On October 26, 2020, Ghanaian civil society organizations took the government to court. They argued that the president had illegally interfered with the work of the Auditor General (AG) – who is tasked with reporting on the government’s operations. As the Auditor was finalizing his 2019 report a few months prior, the president essentially forced him to take accumulated leave, and appointed an “acting” Auditor General in his place. Activists argued that this contravened Ghana’s constitution, which, like many other constitutions, gives independent constitutional offices broad autonomy to carry out their functions. The government argued, by contrast, that the constitution (in article 297) allows anyone who appoints a public officer to also “exercise disciplinary control” over that officer.
This case has of course not been decided yet, but it affords an opportunity to reflect on the extent to which African advocates and courts have helped to reshape the contours of what we mean by democratic, accountable government in recent years. This dispute, which has echoes of a similar conflict over Kenya’s Public Audit Bill in 2014 (when the Kenyan Auditor General argued for independence over human resource management), entails a critical decision about the extent to which formal oversight bodies can act independently. The Ghanaian case will help to set precedence for the way in which we currently understand the working of democratic institutions, the separation of powers and the rule of law.
Groundbreaking examples across Africa
The case draws on and reminds us of another important precedent from Ghana, Occupy Ghana v. Attorney General, decided in 2017. This case concerned the powers of the Auditor General to disallow illegal expenditures and surcharge officials for their actions (or lack of action) in causing public revenue losses – powers which existed on paper but were seldom used. The AG at the time argued that the office’s responsibility was met “simply by auditing and pointing out financial irregularities in the accounts of a public entity” and did not require him to impose surcharges.
Remarkably, the case sought to force the AG to use these powers, arguing that systematic failure to do so was a violation of the constitution. Perhaps even more remarkably, the courts agreed. Arguing that “the tendency where public accounts are considered as a fattened cow to be milked by all and sundry must stop,” the courts ordered the AG to surcharge officers found to have condoned illegal expenditure, and to take steps to ensure that these surcharges were paid. This novel case tested the boundaries of the meaning of accountability in modern states by requiring constitutional offices to rise to their oversight responsibilities. Its singular importance justifies its inclusion in the International Budget Partnership’s (IBP) recent global assessment of oversight systems, published in partnership with the INTOSAI Development Initiative.
Building space for public participation in tax and budget decisions
Groundbreaking cases from Africa related to the nature of modern democracy and accountability are not limited to issues surrounding auditors. For example, the South African courts have blazed new trails in defining public participation. In 2007, the courts elaborated on a theory of the state’s “duty to facilitate public participation” in Doctors for Life International v Speaker of the National Assembly and Others, claiming inadequate participation in the passage of health legislation. A critical aspect of this decision was the burden it placed on the government to provide citizens not only with opportunities to participate, but with the means, including the capacity (developed through education) to participate meaningfully. Attention was particularly drawn to the need to include marginalized voices in legislative decisions that affect them and the courts found that speedy resolution of policy issues was insufficient on its own to justify curtailing participation.
As I have noted in this space before, Kenyan courts, drawing on local and international jurisprudence, have breathed further life into legal requirements for public participation. They have in part drawn on South African cases like Doctors for Life when tackling participation in public finance matters. For example, in 2013, the courts found that the enactment of a county tax law (the Kiambu County Finance Act) was unconstitutional, as the county had failed to undertake meaningful public participation prior to its enactment. In this case, the court held that the County Assembly had a duty to “exhort its constituents to participate in the process of the enactment of such legislation by making use of as many fora as possible such as churches, mosques, temples, public barazas national and vernacular radio broadcasting stations.”
The South African and Kenyan courts’ interpretation of the meaning of participation—that the people’s representatives have a duty to “exhort” them to participate in tax legislation, among other policy areas—is quite novel, and certainly at odds with a more traditional pluralist view, which assumes that the problem of democracy is how legislators can manage the contradictory pressures emanating from participation. As in South Africa, these cases emphasize the state’s special duty to encourage participation for a broader public that has traditionally been excluded from decision-making.
