Budget Support in the Western Balkans: a catalyst to the EU?

“Aid modalities” to use the jargon, is a bit like men’s fashion. Rather like flared trousers and loudly coloured ties, they come around in fashion every so often. Same with the fashions in aid effectiveness.

Having sat on several national and OECD level talking shops, I now conventionally start with a quip of adding the negative…so aid effectiveness becomes ‘aid ineffectiveness’ which is often closer to the reality on the ground in recipient countries where despite well meaning declarations, foreign donors more often-than-not have their own peculiar pet ideas and vision.

One delicious example was when I came across a reasonably well designed and operational fiscal system in a particular transition economy and a certain Nordic donor insisted that its support in the area was conditional on the budget being gender based! Hmm, the average Public Finance Management expert may ask: what if budget programming is sound and based on a reasonable identification of needs and priorities?

… back to Aid (In) Effectiveness.

The EU’s aid budget is managed through its euracracy, the European Commission (EC). And in recent years there has been a marked shift to align its aid dollops through an increasing share of budget support operations or cash transfers to the national Treasury via generally its account at the central bank although they are now aimed to be 25% or so of the total aid pot.

Traditionally a tool favoured for developing and emerging nations, Budget Support has now found its way to the Aid menu for would-be accession countries of the EU’s periphery, including bits of the Western Balkans not already in the EU.

One of the interesting developments has been whether budget support operations meets the wider goals of development aid and in turn whether the tool is relevant for what is left of the Enlargement-seeking countries – relevant for either their broader development or for guiding and accelerating EU aspirations.

Leaving aside the outlier that is Turkey – it being recipient of a cool $4.8bn aid over 6 years from the EU over 2014-20 and a further $3.something bn commitments late in 2015 to Turkey “manage” Syrian refugees – the question has become focal for the Western Balkans – Albania and the 4 Yugo successor states not yet in the EU: Serbia, Montenegro, Macedonia and Kosovo.

Picture a situation where anything up to 90% or more of aid flows are from the EU into a recipient country in the Western Balkans that is earmarked to be €1.6bn in 2015. Sounds a lot but if budget support takes about a small portion of €20-40m then this is small change for the Western Balkan budgets.

So can budget support – essentially cofinance for existing budget lines for line ministries – be conducive to reform in the Western Balkans (where reforms have stalled) particularly where convergence to EU norms is concerned?

Time will tell.

One thing is for sure – Budget Support for Sector Reform is a well-meaning approach relevant for development more generally and it does in principle meet the broader aims of national ownership by allowing recipient nations to use own systems and procedures. It means funds go through the national Treasury and in effect imply a potential boost to Aggregate Demand through a rise in government expenditure.

On the other hand, anyone who has worked in EM or in other developing countries will wonder if the use of often bent national procurement systems really does lead to meaningful impact of those hard earned (and argued in austerity-hit donor countries) transfers of Euros, pounds, dollars or any other currency.

In summary, Budget Support is not a panacea in aid delivery. It is a tool or modality and one amongst a family of tools that range from classical Technical Assistance from the private sector or from national administrations in the EU (twinning as it’s called) to continued use of EU or other donor procurement systems but where the beneficiary country or authority (such as the Road Fund or Railways or Border Control Management) is given the right to make a transparent selection based on verifiable criteria.

Budget Support does make Ministers of Finance and other key ministerial folk sit up and take notice because its pure cash rather than some woolly project where foreign experts eat up most of the sum from consultancy fees. And as such policy conditionality works if the programme is well designed. Equally if it is but a substitute for a better option such as a standard Supply Contract then its impact and value-for-money will be lower.

This in turn opens up perhaps the critical path for potential reform. Via the budget.

The share of government in Western Balkan economies remains relatively high and so fundamental reform in key sectors will be credible only if the piles of donor funded sector plans and fancy Medium-Term Expenditure Frameworks (MTEFs) are subject to genuine Public Finance Management through much improved budget programming, better expenditure management and improved financial accountability.

Having designed the one main General Budget Support package for Serbia in 2009-10  and a pilot Sector Budget Support in the Western Balkans in the last two years, I remain cautiously optimistic about the potential of the new modality as a conduit to more effective governance, rule of Law and government finances.

The latter three tick boxes toward the Copenhagen criteria that defined the initial basis of meeting the entry requirements to the join the EU.

That said, the Jedi Knights of the Acquis Communautaire may wonder if the Force is really with them if this does not lead to meaningful real convergence at the geek-level EU Chapters….from statistics to agriculture and veterinary control to financial control.

