Financial Planning Methodology and Policies – Tarun Das

Financial Planning Methodology and Policies

Part-1: Methodology

________________________________________________________________

Prof. Tarun Das1, Ph.D.

Glocom Inc. (USA)
Strategic Planning Expert
ADB Capacity Building Project
On Governance Reforms

________________________________________________________________

Ministry of Finance
Government of Mongolia
Ulaanbaatar, Mongolia.

January 2008
.

1
Formerly Economic Adviser, Ministry of Finance and Planning Commission of the
Government of India, and Professor (Public Policy), Institute for Integrated Learning in
Management (IILM), New Delhi. For any clarifications contact das.tarun@hotmal.com

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 Financial Planning Methodology and Policies – Tarun Das

Financial Planning Methodology and Policies

Prof. Tarun Das

CONTENTS

Part-1: Methodology

1. Introduction and Scope

1.1 Objectives of Financial Planning
1.2 Components of Financial Planning
1.2.1 Reallocation of budgetary resources
1.2.2 Budgetary Planning for the future
1.2.3 Nominal number planning versus ratio planning
1.2.4 Independence of fiscal and financial authorities
1.2.5 Financial control systems and mechanisms
1.3 Status of Fiscal Planning in Mongolia
1.3.1 The larger role of the government
1.3.2 New public sector management

2. Public Finance Management in Mongolia

2.1 Determination of policies and priorities
2.2 Allocation of public resources
2.3 Establishment of mechanisms for financial control
2.4 Uniformity of accounting standards and fiscal statistics
2.5 Internal and concurrent audit system
2.6 Ex Ante Financial Control

3. Relation Between Financial Planning and Budget Planning

3.1 Budget planning and Strategic Planning
3.2 Public Sector Management and Finance Act (PSMFA 2002)
3.3 Progress of Implementation of PSMFA during last five years

4. Methodology for Financial Planning for 2009-2011

4.1 Macro-economic framework
4.1 Methodology for Financial Planning
4.3 Financial Planning for 2009-2011

Annex: Financial Accounting Tables prescribed by IMF GFSM-2001

Selected References

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Part-2: Policies

5. Policies for Financial Planning and Risk Management

5.1 Risk Management for Natural Disaster
5.1.1 The credit system
5.1.2 Risk transfer instruments
5.1.3 Insurance and development bonds

5.2 Management of Contingent Liabilities

5.2.1 Contingent liability- definitions and measurement
5.2.2 Fiscal risk matrix for Mongolia
5.2.3 Lessons from international best practices
5.2.4 Management of contingent liabilities

5.3 Management of Public Debt

5.3.1 Public debt of Mongolia
5.3.2 Debt sustainability and fiscal deficit
5.3.3 Risk management systems for public debt
(a) Independent and integrated Public Debt Office
(b) Composition and functions of the Public Debt Office
(c) Transparency in risk management
(d) Basic principles f risk management
(e) Risk management framework
(f) Assessment of risk

5.4 Management of External Debt

5.4.1 Various risks of external debt
5.4.2 Risks for different modes of capital transfer
5.4.3 External debt sustainability measurement
5.4.4 Risk management policies for external debt
5.4.5 Stress tests
(a) Standard stress tests
(b) Indicators of debt distress episodes
(c) Determinants of debt distress
(d) Quality of institutions and policies
(e) Indicators of debt and debt service thresholds
(f) Debt distress classifications

5.4.6 International best practices or debt management

Selected References

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 Financial Planning Methodology and Policies – Tarun Das

Financial Planning Methodology and Policies

Prof. Tarun Das, Strategic Planning Expert

1. Introduction and Scope

As per the Terms of Reference of the ADB Capacity Building Project on

Governance Reforms, the International Strategic Planning Expert is required “to
develop a methodology for the preparation of ex ante financial planning
(for the central government)”. In the broad sense, ex-ante financial planning
implies assessment of feasible financial resources and planning revenues and
expenditures before the budgetary commitments are made, while ex-post
financial planning means management of public finance after the approval of the
budget by the Parliament. However, both ex ante and ex post financial planning
are integrally related. Therefore, in this paper we deal with methodologies and
policies for both ex ante and ex post financial planning and management.

1.1 Objectives of Financial Planning

Basic objective of government financial planning is to assess the mobilisation,
allocation and management of financial resources keeping in view the
Government’s strategic objectives and sustainability of pubic expenditure within
the total available resources and cash budget limits. This includes developing,
promulgating and implementing financial policies, rules and regulations across
the budget entities. It also includes establishing and strengthening institutions
and policy planning systems for the better management of investment plans, and
development of efficient and vibrant financial, monetary and capital markets.

An effective financial planning serves to provide:

 Optimal allocation of resources among competing needs and sectors;

Sustainability of fiscal deficit over time;
 Stability and predictability of government financial resources;
 Coherence to diverse fiscal objectives for both short and long term interests.

There is of course no universal model, methodology or structure for an effective

and efficient financial planning. Like physical planning, government financial
planning must satisfy the following characteristics:

 ransparency –There should be openness for government’s fiscal, monetary,

T
budgetary and financial policy formulation and implementation. There should not
be any hidden agenda of the government for favoring some particular groups.

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 Accountability – Actions and decision-making processes should be open to

scrutiny by public agencies, Parliament and civil society;

 Responsiveness – It should have the capacity and flexibility to respond to

changing national and international circumstances;

 Future Orientation – It must have the inherent ability to anticipate future

problems and liabilities and to develop policies that take into account future costs
and contingent liabilities;

Rule of Law and Integrity –It must be subject to equitable enforcement of fair
and transparent laws, regulations and codes, so that the basic culture in the
public sector supports ethical behavior and strict actions to fight corruption.

1.2 Components of Financial Planning

1.2.1 Reallocation of budgetary resources

The reallocation of resources is at the heart of budgeting and financial planning.

A change in national and global economic environments leads to a change in
strategic business plans with subsequent impact on outputs and outcomes.
Financial planning must be able to adjust accordingly for resource flows into
various sectors of the economy. However, there could be inherent difficulties to
resource reallocation due to resistance by the groups who might be adversely
affected. In many cases, support from those, particularly the weaker, poor and
vulnerable groups, who would benefit tends to be weak and diffuse, even though
this group may be much larger than the vested interest groups.

When anticipated resources fall short of budgetary targets due to some internal
and external shocks, it is customary for the government to resort to pro-rata
reduction in the operating expenditures or to have cross-the-board cuts in the
capital expenditure. However, cross-the-board cuts are less desirable than the
tougher choice of reallocating among line ministries and budgetary agencies.

1.2.2 Budgetary Planning for the Future

Planning by definition deals with the future. But, annual budget and financial plan
often ignore the long-term objectives and sustainability. Therefore, financial
planning must have the medium term panning horizon, just as the Medium-term
or multi-year budget frameworks. Although, multi-year allocations may not be
legally binding due to change in government or unanticipated events, medium-
term plans help to overcome the following difficulties:

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t he tendency of the present government to over-estimate future financial

prospects and economic growth;
the tendency of budgetary entities to view their unrealistic and wishful goals
as entitlements to future funding.

1.2.3 Nominal Number Planning versus Ratio Planning

It may be emphasized here that in planning one should not focus on absolute
magnitudes and nominal numbers. On the contrary, the focus should be on the
direction of change and on real numbers (generally expressed as percentages of
or ratios to Gross Domestic Product at current market prices), because when
nominal economic growth falls or inflation rate accelerates, revenues and
expenditure forecasts expressed as ratios to GDP are automatically adjusted.
Thus the Fiscal Responsibility Acts of various countries fix targets for fiscal
deficit, revenue deficit, outstanding public debt and contingent liabilities,
incremental debt or incremental contingent liabilities in terms of percentages of
GDP (and not in absolute numbers).

1.2.4 Independence for Fiscal and Financial Authorities

It is now generally recognized that the central bank must be independent with
adequate power to use monetary instruments for inflation targeting and to sustain
growth prospects. Government should not manipulate monetary policy for
political purposes. While government will have independence to determine tax
rates, impose new taxes and allocate resources, monetary authority should have
independence to maintain low inflation rates and stability in real interest and
exchange rates. However, certain parameters for financial and fiscal planning,
notably forecasting of major economic parameters such as growth rates, inflation,
balance of payments, private savings, private investment etc., deserve
agreement by both monetary and fiscal authorities.