The Kenyan courts have gone further still in permitting public interest legislation that has overturned tax policies. I have previously discussed Tax Justice Network Africa’s (TJNA) case against the Double Taxation Agreement with Mauritius in this space. That case was decided on narrow grounds that did not substantially expand the meaning of modern democracy, but it did show that civil society could establish standing in tax policy cases. This opened the door to more substantive petitions, including a more recent lawsuit by TJNA against the Government of Kenya over ten tax treaties on both procedural and substantive grounds. A 2020 case in Zambia confirms that African revenue authorities are increasingly able to confront multinational corporations over tax evasion related to transfer pricing; thus the courts are not only increasing the power of ordinary citizen influence over policy, they are also limiting the extraordinary power of corporate interests.
Returning to Kenya, in 2017, activists successfully sued the government over an increase in excise tax on beverages. The Kenyan courts invalidated the tax increase, holding that there was inadequate public participation to inform it. They specifically found that “[t]axation or any legislation or policy that creates a financial burden upon citizens must as of necessity be subjected to adequate public participation wide enough to cover a reasonably high percentage of population in the country.” It is not enough to “to rely on attendance sheets for two meetings attended by a few persons with no supporting minutes” held in the capital, on an issue affecting most Kenyans.
This establishes a fairly high bar for what participation requires. Moreover, the same case found that, in the case of water taxation, the government had a constitutional obligation to justify this tax as reasonable, taking into account the potential impact on the constitutional right to both water and property. The government, should it wish to reintroduce this tax with proper participation, would still need to provide this justification. The South African, Zambian and Kenyan cases discussed here demonstrate that traditional areas of executive privilege around treaty-making and taxation are not immune from modern demands for greater public participation in democratic settings.
Redefining accountable democratic governance
Taken together, this emerging body of law across Africa has altered our understanding of what accountable democratic government means. African courts have pushed the boundaries of our understanding of oversight and participation, normalizing participatory democracy above and beyond representative democracy, and demanding that public officials clear a higher bar in making decisions without public oversight. There is of course much more work to be done, but this is a narrative that deserves wider recognition.
This piece was originally posted on the World Bank blog.
Countries around the world have responded to the COVID-19 pandemic and the ongoing economic crisis by expending trillions of dollars to support their economies and provide relief to their populations. Governments are following expedited procedures to quickly channel funds to relief and recovery programs. Still, a key challenge that countries are facing is ensuring that funds contribute to recovery and reach intended beneficiaries. This is a serious concern as cases of misuse and mismanagement of COVID-19 funds have been reported on every continent.
Supreme audit institutions are key
Fortunately, countries already have organizations such as the supreme audit institutions (SAIs) that are responsible for providing independent assurance on the effective and lawful use of government monies, improvement in public service delivery, and response to disasters. In fact, in the aftermath of the tsunami that hit South and South-East Asia in 2004, the International Organization of Supreme Audit Institutions (INTOSAI) issued special standards on disaster-related expenditures. Further, during the Ebola pandemic in 2014, the SAIs of Liberia and Sierra Leone were lauded for their audits of emergency programs, which received extensive coverage in the national and global media.
Civil society’s involvement is necessary
Simultaneously, civil society organizations (CSOs) have also developed innovative methodologies to monitor government expenditures during emergencies and ensure that remedial measures are instituted based on audits conducted by SAIs. For example, in the aftermath of the devastating earthquakes that hit Mexico and Nepal in the past few years, local CSOs used audit reports issued by their national SAIs to demand that their governments implement reforms in relief programs.
CSOs have now joined calls made by various international bodies and financing agencies for SAIs to be more involved in the monitoring of COVID-19-related funds. These are positive developments but more needs to be done to ensure that audit findings foster the efficient and effective use of public resources for the benefit of citizens.
Effective oversight relies on an ecosystem
In November 2020, the International Budget Partnership (IBP) and the INTOSAI Development Initiative (IDI) are releasing a joint report that assesses the adequacy of national oversight systems based on data from 117 countries in the latest Open Budget Survey.
Audit and oversight are an “ecosystem,” consisting of a set of interconnected actors, conditions and processes that need to be in place and function well for the system as a whole to perform effectively. Although SAIs lead the charge, the success of their audits in upholding accountability and enhancing performance in large part depends on the actions of legislators, civil society, the media and ultimately the executive.
