btc objectives coverage regulatoryframework

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Budget Transparency &

Comprehensiveness(AFE Regional Workshop)

Session 1:

1

verv ew o u ge ransparencyComprehensiveness

Davina Jacobs

Public Financial Management Division

Fiscal Affairs Department, IMF

Zanzibar, October 20-22, 2009

Overview

I. Introduction

II. Definitions of Budget (or Fiscal)

Transparency & Comprehensiveness

2

. e sca ransparency o e

IV. Recent Developments in IMFs work on FT

V. Results of FT Assessments

VI. Other FT Assessments

VII. Conclusions

I. Importance of Fiscal

Transparency

Public right to know

Promotes: accountability; market discipline; lower

corruption; good institutions; time-consistent behavior

3

trust; fairness.

Fosters: reform in public financial management, public

expenditure, tax administration, tax policy, macro-fiscal.

Doesnt: restrict government decision space


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II. A Definition of Fiscal

Transparency

Being open to the public about the structureand functions of government, fiscal policyintentions, and public sector accounts and

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projections (Kopits and Craig).

Providing ready access to reliable,comprehensive, timely, understandable, andinternationally comparable information ongovernment activities (wherever performed).

What is Budget

Comprehensiveness?

The soundness of budget systems can be

judged by the following by its

5

,

Is the coverage of government operations

complete?

Are estimates gross or does netting take

place?

III. The Origins of the

Fiscal Transparency

Code

Following the Asian economic crisis in 1998 (and the earlier Mexico crisis),the international financial institutions were encouraged to develop and promote12 codes of practice of economic governance in public and private sectors

Three transparency standards were developed by IMF: fiscal transparency,monetar and f inancial olic t rans arenc and economicdata.

6

, .

Other standards covered accounting, auditing, etc.

A Code of Good Practices on Fiscal Transparency was formulated, whichwas extended in 2001 and revised in 2007. Now identifies 45 good practices,within four pillars

Reports on Standards and Codes (ROSCs) assess a countrys observanceof these codes and are intended to promote greater financial stability by:assisting countries in strengthening economic institutions; supporting Fund andBank work; and informing the private sector.


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The 4 Pillars of Fiscal

Transparency

Clarity of roles and responsibilities:Structure and functions of government, responsibilities within government,relations between government and the rest of the economy

O en bud et rocesses:

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Budget preparation, execution, and monitoring; timetable for legislature;realism of estimates and medium-term framework; fiscal sustainability.

Public availability of information:Specification of the coverage, detail and timing of fiscal information to beprovided to the public.

Assurance of integrity:Quality of fiscal data, internal oversight, and external scrutiny.

IV. The 2007 Revisions to

the FT Code

- Clarified many existing good practices.

- Introduced nine extensions:

-

8

.

Distribute a clear and simple summary guide to the budget.

Provide time for consultation on broader policy changes.

Give legislature time to consider the draft budget.

Make all contractual arrangements publicly accessible.

Provide explicit legal basis for granting rights to use or exploit public assets

Present supplementary proposals in same form as original budget

Identify separately receipts from all major revenue sources.

Undertake and identify purchases and sales of public assets openly.

Manual on Fiscal

Transparency

Explains and provides context for all Good Practices of theCodenow linked with the Resource Revenue Guide.

9

Includes extensive country examplesOECD, emergingmarket and developing economies.

Also illustrates best practices and basic requirements.

Available in many languages

Revised and extended in 2007


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What is a Fiscal ROSC?

IMF Country report prepared on request

Part of the Standards and Codes Initiative (12 areas in total)

Ideally once every five years

10

Reviews current position and progress made against good practice standards:systematic but tailored to country circumstances

Includes staff commentary with recommendations, including prioritization andtimeline

May lead to technical assistance

Usually published on Fund website and can be updated on request

So far, 19 completed in AFR most AFE countries, except Ethiopia & Eritrea

By IMF Department

63.6%

48.6%

60%

By Level of Development

83.3%

68.8%

80%

91 Countries have Published

Fiscal ROSCs

43.8%

38.6%36.4%

0%

20%

40%

EUR WH MCD AFR APD

46.7%

36.4%

0%

20%

40%

60%

Transition

Economies

Emerging

Markets

Advanced

Economies

Developing

Economies

V. Mixed Performance by

Countries on Different Aspects

of Transparency

High Levels of Observance

Regular debt data

Timely fiscal data (not developing and resource-rich)

Statement of medium-term policy objectives

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,resource-rich)

Budget classification

Low Levels of Observance

Identification of fiscal risks (statement, contingent liabilities, etc)

Identification of quasi-fiscal activities of non-financial publicenterprises (OK for advanced)

External assessment of fiscal and macro forecasts.


