Speech

Speech on Governance
By Mr. Abdoulaye Bio-Tchané
Director, African Department, IMF
Given at the AfDB Symposium on New Partnership for Africa's Development (NEPAD)
Addis Ababa, May 27, 2002

Ladies and Gentlemen:

1. I am honored to be here today to talk about governance issues in the context of the New Partnership for Africa's Development (NEPAD). Governance, both political and economic, is a prime theme in NEPAD, and rightly so. Without peace, security, and accountability, it is difficult for Africa to take off, and NEPAD recognizes this reality. Today, I will focus on governance in the macroeconomic area, which is what the Fund primarily deals with.

2. Political, economic, and corporate governance are each given importance in NEPAD as preconditions for development. NEPAD encompasses governance issues more widely and broadly than does the Fund. That is an advantage, for many of the issues are so interlinked that it is hard to address them in a vacuum. Let me share with you our experience with governance issues in Africa. The Fund's own guidelines call for a proactive advocacy of policies promoting good governance, and a comprehensive treatment of governance issues that are within the Fund's mandate and expertise. The Fund is not influenced by the nature of a country's political regime but must judge the prospects of proper policy formulation and implementation. The main economic issues of good governance relevant to the Fund fall in the areas of the management of public resources (including sales of public assets), and the development and maintenance of a transparent economic and regulatory environment conducive to private sector activity. The criterion for Fund involvement in a governance issue is whether it would have a significant current or potential macroeconomic impact in the short and medium term on the government's ability to credibly pursue policies aimed at external viability and sustainable growth. The Fund staff is alert to the potential benefits of reforms that would strengthen governance, and to the risks that poor governance carries for economic performance or program implementation.

3. Economic governance issues include corruption but go beyond this to encompass transparency, efficient rule making, discretion, and the scope for abuse of power. Let me give you three examples. In the first instance, the public may not be aware of the formulation of, say, budgetary priorities because the rules do not exist that determine how these priorities are set. Because the rules do not exist, the possibility is created of an abuse of power, or, to put it another way, there is the strong probability of a lack of accountability. In the second instance, the rules may exist, but they are not clearly known by the public, because, for example, they are hidden, or too complex to understand and interpret, or not apparent in some other way. This lack of transparency is equally unacceptable because it makes it more difficult, if not impossible, to exercise accountability. In the third instance, the rules may exist, and are clearly known, but the minister arbitrarily overrides or ignores them in order to "do his own thing," and gets away with it. Of these three examples, the first deals with efficient rule making; the second with the issue of transparency; and the third with the issue of discretion or corruption. The motivation or causes of each may be different—it may have to do with capacity constraints, or institutional weaknesses, or lack of political will. But all three are cases of governance issues that are covered by the Fund because they interfere with good economic policy making, and have special macroeconomic relevance. Another common example of an economic governance issue is that of ad hoc tax exemptions. The rules guiding the circumstances in which they are given may not exist, or even if they exist, they may not always be known or clear, or even if they are known, they may be granted to vested interests in a discriminatory way to further the minister's interests.

4. Apart from undermining confidence in the government and its moral authority, pervasive governance problems have very real economic costs. They are likely to make the misallocation of resources worse. Empirical evidence shows that significant governance problems negatively affect economic growth. Since they act as a tax on enterprises, they raise costs and reduce incentives to invest. They are often discriminatory, with all the attendant ill effects of discriminatory behavior. Where well-publicized governance issues exist, they have discouraged foreign direct investment and sometimes induced investors to pull out. They may reduce domestic savings and investment, as most savers and investors will hesitate to fully commit themselves to an economy in which official discretion and secrecy create a high degree of uncertainty. Pervasive governance problems may discourage donors from providing sufficient aid, which could also harm growth.

