for TA
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Some Risks
Risks
1. Macro Risk
2. Potential
disputes between
(and within)
national and SN
3.Reforms may be
unsustainable
Possible Actions to Contain Risks
 Presence of SAL, IMF program
 Conditionalites with SN-level fiscal
targets
 Established track record
 LT dialogue with government
 Comprehensive strategy of assistance
(AAA, TA, multi-sectoral approach)
 Insitutional building and participatory
approach
 Choose difficult-to-reverse reforms
 Sequencing (choose fiscal reforms
before sectoral reforms)
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Non-lending instruments
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ESW/AAA
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ESW
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Brazil - State Economic Memorandums (SEMs)
India - state fiscal studies
Argentina - provincial finances study
SN-level core diagnostic reports
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PERs – Indonesia, Mexico, Pakistan
CFAAs – 6 to date
CPARs
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Some Preliminary Findings/Lessons
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National framework for fiscal reform is
critical.
Sequencing is important –fiscal
adjustments need to be taken upfront.
Flexibility of support can be important in
the process of reform.
ESW while usually judged to be of high
quality sometimes have limited impact
because of relevance (timing issue,
dissemination).
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Some Preliminary Findings/Lessons
(cont.)
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Data at SN level is weak in most countries.
Loan design needs to incorporate country
context, political cycles and reform
objectives.
Institutional development is still the
weakest area of Bank support.
Participatory approaches can facilitate
implementation and support sustainability
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