1.2.5 Financial Control systems and mechanisms

Financial planning must be integrally related to financial control, accounting and

auditing. All the sectoral development, social security and insurance funds need
to be properly managed, accounted and utilized for the purposes for which they
were set up. Agencies set up to manage the special funds must fulfill specific
minimum standards concerning operating procedures, internal financial controls
and audits, procurement rules, adequate technical staffing, etc. Similarly
resources from external aids need special accounting and auditing. Financial
rules relating to public procurement, financial control and reporting are also
required to be framed and strictly enforced.

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1.3 Status of Fiscal Planning in Mongolia

1.3.1 The larger role of government

Presently Mongolian government is passing through a stage of governance

reforms to improve efficiency and productivity of the public sector. There is
greater emphasis on public-private partnership in development of both physical
infrastructure and human capital. At the same time inflation has emerged as a
major problem, and the levels of taxation and public sector borrowing are
growing over time. The public pressure has, therefore, emerged for better
planning of public expenditure coupled with a demand for improved management
of the public services.

1.3.2 New Public Sector Management

The central government in Mongolia is in effect moving to a system of “New

Public Sector Management”. It has the following key features:

t he separation of policy-making from service delivery and strengthening

agencies to deliver services in health, education, employment and social welfare
and security;

the separation of the provider function and producer function- government

has already privatized and withdrawn from activities where private participation
including foreign investment is more productive and more efficient;

 as required by the Public Sector Management and Finance Law (2002)

government is formulating accrual-based output budgets (AOB) and shifting its
emphasis from inputs to outputs and outcomes;

 Government is emphasizing on the systematic comparison of activities and

output costs between various management units (benchmarking);

Government is developing performance measures and indicators for efficient

budget allocations and for rewarding good performance in achieving set
objectives;

 Government is also strengthening accounting and auditing standards and

systems,

 Government is upgrading capacity and skill of personnel engaged in

planning, budgeting, accounting and auditing; and strengthening the information
technology system to support the budget modernization process and systems.

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2. Public Finance Management in Mongolia

Public Financial Management covers the institutions and processes related to the
management of public resources. This process consists of three stages.
 Determination of policies and priorities
 Allocation of public resources in accordance with the specified policies
 Establishment of financial control, accounting and audit mechanisms to
ensure the economical, effective and efficient acquisition and utilization of
public resources

2.1 Determination of the policies and priorities

For efficient operations, a government is required to make strategic plans

indicating vision, mission, objectives, strengths and weaknesses of the economy
and considering resource constraints in the short and medium terms and to
prepare financial plan and budget to support these policies and objectives. All the
line ministries and budgetary entities in Mongolia are already preparing master
plans and strategic business plans indicating desired outputs and outcomes in
the medium term. The Public Sector Management and Finance Act (27 June
2002) also requires preparation of multi-year budgeting, output budgeting on the
basis of accrual accounting, benchmarks and performance parameters,
accountability by General Managers of Budget Entities, fiscal transparency,
efficient internal financial control, which are major components of modern
financial planning and management.

2.2 Allocation of public resources

Annual Budget prepared by the MOF is the

 the main allocation instrument of the limited resources.
 the instrument of realizing economic plan and policies.
 a basic political choice indicating the common public needs
 the financial planning of the government policy.

Establishment of mechanisms for financial control

Financial controls include both Internal Control and External Control, and there
could be both ex-ante control (before disbursement of funds) and ex-post
control (after disbursement of funds).

(a) Internal Control comprises

 Ex ante control- Before disbursement of any funds, the internal
financial advisers examine the proposed expenditure to satisfy that
it conforms the scope and limits approved under the budget.

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 Ex post internal audit- After finances have been spent, internal

auditors examine whether the expenditure was within budgeted
purpose and limits.

(b) External Audit

• Another audit mechanism is the statutory financial reporting and the
existence of a budget code structure and government accounting
principles.
• Government of Mongolia is also making attempts to improve the
automation and information system of the financial management,
accounting and auditing.

2.4 Uniformity of Accounting Standards and Fiscal Statistics

The same accounting system and standards are used in all budget entities within
the scope of the general government.
 The Ministry of Finance determines the accounting and reporting
standards and frameworks, Chart of Accounts and the format, period and
type of the reports that will be applied by all budgetary bodies within the
scope of general government.
 MOF provides guidelines for preparation and public announcement of the
fiscal statistics.
 MOF also determines rules and regulations for Ex ante control over the
payments, procurement, control over public revenues and expenditures
and mechanism to prevent irregularities and fraud.

2.5 Internal and Concurrent Audit System

It is understand that there is no system of internal auditing or concurrent auditing

in the budget entities. For efficient auditing system, it is recommended that to
start with the major line ministries such as MOF, MOECS, MOSWL, MOH and
MOJIA must have a system of internal audit and concurrent audit. It is discussed
in more details in the following section on ex ante financial control.

2.6 Ex Ante Financial Control

Ex Ante Financial control implies examination of any expenditure proposal before

its commitment or execution or disbursement of funds. In many countries, like
India, Bangladesh, Nepal and Pakistan, there are Financial Advisers/ Financial
Control Officers attached to the Expenditure Department of the Ministry of
Finance but working for various budget entities. The same Financial Adviser/
Financial Control Officer may deal with various budget entities. An expenditure
proposal approved administratively by any department needs to be examined by
the concerned Financial Adviser before actual disbursement of funds. The
Financial Adviser examines whether it falls within the scope and limits of the

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approved budget for the budget entity. However, budget entities have the power
to save finances under certain heads and utilize the surplus for development
purpose. But the proposal needs be examined and scrutinized by the Financial
Adviser. Thus the Financial Advise/ Financial Control Officer helps the line
ministry for the following functions:
 allocating appropriations
 approving financial commitments
 holding tenders and concluding contracts
 overseeing purchase of goods or services
 overseeing execution of public works
 approvals for payment orders

Such Ex ante control mechanism is based on the principle that compliance audit
is performed before the payment is made at various stages of the spending
process. In the event that the transactions not approved are realized, the
authorizing officer shall be deemed to have personal responsibility.

It is understood that the government of Mongolia does not have a system of

Financial Adviser/ Financial Controller/ Internal Auditor. It may be advisable for
the Mongolian government to adopt such a system for ex ante financial control.
To start with, MOF may appoint Financial Advisers/ Financial Control Officer for
the major ministries like MOF, MOECS, MOSWL and MOH.

3. Relation Between Financial Planning and Budget Planning

3.1 Budget Planning and Strategic Planning

Financial planning is an integral part of a sound and transparent budgeting

exercise. Budgeting techniques have been changed significantly over the years.
Modern budgets emphasize independence between fiscal policies and monetary
policies and therefore donot make automatic support by the central bank through
monetization of deficit. As compared with classical budgeting with more
emphasis on sectoral and individual projects budgeting, inputs and expenditure
budgeting and cash accounting; modern budgets are based on strategic
planning, output budgeting, accrual accounting, benchmarks and performance
parameters. In classical budgets, Ministry of Finance used to adopt a top-down
approach under which financial resources are first allocated to various ministries
which in turn allocate assigned resources among various projects. Under modern
budgeting, more emphasis is placed on prior consultation with all stakeholders
and a bottom-up approach where outputs and outcomes are given priority and
line ministries first prepare their strategic plans and budgets and sends requests
for financial allocations to the Ministry of Finance. The MOF then decides
allocations for budgetary bodies within budget constraints and to achieve inter-
sectoral and inter-regional equity. Table-1 summarizes the major characteristics
of modern budgets as compared with those of classical budgets.