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Attributes of Fiscal Transparency:

Global Averages

0.6

0.8

1.0Forward Estimates

Tax Expenditure

Contingent Liabilities

QFA-Financial SectorExternal Audit

Independent Expert

Forecast overview

Realism of the Estimates

13

-

0.2

0.4QFA-NonFinancial

Public Enterprises

Debt

Fiscal Data

Medium Term Quantitative

Macroeconomic Framework

New Policies

Policy Objectives

Fiscal Risks

Accounting System

Budget Classification

Budget Coverage

Mid term Report

Internal Audit

Final Accounts

Attributes of Fiscal Transparency:

Resource-Rich Economies

0.6

0.8

1.0

Forward Estimates

Tax Expenditure

Contingent Liabilities

QFA-Financial SectorExternal Audit

Independent Expert

Forecast overview

Realism of the Estimates

All

Rich Resource Economies

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-

0.2

0.4QFA-NonFinancial

Public Enterprises

Debt

Fiscal Data

Medium Term Quantitative

Macroeconomic Framework

New Policies

Policy Objectives

Fiscal Risks

Accounting System

Budget Classification

Budget Coverage

Mid term Report

Internal Audit

Final Accounts

Source: IMF FTU

VI. Other Assessments

of Fiscal Transparency

Open Budget Initiative (IBP); 59 countries

(2006); 85 countries (2008)

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x or nay ca surveys; coun r es.

Public Expenditure and Financial Accountability

program (PEFA); 80 aid recipients

Extractive Industries Transparency Initiative

(EITI); potentially 28 candidate countries


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Fiscal Transparency Indices:

Comparisons

Open Budget Initiative - ROSCs

R2

= 0.51

0.8

1.0

ative

Oxford Analytica - ROSCs

R2

= 0.57

1.0

a

16

0.0

0.2

0.4

0.6

0 0.2 0.4 0.6 0.8 1

ROSCs

OpenBudgetIniti

Source:IMFFTU&OBI

0.4

0.6

0.8

0.1 0.3 0.5 0.7 0.9

ROSCs

OxfordAnalytic

Source:IMFFTU& Oxford Analytica

Extractive Industry

Transparency Initiative (EITI)

Revenue flow transparency is main focus.

Full reconciliation of publicly accessibleinformation on tax revenues received andpayments made by companies is main aim.

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revenues; and comprehensive coverage.

Civil society must be actively engaged.

EITI Candidate status so far achieved by 15candidate countries, and potentially 13 more.

No country is yet EITI compliant

IMF supports through Guide, TA, Training, etc.

VII. Why is Fiscal

Transparency Important?

Openness about government structure and functions, fiscal policy intentions andprocesses, and government accounts.

Citizens rights to information

Increaseaccountabilit inc ludin toand b le islature and reducecorru t ion

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Improve decision-making and accelerate corrective action

Enhance credibility and support for policies

Mitigate surprises for markets

Reduce borrowing costs

Meet international obligations (donors, creditors)


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Fiscal Transparency and Credit

Ratings: Empirical Results

Residudals: Credit Ratings & FiscalTransparency

3

4

Credit Ratings: Regression Fit

21.0

24.0

19

R2 = 0.11

-4

-3

-2

-1

0

1

-0.3 -0.2 -0.1 0 0.1 0.2 0.3 0.4

Residual Fiscal Transparency

ResidualRatings

Source: IMFFTU

6.0

9.0

12.0

15.0

18.0

6 9 12 15 18 21 24

ROSCs

GE:stand.variable

Source:IMF FTU

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Thanks!

