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The Impact of Cash Budgets on Poverty Reduction in Zambia: A Case Study of the Conflict Between Well-Intentioned Macroeconomic Policy and Service Delivery to the Poor

Author: T H Dinh, A Adugna and B Myers
Date: 2002
Size: 34 pages (113 KB)

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Summary

Has a cash-based budget brought fiscal discipline and inflation control to Zambia? Has cash budgeting damaged service provision to the poor?

This report, by a team of World Bank economists, evaluates the experience of Zambia in cash budgeting. The Zambian government adopted cash budgeting in the early 1990s to control runaway inflation and stabilise the economy. While cash budgeting reduced hyperinflation initially, overall it has contributed to keeping inflation at high levels, misallocation of resources, and a worsening in the inefficiencies and inequity in the delivery of social programmes. The document also contains a comparative analysis of the experiences of Uganda and Tanzania in cash budgeting which show similar results to Zambia.

While cash budgeting can provide some short-term macroeconomic stability, all cash budgeting systems have inherent features that weaken budget discipline and open up the normal budget process to unplanned decision making.

In Zambia, some of the effects of cash budgeting have been:

• Substantial reallocations of resources during budget implementation. Reallocations were systematically made towards public services – State House, defence, the judiciary – at the expense of economic and social services.

• Transference of budget control from parliament to a small committee that makes monthly decisions on what funds will be released. This has undermined democratic control over the budgeting process.

• Volatile and unpredictable cash flow. This makes planning very difficult and has had a damaging effect on vital social services such as health and agriculture, which are under the responsibility of less powerful ministries.

• The build up of arrears. While cash expenditure is strictly controlled, the financial commitments are under less scrutiny.

• Public servants have devised strategies for surviving in this hostile environments which further undermine budget discipline, and are inefficient and costly.

Countries should carefully consider their choice of macroeconomic stabilisation tools, and assess their likely impact on service delivery to the poor. Some recommendations on how to reduce the harmful effect of cash budgeting on poverty reduction in Zambia (and other countries) are as follows:

• Improve efficiency in planning by gradually increasing the time period covered by each cash release, and by splitting the operation into two steps: publication of a cash release plan and execution of the actual release.

• Link cash releases closely to the budget, using a rule-based system that maintains long-term government priorities.

• Strictly enforce the mandate of the Ministry of Finance and National Planning to cut back new cash releases to overcommitted budget heads to pay off debts.

• Improve the transparency of the system by including more detailed statistics on quarterly expenditures and linking actual expenditures by ministry (budget head) and major expenditure category to original budget estimates.

• Longer term, implement a medium-term expenditure framework which links government priorities with the budget to highlight the tradeoffs between competing objectives.

Access full text: available online

Source: Dinh, H. T., Adugna, A. and Myers, B., 2002, 'The Impact of Cash Budgets on Poverty Reduction in Zambia: A Case Study of the Conflict Between Well- intentioned Macroeconomic Policy and Service Delivery to the Poor', World Bank Working Paper 2914.
Author: Abebe Adugna , aadugna@worldbank.org