CHAPTER ONE

Foundation of international financial

management
Public financial management
Financial management refers to the financial
decisions of municipalities make based on financial
analysis and community’s need satisfaction.

It involves long term and short-term decisions

that promote development and maximize the use of
monies available for service delivery and to
promote development.
Cont’
Public Financial Management covers the
processes and institutional arrangements
(stakeholder roles and responsibilities) involved in
the planning, budgeting, management and
reporting of public sector resources, both financial
and non financial.
Cont………
PFM is concerned with the laws, organizations,
systems and procedures available to governments
wanting to secure and use resources effectively,
efficiently and transparently.

While PFM encompasses taxes and other government

revenue, borrowing and debt management, its main
focus is expenditure management.
Cont’
At the level of local government, financial
management has four basic purposes:

•To control public funds (Safeguarding)

•Monitoring

•Accountability

•Budgeting
Cont’
In addition to these four major functions of
financial management, the other important
function is management of public funds and other
resources such as human resources.

Public Financial Management (PFM) focus on

improving the efficiency and effectiveness of
public expenditures, i.e. improving the delivery of
services funded through government
expenditures.
Cont…………..
Thus the focus of PFM is not only on the technical

processes involved in allocating and managing

scarce resources, but also on the

• Roles

•Responsibilities,

•Institutional incentives and

•Information required for making the best use of

these resources
Cont………..
Public finance with significant foreign operations are
often called international public finance.
International public finance must consider many
financial factors that do not directly affect purely
domestic operations.
These include foreign exchange rates, differing interest
rates from country to country, complex accounting
methods for foreign operations, foreign tax rates, and
foreign government intervention.
Cont……
One of the most significant complications of
international finance is foreign exchange.
 International monetary system
The objective of the IMS is to contribute to stable and
high global growth, while fostering price and financial
stability.
The IMS comprises the set of official arrangements
that regulate key dimensions of the balance of
payments
Cont…………..
It consists of four elements:

•exchange arrangements and exchange rates;

•international payments and transfers
relating to current international transactions;
•international capital movements; and
•international reserves.
BALANCE OF PAYMENTS
The balance of payments is a summary of transactions
between domestic and foreign residents for a specific
country over a specified period of time.
It represents an accounting of a country’s international
transactions for a period, usually a quarter or a year.
It accounts for transactions by businesses, individuals,
and the government.
Cont……..
Major components of a balance-of-payments are:
•The current account

•The capital account, and

•The financial account

For all three accounts, transactions that reflect inflows

of funds generate positive numbers (credits) for the
country’s balance whereas transactions that reflect
outflows of funds generate negative numbers (debits)
for its balance.
Cont……..
Current Account: The main components of the current
account are payments for:
(1)Merchandise (goods) and services,
(2) Factor income, and
(3) Transfers

Capital Account: The capital account includes the

value of financial assets transferred across country
borders by people who move to a different country.
Cont……..
Financial Account: The key components of the financial
account are payments for
(1) Direct foreign investment,
(2) Portfolio investment, and
(3) Other capital investment
International Public goods and externalities
An international public good is a benefit providing
utility that is in principle available to everybody
throughout the globe.

An international public good does not imply

measurable benefits for everybody in every country or
nation; it does require that the benefits are available to
the global public.
Cont……..
A Public or social good is one which all enjoy in
common in the sense that each individual’s
consumption of such a good leads to no subtraction
from any other individual consumption of that good.

Pure public goods must exhibit two characteristics:

•First it should be non-excludable
•Second it should be non rival in consumption
Cont……..
Externalities : the activity of one country can affect
the other countries.
In many instances, one country event, can have
external benefit or harm to residents of other
countries.
There occurs a spillover effects.
International Income Distribution
As the world has become increasingly interconnected
through trade, investment, migration and
communication, people’s interest in and knowledge of
international comparisons of living standards has grown.

Correspondingly, the global distribution of income

has become the subject of numerous research papers and
articles, and commentaries in the
media
Cont’
It seems self-evident to be of interest that great
wealth and great poverty coexist in the world.

Global income inequality have widely been

recognized.

Global distribution of income: among individuals in

the world, per capita household income, distribution
among countries of per capita national income
Cont’
This is in part due to the perception that the benefits of
rapid economic growth in recent decades, which has
coincided with a period of rapid globalization, have been
distributed highly unequally.

The Economist has described growing inequality as “one of

the biggest social, economic and political challenges of our
time”.
Cont’
At the 2012 World Economic Forum meeting at Davos,

“severe income disparity” was featured as the single

most likely global risk, and with one of the highest

potential impacts.

Again at Davos in 2013, Christine Lagarde, managing

director of the International Monetary Fund, stated

that “[e]xcessive inequality is corrosive to growth; it is

corrosive to society.
Cont’
To compare real incomes across countries one needs
to convert them using purchasing power parity (PPP)
exchange rates, rather than market exchange rates, to
take account of aggregate price differences between
countries.
 Discussion Questions
1. Briefly explain public financial management and
international public financial management.

2. What is the need of studying international public

financial management?