Hidden gems in PFM manuals and handbooks

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This is a series of posts presenting ‘hidden gems’ i.e. elements, considerations and recommendations in PFM, which might have gone under the radar, not being referenced often by practitioners.

My posts will present ‘hidden gems’ from the Fiscal Transparency Code Handbook by the IMF (2018).

If you feel like it, post your own 'hidden gems' from other evaluation manuals. Or enter the conversation to add your views on the presented ones.   

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The first 'hidden gem' is an unusual definition:

Indicator shopping by Government: in relation to the integrity and trasparency of fiscal data, this definition warns abouth the risk of Government 'to seek to focus attention on the figures that most flatter the current fiscal position' [IMF Fiscal Transparency Handbook, page 50). It is part of the Dimension 1.4 'Integrity of fiscal reporting'

Memorandum Item
Good practice requires some operational independence for the agency compiling fiscal statistics and encourages the introduction of policies on statistical integrity and professional independence. It also calls for a more transparent process starting from the producers of source data all the way to the potential users

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The second ‘hidden gem’ in the IMF Fiscal Transparency Code (2018) is related to PFM accounting practice used for fiscal reconciliation

Fiscal reports should include reconciliations between alternative measures of summary fiscal aggregates (page 38 under the principle of Internal Consistency):
-   Fiscal balance with net financing (linking the ‘above-the-line’ to the ‘below-the-line’)
-   The stock of debt issued with the stock of debt held by counterparties
-   Net financing with the change in the stock of government debt

Where countries are producing accrual accounts, operating, cash flow, and balance sheet statements make these reconciliations easy to produce. If countries are operating on a cash basis without financial statements, the reconciliations need to be integrated with and/or informed by data produced by the central bank.

Memorandum items
'Most countries have cash-based budgets, while financial statements and fiscal statistics are increasingly being prepared on an accrual basis. These differences could lead to large discrepancies among various reports. For example, arrears may be reported in accrual terms in debt management reports but ignored in cash accounting’.

A reported fiscal deficit “above-the-line” that is smaller than the net financing (below-the-line) may indicate that there are many off-budget operations.

Any discrepancies between the government’s debt liabilities and private-sector debt holdings may indicate misreporting of public debt figure'.

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Another ‘hidden gem’ in the IMF Fiscal Transparency Code (2018), this time under the pillar Fiscal Forecasting and Budgeting.

Tax Farms: (page 56) Fees and charges collected from the direct beneficiaries of government services should be reflected in the ministry’s budget allocations. 
Operating revenues from the sale of goods and services should not be retained unless there is strong justification. Such retained revenues should be counted as negative expenditures in the budgets of the respective ministries/agencies.

This means that ministries and agencies can retain and spend any overcollection during the year without exceeding their gross appropriation.
Any collections above budgeted amounts should be returned to the finance ministry to prevent ministries from becoming ‘tax farms’.

Memorandum items: In Uzbekistan expenditures financed from own resources in the Ministry of Agriculture were on Treasury but not on Budget. This despite have an almost  1:1 ratio to the related Budget Allocations of the Ministry. 

53.5% percent of this off-balance budget expenditure allocations went to pay salary tops-up in different departments and dependent agencies. The remaining 46.5% was allocated to Type IV economic item ‘Other Expenditures’, mostly under the generic sub-code ‘other expenditures’.

Based on the above findings, it is legitimate to say that the Ministry of Agriculture’s expenditures were not strategically planned during budget preparation but rather tactically spent during budget implementation. Needless to say that rumours of corrupted practices were abundant.   

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For the fourth ‘hidden gem’ we temporarily move away from the IMF Fiscal Transparency Code, to present a well-known McKinsey jargon, that of hockey stick forecast applied in our case to MTEF projections.

Hockey stick forecast: (https://www.linkedin.com/pulse/how-investors-can-spot-company-whose-hockey-stick-growth-sven-smit/ ) ‘One of the most common artifacts of the corporate strategy process is the so-called hockey stick plan, showing a line that sails upward on the graph to account for upfront investment.

The projections tend to be overly aggressive in the longer term, but they give boards, analysts and investors confidence that the company is poised for a glorious future. Over the years, however, unrealized hockey sticks string together and turn into an ugly phenomenon we’ve dubbed the hairy back.’

