Fiscal Planning and PFM Reforms

Jean-Marc LepainAFRITAC West 2 Resident Regional PFM Advisor

jlepain@imf.org

Workshop on Medium-Term Budget Frameworks

June 2nd–6th, 2014 Accra, Ghana

Outline of the Presentation

I. Key ideasII. Fiscal Planning in the framework

of PFM ReformsIII. A quick Tour of Fiscal PlanningIV. Regional issues

I. Key ideasFiscal planning is a key component of PFM

reforms.Fiscal planning must evolve is stages. Sequencing of the introduction of the

different MTFs must be aligned with the sequencing of PFM Reforms.

The fist batch of reforms must aim at establishing budget credibility, using MTFF among other tools.

Program-based budgeting and MTEF can be introduced only after budget credibility is established.

II. Fiscal Planning in the Framework of PFM

Reforms

Objectives of a PFM System1. Macro economic stability2. Strategic allocation of resources to

foster economic development3. Timely and effective funding of public

services 4. Aggregate fiscal discipline5. Financial compliance6. Social justice, fiscal fairness, income

redistribution

Fiscal risk management :Are all fiscal risked identified and monitored (contingent liabilities, guarantees, SoE,

State Funds, etc.)?

Fiscal risk management :Are all fiscal risked identified and monitored (contingent liabilities, guarantees, SoE,

State Funds, etc.)?

Exhaustive and timely information:Is a system of information dissemination already in place ? How comprehensive is the reporting

system ?

Exhaustive and timely information:Is a system of information dissemination already in place ? How comprehensive is the reporting

system ?

Budget exhaustively and linkage with

economic objectives :Does the budget records all state

transactions ? Does it reflect economic

priorities ?

Budget exhaustively and linkage with

economic objectives :Does the budget records all state

transactions ? Does it reflect economic

priorities ?

Realism of the budget:

Can the budget be executed in a timely

and predictable manner ?

Realism of the budget:

Can the budget be executed in a timely

and predictable manner ?

Expenditure Control : Is the expenditure

control reliable? Does the system identifies

all arrears and monitor the stock

Expenditure Control : Is the expenditure

control reliable? Does the system identifies

all arrears and monitor the stock

Acomptabilité et transparence:

Des mécanismes cohérents et complets

garantissant l’acomptabilité et la

transparence sont-ils en place?

Acomptabilité et transparence:

Des mécanismes cohérents et complets

garantissant l’acomptabilité et la

transparence sont-ils en place?

Les Six Critères d’Evaluation des Système de Gestion des Finances Publiques

The six characteristics

of well performing PFM

Systems

Typical sequencing of reforms1. Fiscal discipline and budget

credibility2. Timely information and

accountability3. Strategic allocation of resources4. Value for money and

performance management

Fiscal discipline and budget credibility

- MTFF + budget ceiling- TSA + cash management- Commitment control

Timely information and accountability

- Revised CoA + FMIS- MTBF- Program-Based Budgeting- Risk management

Strategic allocation of resources

- Sector strategies +Sector Development Frameworks-MTEF

Value for money and performance management

-Analytical accounting- Budget analysis- Monitoring and evaluation- Performance framework

Reform sequencing and PFM requirements

Key messagesReforms should be planned with a strategic

vision of the final PFM System architecture. Reforms should take into consideration two

parameters: efficiency gains and improvement in PFM performance

Introduction of MTFs should be done in phases well coordinated with other reforms.

Complexity should not be underestimated. Choice of a PMF reform methodology is

essential.Sequencing of reforms must integrate

sequencing of fiscal planning.

PFM Reform Methodology

Pragmatic approach (Action Plans)

Systemic approach

Basic First approach

Platform approach

PEFA indicator approach

Basic-First Approach Control inputs before seeking to control outputs. Account for cash before introducing internal control. Establish external controls before introducing internal control. Ensure budget credibility before moving to accountability Establish internal control before introducing managerial

accountability. Operate a reliable accounting system before installing an

integrated financial management system. Do not introduce program budgeting before budget credibility is

established and a robust accounting system is in place. Budget for work to be done before budgeting for results to be

achieved. Budget analysis before Monitoring & Evaluation Monitoring & Evaluation before performance budgeting Enforce formal contracts in the market sector before introducing

performance contracts in the public sector. Have effective financial auditing before moving to performance

auditing.

III. A quick tour of fiscal planning

Sequencing of Fiscal Planning

National Development Plan

Medium Term Fiscal Framework

Medium Term Budget Framework

Medium Term ExpenditureFramework

10 years

5 years

3-4 years

Medium Term Macro Economic Framework

- Macroeconomic sustainability

- Debt strategy

- Fiscal discipline- Fiscal envelopes

- Budget Credibility- Program Budgeting

-Value for money- Performance

management- Accountability

Medium Term PerformanceFramework

- Strategic Allocation of funds

Medium Term Fiscal Framework

Credibility of the budget depends on credibility of the MTFF

Focus on the surplus / deficit and on financing the gap

Main output: sector ceilings

MTFF main issuesRealism of revenue forecastsExtra-budgetary fundsUnplanned expenditureUnrecorded arrearsContingent liabilitiesPara-fiscal activities of the

central bank

MTEF ObjectivesEnsure budget alignment with

economic priorities

Ensure budget ceiling realism by better knowledge of sector funding needs

Move away from political bargaining to rational decisions based on sector needs and value for money

Medium Term Expenditure Framework The MTEF links the planning process to

the budget process

It combines the top-down approach of the MTFF with a bottom-up approach

The National MTEF is the result of discussion based on sector MTEFs

Sector MTEF are based on costed Sector Strategies and Sector Development Framework.

When to introduce PBB?MTBF or MTEF ?Budget credibility is a

prerequisiteChart of Accounts must be testedScope of PBB must be defined

and introduced in phasesManagement rules must be

agreed (no “one size fit all”)Piloting is recommended

IV. Issues in the region

Issues in the regionBudget credibility is not

established in most countriesFMISs do not cover all

expenditure and are at various stages of development

Program budgeting is introduced without accountability

Budget credibility in the region(PEFA indicators)

Gambia Ghana Liberia Sierra Leone Cabo Verde

P1 Aggregate expenditure out-turbn compared to origina l approved budget B C D B AP2 Compos ition of expenditure out-turn compared to origina l approved budget C NR D+ C BP3 Aggregate revenue out-turn compared to approved budget B C D B BP4 Stock and monitoring of expenditure payment arrears D D B NA B+

The tools for enforcing budget credibility and fiscal disciplineMTMF and debt sustainability

study to ensure fiscal sustainability;

MTFF to allocate realist expenditure ceilings;

Single Treasury Account to ensure an efficient mobilization of resources;

Cash management

National Development

Strategy

Sector Strategies

Sector Development Frameworks

Sector Financial Framework

SectorMTEF

NationalMTEF

From Economic Planning toMTEF

Fiscal issues to be taken into considerationDependence on export of natural and

agricultural resources with volatile prices.

Limited fiscal space with limited potential for increase

Revenue leakagesPrice variation that makes difficult

expenditure forecastingLack of information on ongoing tendersStock of arrears

The Four stages of MTF Sequencing

Budget credibility through MTFFAggregate fiscal discipline

though MTBFPolicy-based budgeting through

MTEFResult-based budgeting through

MTPF

Thank you