5. In view of the role of good governance in effective economic policymaking and poverty alleviation, the Fund has addressed governance issues in its dealings with authorities of African countries, where such issues are relevant. This is done by means of the following:

· advice given in an annual Article IV consultation mission or Fund-supported program;

· technical assistance; and

· conditionality in various forms (such as prior actions, structural performance criteria or benchmarks, or reviews) if a country has a program supported by the Fund and the measure is deemed essential for the successful implementation of the program.

6. The Fund has worked with African member countries to improve governance in areas in which the Fund has expertise:

· transparency and accountability in public resource management;

· fiscal and public sector reforms;

· banking and financial sector reforms;

· statistical data and information flow; and

· legal and judicial systems reforms.

7. The first two areas occur with by far the highest frequency. Thus, the authorities have worked with the Fund to strengthen public resource management, especially public expenditure control, and more generally, budget preparation and implementation. For example, in Guinea, as part of the effort to increase transparency, the authorities began in 2000 to hold regular press briefings on budget execution, a process greatly facilitated by the introduction of their computerized expenditure tracking system. Also, the government in Niger started implementation in April 2000 of a program of reform measures that, inter alia, stopped the recourse to exceptional budgetary procedures (such as the prepayment of expenditure), and froze payments of some expenditures, pending verification of these financial obligations. In Zambia, the submission to parliament of audited government accounts began in recent years. Mozambique started to publish quarterly budget execution reports in May 2000, and in Angola, the authorities are working to develop a comprehensive reform of the public finances that would include, inter alia, establishment of a strong treasury system for monitoring the implementation of the budget.

8. Several countries have taken steps to make the operations of, and the revenues from, the oil sector more transparent. For example, in late 2000, Chad introduced a series of measures to improve transparency in the oil sector: it froze the portion of the oil bonus that had not already been spent and allocated; it allocated the unspent portion to priority sectors in the context of a revised budget law; it committed itself to conducting audits on the future use of the oil bonus; and it responded to parliament's questions on the use of the bonus. In the Republic of Congo, the government has initiated an external financial audit of the state oil company, SNPC, and intends to prepare consolidated fiscal tables covering the government's and SNPC's operations. In the Central African Republic, the state-owned petroleum company was liquidated, and the import, storage, and distribution of petroleum products were privatized.

9. Also, resort to extrabudgetary operations is being reduced. For example, Chad has integrated its extrabudgetary spending into the treasury accounts and prohibited such spending in the future. Weakness and fraud in tax and customs administration are being tackled. In Guinea, for example, the authorities have stepped up their efforts to combat tax fraud and corrupt practices in fiscal administration. In Uganda, various measures were undertaken to improve the functioning of the Uganda Revenue Authority. In Mali, the tax code was reformed recently. In the Democratic Republic of the Congo (DRC), preliminary financial audits of the customs and tax departments and most of the public enterprises have been performed, leading to the firing of many directors.

10. Moreover, improvements in the public procurement system are being brought about. For example, in Rwanda, public procurement is now channeled through the National Tender Board, which the authorities put on a firm legal basis by amending the public procurement law and the law on the tender board. Privatization and divesture programs are becoming more transparent. In Tanzania, for example, the government has initiated legislative action to reform the public enterprises and decentralize the fiscal authority. In Namibia, the government has announced an institutional arrangement to improve its oversight of public enterprises and take up issues of divestiture. In Burundi, legislative action with regard to the privatization of public enterprises has been initiated. Burundi appointed, in November 2001, a minister in charge of good governance and privatization. In Cote d'Ivoire, legislation against defaulting cocoa exporters has been promulgated. In Senegal, the law on the reform of the National Retirement Fund (FNR) was recently enacted.

