Should Sri Lanka do PFM reform without civil service reform?

By Centre for a Smart Future

Julie Cooper

The strategic management of public finance is essential to improving the lives of individuals, particularly those groups that are most vulnerable and disadvantaged (improved healthcare, education, and welfare transfers, for instance) at a time when fiscal consolidation is being pursued aggressively. Yet, Sri Lanka’s journey with reforms to public financial management (PFM) has had fits and starts. 

President Ranil Wickremesinghe’s announcement in the recent 2023 Budget speech that he plans to introduce a Public Financial Management Act are, therefore, encouraging. It rekindles the conversation around reforms to Sri Lanka’s outdated PFM system. Interestingly, the President also proposed the appointment of a ‘National Commission on Public Sector Reform’. The fact that these are both mentioned together bodes well, because as this article argues – they are intrinsically linked. 

The Centre for a Smart Future recently engaged with an international expert in PFM, Julie Cooper, to understand the key principles of PFM reform and the vital link to civil service reform. Julie has worked with the IMF, World Bank, and large consulting firms in countries like Jordan, Egypt, South Sudan, Afghanistan, Australia, and Sri Lanka but also in smaller island nations like Vanuatu, Tuvalu, and Tonga, and has a broad experience with this complex subject. Cooper says that public finance challenges have risen to the fore lately due to the global Covid-19 pandemic and the consequent fiscal pressures on governments. Budget deficits were exposed, and PFM gaps were laid bare. 

Cooper pointed out that a reformed PFM system naturally tackles issues such as reforming the budget, revenue collection, expenditure control, treasury cash management, and others. Yet, governments often underestimate the clear relationship between civil service reform and an effective PFM framework. She recalled her experience with PFM reforms in countries like Australia and New Zealand, where they implemented a reform in their civil service along with their PFM framework resulted in stronger positive outcomes, compared to countries that implemented only PFM reforms.  Those that did only the latter ended up with a failed attempt at reworking their PFM systems, whereas those that did both ended up with a successful ongoing robust PFM system. The time lag between implementing a PFM policy and its outcomes solely rests in the hands of civil service workers and governmental officials. As Sri Lanka plans its PFM reforms, Cooper suggests that it should be sure to include a civil service worker reform. 

Cooper argued that Sri Lanka can adopt many of the private sector’s human resource techniques to its public sector workers. This can include, signing contracts, reviewing salary scales, offering mid-career executive training programs, enhancing the use of modernised IT to enhance workflow, and the use of bi-annual performance reviews. 

When asked about whether a ‘big bang’ approach, or incremental approach to PFM and civil service reform is recommended, she noted that both have their merits. Small incremental changes are a safe option, which allows for easing into a reform programme with slow and steady explanation to all stakeholders affected. Whereas a ‘big bang’ effort, especially when it comes to essential civil service reform allows workers to have a greater sense of comprehension of the overall reform programme – its start and beginning – in one go. For instance, applying the PFM reform across the board can ensure coordination within all governmental departments, preventing one or more departments going off and doing their own thing, leading to the wastage of resources and the failure to achieve the greater goals. Where acts of redundancy and dismissals are bound to occur, making the reforms on a larger scale and well-known, allows workers and other stakeholders a greater understanding of the overall reform effort and therefore may be more willing to be patient to ride out the full reforms.

She acknowledged a well-known fact – that these reforms will take more than one election cycle. Civil service and PFM reforms are good for the wellbeing of Sri Lanka in the long term, and for that reason, external political factors should not derail these reforms. There must be broad bi-partisan support for them. Ultimately, these reforms are also good for politics – ensuring that the citizens of Sri Lanka have access to a better PFM system and civil service can strengthen public confidence in government and political leaders. 

She noted that by transforming Sri Lanka’s PFM framework, people and businesses would begin to believe that the government has better control and stewardship over public resources and the economy itself, resulting in greater political confidence.

(This article was compiled by Dithni Perera of the Centre for a Smart Future (CSF). CSF is an independent, interdisciplinary public policy think tank based in Colombo. To listen to the full interview with Julie Cooper, visit CSF’s website: www.csf-asia.org/forum-and-activities/.)