Overcoming barriers that limit accountability
Too often, SAIs suffer from deficiencies that are compounded by weak legislative oversight, inadequate responsiveness from executives to reports, and few opportunities for public engagement in the audit and oversight process. These challenges preceded the pandemic and are likely to be exacerbated by the crisis. The IDI-IBP report suggests that all partners of the oversight system need to take action to strengthen accountability. Recommendations include:
- Increasing the mandate, independence and resources of SAIs to audit public funds, including special funds established to channel resources emergency programs,
- Improving the quality of audits by strengthening systems and independent quality checks,
- Enhancing transparency with timely publication of audit reports and tracking executive responses to recommendations,
- Ensuring that legislatures scrutinize SAI reports, including the ones on emergency spending measures, and
- Expanding opportunities for public engagement during the formulation of plans, legislative discussions, and crucially, executive implementation of audit recommendations.
It is very important that governments and other stakeholders use audits to ensure that public funds are expended in a manner that will best save lives and reduce hardships caused by the coronavirus pandemic.
*Martin Aldcroft is Senior Manager of the Strategic Support Unit of the INTOSAI Development Initiative, Vivek Ramkumar is the Senior Director of Policy at the International Budget Partnership and Edward Olowo-Okere is Director of the Global Governance Practice at the World Bank.
* * In 2019, IBP and IDI signed a strategic partnership agreement out of mutual recognition of a shared vision and fruitful synergies while supporting effective engagements between SAIs, legislatives and civil society in order to enhance accountability, audit impact and make a difference to the lives of citizens. This joint report “Harnessing accountability through external public audits: An assessment of national oversight systems” is one product resulting from the partnership.
Governments around the world are at a critical juncture. Democracy is continuing to erode in countries across the globe, with increasing threats to citizens’ freedoms and restrictions on civic organizations. At the same time inequality is high and rising. Frustration with governments (democratic or not) failing to address peoples’ needs, alongside cases of corruption, has caused citizens to take to the streets in unprecedented numbers, forcing government action. Yet often the root causes of impunity remain untouched.
At the moment, these medium-term trends are overshadowed by the COVID-19 emergency. Faced with this crisis, governments in the north and south have taken action, both to protect their populations from the virus and, given the economic harm often necessary to prevent the spread of the virus, to provide social protection programs. Effective response by governments are necessary to save lives and prevent families from falling into poverty and hardship in the short term, and hold the key to coming out the other side of this crisis with strengthened social safety nets, health systems, and more. However, it is likely that funds meant to strengthen public health infrastructure and reach vulnerable groups will be mismanaged. This is an opportunity for public auditors to ensure that public money is well spent during and after the crisis.
This is the moment for Supreme Audit Institutions (SAIs), entities mandated with checking whether public funds are being managed properly, to become much more visible accountability champions, strengthening their hand to ensure government resources reach people in their moment of need. However, many SAIs will struggle to seize that opportunity. Evidence shows us that even technically sound audits undertaken by independent auditors are often not acted upon by governments. Parliaments may not take up the audits, or if they do, they may not enforce meaningful action. Findings of mismanagement or corruption could potentially implicate politically well-connected actors, both inside and outside government. Thus, it is not surprising there would be resistance to holding them to account, which could embarrass the government and even shut down what might be lucrative opportunities for enrichment. Of course, not every audit finding is about corruption and some may point to challenges faced in delivering complex public programs. In these cases, even if audits point to the right solution, these may be difficult to put into practice. Both a political economy lens, who stands to lose from audit findings being acted upon, and a practical lens of the challenges of implementing audit recommendations, may point to barriers to meaningful action.
This challenging reality suggests a need for more strategic approaches to leveraging audits for accountability, one that is realistic about the causes of public sector problems and the complexities of reform to address those challenges. Thinking about the role of SAIs within a broader accountability ‘ecosystem’ of actors and mechanisms suggests that ‘connecting the dots’ between these actors is more likely to result in meaningful change than isolated efforts. That means bringing together citizens and civil society organizations to work with SAIs to undertake audits and champion findings and recommendations. Too often, civic efforts fall short when seeking to address systemic challenges related to public resources and services, and could be strengthened by connecting more meaningfully to state oversight. IBP’s efforts to support CSOs and SAIs in five countries has shown promise in assembling diverse coalitions that leverage audits to engage government actors and ensure corrective action.
