The recent economic crisis in Sri Lanka has created concern regarding the potential stability of other countries in the Asia Pacific region over the coming months and years. This article considers the role of professional accountancy organisations (PAOs) in providing advocacy and support to governments during these challenging times.

 

The Crisis in Sri Lanka

Sri Lanka’s economy suffered due to the pandemic – when tourism collapsed, it triggered a drop in foreign currency income while at the same time Sri Lanka’s debt levels increased. The situation was made worse during 2022 by the increase in global commodity prices following the Russian invasion of Ukraine. For the first time in its history since independence in 1948, Sri Lanka defaulted on its foreign debts after inflation topped 64%.

The Sri Lankan Government sought significant loan arrangements with the International Monetary Fund (IMF) – such arrangements usually come with conditions, which may include general requirements to improve public financial management (PFM), or the introduction of specific policies, such as tax reform measures.

 

Learning from other economic and debt crises

This is not the first time that countries under significant economic pressure and attention turned towards improving PFM. In 1997/98, Thailand’s economic situation deteriorated due to the weakening of its fiscal position caused by a combination of factors including a widening current account deficit, high borrowing, a slow- down in investment, and weaknesses in the financial system.  GDP growth and the local currency came under significant pressure. The IMF came forward with a structural adjustment package to support the Thai economy which included the introduction of measures to improve PFM (including transparent and comparable financial reporting).

In 2010, the sovereign debt crisis shed light on the poor quality of financial reporting and financial management by governments around the world. The focus at that time was particularly on countries in Europe (such as Greece and Cyprus) and the Middle East (Turkey) where economic crises resulted in bailouts from various organisations such as the IMF, European Central Bank, and the European Commission. The financial problems over a decade ago centred on some countries concealing their deficit and debt positions. This, in turn, created distrust and lack of confidence in their financial information as well as a crisis of confidence in governmental leaders.

Each new economic crisis highlights the need for better financial management through robust governance and accountability mechanisms, and open and transparent reporting through high quality and consistently applied accounting and auditing standards.  This requires strong financial leadership at the very top of government, and trusted politicians with the political will to change and reform government public finance systems and processes. As occurred in Europe, the events in Sri Lanka provide an opportunity to shine a spotlight on Asia Pacific. The lessons learnt, risks and opportunities, of course, apply globally.

 

What is good PFM?

Since the 1990’s the IMF has stressed the need for sustainable public finances and high-quality information on the state of those finances. It published its Code of Good Practices on Fiscal Transparency in 2007 which highlights the need for:

• Clarity of roles and responsibilities
• Open budget processes
• Public availability of information; and
• Assurances of integrity

While many governments may have a set of well-prepared national statistical accounts, which is a good start, relying on a set of specific and narrow set of statistics is not sufficient to understand or manage fiscal risks. To foresee and manage potential economic crises, it is important to have sound macroeconomic policies – but it might be hard to pursue the right policies if the problems are not apparent.  The collation and reporting of this information for macroeconomic policies can be susceptible to politicisation and manipulation.

 

High quality, reliable financial information

It is important for governments to have access to better, more reliable information about the true nature of fiscal risks. Increased transparency through a published set of accrual-based financial statements, prepared in compliance with international or local standards, is a key first step. This information can support a better understanding of public finances and enable better decisions to be made about taxes and public spending. Accrual-based financial statements can help identify alternative indicators and information on the government’s deficit and debt levels. It can also help to establish and forecast public spending and revenue which can, in turn, help reveal fiscal problems that may not be identified from the national statistical accounts.

The IFAC – CIPFA International Public Sector Financial Accountability Index – 2021 Status Report revealed that only 7 jurisdictions in Asia are currently reporting accrual-based financial information. The good news is that progress is expected, with that number forecast to increase to 17 by 2025. However, the time to implement can be lengthy, and in the intervening period it will be vital to remain alert to the risks.

Sustainable public finances

In an economic crisis, it is important to assess long-term public finance sustainability. This occurs by understanding and assessing the government’s income streams and its obligations into the indefinite future. It is important to know if a government can roll over its outstanding debt into the foreseeable future. To manage long-term finances, expenditure may need to be cut and revenue increased, which may require difficult decisions to change tax and expenditure levels in order to improve conditions for growth.

It is therefore vital to identify and understand the root cause of any fiscal problems so that mitigating actions can be taken.

Some PAOs regularly offer ideas and insights for improving PFM[1].

Holding governments to account

As economic challenges arise, government policies need to be scrutinised before they are enacted. One way of doing this is to establish an independent fiscal institution to review tax and spending policies. Bodies that can examine the sustainability of public finances, in an objective and transparent way while providing scrutiny over fiscal policies can be key to ensuring that the right public finance decisions are made with the public interest at the heart of decision-making. Examples include:

• • Australian Parliamentary Budget Office 
  • Japan Fiscal System Council
  • Korean National Assembly Budget Office 
  • United States Congressional Budget Office
  • UK Office for Budget Responsibility

Financial leadership

Underpinning the core objective of high-quality information and evidence-based decisions to support and strengthen economic growth, as well as public service delivery are usually finance professionals. Experience in both the private and public sectors around the world has shown that where finance professionals with strong leadership skills, ethics, and the right financial training are employed, the financial affairs of any organisation are usually better managed.

