MULTIDONOR BUDGETARY SUPPORT (MDBS)

Principles

Multi-Donor Budgetary Support (MDBS) is the official development assistance (ODA) arrangement under which bilateral and multilateral development partners (DPs) collectively contribute to the budget of the Government of Ghana (GoG). Specifically, the donors channel funds towards implementation of the Ghana Poverty Reduction Strategy (GPRS).

This form of direct budget support represents a move away from the previous ODA approach in which individual donors funded selected sectors and/or projects.

How MDBS Works:

In March 2003, GoG signed a framework memorandum with nine DPs to govern the first year of budget support operations. The signatories included the African Development Bank, Canada, Denmark, European Union, Germany, Netherlands, Switzerland, United Kingdom and the World Bank. France signed on in 2005 to make 10 contributing donors.

The main goal of MDBS is to improve aid effectiveness. In this regard, all partners see a need to balance GoG’s desire to have timely and predictable disbursement of pledges with the DPs objective of encouraging reform. The MDBS agreement therefore requires bilateral DPs to disburse budget support in two equal parts (tranches). The first tranche, also called “base payment”, is made early in the year following a positive IMF review of the macro-economy. (GoG achieved this on May 9 for 2003 funds; December 2003 for the 2004 funds and June 20th for the 2005 disbursement).

The second tranche, or “performance payment” depends on the outcome of a joint progress review of GoG implementation of agreed policy actions. These focus on key areas of reform: Public finance management (PFM), the budget process, decentralization, public sector reform, governance, and the poverty related expenditures to the social sectors.

A policy outline has been mutually agreed around these areas of reform with a series of objectives, targets and means of verification. The objective, starting 2005 is to use a harmonized policy matrix with the World Bank Poverty Reduction Support Credit (PRSC) and the GPRS as more specific sector issues in areas such as health, education, agriculture, private sector development, natural resources management, and energy are brought into the assessment.

Benefits

From the GoG perspective, the main benefits of MDBS are:

• Reduced costs in negotiating ODAs, particularly costs arising from meeting the conditions attached to flows of ODA. This includes harmonized procedures, more predictable resource inflow, less burden from individual DP terms and parallel performance assessments;

• Increased certainty of ODA flows, allowing for better medium-term planning and more efficient resource allocation; and

• Improved institutional capability, enhanced effectiveness of MDA’s budgetary process and PFM; improved service delivery for human development, public sector accountability, governance (economic) and fiscal decentralization.

For DPs, MDBS is a key tool for supporting the implementation of the GPRS. By emphasizing the importance of public financial management, public sector reform and governance issues, MDBS seeks initially to strengthen the institutional environment in which GPRS will be implemented. Starting 2006 when the GPRS 2 is finalized, harmonization of the policy matrix with GPRS assessment will facilitate more direct input into achievement of GPRS targets, particularly in sectoral issues.

In addition to these policy benefits, MDBS will also offer DPs similar efficiency gains through reduced transaction costs associated with ODA.

Risks associated with Multi-Donor Budget Support

The main source of “cost” associated with MDBS for both DPs and GoGs will be an increase in the levels of risk borne. There are two types of risk involved.

• Downside risks are those arising from the possible failure of MDBS. GoG and DPs each bear a share of these risks, which because of the pooling of ODA conditions in a single arrangement, are greater than under traditional bilateral project-based arrangements. For GoG, the risk is that it loses a large proportion of expected ODA if it fails to meet performance criteria. In the case of DPs, the risk is of losing a large proportion of their individuality in development projects/programmes.

A number of factors raise the profile of these shared downside risks, including: capacity of GoG to meet progress targets; over-optimism on part of GoG in accepting targets; the potential for inflexible application of targets by DP’s; (i.e. application of the “letter” instead of the “spirit” of the law) and possible ambiguities in progress assessment standards. These drivers suggest that ongoing dialogue involving the sharing of assumptions, information and forecasts by both sides should form the basis of downside risk mitigation efforts. Arrangements in place for MDBS – including regular contacts with the Co-Chairs of the DPs and the MDBS Secretariat – (MoFEP), flexible and pragmatic negotiations and continuous and ongoing contact at the Sector Group meetings – ensure that is the case.

• Upside risks are those that threaten to limit the benefits of MDBS to either party, even when the programme has been successful in some degree. For GoG, upside risks revolve around the possibility that DPs will not keep to their commitments: for example, that the insertion of specific conditions by individual DPs will undermine the benefit of reduced transaction costs, or that a sudden shift in policy from the centre will result in some DPs reducing MDBS funding, thus undermining predictability. Given the systematic progress being made by both GoG and DPs in implementing MDBS, GoG’s assessment of these risks is likely to be low enough to render them acceptable.

Experience with Inflows

Since the last two years, (in about three decades), the country can now report of receiving in a calendar year, nearly 100 percent of the pledged amount of budgetary support inflows. For 2003, the amount of about US$281 million was received – (55 percent grants, 45 percent concessional loans).

For 2004, the pledged inflows received were US$252.93 million (with increased grant funds of 65 percent which is a continued improvement in Government’s resolve to seek for more grant resources than loans).