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Public Financial Management ReformThe International Experiences and Lesson for CambodiaPresentation to OIRC, Policy Research InstituteMinistry of Finance, Japanby Hap ChantheaVisiting Scholar from Cambodia July 19, 2007

2

Outline ♦ Chapter I : Introduction

– Macro Economic Situation– Fiscal Performance– Fiscal Sustainability

♦ Chapter II Public Financial Management Reform– Current Budget System Reform– Budget Revenue mobilization

♦ Chapter III: Medium Term Expenditure Framework (MTEF)– International Experience MTEF– Priority Ministries MTEF

♦ Chapter IV: International Experiences and Lesson for Cambodia– Japanese Experience– International Experience

♦ Chapter V: Conclusion – Challenges – Recommendations

3

Economic Growth

0

2

4

6

8

10

12

14

2001

2002

2003

2004

2005

2006e

2007p

2008p

2009p

20010p

Source: IMF : 2005-2006 and Ministry of Economy and Finance

4

Growth Rate

0

2

4

6

8

10

12

14

2002 2003 2004 2005 2006Cambodia Georgia Lithuania Turkey

Source: IMF and Friends

5

Consumer Price Index

0.4 0.6 0.4

3.7

7.6

3.70.5

3.85.9 4.75.6 4.8 5.7

8.210.2

2.9 3 3.9

29.7

18.4

9.37.7

5.0

-1 -1.3

-4

1

6

11

16

21

26

31

2002 2003 2004 2005 2006

(%)

Bosnia Herzigova Cambodia Georgia Lithuania Turkey


6

CCurrenturrent Account Deficit (%GDPAccount Deficit (%GDP))

0

5

10

15

20

25

2002 2003 2004 2005


(%)


7

Foreign Direct Investment

1.62.3

2.83.2

0.1 0.1 0.1 0.4 0.40.2 0.3 0.5 0.5 0.6

2.9

4.34.9

5.6

8.5

1.11.8

2.9

9.89.1

0

1

2

3

4

5

6

7

8

9

10

2002 2003 2004 2005 2006

Bill

ion

$



8

SensitivitiesSensitivitiesForeign Exchange Rates

1.201.702.202.703.203.704.20

Jan-

03M

ar-0

3M

ay-0

3Ju

l-03

Sep-

03N

ov-0

3Ja

n-04

Mar

-04

May

-04

Jul-0

4Se

p-04

Nov

-04

Jan-

05M

ar-0

5M

ay-0

5Ju

l-05

Sep-

05N

ov-0

5Ja

n-06

Mar

-06

May

-06

Jul-0

6Se

p-06

Bosnia Herzigova Cambodia GeorgiaLithuana Turkey

Central Bank Reserves

0

1

2

3

4

5

3 6 16 1M M J S N3 6 5 2 6M M J S N3 6 8 9 2M M J S NO 0 2M M T E KO 0 3M M T E K0

10

20

30

40

50

60

Bosnia Herzigova CambodiaGeorgia LithuanaTurkey


9

More Revenue Effort, Domestic Revenue Percent of GDP

10.29.9

10.6 9.6 10 10.3 11

11.9

16.8

17.8

02468

1012141618

2000

2001

2002

2003

2004

2005

2006

Lao PDRVietnamThailand

Source: IMF (John Nelmes ) and Ministry of Economy and Finance

10

Public Sector Primary Balance (% GDP)

0.71.7

2.2 2.2

-6.1 -5.8

-3.2 -3.1

-1.9 -1.6

0.4 0.4

6.47.1

6.2

-0.1

-4.5

-2.4-2.4

-0.2 -0.3-0.1

-0.1

6,5

0.4

-7

-5

-3

-1

1

3

5

7

2002 2003 2004 2005 2006

(%)



11

EEexternal external DDebtebt IndicatorsIndicators for for CambodiaCambodia

50515253545556575859606162636465

2002 2003 2004 20051.5

2

2.5

3

Total Ext. Debt / GDP Total Ext. Debt / Exports FOB (RHS)

(% of exports)(% of GDP)


12

RemarksFinancial Management

Information System (FMIS)Financial Management

Information System (FMIS)Link to Government PolicyLink to Government Policy

Revenue MobilizationRevenue Mobilization Expenditure MobilizationExpenditure Mobilization

BeginningCornerstone PFM Reform

BeginningCornerstone PFM Reform

Growth and FISCAL SUSTAINABILITYGrowth and FISCAL SUSTAINABILITY

13

Chapter II. Public Financial Management Reform (PFM)

♦Achieving Aggregate Financing

♦Smooth Budget System in Implementation

14

MINISTRY OF ECONOMY & FINANCE

Public Financial Management

Reform

PFM MTEF

CoA

Guidelines

FMIS

MoH

MOEYS

MoW

MAFF

MTEF Budget

MTEF Outputs

Budget Classifications

LEDGEND:PFM Public Financial Management ReformCoA Chart of AccountsFMIS Financial Management Informatiion SystemMTEF Medium Term Expenditure FrameworkMoH Ministry of HealthMOEYS Ministry of Education Youth & SportsMoW Ministry of WomenMAFF Ministry of Agriculture, Forestry & Fisheries

