Is There a Place for Virtual Poverty Funds in Pro-Poor Public Spending Reform? Lessons from Uganda's PAF

Various developing countries with weak public expenditure management systems are establishing virtual poverty funds (VPFs), drawing on the experience of Uganda's Poverty Action Fund. As a mechanism for tagging and tracking the performance of specific poverty-reducing expenditures in the budget, a VPF can be useful. However, this article argues that such devices should be treated from the outset as transitional, and as part of wider processes of strengthening public expenditure management; otherwise, they can seriously distort public expenditure allocations and management systems, potentially undermining growth. Emphasis needs to be placed on identifying the right balance of expenditures in the entire budget; improving the effectiveness and efficiency of existing allocations; and developing better public-sector policies for promoting pro-poor private sector growth. Copyright Overseas Development Institute, 2003.