“Green PFM” – IMF Staff Approach to Climate-Sensitive Public Financial Management
The âGreen GFPâ note describes the framework proposed by IMF staff to adapt existing PFM practices to support climate-sensitive or more broadly environmentally friendly policies. It shows that, given the cross-cutting nature of climate change and broader environmental concerns, âgreen PFMâ can be a key catalyst for the implementation of an integrated government strategy to combat climate change.
While the ‘green budget’ is by no means a new topic (the first ‘green budget’ was produced in the early 1990s in Norway), the urgency to tackle climate change has increased the relevance of ‘ the integration âof environmental concerns into PFM instruments, as evidenced by the creation in 2018 of the Paris Collaborative for Green Budgeting and Helsinki Principle 4 of the Coalition of Finance Ministers for Climate Action. IMF staff are now contributing to the discussion by proposing a conceptual framework and key principles for the successful implementation of green PFM reforms, applicable to all countries, regardless of their level of capacity.
The proposed framework emphasizes the need for an approach combining different entry points within the overall budget cycle (strategic planning and budget framework, budget preparation, budget execution and accounting, control and audit) and across and beyond the cycle. (budget transparency, coordination of central governments with public enterprises and sub-national governments). This is presented in Figure 1 below, which describes the main areas of PFM in which ecological concerns should be ‘mainstreamed’.
The IMF staff ‘green PFM framework also sets out five key principles to ensure successful implementation of green PFM reforms.
First, certain preconditions are needed for successful green PFM reforms, including having the basic elements of a functioning PFM system already in place, building on significant political ownership, and developing some ‘green’ expertise for key players in PFM processes. These can be demanding because staff attached to the central budget authority or other key PFM actors are not selected for their expertise in environmental or climate economics. Particularly in low capacity environments, tailor-made solutions may be needed to help institutions develop these skills through capacity development and additional recruitments.
Second, while green PFM reforms are a whole-of-government enterprise, the finance ministry, as the custodian of public resources, should be in the driver’s seat. Line ministries – with the Ministry of the Environment in the lead – and other actors have an important technical role to play, but the Ministry of Finance will have the requisite mastery of PFM processes to assess how green elements can be infused. in these processes.
Third, green PFM reforms should be integrated into the existing PFM reform program. For example, the shift to program budgeting, an important PFM reform in many countries, may provide an opportunity to improve the monitoring of environmental outputs and outcomes.
Fourth, countries should seek smart sequencing of green PFM reforms. Most of the time, this means starting with green PFM reforms affecting the budget formulation process, for example developing the capacity to assess ex ante green impacts of tax policies, before moving downstream, for example by measuring actual results and impacts and comparing them to ex ante Goals. The gradual roll-out of reforms, in particular through the use of pilots, can also be useful.
The fifth and final principle concerns the importance of adequately communicating about green PFM reforms to ensure buy-in from all stakeholders and manage expectations.
A future practice note will expand on this climate note with more specific details on the framework and a wide range of existing national practices. Going forward, the IMF’s Fiscal Affairs Department will disseminate this framework through workshops and training. It is also ready to provide capacity development support to governments of IMF member countries wishing to develop and implement a green PFM reform strategy.
 All authors are from the IMF’s Fiscal Affairs Department.
Note: the messages on The IMF PFM blog should not be flagged as representing the IMF’s point of view. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policies.