The AfDB and ACBF have published the first African Financial Governance Outlook (AFGO), a new flagship report to enrich understanding of public financial management (PFM) and its contribution to good governance, with the ultimate aim of reducing poverty and delivering sustainable and inclusive economic growth.

It complements quantitative indicators with qualitative analysis to show trends over time and to explain the drivers of change in financial governance across AFGO pilot countries.

Covered in this outlook are 10 African countries that have participated in the African Peer Review Mechanism – Burkina Faso, Ethiopia, Ghana, Kenya, Mali, Mozambique, Rwanda, Senegal, Tanzania, and Uganda. The countries were drawn from the different regions and represent different political and administrative traditions (Anglophone, Francophone, and Lusophone) to ensure a wide range of countries.

They were analyzed using a financial governance matrix that combined five financial governance arenas of Budget Governance, Revenue Governance, Internal Controls, Public Procurement, and External Audit as well as five political governance variables of Inclusiveness, Openness, Rule Compliance, Oversight, and Capability. The quantitative results in chapter 3 show a wide variety of performances for different countries in different arenas and indicators.

To explain this performance and to go beyond surface explanations, a comprehensive political economy analysis using stakeholder mapping to determine the influential actors and their role in the financial architecture was applied in chapter 1. This was supplemented by a further level of analysis that categorized stakeholders as change Facilitators or Dissenters according to their financial governance arena. The stakeholder mapping gave insights into who the major relevant stakeholders are and the reasons for their influence and interest. And categorizing them into change Facilitators and Dissenters enabled understanding where in the financial architecture they operated and whether their influence was positive or negative for good financial governance.

Also to be considered is the future direction of research for the Outlook and its expansion. A pilot exercise tested and applied the new Outlook methodology to country case studies and evaluated the results. The basic structure of the methodology has been found to be robust and to yield key insights about PFM for African countries. But it is possible to build on this model and improve its scope and depth. More detailed and more recent data will greatly improve the quantitative analysis, which already is very strong and pools almost all the primary survey data on PFM in the region. Further refining and improving the model will sharpen the quantitative analysis and provide more detailed results.

To provide a really holistic picture of financial governance and PFM issues facing African states, it will be necessary to expand AFGO coverage to include more African countries, including the larger economies, which have a significant impact on the continent's growth and development prospects. Periodic updates of the reports for countries already covered will keep the picture current.

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Overview

Good governance is important for Africa's equitable and sustainable development. It is critical for sustainable economic growth (high per capita income), and for high foreign direct investment. The evidence also confirms the causal link between good governance and the decline in absolute poverty, infant mortality, and illiteracy; the move toward gender equality; and the increased access to clean water and other Sustainable Development Goals.

The Policy on Good Governance of the African Development Bank (AfDB) defines governance as “a process referring to the manner in which power is exercised in the management of the affairs of a nation, and its relations with other nations.” It identifies the key elements of good governance as: ensuring accountability, transparency, and participation; combating corruption; and promoting an enabling legal and judicial framework.

The Outlook treats financial governance as a fiduciary relationship between states and citizens in how public resources are managed. This relationship is critical in Africa as countries try to transform from discretionary to rule-based and transparent public financial systems. This transition depends heavily on the quality of public institutions, the capabilities of the state, and the fiscal foundations of state-society relations.

Public financial management (PFM) is defined here as “the effective management of public resources to meet the long-term goals of sustainable economic growth and poverty reduction (within the African context). It carries out this objective in a transparent, accountable, and participatory manner within a clearly defined legal and procedural framework that minimizes corruption and maximizes impact.”

Some conflicts in Africa are grounded in mismanaged public resources, undermining service delivery, with some citizens failing to access their benefits, fueling discontent. This is all the more reason why the future use of revenues from natural resources, and the use of local content have attracted the attention of Africa's natural resource countries. These are intrinsically PFM strategies.

Even in peaceful countries, Africa lacks local and national capacity in PFM, despite capacity interventions by bilateral and multilateral organizations, and this lack has retarded effective PFM.

The main findings

• Progress in African financial governance. Over the last 20 years, interventions by national governments and external institutions have boosted country performance, whether at a single point in time (snapshot) or over multiple points (trends). Areas of gain include building regulatory institutions, creating greater transparency for budgetary and revenue expenditure, recognizing the need for greater accessibility of information and public participation, and using modernized accounting and record-keeping systems. Much room for improvement remains, however.

• More public participation needed. Where the budgetary and revenue processes include civil society organizations, ordinary citizens, and other key actors in the private sector, these external agents help formulate policy, provide feedback, and take part in the general process of governance, with a positive impact. Not only does this engagement strengthen the fiduciary relationship between citizens and the state – the heart of good financial governance – but it also improves the effectiveness of state policy, increases compliance, and enables the government to reach its PFM targets. Exclusion leads to resentment, less understanding of governmental aims and priorities, and a reluctance by citizens to fully engage in financial governance. In turn, this affects compliance and the state's ability to collect revenue and carry out its expenditure programs.

• Need for internal accountability mechanisms in PFM systems. Internal as well as external oversight and regulatory institutions are vital. PFM systems and ministries, departments, and other government spending and collection bodies need such internal mechanisms and procedures to ensure accountability, transparency, and the monitoring of financial activities to check misuse of funds or administrative procedures leading to rent-seeking. These mechanisms and procedures are the first line of defense protecting PFM systems.

• Independence of key regulatory institutions. Independence of institutions responsible for monitoring, overseeing, and enforcing rules is critical to good financial governance. Where these institutions – including audit authorities, finance inspectorates, tax and revenue authorities, and procurement agencies – are protected from political interference and can carry out their duties unimpeded, the beneficial impact on financial governance is notable. Where their independence is curtailed, overtly or covertly, the regulatory system is weakened and malpractices and rent-seeking proliferate. Ensuring the robust independence and strength of these regulatory institutions is a major work in progress in Africa.

• Preponderance of the executive. The executive is usually dominant in administering and managing PFM systems. This can be positive, when the ruling party or group in power shows a strong commitment to improving financial governance, like Ethiopia and Rwanda. But in the longer term, an overweening executive is damaging, since entropy is a characteristic of all political regimes, and those that remain in power for a long time are vulnerable to such degradation. It also means that the success or failure of PFM reforms depends heavily on the orientation of the leading group in the executive, and this can change with the political wind. Addressing this ultimately dangerous weight of the executive is crucial to ensure long-term success.

• Importance of legislative oversight. It is crucial that the legislature holds the executive to account over the budget and uses bodies such as public accounts committees to monitor government spending and taxation and to bring government malfeasance to light, dealing with it appropriately. The legislature remains a check on the financial power of the executive.

• Greater transparency required in government procedures. PFM is complex and requires specialization and access to information about government administration. Improving public awareness about the procedures, and making public financial information on government spending and taxation easily and widely available, will improve the public's ability to participate in financial decisionmaking and engender transparency. This will help reduce corruption and increase citizen confidence in PFM public institutions.

Download the full report (pdf)

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This Report is a joint production of the African Development Bank (AfDB) and the African Capacity Building Foundation (ACBF). The preparation of the report benefited from the tutelage of the ACBF team led by Thomas Munthali, Director for Knowledge and Learning Department (K&L), assisted by Robert Nantchouang, Senior Knowledge Management Expert.