The Case for Enhancing the Institutional Framework for Macroeconomic Policy Coordination in MEFMI Countries

By Christopher K. Kiptoo
May 2011

The macroeconomic environment in virtually all MEFMI countries is characterized by and often vulnerable to relatively high uncertainty brought about by exogenous shocks such as poor weather and international commodity price shocks. Additionally, institutional weaknesses and in some instances political uncertainty contribute to macroeconomic instability. In this respect, policy consistency and institutional credibility matter crucially in shaping the confidence of economic actors in the economies of these countries. The role of institutions in shaping this macroeconomic environment is particularly important especially given the fact that the interactions between institutional capacity, economic conditions and policy regime tend to significantly affect the macroeconomic outcome. The particular institutional factors that contribute to the viability of a macroeconomic policy coordination mechanism include institutional linkages, leadership and related technical capacity. The intensity and quality of coordination also matter given the fact that various aspects of macroeconomic policy are formulated and implemented by different official bodies that have different incentives, constraints and own objectives.

This paper focuses on the need for enhancing the institutional framework for the macro-fiscal face of the Medium term expenditure framework (MTEF) in MEFMI Countries. The paper focuses on institutions and viable coordination mechanisms at the two levels of the policy process, namely; policy-making and policy implementation that will enhance the conduct of macroeconomic policy among MEFMI members. The paper provides the linkages that exist between macroeconomic management and budget preparation on one hand and planning processes and budgetary processes on the other in MEFMI Countries. The paper observes that Macro Models and the Financial Programming Framework are among the models and forecasting tools currently employed by the members of the Macro-Working Groups (MWG) to generate the medium term macroeconomic forecasts. It also, however, points out that there are a number of weaknesses that have and continue to affect the institutional credibility of the macroeconomic coordination in MEFMI member countries including the following: weak institutionalization of the framework; inadequate and inconsistent institutional representation in MWG; lack of continuous agenda or focus of MWG leading to meetings held on adhoc basis and at very short notices leading to ineffective participation due to inadequate preparation; lack of clear channels of communicating the policy outcomes to higher decision-making levels; lack of coherence in macroeconomic forecasts and production of key documents without involvement of key stakeholders.

Owing to this lack of effective coordination and leadership coupled with the absence of adequate technical expertise and requisite analytical tools as enumerated above, firm knowledge of short-term trends and macroeconomic prospects has not been as readily available as it should be. In this respect, the paper proposes that the Office of the Prime Minister or the President (whichever is applicable in terms of role of coordination and supervision of the execution of government affairs) establishes an institutional framework to be known as the Macroeconomic Policy Coordinating Committee (MPCC) in each MEFMI country that meets regularly and frequently to assist in macroeconomic policy coordination including providing institutional linkages, coordination and leadership and related technical capacity. The MCC will be draw membership from the following institutions: Ministry of Planning, National Development; Treasury/Ministry of Finance; Office of the President or the Prime Minister (whichever is applicable);Institute of Public Policy Analysis or equivalent think tank; Revenue Authority; Central Bank; and. National Bureau of Statistics. The MPCC will be composed of two levels of representation, with the first being policy (named policy coordinating committee -PCC) and the second being technical (to remain as the Macro Working Group (MWG). All technical tasks are to be delegated to the MWG while the PCC will play an oversight role and thus provide direction on capacity building, staffing and resources for both training, acquisition of tools and professional attachments/benchmarking. The PCC should in turn be responsible for submitting reports (at least quarterly) to the Economic Committee of the Cabinet chaired by the Prime Minister or the President. This will ensure full year involvement at the highest level of macroeconomic issues in the country. The paper provides the rationale for the institutional structure of MPCC mainly based on the distinct role of each of the participating institutions in macroeconomic policy formulation and implementation. The paper provides the specific task to be performed by the MPCC and proposes the calendar of meetings for the MPCC.