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Table-1: Characteristics of Modern Budgets Compared with Classical Budgets

Classical Budgets Modern Budgets

Unbalanced budget with reliance on Balanced budget without any monetized

monetized deficit financed by the monetary deficit. Fiscal deficit is financed by market
authority with creation of additional money borrowings from either domestic markets or
supply. from external sources including bilateral
countries and multilateral funding agencies.
Sectoral financial planning focusing Strategic business planning keeping in view
basically on short-run or sectoral gains broader objectives, vision, mission, strengths
and weaknesses
Input based budgeting- Budgeting in terms of Activity based budgeting- costing and
wages and salaries, purchases of goods and budgeting of activities required to produce
services desired outputs
Inputs/ resources budgeting – budgeting for Output/ Outcome budgeting- budgeting for
labor, energy, transport, goods and services specific outputs and outcomes
Cash accounting- accounting revenues and Accrual accounting- accounting revenues
expenditures when cash is received or paid and expenditures when commitments are
made or liabilities are created – it does not
matter whether cash is received or not.
Project budgeting- focusing on completion of Program budgeting- focusing on integrated
individual projects program for a specific purpose such as
employment generation or poverty reduction
Expenditure based budgeting- allocation of Performance based budgeting- allocating
money on the basis of expenditures finance on the basis of performance
Annual budgeting- budgeting for a year Multiyear budgeting- budgeting for a number
of years, generally for the budget year and two
forward years
Non-Transparent budgeting – budgets are Transparency based budgeting – less
prepared in top secretary secretary in preparation of budgets, experts
and stakeholders are consulted, government’s
objectives are announced.
No public scrutiny- does not allow scrutiny by Public scrutiny- allows scrutiny by the media
others and the general public
No stakeholders’ consultation- stakeholders Multi-stakeholders’ consultation-
are not consulted stakeholders are consulted before finalizing
the budget
Top-Down Approach- MOF first allocates the Bottom-up Approach- Line ministries first
resources to line ministries who then allocate prepare their budgets and sends requests to
funds under various heads MOF who makes adjustments on the basis of
resource constraints and inter-sectoral equity
Complete secrecy in budget preparation Limited secretary and public consultation

3.2 Public Sector Management and Finance Act (PSMFA June 2002)

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It is well known that the Government of Mongolia enacted the Public Sector
Management and Finance Act (PSMFA) on the 27 June 2002 in order to
modernize budget planning and budgeting systems as per international best
practices. The complete implementation of the provisions of the Act requires the
following activities on the part of the government:

(1)Preparation of “a Strategic Business Plan” for each budgetary body

indicating its strategic objectives for the next three years and the outputs to be
delivered during the budget year specified by category, quantity, quality and
costs. Output costs shall be determined on the basis of accrual cost of
production including management overheads and capital charges.2

(2)Signing of output purchases agreement between the “Portfolio Minister” and

the budgetary bodies for purchase of goods and services. Output purchase
agreement shall specify terms of delivery of outputs and prices to be paid from
the budget3.

(3)Setting accounting policies for budgetary bodies in conformity with

International Accounting Standards and implement these policies4:

(4)To prepare Financial Statements containing operating statement, balance

sheet, and statements of cash flows, net assets and contingent liabilities5,
which are also the requirements of the IMF Government Finance Statistics
Manual (GFSM 2001). The details of the Financial Accounting Tables
prescribed by the IMF GFSM-2001 and the current situation in Mongolia along
with necessary action are discussed in the Annex.

(5) To prepare Fiscal Framework Statement including the Government’s

medium term objectives, public investment plans, forecast balance sheet and
cash flow for the budget year and two forward years6.

(6) To conclude Performance Agreement between the Portfolio Minister and the
General Managers (GM) of a budgetary body within one month from the date of
the approval of the State Budget by the State Great Hural7. The Act also
specifies systems for the Assessment of Performance Agreement8 .

3.3 Progress of implementation of PSMFA during last five years

2
Articles 26.1 to 26.3 of the Public Sector Management and Finance Act (27 June 2002).
3
Article 23 of the PSMFA.
4
Article 9 of the PSMFA.
5
Article 37 of the PSMFA.
6
Article 25 of the PSFMA.
7
Article 18 of the PSMFA.
8
Article 47 of the PSFMA.

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The government of Mongolia initiated measures to implement the provisions of

the PSMFA almost immediately since its inception in June 2002. Good progress
has been made with the preparation of Strategic Business Plans in major line
ministries; formulation of Medium Term Fiscal and Budgetary Framework,
preparation of consolidated financial statement for the general government, time
bound execution of budget and improved fiscal reporting on cash basis with
some steps towards accrual accounting.

MOF is implementing two major capacity building projects being financed by

grants and loans from the World Bank and the Asian Development Project.
Significant progress has been made in the development of basic concepts,
preparation of methodological papers, guidelines, manuals on strategic planning,
output costing and output budgeting, accrual accounting, setting benchmarks and
performance parameters for the budgetary bodies, improving technical
capabilities of the staff engaged in budget formulation, strengthening Information
technology (IT) system and creating general awareness of the stakeholders
about the usefulness and necessity of modern techniques for output budgeting
on the basis of accrual accounting and benchmarks.

In addition to the mobilization of the national capacities, valuable assistance and

consultancy from experts of the international financial institutions such as ADB,
IMF and the World Bank have been extensively used in the implementation of
fiscal reforms and enforcing related legislation. Assessment and evaluations
made by the international experts facilitated the fiscal reforms process,
particularly for strengthening the capacity building for governance reforms.

Despite these efforts and good results during the last five years, progress
towards full implementation of the PSMFA remains slow due to some structural
problems. Assessments made by the IMF and ADB experts have indicated the
following constraints:

(a) There is absence of a specialized institutional system at various levels of

the Government, line ministries and local governments, which have
adequate experience and expertise in strategic planning, output costing
and accrual budgeting;

(b) The issues and activities involved in budget modernization are complex,
but the international experiences for transition from the classical budget
techniques to the modern framework were not studied carefully and in a
timely manner.

(c) Assessment of national capabilities for implementation of the law such as

outlining of required human resources, suitable organizational structures,
and adequate information technology was also neglected.

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(d) Thus, a hustled approach was adopted to complete the full

implementation of the framework within 1-2 years without adequate
capacity building and necessary infrastructure, which is responsible for
slow progress and partial success.

Above observations lead to the conclusion that the successful implementation of

the PSMFA (2002) as regards strategic business plans and output budgeting on
the basis of accrual accounting and benchmarks will require the following actions
on a priority basis by the present government of Mongolia:

(1) To consolidate the progress made until now by proper

documentation in both English and Mongolian;
(2) To build up necessary institutions for modernizing budgets;
(3) To build up capacity and skill of the personnel engaged in planning,
budgeting, accounting and auditing;
(4) To strengthen and upgrade the information technology system to
support the budget modernization process and systems.
(5) To conduct all these works in a time-bound systems framework but
step by step and in a phased manner.

We have already outlined a seven year action program to complete these

activities in a phased manner (see Tarun Das and E. Sandagdorj 2008).

4. Methodology for Financial Planning for 2009-2011

4.1 Macro-economic framework

In this section we describe a methodology for Financial Planning for the

Mongolian Budget. However, it must be kept in view that there is no unique
methodology which can be applied at all times. Financial Planning depends on
the macroeconomic prospects and on the budgetary and fiscal framework
already approved by the Parliament.

In recent years Mongolian economy has performed very well. In fact, Mongolian
economy is presently in a rebound and resilient mood after successfully tackling
the adverse impact of the severe and successive dzuds during 2000-2002.
Economy performed very well since 2003 and achieved an average growth rate
of 8.4 per cent during 5 years 2003-2007 with peak at 10.7 per cent recorded in
2004 (Table-2). The mining, construction, wholesale and retail trade, financial
services, transport and tele-communications served as the main drivers of growth
supported by favorable weather conditions. Mongolian economy usually does
well when the weather conditions are favorable and commodity markets are
buoyant. Consumer prices inflation moderated from 11 per cent in 2004 to 7
percent in 2006, but increased to 8.6 percent due to rise of wages by 30 percent
at home and hardening of international prices of petroleum products abroad.

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Interest rate on central bank bills declined from 15 percent in 2003 to 5.8 percent
in 2006, but was raised to 6.4 per cent in September 2007 by the Bank of
Mongolia as a part of policies for inflation targeting. The current account balance
on both the government budget and the external sector improved significantly
and were in surplus in 2006 and 2007.

Net present value of public external debt halved from 64 percent of GDP in 2003
to 32 percent in 2006. External debt service ratio (as percent of exports of goods
and services) declined significantly from 34 percent in 2003 to 3.4 percent in
2006. As per World Bank classification, Mongolia is now categorized as a low
income and les indebted country.