Session 2 Coverage of the Budget

Problems, Challenges and

Regional Workshop on Budget

Transparency and Comprehensiveness

October 20 22, 2009

Opportunities

Mohan Joseph

Public Financial Management Advisor

IMF - East AFRITAC


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General principles of budgetary coverage

Current budgetary coverage of AGAs/ SAGAs

/ EBFs / etc. in select African countriesRole of EBFs in government expenditures,

and fiscal risks posed

Outline of Presentation

Mainstreaming these agencies under control

and oversight

General practices followed by OECD nations in

regulating EBFs

Improving coverage of external aid on budget and

integrating capital and recurrent budgets

Way forward

23Defining General Government

Public Sector

General Government

Central Government1. Central (state) budget 2. Extra-budgetary funds

Line ministries, constitutional

bodies, agencies and their3. Semi-Autonomous

and Autonomousea quarers an oca

budgetary units

Local Government State/Regional Governments, District Governments,

Municipalities and Rural Councils, and their budget users

Public enterprises

Government Agencies

and Institutions

Any local government ownedextra-budgetary funds or

semi-autonomous agencies

General principles of budgetary coverage

Principle of comprehensiveness - revenues and

expenditures consolidated in gross terms, and not netted

out ;

Classified on basis of same classifications systems as the

overall budget Accounts of autonomous funds and special accounts must be

audited externally and regularly

Financial reports of government activities should consolidate

operations of autonomous funds/agencies with other operations

Principle of fiscal transparency-for ensuring

accountability


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According to IMFs Evaluation of PEM Reform of 2006

covering Gambia, Kenya, Malawi, Nigeria, Rwanda,

Tanzania, Uganda, and Zambia :

(i) Coverage of expenditures limited to central government,

ro ems o urren u ge ary coverage o

AGAs / SAGAs / EBFs / etc. in select African

countries

transfers to local governments, few autonomous funds

(ii) EBFs excluded from budget coverage

(iii) Transfers to lower levels of government lack

transparency and accountability

(iv) Budget documents are incomplete in coverage of

government operations

Significant extra budgetary spending takes place

outside budgetary management rules ( ROSC /

PEFA)

Kenya - 101 SAGAs and EBFs, and 42 Fund

Accounts reported, 20% of spending, estimated at

Problems of budgetary coverage of AGAs / SAGAs /

EBFs / etc. in select African countries ( contd.)

o

Tanzania - between 5 10% of government

spending

Rwanda and Malawi - significant quasi fiscal activities

are carried out, not adequately reported

Financial operations not reported, circulated or

published; limited scrutiny in MoF / Parliament

EBFs normally refer to government transactions that

are not included in the annual budget presentation, not

subjected to levels of scrutiny, or accounting

standards, as annual budget. (IMFs Manual of Fiscal

Transparency

Account for 40 45% of central govt. expenditures in

Role and importance of EBFs in govt. expenditures

both developed and developing countries

Two thirds of this represent social security funds

Expenditures impact fiscal policy, PFM, and

governance

Have their own legal status independent of Ministries

Also referred to as revolving, counterpart,

emergency, special funds


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Fiscal risks / problems posed by

EBFs Distorts allocation of resources and the budget process

Example of political/administrative corruption (IMF)

Undermines comprehensive budgeting, fragments

financial reporting and cash management Transparency, oversight and accountability concerns

Distorts overall macroeconomic and fiscal osition of

governments

Borrowings can impact on contingent claims against the

government, and on fiscal sustainability

Poses serious risks on heavily-indebted poor countries

EBFs often do not achieve their intended policy goals

(IMF/WB)

Establish strong justification for continuance

Abolish /commercialize/ privatize, eg, Bulgaria / OECD

Limits on debt issuance approval of MoF needed

Clear oversight authority of line ministry and MoF

Mainstreaming EBFs under Treasury control andParliamentary oversight

Must comply with prescribed standards of accounting,

reporting, internal control, and internal and external audit

Function under a sound regulatory framework

Consolidate EBFs with legislative budget The US

concept of a unified budget

Agency Model adopted for better allocation of resources

Operates with degree of autonomy:

Established through law

General practices followed by OECD nations

in regulating EBFs

and under a MTBF framework

Financed through combination of:

o Own sources

o Earmarked contributions

o Transfers from state budget


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In UK

A governance and financial regimeestablished for non departmental bodies

General practices followed by OECD nations

( contd.)

ows agenc es o opera e e r own

budgets

Subject to common PFM standards

established by Treasury for accounting,

reporting, audit etc.

