Good financial governance

Germany’s value-based approach

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Governments need money for schools, roads, healthcare systems and other public institutions and goods. Germany helps its partner countries increase their domestic revenues and ensure responsible, pro-development public spending.

In its work to promote good financial governance, the German Federal Ministry for Economic Cooperation and Development (BMZ) takes a value-based, integrated approach. The conviction behind it is that a legitimate and transparent system of public finance is inextricably linked with other principles of good governance. These include rule of law, respect for human rights, a social market economy and universal political participation.

This means that public finance management cannot be considered in isolation and from a purely technical point of view. Fiscal reform processes can only be successful if they take into account the political, economic, legal, social, historical and cultural background of the country in question.

Currently, financial support totalling 40 million euros per year is provided for roughly 30 Financial and Technical Cooperation projects in the area of good financial governance.

Action areas

The decision as to the areas in which German development cooperation activities are to be implemented is based on the needs and situation of the partner country concerned. Key areas of action are:

  • tax policy and administration reform (mobilisation of domestic revenues, improvement of effectiveness and service mindedness and fairer taxation);
  • public budget (advice on planning, drawing up, implementing and monitoring the budget, inclusion of civil society, cross-regional sharing of knowledge and experience);
  • financial control (organisational advice and infrastructure development aimed at increasing the efficiency and independence of national audit offices);
  • public procurement (increase in cost efficiency and transparency and awarding of public contracts in line with ecological and social principles);
  • fiscal decentralisation (improvement of financial management at the provincial and local level and appropriate division of public revenues between the various levels of government in accordance with their tasks and functions); and
  • debt management (collaboration with the World Bank, the International Monetary Fund and the United Nations Conference on Trade and Development, UNCTAD).

The BMZ draws on the expertise of German fiscal institutions (audit offices, tax administration bodies and finance ministries), as required, to ensure that the advice given reflects real-world practice. Specialists are also provided through the Senior Expert Service (SES).

International Tax Compact

At the second International Conference on Financing for Development, held in Doha in 2008, the BMZ proposed that an International Tax Compact (ITC) be created. Now in place, this platform for dialogue and action is open to all interested developing and transition countries and international and regional organisations that deal with development policy and taxation.

The aim of the ITC is to support developing countries’ efforts to reform their tax systems and tackle tax evasion and avoidance. It provides a channel through which information about tax reform can be shared and best practice propagated. The BMZ finances the work of the ITC Secretariat, which is based in Bonn.

International collaboration

Germany also promotes good financial governance through European and multilateral institutions. One example of this is that the BMZ is striving to ensure that German development projects are more closely dovetailed with programmes run by the EU Commission. The aim is to increase the extent to which the values important to German development cooperation, such as transparency, accountability and public participation, are reflected in EU programmes.

Among the most important partners for German development policy in the areas of public finance management and debt management are the International Monetary Fund (IMF), the World Bank and the Organisation for Economic Cooperation and Development (OECD).

One aspect of the BMZ’s collaboration with these partners is the support it gives for the activities of the IMF’s regional centres in Africa and Central America. Germany also plays a significant role in the IMF’s Revenue Mobilization Trust Fund (RMTF), which promotes revenue policy and administration in developing countries. In addition, Germany’s Federal Government supports the development and propagation of the Tax Administration Diagnostic Assessment Tool (TADAT), with which the strengths and weaknesses of tax administration bodies can be measured.

BMZ glossary

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