This can be extended in PFM to overoptimistic forecasts by the MoF for the outer years of MTEF. This phenomenon occurs when new programmes, often financed by donors, are planned either beyond the implementation capabilities of Government agencies and/or over the spending framework allowed by legislation. In the latter case fiscal rules require fiscal constraints in annual budget planning, forcing the MoF to push unrealistic programme expenditures in the MTEF outer years.

Memorandum item:  In Albania the rolling three-year MTEFs in the period 2014-2019 showed the ‘hockey sticks’ trend. The sticks indicated that the medium-term forecast beyond the budget year is not financially sustainable and  the Albania was falling back to a de-facto one-year planning and budgeting.

The attached table (click once on the pic) is the visual representation of what McKensey calls ‘hockey stick dreams and airy back results’.

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Back to the IMF Fiscal Transparency Code, for two more hidden gems presented in combo. They relate considerations that should be common sense in PFM but often are not, due to bureaucratic practice and political pressure (revisit the first hidden gem on this web page, too).

Data for the revised appropriation rather than the original appropriation: ‘The use of supplementary budgets that change appropriated amounts can be a source of confusion when comparing fiscal outcomes with budgets. Most final accounts include a comparison of the budgeted amounts and the actuals, but, in practice, the comparison is often made using data for the revised appropriation rather than the original appropriation’ (page 51).

Memorandum item:  In Albania in the early 2010s massaged data of actual capital expenditures were common practice. Instead of being compared to the original appropriation, the comparison of actual vs. planned expenditures used data from supplementary budgets, improving the related ratio. One year that ratio resulted in almost 100% compliance due to the use of data contained in a normative act approved by the Parliament in December to account for a Government’s sequestration of funds that took place in late September.     

Format over content: (page 33) ‘The quality of a report is determined by the relevance and consistency of the information it contains. A similar set of characteristics has been proposed by IPSAS’ among which ‘reliable’. Information is reliable when it is complete in all material respects, free from any material error and bias, and represents faithfully the financial position reflecting the economic substance of transactions and not merely the legal form.

Memorandum item: During a compliance mission a donor considered that a programme condition was met because a Line Ministry had submitted a budget programme table in the required format. The table included not only internal data inconsistencies, but its totals did not match the totals of the same Ministry’s economic item table. The programme budget table with the above shortcomings was approved by the Ministry and published on its website. This represented an additional issue of reform credibility, beside that of data reliability, for the ongoing introduction of a performed based budgeting,

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We start the new week with another gem, not so hidden tough, as it is a current concern for monetary policies of Central Banks. Kristalina Georgieva, IMF Managing Director, used it during her speech at the Bank for International Settlements on September 7th 2026.

Risk of Fiscal Dominance in monetary policies: ‘I chose to use my recent remarks at Jackson Hole to warn about the risk of fiscal dominance. When public debt is high, history has taught us that fears of lower-than-optimal policy rates or future monetization may lurk in the background, pushing bond yields and inflation expectations upward. And, with many central banks now making losses from a mix of low yields on legacy assets and high interest expenses on bank reserves, the challenge for central banks is even greater.

With high debt and fears of fiscal dominance conspiring to increase the risk of inflation expectations moving upward, central banks will need to respond forcefully to future shocks to protect independence, preserve credibility, and deliver on their price stability mandate’

Memorandum item: I asked AI about the three types of dominance that can impact the Central Bank Independence, and the following table was generated:
   
Type of Dominance              What constraints the Central Bank?                                              Primary consequence

Monetary Dominance (ideal)    None: the Central Bank freely prioritizes its price stability mandate    Controlled inflation and credible monetary policy

Fiscal Dominance                    High Government debt level and large deficit                                    Central Banks keeps rates artificially low
                                                                                                                                                         to prevent Government default

Financial Dominance               Fragile banks, banking sector vulnerability or systemic debt               Central Banks hesitate to raise rates out of fear
                                                                                                                                                        of triggering a banking crisis

In recent weeks the interest rate hikes decided by the Federal Reserve, the ECB and the Bank of Japan seem a concerted effort to mitigate the risk of fiscal dominance advocated by some Government’s officials. The Bank of England held the rates but it should be noticed that their levels are currently higher or similar to the ones set by the other Central Banks.