Table-2 Mongolia: Trends of Selected Economic Indicators in 2003-2006

Economic Indicators 2003 2004 2005 2006 2007P

1. Real GDP growth (percent) 5.6 10.7 7.0 8.7 9.9
(a) Agriculture 4.9 17.7 9.6 7.5 10.0
(b) Industry 4.8 15.0 1.2 7.0 7.9
(c) Services 6.1 6.3 8.7 10.0 11.1
2. Consumer prices inflation rate (percent) 4.7 11.0 9.5 7.0 8.6
3. Growth rate of broad money supply (%) 49.7 20.3 37.3 34.9 43.8
4. Interest rate on central bank bills (percent) 15.0 15.8 3.7 5.8 6.4
5. Revenue and grants (as % of GDP) 37.9 37.3 37.0 36.6 39.5
6. Mineral revenue (as % of GDP) 2.8 4.1 4.5 13.5 NA
7. Non-mineral revenue (as % of GDP) 34.2 32.5 29.0 27.0 NA
8. Expenditure and net lending (% of GDP) 42.1 39.4 33.7 33.3 40.5
9. Overall budget balance as % of GDP -4.2 -2.1 3.2 3.3 -1.0
10. Current account balance as % of GDP -7.7 1.6 1.4 5.2 NA
11.Year-End foreign exch. reserves (US$ ml) 178 208 333 626 1290
12. Forn. exch. reserves (months of imports) 1.5 1.6 2.1 3.4 8.0
13.Total public debt (as % of GDP) 113 93 68 54 NA
14. External debt (as % of GDP 98 85 64 51 NA
15. NPV of external debt (as % of GDP) 64 52 40 32 NA
16. Domestic debt (as % of GDP) 15 8 4 3 NA
17. External debt service (as % of exports) 34 7.5 2.9 2.1 NA
18. End-period Exchange rate (MNT/US$) 1170 1209 1221 1164 1186
Source: ADB, IMF, Govt of Mongolia 2008 Budget and the Bank of Mongolia.
Note: P stands for preliminary and the latest available information.

Foreign exchange reserves were rebuilt from their end-2003 low level after the
settlement of the pre-1991 Russian debt, and reached US$626 million
(equivalent to 3.4 months of imports) at the end-2006 and further to US$1290
million (equivalent to 8 months of imports) at the end-2007.

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Mongolian economic prospects in the short and medium term are considered to
be bright. Assuming that there would be no major internal or external shocks
having destabilizing effects on the Mongolian economy and no monsoon failures,
Mongolia would be able to sustain real GDP growth rates around 10 percent in
2008-2011 supported by a growth rate of 5 to 6 percent in agricultural value
added, 10 to 11 percent in industry and 11 percent in services (Table-3).
Industrial and services production are expected to sustain growth momentum
largely driven by cyclical factors and induced by a rise in agricultural income and
increased public spending on physical and social infrastructure.

Table-3: Projections of real GDP growth by main sectors (in percentage)

Sectors 2007P 2008 2009 2010 2011

Agriculture 9.9 5.0 5.8 6.0 6.0
Industry 10.0 11.5 10.6 10.0 10.0
Services 7.9 11.5 11.1 11.0 11.0
Total 11.1 10.1 9.9 9.8 9.8
Source: Government of Mongolia Budget 2008 for the years 2007 to 2010, and the
author’s estimate for 2011.

Parliament of Mongolia has earlier approved major macroeconomic and fiscal

parameters as medium-term objectives under the Medium Term Budgetary
Framework (Table-4). For Financial planning during 2009-2011, we consider
major macro-economic and fiscal parameters such that these parameters comply
the basic targets under MTBF.

Table-4 Compliance with the 2008 MTBF targets

(As percentage of GDP unless otherwise specified)
Major macro-economic and fiscal MTBF Budget for Financial
parameters 2008 Plan9 for
2009-2011
1. Floor on GDP growth rate (%) 8.7 10.1 10.0
2. Ceiling on inflation rate (%) 5.0 5.5 5.5
3.Ceiling on total budget revenue 40.2 44.0 43.7
4. Ceiling on total budget expenditure 43.2 47.0 46.2
5. Floor on current balance 7.9 7.7 7.7
6. Ceiling on budget deficit -3.0 -3.0 -2.5
7. Floor on capital expenditure 8.0 8.8 9.0
Source: Government of Mongolia Budget 2008 for MTBF and 2008 Budget, and the
author’s estimate for the Financial Plan for 2009-2011.

9
Author’s projections in this report. For details, see section 4.2.

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It may be mentioned here that the Socio-Economic Development Guideline of

Mongolia for the year 2008 has an inflation target of less than 10 percent. This is
significantly higher than the European Union’s inflation target at 3 percent, and
the inflation target of the most of the developing countries at less than 5 percent.
Mongolian policy implies a major departure from the neo-liberal macroeconomic
framework that has dominated policymaking in many developing countries. The
neo-liberal model favors strict fiscal discipline that is pre-occupied with
maintaining small fiscal deficits, monetary policy that has low inflation targets and
exchange-rate policy that is committed to be fully flexible and market-determined.
While the government of Mongolia also supports fiscal discipline (with overall
fiscal deficit targeted at less than 3 percent of GDP as in the European Union)
and flexible exchange rate, it is more liberal for the target of inflation rate. This is
because the overall inflation in Mongolia is highly correlated with global prices of
minerals and petroleum products, which had witnessed significant increases over
the past few years.

Higher inflation rate also implies a more expansionary fiscal policy to encourage
work efforts and production, to enhance buoyancy in government revenues and
to foster private investment. Monetary policy can be accordingly designed to
support fiscal expansion and export promotion by achieving low real interest
rates for private investment and the alleviation of public-sector debts.

With higher inflation rate prevailing in the economy, monetary authority (i.e. the
Bank of Mongolia) could take direct measures (such as selective credit controls
and higher cash reserve ratios) to dampen the inflationary pressures resulting
from ‘supply shocks’— e.g., sharp increases in food and energy prices. They
should not hold back economic growth by raising interest rates and trying to
contain inflation at five percent or less. They could move aggressively to provide
increased access to affordable credit, through offering loan guarantees for
productive activities and reviving development banks. They could also pursue
appropriate foreign exchange management policies to reduce volatility in
exchange-rates and to maintain stability in real interest rates.

4.2 Methodology for Financial Planning

Financial planning means forecasting different components of government’s

revenues and expenditures for the financial planning horizon. In this exercise, the
current budget year 2008 has been taken as the base year and the three
forwarding years viz. 2009-2011 have been taken as the planning horizon.
Trends of different revenue and expenditure items are examined during 2006-
2008 and then one of the following methods, depending on the pattern of past
trends and underlying relationships, are used for projecting these items for the
planning horizon:

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(a) Growth method- Average growth rate of an item during 2005-2008 or

growth rate during 2008 or average growth rate in the past excluding
extreme values;

(b) Stability approach- Stable value for an item over the planning
horizon implying attainment of satiety or saturation level;

(c) Ratio or intensity approach- Average ratio of an item to GDP at

current market prices.

(d) Elasticity approach- Elasticity of an item with respect to GDP at

current market prices.

The methodology for specific items is described in details in Table-5. If larger

time series data were available, one could have used the usual trend analysis or
multiple regression techniques. Here, very simple but logical techniques have
been used for forecasting an item for financial planning. The results are indicated
in Tables-6A, 6B, 7A and 7B.