In the context of a decline in trust in public institutions, citizen engagement with the state in seeking accountability can make a difference, from strengthening the active practice of citizenship and the social contract to more tangible outcomes in improved government efficiency and responsiveness. SAIs are increasingly engaging citizens more broadly, both to inform audits and to help ensure action. Cases such as South Africa demonstrate that SAIs are increasing interested in tapping into these potential synergies. SAIs are increasingly adopting the language of public engagement, and there are promising cases of collaboration.
Even in contexts of a weak accountability ecosystem and limited democratic governance, evidence shows that civic action is an important factor in audits being acted upon by government. In the best cases, citizen participation with SAIs is both a means to more effective audits and ultimately greater accountability, and an end in itself in terms of democratizing audit processes, strengthening the accountability ecosystem, and deepening citizenship practices. However, engaging citizens and civil society is no magic bullet, as examples of ‘box ticking’ in other domains, such as participatory budgeting, confirm. Collaboration between mobilized citizens, CSOs and SAIs can lead to effective coalitions with powerful synergies, but this requires significant effort to build relationships, strategize together and align ways of working.
Given the many challenges faced by citizens and governments around the world, there is an urgent need for SAIs to be more effective in their oversight efforts to ensure scarce public resources are used most effectively. During the present COVID emergency, lives depend on it. Accountability strategies that leverage SAI, CSO and broader citizen roles – along with media, private sector and other government actors, such as parliaments and courts – can mitigate some of the challenges faced by oversight actors, particularly during the COVID emergency. This can lead to public resources being used more effectively in the short term. In the long term, it could contribute to strengthening and democratizing the accountability ecosystem.
This blog post is also on the Extractive Industries Transparency Initiative (EITI) website.
Resource-dependent countries face many obstacles in adhering to principles of good extractives governance, including corruption and mismanagement. Enhanced fiscal transparency is vital for addressing these challenges. It is a goal shared by the Extractive Industries Transparency Initiative (EITI) and the International Budget Partnership (IBP).
The EITI is serious about measuring its impact. IBP’s Open Budget Survey (OBS) is a source of data on key dimensions of fiscal accountability, such as fiscal transparency, public participation and oversight by legislatures and independent audit institutions. Of the 77 countries surveyed in the OBS since 2008, 30 are EITI members with comparable data across all years during which the OBS was conducted.
What does the latest Open Budget Survey reveal?
A review of this recently released data yields striking results. Despite a much lower starting point, the average score of EITI implementing countries has increased faster over the last 12 years than that of non-EITI countries on the key dimension of fiscal transparency. In 2008, EITI countries lagged, scoring on average 36 out of 100 on the OBS indicator for transparency. By 2019, their average score had increased to almost 46, surpassing the average score of 44 for non-EITI countries.
- The graph shows average trends of EITI versus non-EITI countries, based on regressions performed by the EITI and IBP. Results are statistically significant.
- 41 of 53 EITI countries are assessed in the 2019 Open Budget Survey. Of these 41 countries, only 30 have comparable results since 2008. The remaining 11 EITI countries that were not comparable over time were excluded from this time series analysis (Burkina Faso, Chad, Cote d’Ivoire, Iraq, Madagascar, Mozambique, Myanmar, Sierra Leone, Tajikistan, Timor-Leste, Zambia).
In fact, EITI implementing countries have been a driving force behind the improvement in overall fiscal transparency scores for the 77 countries covered by the OBS. This group has shown sustained improvements of almost two points in each round of the OBS, while others in the index have seen stable or decreasing scores.
Corresponding time-series data for the “Participation” and “Oversight” categories are not yet available. But a comparison of 2019 results illustrates a slightly higher average for EITI countries, both for public participation in the budget process as well as audit and legislative oversight. While these initial findings are encouraging, we need to await future iterations of the OBS to determine whether the correlation between EITI implementation and high OBS scores is maintained.
Looking behind the data
There is no single factor that can explain why EITI implementing countries have made such good progress in the OBS, and there are also variations in performance within the group.
However, 16 EITI implementing countries stand out in OBS 2019 and some general trends exist in their governance of extractives. The Dominican Republic and Mongolia have developed extractive transparency portals, which provide additional disclosures where previously there were none. In Kyrgyz Republic and Indonesia, such systems already existed, but have been opened up to the public. Afghanistan and Senegal transitioned from more manual and paper-based ledgers to interoperable government systems that share information. Governments are already opening up these new systems, as confidence in the reliability of data grows.