11. Similarly, African countries are tackling problems in their financial sector—the third area in which the Fund has expertise. For example, the Bank of Ghana has, inter alia, instituted new procedures to counter money laundering, whereby suspicious transactions are reviewed and third-party transactions are checked against a list of suspected organizations. The bank has published new monetary data, correcting the underrecording of reserve money in the old series. The new governor of the Bank of Ghana initiated an external audit of the central bank, by auditors of international standing and experience as a signal of the new management's determination to ensure the compilation and dissemination of full and accurate data for policymaking purposes. Cape Verde intends soon to legislate a new organic central bank law. In Sierra Leone, new prudential regulations have been implemented. In Burundi, a revised banking law was adopted by the government and sent to parliament for adoption. In Ethiopia, the central bank has adopted a regulation for the provisioning by banks for nonperforming loans, and the Council of Ministers in Guinea-Bissau recently approved the liquidation of the country's largest commercial bank (BIGB) after its collapse.

12. The lack of adequate essential data—the fourth area in which the Fund has governance expertise—impedes an accurate and comprehensive analysis of recent economic and financial developments, and ambiguity in the statistics is a temptation for manipulation and abuse. But countries are taking steps to solve these problems. Lesotho, for example, participates in a regional effort to improve the provision of data and comply with the General Data Dissemination System (GDDS). Also, the Gambia has increased resources in the 2002 budget for the Central Statistical Department.

13. Finally, legal and judicial systems and processes are not directly an area of Fund expertise; however, institutional shortcomings in this area can vitiate implementation of reforms in many economic areas of direct Fund relevance. Besides, strong legal and judicial systems are important to establish an environment conducive to private sector activity. Hence, even if the Fund has to rely on the expertise of other institutions, most commonly that of the World Bank, it may address problems in this area, resolution of which makes it easier to tackle reforms in areas that have a profound bearing on matters of its mandate. A number of countries have taken action in this area. For example, in late 1999, the President of Mali appointed an ad hoc commission to address irregularities in the use of public resources in the cotton sector. Also, Malawi is in the process of amending the Corrupt Practices Act to make it more effective. In Kenya, Parliament has recently approved the Corruption Control Bill, aimed at reviving an antigraft agency, as well as legislation that would require all public servants to declare their wealth, these bills are expected to become law shortly. Governance issues in Gabon are being addressed primarily through the elaboration of an anticorruption law, a code of conduct for civil servants, and implementation of an integrated budget management system. Cameroon has launched a technical audit of the judicial system. In Burkina Faso, meanwhile, the strengthening of economic governance is covered by the National Plan of Good Governance, which was enacted with the initiation of the poverty reduction strategy paper (PRSP) in 1999. In Benin, a national anticorruption strategy was adopted. I can give you many more examples, but it is, I hope, clear that the authorities are beginning to seriously tackle governance issues—although they will be the first ones to acknowledge that there is still some way to go.

14. Countries have sought to make durable improvements in governance primarily through five instruments or processes:

· a change in the rules, either done administratively or by legislative action;

· the removal of bottlenecks through capacity building;

· peer review;

· the poverty reduction strategy paper (PRSP) process; and

· Fund conditionality.

15. In some cases, legislative action is required to address the governance issue. Once the legislation has been put in place, however, has it been effectively implemented and followed upon? This is the crucial question. For one can formulate the rules, but if they are not followed, the governance problem remains. The evidence has been mixed. In a number of cases, the authorities have vigorously pursued effective implementation of transparent rules that provide the basis for their actions, but in other cases implementation has been slow or ineffective. Where implementation has been weak, a lack of political will is often cited as the main contributing factor, but other factors include capacity constraints, institutional weaknesses, bureaucratic delays, the culture of impunity associated with the poor administration of justice, security concerns, the absence of financial support, for the inordinate amount of time required for gaining consensus.

