Public Sector Governance and Accountability Series: Budgeting and ...

66 Salvatore Schiavo-Campo
pay off the more expensive types of debt in the government’s portfolio.
Under unusual circumstances and for specified and basic human needs
(such as drought relief and crash vaccination programs), it may be appropriate
to assign windfall revenues to those needs. Before the actual expenditures
are made, however, sound and well-designed administrative arrangements
must be in place.
Aid-financed expenditures
In the 1970s and 1980s, expenditures that were financed with tied external
loans or grants were routinely omitted from the budgets of aid-recipient
countries. Progress has been made toward better coverage of externally
financed expenditures in the budget, although in many African countries the
budgetary coverage of grants, technical assistance, and expenditures
financed by external loans often remains incomplete. The motivation—or
rationalization—for ring-fencing project aid funds in a country is allegedly
the ineffectiveness of the budget system. In practice, however, the ring-fencing
itself (and the problematic project implementation units it requires) is often
ineffective even at protecting the aid resources and is itself a cause of
continued budgeting weaknesses.
Enclaving a large portion of aid moneys outside the budget weakens the
incentive for the recipient government to improve its budgeting system. And
enclaving does not motivate donors to move away from ring-fencing their
project aid, when they can live under the delusion that the ring-fencing fully
protects the resources and their use. In any case, project aid can and should
be accounted for in the budget—as has been shown most recently in a
budget system as conflict damaged as Burundi’s—even if separate arrangements
are made for its administration. In sum, there is bound to be a need
in many countries to continue special arrangements to manage certain
project aid funds. These arrangements must be considered strictly transitional,
however; they must not be allowed to interfere with the clear priority
to support the improvement in the budget system that will render them
unnecessary. Donors have a key responsibility to facilitate the incorporation
of these expenditures into the budgets of recipient countries.
Expenditures financed from counterpart funds generated by sales of commodity
aid also must be managed under specific procedures, mandated by
requirements of the donors. That such tying of counterpart funds is generally
inefficient does not relieve the recipient country of the burden of satisfying
donor requirements. (Whether the aid should be accepted in the first place,
given these restrictions and the risk of an adverse impact on local production
of close substitutes for the imported commodities, is a different issue.)