An emphasis on better record-keeping for public scrutiny, effective audit procedures and public oversight to track gains from extractives revenues in budget documents may also have contributed to the improvements shown in the data.
It will be interesting to see how the scores of EITI countries under the “Public Participation” category of the OBS develop. Improvements would be a welcome counterpoint to concerns about the erosion of civic space, including in countries implementing the EITI. Public participation in the budget process is fostered both through EITI’s multi-stakeholder platforms and through IBP’s emphasis on improving access to budget information and creating platforms for public engagement and feedback.
There are also complementarities in oversight mechanisms promoted by IBP and the EITI. IBP focuses attention on the importance of supreme audit institutions (SAIs), understanding that if audit findings are not acted on, they are of limited use. The EITI has also recognized the importance of stronger public oversight mechanisms and increasingly works with SAIs.
Why do the findings matter?
Open budget data has additional value in shaping the availability of investor finance for governments and companies. This will be critical as resource dependent countries seek to build back their economies. Analysts seeking out data to inform investment decisions are increasingly prioritising environmental, social and governance (ESG) considerations as they respond to public pressure for responsible investment. Their needs can only be met if budgets and government data are available in open format, and if evidence of improved budget transparency through the OBS is more readily available to investors.
The EITI standard and the OBS produce transparency scores that can inform governance dimensions of sovereign credit ratings’ governance, while the focus on public participation also improves companies’ and investors’ social license to operate. Both deserve more attention in the investor world.
In demonstrating a steady improvement in budget transparency in EITI countries – albeit with significant variation between countries – the OBS findings offer some comfort to proponents of extractives transparency.
In light of the triple crisis that resource-dependent countries face as a result of the Covid-19 pandemic, they assume greater significance. The crisis could have an adverse effect on the hard-won transparency gains evidenced by 12 years of OBS data, as governments divert resources to public health priorities and away from extractives transparency reforms. Protecting these gains and presenting evidence on progress in EITI countries can shore up support for governance reforms in the extractives sector at this challenging time.
The authors are grateful to Christoffer Claussen and Vivek Ramkumar for their advice and input on this blog post.
 The 16 countries are Afghanistan, Albania, Cameroon, Democratic Republic of the Congo, Dominican Republic, Guatemala, Honduras, Kazakhstan, Kyrgyz Republic, Liberia, Mexico, Indonesia, Philippines, Mongolia, Sao Tome and Principe, and Senegal.
This post also appears on the Open Government Partnership website.
There’s a damaging rumor doing the rounds in Kibera, Nairobi’s massive informal settlement: that COVID-19 is a fabrication invented by the country’s elite to raise money from the World Bank and the World Health Organization (WHO) to pay off the elite’s debts. It is dangerously wrong, but its origins understandable when you consider – based on their experience, these citizens have little confidence that money for their government will flow into health or humanitarian services where they live.
The good news is that there’s a vaccine to protect against the risk of such rumors, and the financial mismanagement they arise from: openness, which enables journalists, civil society, and citizens to “follow the money.” Openness promotes government financial accountability, improves service delivery and rebuilds civic trust.
To that end, the Open Budget Survey (OBS), launched just over a week ago, provides both a warning and a call to action. It highlights how only 31 of the 117 surveyed countries have sufficient levels of budget transparency according to the basic minimum standards set in accordance with international norms. This means that three-quarters of surveyed countries do not. Governments often fail to publish key budget documents, which should clearly explain budget policies, decisions and outcomes. Governments release more information during the formulation and approval stage of their budget process than they do on implementation, which undermines government accountability for spending the budget.
A closer look at the health and education budgets in 28 of the countries surveyed finds that they lack the kinds of information needed to monitor service delivery. Global debt levels are spiraling, but budgets are missing details on the levels, risks, and sustainability of public debt. Many organizations are now focused on tax equity and increasing revenues, but few countries provide detailed reporting on tax expenditures – the revenue lost from breaks or exemptions given to business or individuals.
