Good financial governance

Project description

Title: Supporting fiscal policy in El Salvador
Commissioned by: German Federal Ministry for Economic Cooperation and Development (BMZ)
Country: El Salvador
Lead executing agency: Ministerio de Hacienda
Overall term: 2010 to 2015

Context

From 2009 to 2014, El Salvador was run by a centre-left government led by Mauricio Funes which aimed to implement fair and pro-poor policies by adopting a more active model of government than its predecessors. The current government led by Salvador Sánchez Cerén, which has been in power since June 2014, intends to continue pursuing this policy. Implementing the fiscal reforms needed to do so are one of the new government’s priorities. To achieve this, however, the conditions for establishing sound fiscal policy must first be created. To date, the state has done little to collect the necessary revenues or spend the scarce public funds effectively and with the proper oversight. This situation limits the government’s capacity to take action, while at the same time reducing the acceptance and legitimacy of the government in the eyes of its citizens.

Objective

The promotion of good financial governance strengthens acceptance of the Salvadorian Government and its capacity to take action.

Approach

The government’s capacity to take action is based on a well-functioning system of public finance. GIZ’s advisory services therefore cover three areas:

  • Tax policy and administration are to be reformed to strengthen the Salvadorian Government’s ability to finance itself.
  • Budgetary processes are to be reformed to make the management of public spending more efficient and results-oriented.
  • External financial control is to be strengthened and dialogue between all sections of society supported, thus promoting government accountability and transparency with regard to its fiscal policy and improving the relationship between citizens and the state.

The project involves all relevant actors within the public finance system – including the Office of the President, Ministry of Finance, tax administration, Court of Auditors, parliament and civil society – in a comprehensive and systematic approach to good financial governance. This inter-institutional approach enables maximum coherence between results at the policy, administrative and supervisory levels.

The main instrument is capacity development at various intervention levels:

  • Government institutions are strengthened at both technical and policy level through the development and introduction of modern concepts as well as mechanisms designed to enhance transparency and accountability. With their help, it should be possible to generate income and make efficient use of public funds. Effective work procedures, administrative processes and knowledge management systems are introduced to this end.
  • Experts and managers from relevant government institutions receive training.
  • Legal bases, such as the introduction of a debt brake, are reformed and dialogue with other relevant actors is promoted.

Regional dialogue within Central America has proved to be useful – for example, with national tax administrations, Courts of Auditors and budget departments. The project enables partners to access regional and international (expert) networks (OECD, ITC, CIAT, OLACEFS) and makes use of South–South learning approaches.

Results

The tax-to-GDP ratio has increased in recent years from 13.7 per cent (2009) to 15.8 per cent (2013), despite weak economic development. Income has risen as a result of tax reforms and the use of more effective working methods by the administration. A national action plan for budget reform has been prepared and presented to all government institutions. The strategic guidelines are complemented by essential detailed plans, such as the classification of programmes and spending. In addition, around 400 government employees from 96 institutions have taken part in train-the-trainer courses on the new budget methodology. By 2015, all central government expenditure will be classified into programmes and evaluated to determine its efficiency and effectiveness. GIZ’s advice to introduce fiscal rules led to the drafting of legislation which was presented to the parliament for approval in May 2014.

Further information