Tracking the use of debt relief resources
Countries have chosen very different systems to manage and account for the savings resulting from debt relief. Three main approaches can be distinguished:
- Institutional Fund Mechanisms
- Virtual Fund Approach
- Comprehensive Expenditure Tracking
The distinguishing feature among the three types is the degree of specificity which is accorded to debt relief funds compared to other government resources.
Institutional fund mechanism
This system implies that revenues from debt relief are set aside in a separate account. Often, a special committee decides about the allocation of the funds. Expenditure typically occur outside the normal budget, reporting, and evaluation system. Countries have adopted this approach as a means of providing higher assurance to donors and citizens about the positive link between debt relief and spending on poverty reduction.
Without doubt, such a system generates greater visibility and transparency with regard to the debt relief resources freed up annually and their use. Line ministries can target their advocacy efforts directly on these funds by submitting projects for approval.
However, the institutional fund mechanism must be evaluated very critically for basically two reasons: First, the setting up of separate institutional arrangements to manage the proceeds from debt relief may divert scarce human resources, capacities and attention away from the ordinary public expenditure management system. Second, the tracking of HIPC expenditures alone does not provide any guarantee for additional resources to the beneficiary sectors. Due to fungibility of funds (i.e. where untraceable funds risk substitution), a government might be tempted to reduce ordinary allocations to programmes that are already benefiting from debt relief resources. In such a context, it is therefore crucial to monitor and ensure that debt relief resources do not crowd out ordinary government spending but are provided in addition to it.
Virtual fund mechanism
An interesting intermediary approach to the management of debt relief savings is the set up of a virtual fund mechanism (VFM). Under this system, the country’s existing budget classification is adapted to tag (by the means of a special code for example) the savings from debt relief. The amounts released by debt relief and in some cases also the related expenditures can be identified and tracked easily. Relying on the normal government procedures and standards for allocation, reporting and auditing, the VFM has the advantage of being fully on-budget by providing at the same time reassurance to donors and citizens regarding the use of debt relief. Often, expenditures financed from the virtual fund would receive special privileged treatment, for example by being protected from within year budget cuts.
In such a context, line ministries would need to advocate for debt relief resources as part of a broader budget envelop. Such efforts are usually more fruitful if health concerns are adequately recognized and given priority in the national poverty reduction strategy paper (PRSP). Moreover, health officials have to find convincing arguments why their programmes and interventions should receive financing from the virtual fund.
Comprehensive expenditure tracking
At the other extreme of possible management systems are countries which abstained completely from any specific institutional arrangements or tracking for debt relief savings. The allocation, reporting and accountability standards are the same for debt relief funds and other budget resources from tax revenue or general budget support. Depending on the accounting standards, debt relief resources may still be identified on the revenue side of the budget, but there is complete fungibility when it comes to expenditures.
The major policy implication for health officials operating in this setting is that direct advocacy for debt relief funds is not possible. Efforts to scale up public health spending must focus on negotiations for the overall budget.
Comprehensive expenditure tracking systems which allow reporting on all poverty-reducing public spending (not just spending financed by debt relief) are clearly the favoured approach by the International Monetary Fund and the World Bank. However, it requires strong public expenditure management systems which provide enough assurance to donors and citizens that debt relief indeed helps to boost poverty related spending.
A more detailed description and analysis of these mechanisms can be found in an article published in the Bulletin of the World Health Organization (Vol 86, 2008):