As an experienced campaigner I’m a little worried to quote some of the OBS findings – for fear they’ll be abused by the callous to justify inaction on funding the COVID-19 fight. Nativist populists will use any data they can about wastage overseas to stop funding the global fight against poverty and disease. But when we don’t honestly discuss these risks, we are ourselves increasing the long-term risk and erosion of precious public trust. I’ve found, in campaign after campaign, that when it’s time to push for a major global financing mechanism, campaigners do not press the point about the importance of open budgets, contracts and government for fear it will scare away funds. We must move past that fear and focus on both getting the necessary funds and ensuring they’re used accountably. In truth we have made strong progress on transparency and accountability as part of campaigns for debt relief, aid and increased domestic taxation to fund sustainable development. But this Open Budget Survey shows we have much further to go.
A New DATA Deal
How fiscal transparency and accountability practices should be embedded in all COVID-19-related public finance activities, including raising and managing debt, is well covered here by the International Budget Partnership’s most recent blog, “A Call to Action on Open Budgets during the COVID-19 Response,” and the details of how the openness of response and recovery plans builds trust and improves results is well addressed in the Open Government Partnership’s report “Open Response, Open Recovery: Building Trust as the Antidote to COVID-19.”
If I may crudely summarize these arguments: we need a new sustainable development finance deal, one which may sound superficially familiar to older campaigners: to Drop the Debt payments, increase Assistance, increase progressive Taxation – and in a parallel two-step partnership campaign for increased Democracy, Accountability and Transparency. Citizens within developing countries must be able to scrutinize financing through open processes. If they can’t, financing can’t flow in confidence, corruption grows, trust ebbs.
The key thing about this partnership deal is that the partnership conditions are not imposed by policy makers in D.C. or London on the rest of the world. These conditions are demanded by the citizens of developing and emerging economies, themselves, upon their governments and upon global financing mechanisms and development partners. These issues aren’t just in Africa or the developing world. Citizens within OECD societies and traditional donor nations must be more vigilant at home for this deal – and fight for open accountable financing and government domestically, too. Globally, we will all need to scrutinize, through open budgets, to see where COVID-19 funds are coming from, how far they come at the expense of cutting other lifesaving accounts, and how often they truly arrive where needed. This is where the 78 member countries of the OGP – which span all regions and income levels – can lead by example.
The latest technologies can help us digitally deliver this partnership. Affordable mobile phones and airtime, connectivity, and the latest statistical survey tools, are driving new forms of local accountability, ground truthing at the grassroots the findings of satellite and big data analytics. And it’s key not just to beating COVID-19, but to leaving no one behind and achieving all the SDGs by 2030.
For example, the recently formed #FollowtheCOVID19Money network, formed by youth ground truth networks across Africa, should be scaled and strengthened to scrutinize both COVID-19 and wider health and sustainable development funds. 150 civil society groups across Africa recently met virtually demanding civic space to help scrutinize these emergency resource flows. It has been inspiring to partner with these fast-moving movements.
So let’s campaign like crazy for all the cash we can find, for the COVID-19 vaccine diagnostics therapies and frontline health-workers who must deliver these; let’s fight like heck for the humanitarian and economic response plans’ full financing, and ensure all these funds are additional and not carved from other essential life-saving programs; but let’s equally, at the same time, fight to ensure these funds flow through open contracts, open budget and open government through to the “last mile” of service delivery. If we do this, we won’t just beat COVID-19 – we will build the global social capital and effective networks needed to achieve all the Sustainable Development Goals by 2030.
Let’s apply that greatest vaccine of all: openness, to build up our strongest immune response: trust, and all the solidarity that comes with it.
This post is part of the Fiscal Futures blog series exploring some of the biggest issues that fiscal accountability enthusiasts are likely to encounter over the next 10 to 15 years. Learn more about the Fiscal Futures project and download resources here.
The widespread protests that rocked Iran in early 2018—catching both the government and political analysts by surprise—had an unlikely trigger. When Iranian president Hassan Rouhani unveiled his budget for the forthcoming Iranian year, he for the first time made public aspects of government expenditure that had long been kept hidden. Rouhani was hoping to boost his credentials as a reformer by exposing how significant state funding was being provided to religious and quasi-state institutions – many of which were controlled by his political rivals. But the gambit backfired, and the Rouhani government and the wider Iranian state came under criticism. Thousands of Iranians participated in loosely-organized protests around the country, with some mobilizations reportedly encouraged by Rouhani’s political rivals to express their anger that the state had long allowed such transfers while ordinary people saw their standard of living fall due to growing inflation and unemployment.
