Providing budget aid in situations of fragility : a World Bank and African Development Bank common approach paper

Abstract

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 International Monetary Fund (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. The paper also presents a number of recommendations summarized 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.

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