For this and more see my blog, www.aid-finance.com

Western Balkans: Public Finance Management in Kosovo, Policy Concerns and Risk

With focus during 2015 in Europe on the continuing challenges with Grexit-cum-Brexit, the refugee crisis and the political spillovers across Europe, what of the Western Balkans and long-stated hopes of EU accession?

Inevitably, the yellow-brick road to the EU remains of keen interest to citizens of the Western Balkans if not their erstwhile politicians and policymakers who are happy with the current models of existence. Barring major economic and resultant political turbulence this modus-operandi is changing little.

From the EU the same broadly applies. The European Commission’s Directorate General is no longer DG Enlargement but rather DG Neigbourhood and Enlargement (DG NEAR) that takes in countries around the EU periphery from Belarus in the East via Jordan, Turkey and then across the southern Mediterranean to Morocco. 

The EC’s reduced focus on Enlargement in the Balkans echoes the political mood music in the EU more generally about fear of further flows of economic migration and taking on board economies that remain unprepared in terms of basic principles of governance, political accountability and economic freedoms. 

Yours sincerely has had the opportunity to work on macro-PFM-advisory issues with governments in recent years and the one State I had not worked on was Kosovo. So what was my experience and assessment following several visits from late 2014 and 2015?

Kosovo, formerly bang in the centre of Yugoslavia and now a nominally independent State but quite yet fully recognised by the international community, made some fantastic strides in setting up market based institutions…but much of it was setup under the auspices of the UN agencies in control and without the legacy of state institutions that have often proved to be the limiting factor to change and subsequent implementation of reforms.

See also: www.aid-fnance.com

An assessment was carried out on Public Finance Management in Kosovo in 2015 for a major donor that looked at the entire scope of PFM from budget formulation, strategic planning through to treasury management, financial control, public procurement and internal and external audit functions. The aim was also to assess the current PFM stance in Kosovo in early 2015 as it affects Kosovo’s potential access to the EU Budget Support.

One key finding was that despite Kosovo’s heavy aid dependency over the last decade, formal donor co-ordination in PFM has been largely absent, meaning that the potential leverage of combined external aid and World Bank development financing has been sub-optimal. That said, this is not dissimilar to the situation in other Western Balkan states – or indeed elsewhere where donors are often more focussed on meeting commitment targets for meeting aid targets from national capitals.

Overall, the impact of EU aid in PFM reform was assessed to positive but affected by the lack of available administrative and absorption capacities as well as by the lack of genuine demand or political will to implement fiscal and PFM reforms. Impact and sustainability was found to be highest where there has been clear and full ownership – most clearly for the external audit function at the Office of Auditor General – the external audit function in  Kosovo.

Budget planning was assessed to be fairly advanced in terms of classifications, use of a budget calendar, Single Treasury Unit /cash management and a number of IT systems.

For Internal Audit and Financial Control a key challenge has been a lack of genuine ownership.

The picture was similar for Public Procurement in that the binding constraint has been the degree of ownership and political will rather than the design of aid projects. The projects made modest progress in helping to raise knowhow and improve the legal framework that was found to augur well should the recent signs under the new government in mid-2015 prove to be sustained.

Overall, the picture was essentially on par with the rest of the Western Balkans with perhaps the exception of the very advanced external aid function – although the latter was largely due to the efforts of the UN and then EU support and led until late 2014 by a senior former external auditor from Scandinavia but with increasing risk of the function becoming weakened as a true independent channel to assess accountability and value-for-money of public finances. As in most transition and emerging economies the accountability in parliament through budget and Public Account Committees (PAC) was found to be very weak – with but enormous upside potential, particularly in terms of syncing the external audit reports…aka the way the UK’S PAC has often worked hand-in-glove with reports from the National Audit Office.

Capacity limitations and political will to implement far-reaching fiscal reforms are key limitations in Kosovo. Capacity limitations weaken the potential of over-sexy IT systems for budget planning and perversely mean that there is more actual discretion in shifting appropriations between budget lines than perhaps the case in other legacy-Yugoslav states.

This in turn opens a range of questions about what exactly is the best avenue to target external funds in development aid, the modalities of aid and whether there is sufficient leverage or conditionality to force reform. The headline macro numbers hide some basic vulnerabilities including a bloated size of the state that is acting as a de-facto employer of last resort for a large cohort of workers – often politically driven – and in large part due to a lack of sufficient development of the private sector to absorb excess labour. The true unemployment rate, particularly among the youth is very high, real wages relatively low and this in turn has led to an outflow of migrant workers in search of better life in Germany via Serbia that in early 2015 reached a reported 50 -70000, although some of these will now be returning home following the German decision to not recognise citizens from the Western Balkans as refugees.