 

CAPA’s framework for good PFM

The various crises shine a spotlight on the importance of effective PFM – which is key to the development and growth of individual economies. Countries need more than just accruals-based financial information – they need a whole of government approach to create a comprehensive and coherent system of PFM. CAPA’s Eight Key Elements of PFM Success highlights the key components needed to enhance a country’s economic sovereignty. Governments need to:

1. Build the Climate for Reform – through recognising and acknowledging that change is required with key stakeholders committed to influence and implement necessary reforms
2. Put in place a Legal and Institutional Framework – that facilitates the implementation of efficient and effective public service arrangements (such as appropriate bodies as well as recognised codes, standards and practices)
3. Instil the right Values System – which includes working in the public interest with appropriate attitudes and behaviours and an open, honest and transparency approach to planning, execution and reporting of public services
4. Ensure sufficient Capacity and Capability – appropriately trained, skilled finance personnel and the right systems are needed for successful reforms
5. Put in place a clearly defined Fiscal and Policy Framework which includes a credible budget that reflects the expected financial impact of the government’s policies and its use of resources
6. Develop strong Performance Management systems – which enable the successful implementation of the budget at a macro and micro level to achieve anticipated outcomes through value for money, efficient and effective delivery of services and financial compliance
7. Implement appropriate, transparent Reporting against planned outcomes – which highlights the positive relationship between the degree of fiscal transparency and fiscal sustainability measures enabling governments to be accountable against their fiscal actions; and
8. Ensure there is effective Scrutiny and Assurance (including external, independent audit) – generating confidence by confirming the reliability of reporting information.

 

How can PAOs support governments during challenging economic times?

Governments, depending on their level of maturity on the PFM journey, may seek support from PAOs in their country.

PAOs: Extending Activities into the Public Sector highlights that PAOs that undertake advocacy- and policy-related activities for the private sector will be skilled in providing similar support to the public sector. PAOs that have the necessary resources and skills could reach out to their governments offering such support – even if the government itself has not requested it.  This can be done through:

• Facilitation of broader roundtables, smaller, more targeted group discussions, and even one-to-one meetings – these can be convened to address relevant topics and involve government officials and stakeholders, decision-makers and influencers. The PAO could take the lead in researching and setting the agenda, identifying the key attendees, preparing briefing papers, and co-ordinating the outcomes of the roundtable. The activities can also be used as a way of highlighting the value and role of the accountancy profession in enabling strong PFM principles.
• Representations – in some countries, PAOs may have the opportunity to provide formal, expert testimony, such as to a parliamentary scrutiny committee. PAOs can:
  • engage with government officials to provide general or expert advice, input, and comment on, for example, a government’s move to accrual accounting; and
  • if requested by parliamentary committees, provide formal testimony in an official setting, such as comments on proposed accounting, reporting or audit related legislation.

• Briefings for Politicians – politicians have a variety of backgrounds and can be dealing with any number of issues in their assigned portfolio. While some countries have politicians that are professionally qualified accountants, most politicians do not have any finance-related skills. They may have policy advisors who work with them on a day-to-day basis; however, these advisors are usually from an economic or policy background and will not necessarily have a financial management viewpoint. A PAO can provide support by offering to provide technical and policy briefings on key public interest issues related to PFM, or issues that may affect the profession. It is important to note that:
  • Briefings may take the form of a short paper, providing information about the substance of the issue. This includes breaking down complex information into a factual well-structured document and explaining the topic or issue in a clear and simple way.
  • Written briefings can also be followed up with meetings, giving politicians an opportunity to ask detailed questions to aid their understanding of an issue.

PAOs must also help governments to build their supply of finance professionals through:

• Helping to analyse the skills needs of public sector finance teams; and
• Providing the right initial educational programs (qualifications) and continuing professional education (training) to meet the needs of the public sector.

This will be vital in Asia in the current decade given the expected and required demand for finance professionals to assist in the implementation of accrual-accounting regimes. CAPA continues to emphasise that implementing policy reform, such as international standards for reporting, is all well and good but it will not succeed unless the right resources are in place, especially people. CAPA’s Attracting and Retaining Finance Personnel in the Public Sector provides deep guidance to PAOs on what they can do and how they can engage with other stakeholders to achieve this outcome.

 

Moving forward

More than a decade on from the sovereign debt crisis, and post the pandemic, it is time for governments and the accountancy profession to take stock of lessons learnt from the past. Managing an economic crisis cannot be solved by politicians alone. A wider range of stakeholders need to be involved – and at the heart of managing any economic crisis is the need for better, more open, and transparent information, prepared by competent, highly trained, and highly skilled finance professionals and leaders. This will enable the right decision-making for sustainable public finances and the economic growth and development of a country.

 

This article was first published on the IFAC Knowledge Gateway on 20 October 2022. 

To access the article on Gateway, please refer here.