Though the protests eventually subsided, public anger at financial mismanagement and fiscal governance in Iran has been a consistent feature of domestic politics. Nationally representative polling demonstrates considerable concern about the lack of transparency in Iran’s economy among the public. Nearly 60 percent of Iranians believe that Iran’s “economy is currently run by a few big interests,” rather than for “all the people.” About the same proportion attribute “the greatest negative impact on Iran’s economy” to “domestic economic mismanagement and corruption,” rather than “foreign sanctions and pressures.” But the proportion of respondents who blame sanctions as the primary driver of the country’s economic downturn has been increasing, from 26 percent in May 2015 to 36 percent today. This shift in public sentiment is one example of how sanctions have complicated the domestic politics around financial reforms and fiscal transparency in Iran.
In May 2018, the Trump administration withdrew from the Joint Comprehensive Plan of Action (JCPOA), reimposing sanctions that had been lifted as part of the nuclear deal. The United States has subsequently pursued a “maximum pressure” campaign on Iran, seeking to starve the Iranian government of budgetary resources and to induce an economic crisis to stoke an internal political crisis. Iran’s trading partners have been caught in the sanctions crossfire. European leaders have lamented the impact of extraterritorial sanctions on European companies and banks, decrying a challenge to Europe’s economic sovereignty, while Iran’s oil buyers sought waivers from the Trump administration to allow them to continue buying Iranian crude. Iran’s economy has begun to contract as episodes of currency devaluation, inflation, and rising unemployment take root.
In the face of these intensifying internal and external pressures, the Rouhani administration has nonetheless continued to push for greater financial reforms, most notably in the context of the action plan set forth for Iran by the Financial Action Task Force (FATF), a global body that establishes standards for anti-money laundering and combating financing of terrorism controls. Other initiatives, such as the adoption of International Financial Reporting Standards (IFRS) and an effort to cleave the Revolutionary Guard, part of the country’s armed forces, from its business activities, have also featured as part of these reform efforts. But the intense politicization of what are essentially technical and regulatory reforms, spurred by both domestic political dynamics and the broader fate of Iran’s nuclear deal with the world powers, have hobbled these efforts. As a former finance executive lamented to the Financial Times in January 2018, “Mr. Rouhani is unable to make the budget transparent. His first step to make hardliners more accountable was answered by the unrest.”
The present circumstances in Iran make it a cautionary tale for domestic and international stakeholders seeking to improve financial regulations, fiscal governance, and government accountability in developing economies. The specific ways in which a combination of domestic political rivalries and international sanctions have combined to stymie reform suggest that advocates of reform need to develop more robust interventions to ensure that both the incentives and means necessary for reform are preserved.
When the Rouhani administration launched its efforts to clean up the finances of the central government, state enterprises, and the private sector, the incentives were widely understood—if Iran was going to successfully attract much needed foreign investment, having been deprived during its decade under international sanctions, it would be necessary to raise transparency and governance practices to conform more closely with international standards. But the re-imposition of sanctions, and the characterization of those sanctions by the Trump administration as part of a “financial war,” have not only eliminated this incentive, but also allowed opponents of financial reforms to oppose new regulations and transparency measures on the basis that such measures compromise Iran’s national security. Nowhere has this been clearer than in the intersection of the FATF action plan requirements and issues of fiscal transparency.
Iranian foreign minister Javad Zarif, whose mandate to repair political and economic ties with the international community depends in large part on the FATF process, has complained of a campaign to stop the reforms, telling reporters, “those places that do launder thousands of billions are certainly financially capable of spending a few hundred billion on propaganda and psychological operations in the country.” These “psychological operations” were highly targeted. When Iranian parliamentarians were preparing to vote on a new law related to global standards for combating the financing of terrorism, supporters of the law received death threats.