Difficulties in capturing aid data on budget CABRI Report of 2008

o lack of clear policies and coordination systems within

governments, predictability of aid flows

o responsibilities for aid management poorly defined

PFM Strategies must include :

(i) strengthen medium-term expenditure planning

(ii) improve budget classification and presentation

Improving budgetary coverage of external aid

(iii) Route aid flows through TSA for facilitating efficient cash

management

(iv) improve budget documentation which links aid sources to uses

(v) facilitate meaningful parliamentary review

(vi) resolve overlapping responsibilities for aid management

Encourage donors to review aid predictability practises

Dual budget systems de-link recurrent and capital

and development spending

Distinction is arbitrary, asset maintenance problems

Resource allocation better served within a single

MTEF

Integrating capital and recurrent budgets

Public investments medium to long term

perspective

CABRI - OECD survey of 2008 - 11 of 26 countries

report separate capital and recurrent budgets eg.

Kenya, Malawi, Nigeria, Morocco

Ethiopia, Rwanda, Uganda single budget

High degree of integration in OECD countries


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Integrating capital and recurrent budgets(

contd.)

Key features of high integration of capital and recurrent

budgets are:

1. A single (combined ) annual budget and appropriation

process

2. Clear and unified responsibilities for budget preparation

3. Use of investment appraisal techniques to evaluate

capital spending

A WAY FORWARD

Undertake a comprehensive review of AGA/ SAGAs/

EBFs

Merge activities if needed with line ministries

Full identification and documentation of all agencies

Establish a comprehensive data base of all agencies

op a prec se an common e n on roug aw

Must function within the PFM framework and standards

Provide greater information to legislature of activities

Establish clear linkages between budgets of agencies

with that of line ministries, to achieve synergy

Bring Agency funds under cash mgt control through ZBA

A WAY FORWARD ( contd.)

Improve monitoring of activities, especially EBFs that presentsignificant fiscal risks

Consolidate fiscal operations of sub-national governmentsand EBFs with central government

Strengthen and reform country PFM systems for enhanced

Increase coverage of project aid on budget throughintegration with government FMS

Initiate early steps, but a long-term perspective is required


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Thank You!

Regional Workshop on Budget Transparency and

Comprehensiveness

How can the Regulatory Framework enhanceTransparency and Comprehensiveness?

By

Florence N. Kuteesa

Public Sector Budgeting Expert

Organised by IMF East AFRITACOrganised by IMF East AFRITACOctober 20October 20--22, 2009, Bank of Tanzania Conference Center, Zanzibar22, 2009, Bank of Tanzania Conference Center, Zanzibar

Outline

Background

Major areas of concern related to transparency andMajor areas of concern related to transparency and

com rehensiveness of the bud etcom rehensiveness of the bud et

Extent to which regulations enhance transparencyand comprehensiveness

Lessons learntLessons learnt

** Regulatory framework includes policy, guidelines, and legislation/Law


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Issues related to comprehensiveness & transparencyProcess Comprehensiveness Transparency

Macroeconomic & fiscalforecasting(i.e estimated regardingGDP, domestic revenue,expenditure, deficitfinancing, savings &investment)

Quality and reliabilityestimates Is the forecast open toassessment & verification byoutside experts?Difficulties related to processhandled by two departments(Finance and Planning)Majority of stakeholders hardlyunderstand assumptions andparameters & find it difficult tocomprehend projections.

Medium TermExpenditure ( determinesector allocations(ceilings) ,

Inadequate coverage &and mainstreaming ofexternal resources intothe ceilings-falseceilings.

Sometimes basis for allocationnot clearly explained.Weak link between ceilings ,outputs and program.Not published in some countries.Not known to some keystakeholders .

