Overview

Good Economic and Financial Governance (GEFG)

Against the background of higher aid flows, debt relief, and increasing revenues from natural resources in Africa, good economic and financial governance is receiving increasing attention. Competent, transparent and accountable public financial management is considered a central element of a functioning democracy, while weaknesses in this field, hampers sustainable development, investment, and economic growth. Transparency, participation, and accountability that come from an empowered citizenry are the strongest antidotes to corruption. In addition to other governance issues, GEFG is therefore of particular importance as it is connected to to the achievement of the Millennium Development Goals (MDGs).

Many African countries have already made important progress in public financial management. In recent years, public expenditure management in several countries has improved, regulatory and supervisory bodies have been strengthened, and tax systems have been reformed towards internationally recognized standards of good fiscal practice. As a result, Africa is, today, performing much better than a decade ago and African economies continue to sustain the economic growth momentum which has been built up in recent years.

However, the progress is still insufficient (measured against international comparators) and uneven with limited institutional and human capacity proven to be major obstacles. Reforming public institutions is about establishing new binding rules and constraints; the task is to establish those incentives and accountability systems, which lead people to adhere to these rules. Successfully advancing public sector reforms therefore depend on sustained political commitment and respective communication.

As the African Union (AU) has stressed in its New Partnership for Africa’s Development (NEPAD) programme, African countries accept that responsibility for peace, development, good governance and transparent, sustainable financing of the public sector lies with them. In order to assume this responsibility at both the national and regional levels, they need the required capacity and institutions. The Bank Group is promoting and supporting the establishment and strengthening of these institutions. In this context, African finance ministers endorsed the Abuja Commitment to Action in 2006 and called for long term predictable financing as part of efforts by African countries for transparent and reliable budget management. 

With its Strategic Directions and Action Plan, the African Development Bank has made  “Good financial governance” an imperative in its lending and non-lending operations. The Bank provides support to regional members to implement economic and financial reforms through policy-based operations as well as through institutional support projects. Budget support is primarily used to strengthen financial governance and budgetary systems, in particular government auditing and public procurement.

The Bank approaches include:

• Strengthening African Tax Systems
  African tax systems are generally characterised by low tax/GDP ratios. Despite intensive efforts so far undertaken by our partner countries with the help of bilateral and multilateral institutions, there is still room for reforms in tax policy and more pressingly in tax administrations. In 2002, most African countries committed themselves to the Monterrey Consensus to take steps to mobilise their own revenues, since appropriate participation by citizens in the financing of the development process is a key element in achieving autonomy. In the long term, development policy transfers are no substitute for a partner country’s own effort to finance its development.
  In this context, the AfDB will support efforts by RMCs to reform their tax policies and tax administration. The Bank encourages African countries to make use of regional networks and international knowledge on tax policy and administration in order to bolster domestic expertise.
• Establishing Transparent and Comprehensive Budgeting Procedures
  Positive economic developments in Africa are also based on national budgets that reflect a government’s political priorities. The Bank supports African countries in their efforts to develop concepts for transparent and reliable budget management, as stated in the Abuja Commitment to Action. One of the approaches to strengthen capacities and “peer learning” for budgeting procedures in Africa is the Bank’s support to the Collaborative Africa Budget Reform Initiative (CABRI).
  
• Promoting Accountability, Transparency and Enhancing Budgetary Control
  The credibility and reliability of governments of partner countries in managing their public finances depend upon regular auditing to ensure both the legality and efficiency of public expenditure. This requires an effective and independent system of financial control. Under the umbrella of the International Organization of Supreme Audit Institutions (INTOSAI), African supreme audit institutions have set up the African Organization of Supreme Audit Institutions (AFROSAI) which the Bank supports in many ways.
• Increasing Accountability for Revenues from Extractive Industries
  African countries that are rich in oil, gas and minerals generate a vital proportion of their revenues from the sale of these resources. The call for transparency in the management of public revenues from extractive industries is a vital contribution to the establishment of good governance and enabling citizens enjoy a share of their country’s potential wealth.
  The Bank is committed to increasing transparency and accountability in the management of extractive industries resources. It follows a two-pronged approach in its engagement in the EITI: advocacy to create the political will among resource-rich regional members that have not endorsed the initiative; and technical and financial assistance to regional member countries that have demonstrated the political will by endorsing the EITI, but lack the implementation capacity.
• Supporting Fiscal Decentralisation
  Effective use of public funds can only be effective if the central government and sub-national levels of government charged with providing public services are both able to perform their tasks properly. The Kigali Conference in 2006 emphasised the need for strengthened capacity, transparency and accountability of local governments, and mechanisms for coordination between central and local governments. The AfDB supports African countries in their efforts to establish legally concise and sustainable intra-governmental fiscal transfer and tax-sharing systems that adhere to principles of fairness and accountability.
• Enhancing Capacities for Governance in Fragile States and Situations
  In many partner countries, statehood has suffered temporary or long-term damage as a result of political crises, conflicts or natural disasters. In fragile states, democratic legitimacy is often limited and government structures at all levels are fragmented and lack sufficient capacity to plan, manage and implement policies. These are particular demands on governance, but modest capacity development can be achieved even in states and situations with acute governance challenges. In such a situation, it is often necessary to restore basic functions of government in order to provide basic services and security for the population.
  In order to support governance in partner countries with limited state capacity, the AfDB is seeking to strengthen key governmental functions, so that countries may initiate, coordinate and implement their own development policies.
• Governance throughout the Bank
  Governance is an issue that affects many Bank activities and nearly every department or unit within the Bank does some work on this critical issue. 

Water Sector Governance Project

The Bank’s Water Department (OWAS) is responsible for managing the Bank engagements on the important issue of water. In order to assess the current state of water sector governance, develop indicators and targets for improvement, and provide guidelines for Bank sector staff to use when developing programmes and projects throughout the project cycle, OWAS has undertaken a study whose objectives include:

• Providing decision-makers - task managers, project teams and others - from the Bank and its Regional Members Countries with an in-depth understanding of the concepts, opportunities, and challenges for improving governance in the water sector;
• Providing an in-depth analysis of the social, institutional and legal aspects of sector governance and subsequent development of a method to allow Bank staff to rapidly characterize the state of governance within the sector;
• Preparing guidelines and a list of targets and indicators for improved governance that can be integrated into the Rural Water Supply and Sanitation Initiative (RWSSI) and other programmes and projects to ensure long-term sustainability of investments based on an analysis of success or failure of governance in different countries.