16. I will now turn to capacity building, the second instrument countries have been using to resolve governance problems. NEPAD also recognizes that capacity building is crucial for Africa on just about every front. In the Fund, we intend to give this process a boost by participating in the Partnership for Africa's Capacity Building Initiative (PACT) and by establishing five regional technical assistance centers (AFRITACs). Under this project, the Fund's technical assistance to Africa will increase significantly and focus more on capacity building, thereby complementing the channels of technical assistance that the Fund already provides its African member states. The centers will be guided by Steering Committees, comprising, inter alia, the representatives of African governments serviced by the centers, so as to strengthen country ownership and accountability. The centers' work programs will draw on the client countries' PRSPs and interim PRSPs, where they exist. Each center will be staffed by regional experts in the areas of the Fund's areas of expertise, who can quickly and flexibly provide the assistance requested by the member of that region. One of the five AFRITACs is to be established in Tanzania, and another in Côte d'Ivoire; both of these will be operational by September 2002.

17. We know that discussions are ongoing in NEPAD on the modalities of establishing a peer review process—the third instrument for strengthening governance—and the appropriate standards and codes needed to monitor it. Indeed, the African Development Bank, among others, is intimately involved in this process. We are keenly awaiting the final results of these discussions and their implementation. Also, a similar process is being established by the Organization of African Unity (OAU). We understand that NEPAD intends to establish clear rules, procedures, and standards for the peer review process. When implementation of the peer review process begins, NEPAD may find that it is hard for Africans to criticize, or hold to account, other Africans. But it will eventually discover that, as our surveillance experience suggests, if the rules of the game are clear and are uniformly applied, it is much easier to gain acceptability. And, a successful implementation of the peer review process will raise hopes and gain respect for Africa, both internationally and within the continent, because it will be monitoring its own governance performance.

18. Let me now say a few words about the PRSP process—the fourth means for improving governance. One of the greatest coups for governance is the widespread acceptance of the PRSP process as a country-owned, participative process of developing and implementing an agreed national strategy, with well-defined national priorities and projects. I have no doubt that the PRSP process has gained a certain momentum of its own, that will be difficult to stop. The participatory process is bound to lead to a crescendo of demands for higher and higher levels of transparency and accountability, first in the economic sphere and, ultimately, in the political one, with overall beneficial results for governance. For once the creative energies of the people have been unleashed, it is difficult to stop them. It is important that NEPAD harness these energies, identify with the PRSP process, bring about an alignment of continent-wide strategies with national strategies, and envision the implementation of its call for accountability even more forcefully through the PRSP process. For this to occur, NEPAD's "top-down" approach needs to be supplemented with the "bottoms-up" approach of the PRSP. An informational campaign is called for, in order to acquaint ordinary Africans with the message of NEPAD, with its emphasis on self-responsibility, accountability, and so that Africa can take its fate and its future into its own hands.

19. I am aware that Fund conditionality—the fifth instrument for improving governance—may be unpopular with some countries; however, it has strengthened the hands of authorities and helped them to pursue governance issues more vigorously than they would have otherwise been able to do. In an internal survey, we were pleased to find that in the majority of cases there was agreement between the authorities and the Fund staff on what needed to be done to strengthen governance. Of course, the authorities are in a better position to say how it can be accomplished. But sometimes the Fund can be helpful in nudging the authorities forward. Nevertheless, I hope that NEPAD can agree on ways to tackle governance issues through its peer review process. If it does, there may be less need for conditionality on governance from the outside, as there would be more faith in the feasibility of the voluntary implementation of those economic policies that all agree are necessary for sustainable growth and poverty reduction.

20. In closing, let me state that governance is an issue not only in Africa, but in all regions of the world, as most countries have varying degrees of governance problems. We can learn from the experiences of those who have managed to reduce the extent of the problem. Indeed, a contribution that the Fund can make to tackling governance problems, which I have not yet mentioned, is to share information with country authorities on how a similar governance problem was dealt with in other countries and what was the response. Of course, the particular approach adopted in a country has to be tailored to its own circumstances, but one should not underestimate the beneficial effects of information sharing on "best practices" and lessons learned from experience. The Fund, accordingly, is ready to share its experience with African country authorities on governance should they so wish.

Thank you.