Table-5: Methodology for Financial Planning for the Period 2009-2011

ITEMS Methodology Value
1. TOTAL REVENUE AND GRANTS 2+3+4
2. CURRENT REVENUE 2.1+2.2
2.1 Tax revenue 2.1.1 to 2.1.8
2.1.1 Income Tax PIT+CIT+WT
2.1.1.1 PIT Elasticity with respect to GDP 0.42
2.1.1.2 CIT Elasticity with respect to GDP 1.15
2.1.1.3 wind fall tax GR in 2008 0.16
2.1.2 Social security contributions Average GR during 2006-2008 22.15
2.1.3 Tax on immovable properties Average GR during 2006-2008 19.53
2.1.4 Sales Tax ( VAT ) Elasticity with respect to GDP 1.10
2.1.5 Excise Tax Elasticity with respect to GDP 0.77
2.1.6 Special purpose revenue Average GR during 2006-2008 17.12
2.1.7 Taxes on foreign trade Elasticity with respect to GDP 1.15
2.1.8 Other Taxes and fees Average GR during 2006-2008 37.83
2.2 Nontax revenue GR in 2008 7.48
3. CAPITAL REVENUE Average GR during 2006-2008 13.91
4. FOREIGN GRANTS Stable at 2008 level

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Table-5: Methodology for Financial Planning for the Period 2009-2011

ITEMS Methodology Value
5. TOTAL EXP & NET LENDING 6+7+8
6. CURRENT EXPENDITURE 6.1+6.2+6.3
6.1 Goods and Services 6.1.1+6.1.2
6.1.1 Wages and Salaries Inflation rate 0.10
6.1.2 Purchase of goods/services Inflation rate 0.10
6.2 Interest payment Average GR during 2006-2008 1.71
6.3 Subsidies and transfers 6.3.1+6.3.2
6.3.1 Subsidies GR in 2008 15.12
6.3.2 Transfers GR in 2008 37.78
7. CAPITAL EXPENDITURE 7.1 to 7.4
7.1 Domestic Investment Investment/ GDP ratio in 2008 0.07
7.2 Capital Repairs Average ratio of (7.1) 0.08
7.3 Other capital expenditures Average GR during 2006-2008 40.38
7.4 Road fund by project loan GR of GDP 0.10
8. NET LENDING 8.1+8.2
8.1 Domestic (net) Stable at 2008 level
8.2 Foreign (net) Stable at 2008 level

9. Overall Balance (1)-(5)

10 Current Balance (2)-(6)
11. Mineral balance ----

12. FINANCING: 12.1+12.2

12.1 Foreign (net) 12.1.1 to 12.1.3
12.1.1 Project loans Residual after domestic
12.1.2 Cash loans Stable at 2008 level
12.1.3 Amortization As per debt profile
12.2 Domestic (net) 12.2.1 to 12.2.6
12.2.1 Privatization receipts Stabilize at 2008 level
12.2.2 Repayment of Govt bonds As per debt profile
12.2.3 Long term bond New Amortization
12.2.3.1 New GR in 2008 18.44
12.2.3.2 Amortization As per debt profile
12.2.4 IMF ( Net ) As per IMF loan profile
12.2.4.1 Disbursement As per IMF loan profile
12.2.4.2 Amortization As per IMF loan profile
12.2.5 Banking system net credit 12.2.5.1 to 12.2.5.3
12. 2.5.1 Increase in the DF bal Estimated by Bank of Mongolia
12.2.5.2 Net changes in C/A Estimated by Bank of Mongolia
12.2.5.3 Opening Balance No balance
12.2.6 Non-banking system Preferably nil

Table-6-A: Financial Planning for the Govt of Mongolia for 2009-2011 (Billion MNT)
ITEMS 2005 2006 2007 2008 2009 2010 2011

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Outturn Outturn Outturn MOF Forecast Forecast Forecast

Final
.1. . 2. . 3. . 4. . 5. .6. .7. .8.
1. TOTAL REVENUE AND GRANTS 838 1360 1786 2404 2865 3431 4129
2. CURRENT REVENUE 833 1354 1781 2387 2848 3414 4112
2.1 Tax revenue 692 1128 1417 1996 2428 2962 3626
2.1.1 Income Tax 179 477 626 800 945 1118 1325
2.1.1.1 PIT 58 77 70 85 92 99 108
2.1.1.2 CIT 121 222 242 352 433 532 655
2.1.1.3 wind fall tax 0 178 314 363 421 487 563
2.1.2 Social security contributions 96 112 135 174 212 259 317
2.1.3 Tax on immovable properties 6 7 8 11 13 15 18
2.1.4 Sales Tax ( VAT ) 181 241 237 451 550 672 819
2.1.5 Excise Tax 79 100 119 163 188 217 251
2.1.6 Special purpose revenue 11 11 13 17 20 24 28
2.1.7 Taxes on foreign trade 57 72 98 169 208 255 314
2.1.8 Other Taxes and fees 84 108 181 211 291 402 553
2.2 Nontax revenue 140 226 364 391 421 452 486
3. CAPITAL REVENUE 1 2 1 1 1 2 2
4. FOREIGN GRANTS 4 5 4 16 16 16 16

5. TOTAL EXP & NET LENDING 765 1237 1832 2569 3037 3622 4363
6. CURRENT EXPENDITURE 600 982 1414 1968 2335 2798 3391
6.1 Goods and Services 387 692 667 1020 1122 1234 1357
6.1.1 Wages and Salaries 143 197 307 566 623 685 754
6.1.2 Purchase of goods/services 244 496 360 454 499 549 604
6.2 Interest payment 21 18 20 21 22 22 23
6.3 Subsidies and transfers 193 272 727 927 1191 1542 2011
6.3.1 Subsidies 8 12 330 380 437 503 579
6.3.2 Transfers 185 259 397 548 754 1039 1432
7. CAPITAL EXPENDITURE 90 176 312 482 584 706 854
7.1 Domestic Investment 67 146 250 375 450 540 649
7.2 Capital Repairs 5 12 19 27 34 41 49
7.3 Other capital expenditures 7 9 18 17 24 34 48
7.4 Road fund by project loan 10 9 26 63 76 91 109
8. NET LENDING 74 79 106 118 118 118 118
8.1 Domestic (net) -14 -10 19 -44 -44 -44 -44
8.2 Foreign (net) 89 89 87 162 162 162 162
9. Overall Balance 73 123 -46 -165 -172 -191 -234
10 Current Balance 232 372 367 419 513 616 721
11. Mineral balance -49 -190 0 0 0 0 0

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Table-6-B: Financial Planning for the Govt of Mongolia for 2009-2011 (Billion MNT)
ITEMS 2005 2006 2007 2008 2009 2010 2011
Outturn Outturn Outturn MOF Forecast Forecast Forecast
Final
.1. . 2. . 3. . 4. . 5. .6. .7. .8.
12. FINANCING: -73 -123 46 165 172 191 234
12.1 Foreign (net) 90 74 65 170 201 237 298
12.1.1 Project loans 99 98 112 225 280 336 417
12.1.2 Cash loans 11 6 1 6 6 6 6
12.1.3 Amortization -20 -29 -48 -62 -85 -105 -125
12.2 Domestic (net) -163 -198 -19 -5 -30 -46 -64
12.2.1 Privatization receipts 5 30 32 16 16 15 10
12.2.2 Repayment of Govt bonds -14 0 0 0 0 0 0
12.2.3 Long term bond -12 -94 24 -15 -41 -56 -69
12.2.3.1 New 0 0 56 67 79 94 111
12.2.3.2 Amortization -12 -94 -33 -82 -120 -150 -180
12.2.4 IMF ( Net ) -7 -7 -8 -6 -5 -5 -5
12.2.4.1 Disbursement 0 0 0 0 0 0 0
12.2.4.2 Amortization -7 -7 -8 -6 -5 -5 -5
12.2.5 Banking system net credit -135 -126 -67 0 0 0 0
12. 2.5.1 Increase in the DF bal 0 0 317 463 600 600 600
12.2.5.2 Net changes in C/A -135 -126 -384 -463 -600 -600 -600
12.2.5.3 Opening Balance 0 0 0 0 0 0 0
12.2.6 Non-banking system 0 0 0 0 0 0 0
Memo Items
GDP at current market prices 2267 3715 4526 5464 6557 7869 9442
GR of GDP at market prices (%) 19 64 22 21 20 20 20
Real GDP GR (%) 7.0 8.7 10.1 10.1 9.9 9.8 9.8
Overall inflation by GDP deflator
(%) 10.9 50.8 8.2 12.1 10.0 10.0 10.0
CPI inflation rate (%) 9.5 7.0 8.6 5.5 5.5 5.5 5.5

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Table-7-A: Financial Planning for the Govt of Mongolia for 2009-2011