Source: Terry O’Donnell and Hap Chanthea ADB-TA 44 28 CAM

15

New Chart of Account

♦CLASS 1-CAPITAL♦CLASS 2 -FIXED ASSET ACCOUNTS♦CLASS 4- THIRT PARTY ACCOUNTS♦CLASS 5 - FINANCIAL ACCOUNTS♦CLASS 6 - CURRENT EXPENDITURE

ACCOUNTS♦CLASS 7 – CURRENT REVENUE

ACCOUNT

16

Progress in core PFM activities

Program Budgeting

Budgeting Classification

New Chart of Account

Financial Management Information

System

InformationData Analyses

17

Financial Management Information System

Priorities Ministries

Resources Collection

National Treasury

Ministry of Economy and Finance

18

Shortcoming Budget Commitment Core Activities

Budget Controller MEF

Line Ministries

Commitment and payment order

processing

Budget Department

MEF

High Ranking Official

MEF

19

Cash Flow Management

National TreasuryTransaction

Recording help improvement

Cash Flow

Payments toStaff and

suppliers by check and transfer

Public ServicesImprovement,

Revenue Collection by check and transfer

20

Revenue Mobilization

Potential tax collection under

the existing tax system

Potential collectionASYCUDA Project

and Risk

Potential Non-Tax Revenue

Tourism fee, Casino and others

21

Internal Audit and Line Ministries Audit

22

Chapter III Medium Term Expenditure Framework♦Program Budgeting ♦ International Experience from MTEF♦System input for Program Budgeting

23

Medium Term Expenditure Framework

BUDGET CYCLE

24

Structure of Program Budgeting for Implementing

25

International Experiences for MTEF ♦SRI LANKA

Started budget reform in 1969By 1974 entire government was budgeting & reporting in program formatProcess was driven by a unit in the Ministry of FinanceChange in Government 1977 and the Program Budget Unit was disbandedBy mid-1980’s it was back to cash budgeting

Sources: Terry O’Donnell and World bank handbook

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INTERNATIONAL EXPERIENCES UNSUCCESSFUL

♦ JAMAICA♦PHILIPPINES♦Guinea♦MALAWI♦ZAMBIA♦CAMBODIA ( MOH AND MEYOS)

Sources: Terry O’Donnell and Public Expenditure Management World bank handbook

27

INTERNATIONAL EXPERIENCE ♦ NEW ZEALAND – BEST PRACTICE

The Fiscal Responsibility Act, enacted into law in 1994,

“Principles of Responsible Fiscal Management”mandating preparation of an annual Budget Policy Statement by government

The Budget Policy Statement requirement, obligates government to make an annual statement of fiscal intentions for the next three years and their long-term fiscal objectives, as well as the consistency of fiscal intentions and objectives with the "Principles of Responsible Fiscal Management."

Source: Public Expenditure Management Handbook World Bank

28

Considering MTEF Ministries (% of Total Current Budget)

2006e 2007b 2008p 2009p

Health 11.45 11.88 11.88

19.24

Agriculture 2.41 2.10 2.20 2.30

29.6

11.9

Education 19.66 19.24 19.25

Agriculture% Share of

GDP

32.2 30.4 28.8

Source: Ministry of Economy and Finance, Cambodia

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System Inputs for Program Budgeting

♦Accounting System in Program Budgeting♦Monitoring and Evaluation System in

Program Budgeting to meet the “Goal Target”

♦Straightening Human resources in Program Budgeting

♦Auditing Resources

30

Chapter IV International Experiences♦ Japanese Experience ♦ International Experiences

31

Policies Experience

32

Inputs Qualify for Cambodia

♦ Japanese – Local Debt

– High Local Taxes Collection

– Higher Land Taxes Collection

– Higher Officers Income– Lower Interest Rate– Higher quality and number

of private investment

♦ Cambodian– No Local Debt but high

International Debt– Low Local Taxes

Collection– No Land Taxes Collection– Lower official Income – Higher Interest Rate– Low quality and number of

private local Investment

33

Tax System Experiences ♦ Providing Education on Tax System

– Providing Education about Basis Tax System to all level of Students

– Qualify Teachers about the Basis Tax System– Documents and Advertisements to all level of People

♦ Payment System♦ Self Assessment System♦ Land Tax System

– Improving Agriculture system – Law on land tax and Land unused

34

International Experiences

♦Political Stability ♦Link Programs to the Policies.♦Revenue estimating ♦Current System of M and E for Program

Budgeting♦ Internal Auditing♦Legal Framework for Program Budgeting

35

Chapter V: Conclusion

♦Challenges ♦Recommendations

36

Challenging Budget Comprehensiveness

♦Wages Bill♦Domestic Public Capital Investment♦Road Fund♦Budget Revenues and Spending♦MTEF Budget

37

Challenging in Budget Transparency

♦Organic Budget Law : Short line Approval at Assembly (Ex, Law related Tax Collection, Non-Tax Revenues and so on)

♦ Imbalance Share of Budget (Priority Ministries)

♦Discipline and Intention in the Current Budget System

38

Challenging Continued

♦Challenging Shortcoming Commitment ♦Challenging in Program Budgeting♦Challenging in Cash flow Management

39

Conclusion, Recommendations

♦ Improving Budget Law on Resources for Budget Revenue Mobilization

♦ Avoid Political Upheaval ♦ Improving policies to meet the Target of

Goal ♦Strengthening Current System from Top

level to Button level

40

Current System in Resources Management

National TreasuryResource Collection

Departments

MEF

42

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