Letters

Path to sustainable public finances lies in leadership

treasury

Treasury building. FILE PHOTO | NMG

The management of public finances in developing countries is generally hampered by deficiencies in a number of areas, including budgeting, the treasury and accounting. The focus on budget is important because fiscal policy, a key component of macroeconomic policy, is usually cast in annual frameworks of revenue and expenses.

The treasury manages government cash in order to meet its disbursement needs, whereas accountants report on the actual use of government financial and real assets. Taken together, activities in these three areas make it easier to assess the impact of government decisions on economic activity and social welfare.

The advantages of well-managed public financial systems are usually obvious. However, what is not always fully grasped is how the role of sound financial leadership can help achieve sustainable public finances.

Previously in the public sector, it used to be the norm for financial information to be held by “the finance people”, in other words the public servants tasked with working within the finance function in various departments – including the Treasury.

However, all too often, this has led to a mismatch in policy-making, with economists and policymakers taking the lead in big decisions without involving the finance leaders. In turn this can potentially lead to the finance role being underplayed when the outcome hasn’t been what policymakers wanted to see.

In contrast, in most private sector companies, from the big corporations down to smaller sized companies, the finance leader is involved in all key decisions. However, developments in financial management practices in the public sector are now changing the finance function landscape from an operational silo to a much more leadership-based role.

This means the finance function can play a greater strategic role in the organization as a whole. This leads to more finance-savvy people in key strategic roles around government. The role of the finance leader is, therefore, more important than ever before, and especially when money is tight.

Finance professionals in positions of authority can help mitigate economic risks and indeed improve government accountability and transparency. In addition, empowered financial professionals can help drive reforms that contribute to strengthening the performance of governments and public sector organisations, thereby supporting poverty reduction and economic growth.

While finance professionals cannot single-handedly reverse incidences of mismanagement and mistrust to restore the public’s confidence, they can, with their technical expertise, certainly enhance the quality of public service accountability and outcomes.

But one of the hurdles for the finance leaders is the complexity of public policy initiatives and reforms. Generally, a long-term implementation time frame is needed and difficult trade-offs are inherent.

Moreover, the necessary policy prescriptions are not always readily understood – or valued – by a public whose financial knowledge may have gaps, and is either not privy to or perhaps not interested in policy details. This is even more pronounced when there is mistrust of the government.

While significant, this challenge also presents an opportunity for the finance professional to leverage their stereotypical role as a technocrat to translate complex public policy issues for a wider audience that is looking for ‘straight talk’ communicated in common and simple terms.

In addition to possessing good communication skills, a strong finance leader will need strong awareness of strategic financial management techniques, and knowledge of the standards that must be met. Strong leaders, with the right and sufficient depth of technical knowledge, will know the questions to ask.

But while technical knowledge must be sound, there are other broader skills that are important: organisational skills and softer leadership, people, culture and behavioural skills. Skilled finance leaders should take responsibility for their own performance and development of the different skill-sets.

Michael Armstrong, regional director for Middle East, Africa and Asia, ICAEW

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