Issues related to Comprehensiveness & Transparency

Process Comprehensiveness TransparencyFormulation ofexpenditurepriorities andbudget estimates

Inadequate budget scrutiny of off-budget funds or EBFs and potentialproject aid .Projections are not provided for alldonor funded program.Projects not captured in Budget andappropriationbill

Weak link between estimates andoutputs.Criteria for allocation of grants tolower governments not understood.Key stakeholders hardly involved inprioritization within a sector.appropriation bill.

Both National & Sector Budget Policypapers lack in-depth and objectiveanalysis of budgetary issuesIn most cases submissions hardlyprovide sufficient policy guidance andthus provide input to the nationalbudget policy paper sent to Cabinet.

Inadequate data to assess theappropriateness of intentions andreliability of estimates?Budget documentation are hardlyscrutinized by stakeholders eitherdue to either lack of access, or notuser-friendly or late submission.

Limited adherence to a Budgetcalendar, if its in existence


Process Comprehensiveness TransparencyInvolvement ofpolicy makersand lawmakersin the budgetprocess

Inadequate capacity for in-depthanalysis undermining strategicguidance & political oversight.Legislative constraints forobjective scrutiny and debate onthe budget.

Legislators do not haveopportunity to contribute toformulation of fiscal policiesbefore tabling the budget.The decision makers do notunderstand the decision makinggprocess, neither have access tothe same data as planners, norunderstand budgetdocumentation.Legislators generally seem to feeltheir review is mechanical andtoo rushed.


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Process Comprehensiveness Transparency

Execution ofthe Budgetincludingcash flow

Limited cash underminescomprehensive approach toexecution.

Categorization of budget ( priorityand non- priority ) tends toencourage a disaggregated

Basis for determination of cash ceilingsnot understood.Are stakeholders given accurateforecasts in time to facilitate programchanges?Do they receive explanations for underfunding or for additional funding,includingperiodic macroeconomicgg gapproach ( favor politicallypowerful MDAs)including periodic macroeconomicforecasts?Poor predictability of resourcesProcurement process is hardly openand the selection not subject toobjective scrutiny?Transactions are not properly recordedand neither subject to strict i nternalaudit verification.


Process Comprehensiveness Transparency

DomesticRevenueCollectionDo payers and collectors haveready access to current policies,regulations, and laws?

DebtManagement

Is all relevant information relatedto debt management publishedand implications explained?Although information is published ,some stakeholders are unaware ofit.

FiscalMonitoring Inadequate coverage on actualexpenditure, performance,outputs, plus issues ofoperational efficiency .Hardly examine options to dealwith issues nor providerecommendations for policyproposals.

Stakeholders not giveninformation needed to facilitatemonitoring outputs & and reportpotential irregularities.Audit and other reports areneither accessible and/ norpublished in time.

Puts in place a more effective financial accountability

system over the Public Entities and Executive Authorities

bodies.

South Africa : The Public Finance Management Act 1 of1999, Chapter 6 and 7 Public Entities and executiveauthorities .

government business enterprise or aboard,government business enterprise or aboard,commission, .fund).commission, .fund).

Categorization and list of all public entities in a scheduleand guides on how to handle unlisted entities.

Provides for the role of the accounting authorities,Provides for the role of the accounting authorities,budgeting, financial managements and information to bebudgeting, financial managements and information to beprovided.provided.


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Regulation of the MTEF provides for the imperatives for a

credible budget and open process

Enhances understanding of merits of fiscal discipline and a constrainedresource envelope thus encouraging expenditures to be : driven by agreed policy priorities between and within sectors.

disciplined by budget realities,

Promotes openness about policy intentions, formulation andPromotes openness about policy intentions, formulation andimplementation.implementation.

Encourages full disclosure of resource allocations, which in turnEncourages full disclosure of resource allocations, which in turnenhancesenhances incentives for better targeted and more efficient utilization ofincentives for better targeted and more efficient utilization ofresources by ministries/departments and regionsresources by ministries/departments and regions

Increases predictability in resource allocations so that the spendingagencies can plan ahead with certainty and increased autonomy.

Enhances a participatory process: that allows convergence of topEnhances a participatory process: that allows convergence of top--downdownwith bottomwith bottom--up processes in planning, budgeting, monitoring andup processes in planning, budgeting, monitoring andaccountability.accountability.

