As more resources are channelled to poor countries, and increasingly through modalities that rely on, or at least are compatible with country systems and procedures, budget processes become much more important as the main avenue to allocate and spend aid resources, but also to deliver on development outcomes. Public Financial Management (PFM) systems have therefore been an increasing focus of donor attention, as their strength and adequacy is assessed for fiduciary purposes before aid can be channelled via national budgets. The difficulties that have been encountered in the use of these new modalities, and in the implementation of PFM reform programmes, point to the need to better understand some of the underlying forces (social, economic and, most of all, political) which influence the budget process and drive reform efforts. Strengthening domestic accountability mechanisms through Parliaments, audit institutions and civil society has also become a more prominent objective of both donor and recipient countries.

The workshop organised in October 2005 by the Centre for Aid and Public Expenditure (CAPE) at ODI brought together policy-makers from both donor and recipient governments, researchers, practitioners and NGOs to discuss these issues and some of the contradictions involved. This paper is based on the presentations and discussions at the CAPE workshop, but builds on these by surveying the more recent academic and policy literature. Its aim is to critically review ongoing debates about aid modalities and PFM reform efforts, and to assess the role of donors in promoting more robust budget systems and processes, which in turn could allow for channelling increasing aid resources through national budgets and strengthen domestic accountability channels. The focus on aid-dependent countries, where issues of donor coordination and aid effectiveness are more prominent, inevitably means that this paper mainly draws from sub-Saharan African cases and examples.