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Providing Budget Aid in Situations of Fragility: A World Bank - AfDB Common Approach Paper

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Executive Summary

This paper is concerned with improving coordination and the pooling of risk management in the provision of 'budget aid' in situations of fragility, among the World Bank and African Development Bank, in collaboration with the European Commission and IMF. Budget aid comprises all types of instruments and sources of assistance to the budget, including policy-based budget support lending and grants (instruments), as well as contributions channeled through multi-donor trust funds (sources of financing), which can finance recurrent expenditures subject to specific fiduciary arrangements. The overarching conclusion of the paper is that there is a need for greater coordination of approaches in the provision of budget aid between the participating institutions, with a view to helping fragile situations to embark on a path of stability and resilience. This can be done, inter alia, by providing budget aid that is more predictable and targeted at addressing the root causes of fragility and conflict.

The paper conveys three main messages. First, rather than viewing budget aid as simply a transfer of financial resources to the country's budget, and with a narrow focus on public financial management, it should be considered as a key element of an aid package that consists of evidence-based policy dialogue, analytical work, technical assistance, capacity building activities, as well as financial transfers. This package should be more explicitly geared at addressing the underlying causes of fragility and supporting the transition toward resilience. This can be done by highlighting the role that budget aid can play in: stabilizing the macro-budgetary framework and allowing the state to carry out basic functions, to cement its legitimacy and contribute to maintaining political stability; supporting the longer-term endeavors of peace and state-building; and contributing to strengthening the capacity of recipient countries by channeling aid through national systems.

Second, the risk elements surrounding the provision of budget aid need to be analyzed more deeply and shared more widely amongst the three institutions (World Bank, AfDB and EC). Working together to pool risk is a critical source of added value resulting from improved coordination of approaches. The typology of risk, the analysis of different categories of risk and the trade-offs that exist between them could be given more prominent attention in the documentation associated with budget aid. The risk of not engaging should be set against the benefits that can be reaped by successfully stabilizing a country, including the positive regional (and global) externalities that may be generated. Third, it is important to consider more systematically the choice and complementary nature of policy-based budget support lending and grants as well as other instruments to support recurrent expenditures such as MDTFs. Donors could fine tune the mix of instruments and sources of financing at their disposal depending on their exposure to risk to avoid negative consequences for countries resulting from the delay or withdrawal of disbursements through one mechanism. The paper also presents a number of recommendations – summarized in Table 1 – and areas for further engagement. The recommendations are intended to stimulate further debate and assist the three institutions in strengthening their effectiveness in the provision of budget aid, including from the standpoints of donor coordination and the pooling of risk.

In the light of the diversity of approaches and progress made by each institution in addressing some of the issues raised in this paper, these recommendations may not apply uniformly to all of them. By the same token, the need for better coordination clearly requires the institutions to review these recommendations to see to what extent their adoption may facilitate more effective partnership between them. Given the great diversity of fragile situations, country-specific assessments should ultimately guide the decision with respect to the timing of engagement and choice of instrument and source of financing.