In a sign of real political leadership, parliament passed the law. But the ultimate ratification of these laws depends on Iran’s non-elected government bodies, which serve as arenas for consternation and compromise among Iran’s political factions. Mohsen Rezaei, the secretary of one such body, the Expediency Council, has suggested that final ratification of the FATF laws will depend on Europe continuing to support trade and investment with Iran in a “constructive manner.” The Assembly of Experts, an influential body comprised of jurists, has described the Rouhani governments’ pursuit of FATF compliance as “response to the enemy’s demands” and “a strategic mistake,” a likely allusion to the impact of new transparency and CFT rules on Iran’s ability to provide funding to proxies such as Lebanon’s Hezbollah. Rouhani has countered these arguments by suggesting that failure to meet the FATF action plan would be a form of self-sanctioning, imploring “everyone, no matter their political party or faction, not to build walls around the government because this wouldn’t be to the benefit of the people.”
Cognizant of these internal battles, the FATF has repeatedly extended the deadline for Iran to complete its action plan, despite protests from the U.S. It is in the interest of the FATF, as a technical body, for Iran to remain engaged in the action plan process, even if reforms are slow to materialize. But a second challenge for external proponents of reform is that those Iranian stakeholders who—despite political headwinds—continue to labor towards greater transparency and accountability lack sufficient technical assistance.
In most emerging markets, technical assistance, whether delivered by consultants or non-governmental advisers, plays an important role in developing capacities within both governmental organizations and commercial enterprises. But in Iran, the United States’ primary and secondary sanctions have made it near impossible for consultants and advisers to operate in the country. On one hand, U.S. officials have continually warned businesses to conduct “extra due diligence to keep them from being caught in Iran’s deceptive web.” But U.S. sanctions mean that no entities with a “U.S. nexus” can conduct business with Iran unless generally or specifically licensed to do so by the U.S. Department of Treasury. Given the significant costs and operational challenges associated with establishing completely self-contained teams to pursue engagements in Iran, only a handful of consultancies and non-governmental organizations undertook projects there. The Iranian government therefore lacked much of the expertise and support that has been instrumental to financial and fiscal transparency efforts in so many other emerging markets worldwide.
The situation led some compliance professionals to wonder “If Iran cannot access the very tools that it needs in order to reform, is it being set up to fail?” Iranian bankers think the answer is yes. A board member of a major Iranian bank stated in an interview, “If the objective was to promote greater transparency… it would have been simple to pave the way by encouraging specialized international firms to advise and assist the Iranian government and financial institutions to develop and implement the necessary legislation, procedures, and programs.”
These sanctions-induced failures of reform, which arise from ruined incentives and restricted means, are unlikely to remain unique to Iran. Sanctions are typically targeted at countries that have weak regulatory environments, where either the state or political elites generate rents from activities such as money laundering, and divert those rents for the purpose of political patronage, sometimes including terrorist financing. In other words, sanctions target precisely those countries where interventions focused on financial reform and fiscal transparency are most in need. Aside from Iran, an expanding program of sanctions targeting Russia and Venezuela, as well as recurring calls to impose sanctions on Turkey, threaten further complications for supervision of the global financial system.
Many stakeholder groups in Iran, including political parties, business organizations such as the chamber of commerce, and civil society groups such as teachers unions, continue to push for greater fiscal transparency. Iran’s newspapers regularly feature sharp commentary about the state of the country’s economic mismanagement, and how nontransparent practices and poor regulation contribute to rentierism and graft. Encouraged by this broad campaign, Iranian reformist parliamentarian Mohammad Sadeghi recently stated, “Transperancy has become a discourse and ongoing demand.” However, alluding to political pressures introduced in part by sanctions and the securitization of the national budget, Sadeghi also noted that “the complexity of the transparency issue has created obstacles in some sectors.”
Unless stakeholders committed to fiscal transparency develop strategies to account for the increased use of sanctions, global reform efforts could be seriously compromised. It may be necessary for stewards of global financial integrity to take a more assertive stance on the responsible use of economic sanctions lest years of progress in improving global regulations and supervision be undone in an environment of financial warfare where global financial integration is tantamount to entering a blast radius, and where domestic reforms, such as increased budget transparency, become akin to exposing the location of a piece of critical infrastructure and leaving it vulnerable to attack.
Esfandyar Batmanghelidj is founder and publisher of Bourse & Bazaar, a project dedicated to the free exchange of information and ideas related to commercial opportunities in Iran. Follow him on Twitter @yarbatman.