Adoption of a Budget Calendar opens the budget process

to the public and fosters efficiency in the decision-making

Guides on the consultations, their timing andintegration and outputs in terms of required strategicguidance.

..Pillar taskforces) responsible for spearheading thePillar taskforces) responsible for spearheading theprocess including:process including: composition,composition,

scope of work, andscope of work, and

Deliverables.Deliverables.

Provides opportunities for involvement of non-state

actors in terms of opportunities, required inputs.

Legislative provisions for strengthening political oversight

enhance MPs involvement in the budget process and fiscal

oversight.

Regulation and oversight of the national budget process

Involvement in the budget decision making process.Involvement in the budget decision making process.

,output orientation , minimization of fiscal risks, borrowing policy)

Establishment of a parliamentary budget office,Establishment of a parliamentary budget office,

Monitoring and reporting on the revenues and expenditures i.emonthly publication of revenues and quarterly compliance reports

BudgetAct2001(Uganda) and Fiscal ManagementAct (Kenya) provide for the following among others:


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Constitutional provisions for allocation of resources

especially between the centre and lower governments

Base for formulation of relevant and coherent legislation & regulations for

the budget process, accountability and reporting arrangements at alllevels.

Provides a criteria for sharing the national resources between the centreProvides a criteria for sharing the national resources between the centreand lower governments.and lower governments.

Guides on the type of fiscal transfers provides certainty about level offunding and enhances predictability.

Establishment of an independent institution to guide and oversee theEstablishment of an independent institution to guide and oversee thesharing of the national cake.sharing of the national cake.

Guides the articulation of the roles and mandates of the key institutions.

Guarantees civic participation and empowers lowers governments to adoptGuarantees civic participation and empowers lowers governments to adopta topa top--down and bottomdown and bottom--up approach in planning and budgeting.up approach in planning and budgeting.

Special Regulations that provide for control and

management of classified expenditure.

Example The Public Finance and Accountability(Classified Expenditure) Regulations, 2003- Uganda.

Enhance trans arenc in the s stem of classifiedEnhance trans arenc in the s stem of classifiedexpenditure, while limiting accessibility.expenditure, while limiting accessibility.

Provide for the handling and reporting on classifiedexpenditure by the Auditor General.

Provide for consideration by Parliament of the report ofProvide for consideration by Parliament of the report of

the Auditor General concerning classified expenditure.the Auditor General concerning classified expenditure.

Joint Assistance Strategies- a mutual commitment to

enforce more transparent & effective management of AID

resources

Procedures for effective management of AID thru: Joint programmingJoint programming

Use of government systemsUse of government systems

Joint analytical workJoint analytical work

Joint dialogueJoint dialogue Joint review of monitoring progress.Joint review of monitoring progress.

Spells out the principles and procedures of mainstreamingSpells out the principles and procedures of mainstreamingAID into the MTEF and budget.AID into the MTEF and budget.

Clarifies duties and functions of each key stakeholder inmobilization, programming, disbursement and reporting toreduce duplication and confusion

Division of labor among the development partners.Division of labor among the development partners.


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Cabinet policy and procedures for formulation and

approval legislations, policies, and programs

Encourage politicians involvement in the process.

Guides the consultation process to ensure thatGuides the consultation process to ensure thatimplications for other sectors or crossimplications for other sectors or cross--cutting issuescutting issuesare handledare handled.

Assessment of resource implications for institutionalset-up, staffing, capital and operational inputs so asto direct prioritization and sequencing of publicaction.

Advise on the affordability in terms of humanAdvise on the affordability in terms of humanresource implications and funding proposals overresource implications and funding proposals overthe medium term.the medium term.

Lessons learnt

Regulatory framework is necessary but not sufficient.

Incentives are required to foster meaningful andIncentives are required to foster meaningful andconstructive compliance.constructive compliance.

Well-functioning systems that promote integrity andtrust are vital.

Quality and timely documentation with strategicQuality and timely documentation with strategicguidance are criticalguidance are critical-- to minimize redundancies &to minimize redundancies &wastage.wastage.

Political commitment coupled with concerted effort toenforce the regulations is paramount.

Ahsanteni Sana(Thank You)

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