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Budget Transparency &
Comprehensiveness(AFE Regional Workshop)
Session 1:
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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
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. 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
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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
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,
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.
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, .
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:
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.
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.
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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
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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
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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
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
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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
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4
Credit Ratings: Regression Fit
21.0
24.0
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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
Issues related to Comprehensiveness & Transparency
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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Issues related to Comprehensiveness & Transparency
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.
Issues related to Comprehensiveness & Transparency
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)