Share of GDP (in percentage)
2005 2006 2007 2008 As % As % As %
Outturn Outturn Outturn MOF Of GDP of GDP of GDP
Final
.1. . 2. . 3. . 4. . 5. .6. .7. .8.
1. TOTAL REVENUE AND GRANTS 37.0 36.6 39.5 44.0 43.7 43.6 43.7
2. CURRENT REVENUE 36.7 36.4 39.3 43.7 43.4 43.4 43.5
2.1 Tax revenue 30.5 30.4 31.3 36.5 37.0 37.6 38.4
2.1.1 Income Tax 7.9 12.8 13.8 14.6 14.4 14.2 14.0
2.1.1.1 PIT 2.6 2.1 1.5 1.5 1.4 1.3 1.1
2.1.1.2 CIT 5.3 6.0 5.3 6.4 6.6 6.8 6.9
2.1.1.3 wind fall tax 0.0 4.8 6.9 6.6 6.4 6.2 6.0
2.1.2 Social security contributions 4.2 3.0 3.0 3.2 3.2 3.3 3.4
2.1.3 Tax on immovable properties 0.3 0.2 0.2 0.2 0.2 0.2 0.2
2.1.4 Sales Tax ( VAT ) 8.0 6.5 5.2 8.3 8.4 8.5 8.7
2.1.5 Excise Tax 3.5 2.7 2.6 3.0 2.9 2.8 2.7
2.1.6 Special purpose revenue 0.5 0.3 0.3 0.3 0.3 0.3 0.3
2.1.7 Taxes on foreign trade 2.5 1.9 2.2 3.1 3.2 3.2 3.3
2.1.8 Other Taxes and fees 3.7 2.9 4.0 3.9 4.4 5.1 5.9
2.2 Nontax revenue 6.2 6.1 8.0 7.2 6.4 5.7 5.1
3. CAPITAL REVENUE 0.0 0.0 0.0 0.0 0.0 0.0 0.0
4. FOREIGN GRANTS 0.2 0.1 0.1 0.3 0.2 0.2 0.2

5. TOTAL EXP & NET LENDING 33.7 33.3 40.5 47.0 46.3 46.0 46.2
6. CURRENT EXPENDITURE 26.5 26.4 31.2 36.0 35.6 35.6 35.9
6.1 Goods and Services 17.1 18.6 14.7 18.7 17.1 15.7 14.4
6.1.1 Wages and Salaries 6.3 5.3 6.8 10.4 9.5 8.7 8.0
6.1.2 Purchase of goods/services 10.8 13.3 7.9 8.3 7.6 7.0 6.4
6.2 Interest payment 0.9 0.5 0.4 0.4 0.3 0.3 0.2
6.3 Subsidies and transfers 8.5 7.3 16.1 17.0 18.2 19.6 21.3
6.3.1 Subsidies 0.4 0.3 7.3 6.9 6.7 6.4 6.1
6.3.2 Transfers 8.2 7.0 8.8 10.0 11.5 13.2 15.2
7. CAPITAL EXPENDITURE 4.0 4.7 6.9 8.8 8.9 9.0 9.0
7.1 Domestic Investment 3.0 3.9 5.5 6.9 6.9 6.9 6.9
7.2 Capital Repairs 0.2 0.3 0.4 0.5 0.5 0.5 0.5
7.3 Other capital expenditures 0.3 0.2 0.4 0.3 0.4 0.4 0.5
7.4 Road fund by project loan 0.5 0.2 0.6 1.2 1.2 1.2 1.2
8. NET LENDING 3.3 2.1 2.3 2.2 1.8 1.5 1.3
8.1 Domestic (net) -0.6 -0.3 0.4 -0.8 -0.7 -0.6 -0.5
8.2 Foreign (net) 3.9 2.4 1.9 3.0 2.5 2.1 1.7

9. Overall Balance 3.2 3.3 -1.0 -3.0 -2.6 -2.4 -2.5

10 Current Balance 10.2 10.0 8.1 7.7 7.8 7.8 7.6
11. Mineral balance -2.2 -5.1 0.0 0.0 - - -

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Table-7-B: Financial Planning for the Govt of Mongolia for 2009-2011

Share of GDP (in percentage)
2005 2006 2007 2008 As % As % As %
Outturn Outturn Outturn MOF Of GDP of GDP of GDP
Final
12. FINANCING: -3.2 -3.3 1.0 3.0 2.6 2.4 2.5
12.1 Foreign (net) 4.0 2.0 1.4 3.1 3.1 3.0 3.2
12.1.1 Project loans 4.4 2.6 2.5 4.1 4.3 4.3 4.4
12.1.2 Cash loans 0.5 0.2 0.0 0.1 0.1 0.1 0.1
12.1.3 Amortization -0.9 -0.8 -1.1 -1.1 -1.3 -1.3 -1.3
12.2 Domestic (net) -7.2 -5.3 -0.4 -0.1 -0.5 -0.6 -0.7
12.2.1 Privatization receipts 0.2 0.8 0.7 0.3 0.2 0.2 0.1
12.2.2 Repayment of Govt bonds -0.6 0.0 0.0 0.0 0.0 0.0 0.0
12.2.3 Long term bond -0.5 -2.5 0.5 -0.3 -0.6 -0.7 -0.7
12.2.3.1 New 0.0 0.0 1.2 1.2 1.2 1.2 1.2
12.2.3.2 Amortization -0.5 -2.5 -0.7 -1.5 -1.8 -1.9 -1.9
12.2.4 IMF ( Net ) -0.3 -0.2 -0.2 -0.1 -0.1 -0.1 -0.1
12.2.4.1 Disbursement 0.0 0.0 0.0 0.0 0.0 0.0 0.0
12.2.4.2 Amortization -0.3 -0.2 -0.2 -0.1 -0.1 -0.1 -0.1
12.2.5 Banking system net credit -6.0 -3.4 -1.5 0.0 0.0 0.0 0.0
12. 2.5.1 Increase in the DF bal 0.0 0.0 7.0 8.5 9.2 7.6 6.4
12.2.5.2 Net changes in C/A 0.0 -3.4 -8.5 -8.5 -9.2 -7.6 -6.4
12.2.5.3 Opening Balance 0.0 0.0 0.0 0.0 0.0 0.0 0.0
12.2.6 Non-banking system 0.0 0.0 0.0 0.0 0.0 0.0 0.0

4.3 Financial Planning for 2009-2011

It may be observed from the above tables that the overall fiscal balance as per
the fiscal planning is projected to decline to 2.5 percent of GDP during 2009-2011
compared with MTBF ceiling on fiscal deficit at 3 percent of GDP. This implies
that the financial planning for the period is consistent with fiscal sustainability
over time. Resource mobilizations from individual taxes and duties and
expenditures by economic classifications appear to be reasonable and realistic.
Government’s financing planning also appears to be feasible. Needs for foreign
project loans will continue and the government will be able to repay domestic and
foreign loans and make associated interest payments in time without undue
pressure on government budgets. Underlying parameters for the real GDP
growth rates and the inflation rates for consumer prices are realistic as judged by
past trends. Overall, the fiscal planning as indicated in the Tables 6-A, 6-B, 7-A
and 7-B appears to be realistic and feasible.

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Annex10

Financial Accounting Tables Prescribed by the

IMF Government Finance Statistics Manual 2001

A.1 Basic Concepts

In this report we describe the financial tables prescribed by the Government

Finance Statistics Manual 2001 (GFSM 2001) of the International Monetary Fund
(IMF). GFSM 2001 is a major step forward in terms of fiscal reporting. It fully
integrates flows and stocks, considers both financial and mom-financial assets
and puts emphasis on accrual accounting and preparation of a comprehensive
balance sheet of the government. GFSM 2001 financial statements and fiscal
indicators help for improved fiscal analysis and policy.

Under GFSM, all flows are classified either as transactions or as other economic
flows. A transaction is an interaction between two units by mutual agreement or
by force of law such as interest payments, tax and non-tax revenues. Every
transaction is either an exchange or a transfer. A transaction is an exchange if
one unit provides a good, service or asset a second unit and receives something
of the same value in return. Compensation of employees, purchases of goods
and services, interest expense etc. are exchanges. A transaction is a transfer if
one unit provides a good, service or asset to a second unit without receiving
anything of any value in return, such as government subsidies, grants, and social
assistance benefits to the people. All taxes and duties are treated as
transfers. Transactions cover monetary flows and in-kind activity (such as the
receipt of commodity grants and non-cash remuneration).

Other economic flows are the result of events that affect the value of
nonfinancial assets, financial assets, and liabilities but which are not exchanges
or transfers. These flows can reflect either price changes (including exchange
rate movements) or volume changes due to one-off events such as mineral
discoveries and natural disasters.

10
This Annex is primarily based on the Government Finance Statistics Manual 2001
(GFSM 2001) and other papers on GFSM 2001 published by the International Monetary
Fund (IMF), Washington, D.C. It may be mentioned here that the author was a Member
of the Expert Group Meeting at IMF, Washington D.C. in February 2001 to discuss the
Draft GFS Manual 2001 and to incorporate final round changes and conclusions in
GFSM 2001 (refer the Preface by Mrs. Carol S. Carson, the then Director, Statistics
Department, IMF in the GFS Manual 2001, p.ix).The author was also Country Reporter
for India on IMF Government Finance Statistics when he worked as Economic Adviser in
the Ministry of Finance, Government of India during 1989-2006.
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 Financial Planning Methodology and Policies – Tarun Das

Transactions and other economic flows are recorded on an accrual basis.

This means that they are recorded when the economic impact associated with an
event occur. However, there are difficulties in identifying revenue on an accrual
basis. In practice, a tax liability is normally recorded at the time of assessment.
Transactions in nonfinancial assets, financial assets and liabilities are also
recorded at the time assets change ownership and liabilities are incurred.

A.2 Financial Statements

The basic relationships under the GFSM 2001 analytical framework are
summarized in three accrual-based statements relating to transactions, other
economic flows, and the balance sheet, and one cash-based statement.

• The Statement of Government Operations distinguishes between revenue

and expense transactions, transactions in nonfinancial assets, and
transactions in financial assets and liabilities. Revenue covers all transactions
that increase net worth and expense covers all transactions that decrease net
worth. Transactions in nonfinancial assets, financial assets and liabilities are
not included. The difference between revenue and expense is the net
operating balance. Subtracting the net acquisition of nonfinancial assets from
the net operating balance yields net lending/borrowing, which in turn is equal
to the net acquisition of financial assets less the net incurrence of liabilities.

• The Statement of Other Economic Flows presents information on changes

in net worth that arise from flows other than transactions.

• The Balance Sheet shows the government’s net worth at the end of a fiscal
year, which is equal to the stock of nonfinancial assets plus net financial worth
(i.e., the difference between financial assets and liabilities). The change in net
worth in a year is the sum of changes due to revenue and expense
transactions and to other economic flows. The links between the components
of the balance sheet and the other accrual-based statements are shown in
Table-A.1.

• Statement of Sources and Uses of Cash shows cash flows associated with
revenue and expense transactions and transactions in nonfinancial assets,
and their net impact in terms of the cash surplus/deficit. Adding the cash
flow from transactions in financial assets and liabilities to the cash
surplus/deficit gives the net change in the stock of cash.

A.3 Valuation

All flows and stocks are valued at market prices. This is the cash value of in-
kind transactions or the amount for which goods, services, assets, labor or
capital are exchanged. Flows are valued at the current prices on the dates when

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 Financial Planning Methodology and Policies – Tarun Das

they are recorded. Stocks are valued at the market prices current on the balance
sheet date.

Table-A.1 GFSM 2001 Analytical Framework

Opening Statement of Statement of Closing

Balance Government Other Economic Balance Sheet
Sheet Operations Flows
Revenue

Minus

Expense

Net operating
balance
=

Net worth + Change in net + Change in net = Net worth

worth due to worth due to other
revenue and economic flows
expense
transactions
= = = =

Nonfinancial + Net acquisition of + Change in = Nonfinancial

assets nonfinancial assets nonfinancial assets Assets
due to other
economic flows
+ Plus + +
Net financial + Net + Change in net = Net financial
worth lending/borrowing financial worth due Worth
to other economic
flows
= = = =
Financial + Net acquisition of + Change in financial = Financial
assets financial assets assets due to other assets
economic flows
– Minus – –
Liabilities + Net incurrence of + Change in = Liabilities
liabilities liabilities due to
other economic
flows

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Consumption of fixed capital is the economic equivalent of depreciation. It

is the decline in the current market value of the stock of fixed assets during the
accounting period as a result of physical deterioration, normal obsolescence, and
accidental damage. Consumption of fixed capital accrues continuously over the
accounting period and is treated as an expense under accrual accounting.

Although the balance sheet is to be valued at market prices, provision is made in

GFSM 2001 for reporting the nominal value of the debt as a memorandum item.

Net lending/borrowing, the net operating balance, and the cash

surplus/deficit are the main GFSM 2001 fiscal indicators.

• Net lending/borrowing is the most important indicator, as it reflects the

government’s financing operations.

• The net operating balance is an indicator of the impact of fiscal policy on

net worth.

• The cash surplus/deficit measures the change in the government’s

liquidity position due to revenue and expense transactions, and
transactions in nonfinancial assets.

A.4 Implementation by Countries

Successful implementation of GFSM 2001 in the first instance involves the

reclassification of existing fiscal information, which can be done relatively quickly.
The second step relates to developing key institutional set up for a modern public
expenditure management (PEM) framework, which provides assurance that
government accounting and classification systems are capable of supporting
statistical reporting that is fully GFSM 2001 compliant.

Key Institutional Features of the PEM Framework

Four institutional features of the PEM framework can support a successful

changeover to GFSM 2001. These include the following:

• A chart of accounts, which is a hierarchical coding framework for

classifying and recording fiscal data that is fully mapped into GFSM 2001.

• A general ledger which provides a central accounting record of all

government financial transactions.

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• A treasury single account into which all government receipts are

deposited and from which all payments are made on the basis of budget
authorization.

• A Government Financial Management Information System (GFMIS),

which is an integrated accounting system that can generate detailed
information to support budget preparation and execution, commitment
control, arrears management, liquidity management and other tasks
involved in managing government finances.

Experiences of IMF technical assistance for PEM reforms in many countries

suggest that a well-functioning chart of accounts, general ledger, single treasury
account and GFMIS constitute a sound institutional basis for meeting a wide
range of PEM objectives.

A.5 Phased Approach to the Implementation of GFSM 2001

(a) Categories of countries

IMF has suggested a phased approach to the implementation of GFSM 2001. To

this end, countries are divided into three groups depending on their capacity to
build appropriate PEM capacity.

• Group-I countries are those who record revenue, expenditure, and

financing transactions mainly on a cash basis, but aim at reporting
fiscal statistics on GFSM 2001 basis.

• Group-II countries are those who report revenue and expense

transactions (other than consumption of fixed capital), and
transactions in nonfinancial assets, financial assets and liabilities on
an accrual basis, and produce a balance sheet for financial assets
and liabilities. This method is known as a partial accrual basis or a
modified accrual basis.

• Group-III countries recognize consumption of fixed capital, extend

the balance sheet to cover nonfinancial assets, and complete the
institutional development required to fully implement GFSM 2001.

(b) Implementation and coverage of government

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The focus of GFSM 2001 is the general government. A reasonable objective for
Group-I countries is that they achieve comprehensive coverage on a cash basis
for the central government and at least the important subnational governments.
Group-II countries should routinely expand coverage from central government to
general government, and a shift from a cash to a partial accrual basis. Group-III
countries should be reporting fully GFSM 2001 compliant fiscal statistics for the
whole of general government.

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 Financial Planning Methodology and Policies – Tarun Das

On the basis of the above described characteristics, in August 2003 IMF

categorized Fund member countries into Group I, II, and III countries. Table-A2
shows that, out of 182 Fund member countries, as per the judgment by the Fund
staff, 50 countries were in Group II and 13 countries in Group III (excluding seven
viz. Australia, Canada, Finland, Iceland, New Zealand, Sweden, and the United
Kingdom that had fully, or almost fully, implemented GFSM 2001). The rest of the
countries were in Group-I. Mongolia did not appear in either Group-II or Group-III.
Therefore, Mongolia was categorized as a Group-I country.

Table-A2 indicates further that the countries in Asia and Pacific were far behind
the complete implementation of GFSM 2001. None of the Asia and Pacific
countries belonged to Group-III and only nine countries viz. Hong Kong, India,
Japan, Korea, Malaysia, Nepal, Philippines, Singapore and Thailand belonged to
Group-II, and all other countries including Mongolia were in Group-I.

Table-A2 Group II and III Countries

Group II Group III

Countries Countries 1/

AFR Benin, Burkina Faso, Cameroon, Cote

d’Ivoire, Gabon, Mali, Mauritius,
Senegal, South Africa
Hong Kong, India, Japan, Korea,
APD
Malaysia, Nepal, Philippines,
Singapore, Thailand

EU1 Bulgaria, Cyprus, Czech Republic, Austria, Belgium, Denmark,

Greece, Hungary, Israel, Malta, France, Germany, Ireland, Italy,
Poland, Portugal, Romania, Serbia Luxembourg, Netherlands,
and Montenegro, Slovak Republic, Norway, Spain
Slovenia, Switzerland, Turkey
EU2 Armenia, Estonia, Latvia, Lithuania,
Ukraine
MED Morocco, Tunisia

WHD Argentina, Bahamas, Barbados, Chile, Brazil, United States

Grenada, Jamaica, Mexico, Panama,
Peru, Uruguay
1/ Australia, Canada, Finland, Iceland, New Zealand, Sweden, and the United
Kingdom already report on a full (or close to full) accrual basis as on August 2003.

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 Financial Planning Methodology and Policies – Tarun Das

IMF observed that in general a country, which is fully committed to GFSM 2001
implementation, could spend 1–2 years in Group-I, 4–5 years in Group-II, and 2–
3 years in Group-III. Thus a country could expect to achieve full implementation
in at best 7 years and possibly up to 10 years.

Four years have passed since 2003, and now Mongolia has moved to
Group-II. Government of Mongolia has already developed chart of accounts and
GFMIS and is engaged in upgrading both software and hardware for the Budget
Preparation Information System (BPIS). Even then, full implementation of GFSM
2001 is a major task for Mongolia. It requires careful planning and management
so that the normal flow of fiscal statistics is not disrupted. Furthermore, there is
need to train, recruit, and retain skilled staff to work for the National Statistical
Organisation (NSO), the Ministry of Finance, Bank of Mongolia and other
government agencies.

(c) Links to other reforms

The ultimate objective is that fiscal tables in IMF reports will be presented in full
GFSM 2001 format. This should be the outcome for Group-III countries.
However, systematic steps in this direction should be taken by Group-I and
Group-II countries. Tables-A3.1 and A3.2 set out schematically how fiscal tables
could be modified to parallel the progress that is made with implementation.

While GFSM 2001 involves a shift to accrual reporting, this does not imply an
automatic shift to accrual budgeting. Only a few industrialized OECD countries
currently prepare budget on the basis of an accrual accounting, while most of the
other member countries still prepare budgets on cash basis or on a mixture of
cash and accrual accounting. Successful implementation of GFSM 2001,
however, can support other best practices for PEM reforms. The introduction of
accrual output budgeting (AOB), which involves an explicit focus on the
effectiveness of public policy and efficiency of service delivery, provides a good
example of governance reforms. We have already indicated in the main report
that Mongolia has made significant progress on preparation of output budgets on
the basis of accrual accounting, benchmarks and performance parameters.

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 Financial Planning Methodology and Policies – Tarun Das

Table A3.1 Modifications of Fiscal Tables for Cash Accounting

Current Presentation Group I Presentation

(Cash basis) (Cash basis)
STATEMENT OF SOURCES AND USES OF CASH
GOVERNMENT OPERATIONS
Receipts from operating activities
(A) = (1)
Total revenue and grants (1)
Payments for operating activities
Total expenditure and net lending (2) =
(B) = (2.1) + (2.2.3)
(2.1) + (2.2) + (2.3)
Net inflow from operating activities (C)
Current expenditure (2.1)
= (A) – (B)
Capital expenditure (2.2)
Net outflow from investments in
= (2.2.1) + (2.2.2) + (2.2.3)
nonfinancial assets (D) = (2.2)
Physical capital (2.2.1)
Cash surplus/deficit (E) = (C) - (D)
Equity capital (2.2.2)
Capital transfers (2.2.3)
Net acquisition of financial assets other
than cash
Net lending (2.3)
(F) = (2.2.2) + (2.3) –(3.3)11
Overall balance (3=1-2)
Net incurrence of liabilities (G) = (3.1) +
(3.2)12
Financing (3) = (3.1) + (3.2) + (3.3)

Domestic (net) (3.1) Net change in the stock of cash (H) =

External (net) (3.2) (E) – (F) + (G)
Privatization proceeds (3.3)

Gross debt
Net debt

11
Assuming that all privatization proceeds derive from sales of equity. Proceeds from
sales of nonfinancial assets would be netted out of D.

12
Assuming that information on domestic and external financing is available only on a
net basis. If information is available on a gross basis, any acquisition of financial assets
should be included in F. Financial assets acquired for liquidity management purposes,
which are included below-the-line in the current presentation, fall into this category.

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 Financial Planning Methodology and Policies – Tarun Das

Table A3.2 Modifications of Fiscal Tables for Accrual Accounting

Group II Presentation Group III Presentation

(Partial accrual basis) (Accrual basis)

STATEMENT OF SOURCES STATEMENT OF SOURCES

AND USES OF CASH AND USES OF CASH
(AS FOR GROUP I) (AS FOR GROUP I)

STATEMENT OF GOVERNMENT OPERATIONS STATEMENT OF GOVERNMENT OPERATIONS

Revenue (accrual basis) Revenue

Expense (accrual basis, excluding Expense (including consumption of fixed
consumption of fixed capital) capital)

Gross operating balance Net operating balance

Net acquisition of nonfinancial assets Net acquisition of nonfinancial assets (Q)

Net lending/borrowing (accrual basis) Net lending/borrowing

Net acquisition of financial assets (accrual
basis) (I)
Net incurrence of liabilities (accrual basis)
(J)
STATEMENT OF OTHER ECONOMIC FLOWS
Net acquisition of financial assets
Net incurrence of liabilities
STATEMENT OF OTHER ECONOMIC FLOWS

Other changes in net financial worth Other changes in net worth

(K=L-M) (R=S+L-M)
Other changes in financial assets (L) Other changes in nonfinancial assets (S)
Other changes in liabilities (M) Other changes in financial assets
Other changes in liabilities

FINANCIAL BALANCE SHEET BALANCE SHEET

Net financial worth (N=O-P) Net worth (T=U+O-P)

Financial assets (O=Oo+I+L)13 Nonfinancial assets (U=U o+Q+S) 15
Liabilities (P=P o+J+M) 14 Financial assets
Liabilities

Selected References

13
A ‘0’ subscript indicates beginning of year value.

14
A ‘0’ subscript indicates beginning of year value.

15
A ‘0’ subscript indicates beginning of year value.

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 Financial Planning Methodology and Policies – Tarun Das

Das, Tarun (1999a) East Asian Economic Crisis and Lessons for External Debt
Management, pp.77-95, in External Debt Management, ed. by A. Vasudevan, April
1999, Reserve Bank of India (RBI), Mumbai, India.

_______ (1999b) Fiscal Policies for Management of External Capital Flows, pp. 194-
207, in Corporate External Debt Management, edited by Jawahar Mulraj, December
1999, Credit Rating and Investment Services of India Ltd. (CRISIL), Mumbai, India.

_______ (2000) Sovereign Debt Management in India, pp.561-579, in Sovereign Debt

Management Forum: Compilation of Presentations, November 2000, World Bank,
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_______ (2002) Management of Contingent Liabilities in Philippines- Policies,

Processes, Legal Framework and Institutions, pp.1-60, March 2002, World Bank,
Washington D.C.

______ (2003a) Off budget risks and their management, Chapter-3, Philippines
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Review (PEPFMR), Report No. 24256-PH, A Joint Document of The Government of
the Philippines, the World Bank and the Asian Development Bank, Poverty
Reduction and Economic Management Unit, World Bank Philippines Country Office, April
30, 2003.

______ With Raj Kumar, Anil Bisen and M.R. Nair (2003b) Contingent Liability
Management- A Study on India, pp.1-84, Commonwealth Secretariat, London.

_______ (2003c) Management of Public Debt in India, pp.85-110, in Guidelines for

Public Debt Management: Accompanying Document and Selected Case Studies, 2003,
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_______ (2005) International Cooperation Behind National Borders- A Case Study for
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_______ (2006a) Management of External Debt: International Experiences and Best

Practices, pp.1-46, Best Practices series No.9, United Nations Institute for Training
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 Financial Planning Methodology and Policies – Tarun Das

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_______ (2003a) The Implications of the Government Finance Statistics Manual 2001
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_______ (2003b) External Debt Statistics- Guide for Compilers and Users, 2003, IMF,
Washington D.C.

International Monetary Fund and the World Bank (2003) Guidelines for Public Debt
Management: Accompanying Document and Selected Case Studies, 2003,
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Ministry of Finance, Government of Mongolia (2007) Government Budget 2008,

Ulaanbaatar, December 2007.

Keipi, Kari Juhani and Justin Tyson (2002) Planning and financial protection to
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