Budget Transparency & Comprehensiveness

(AFE Regional Workshop) Session 1: Overview O i of f Budget B d t Transparency T & Comprehensiveness Davina Jacobs
Public Financial Management Division Fiscal Affairs Department, IMF Zanzibar, October 20-22, 2009 1

Overview
Introduction Definitions of Budget (or Fiscal) Transparency & Comprehensiveness III The III. Th Fiscal Fi lT Transparency (FT) Code C d IV. Recent Developments in IMFs work on FT V. Results of FT Assessments VI. Other FT Assessments VII. Conclusions
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I. II.

I. Importance of Fiscal Transparency

Public right to know Promotes: accountability; market discipline; lower corruption; good institutions; time-consistent behavior and sustainable policy; macro and micro efficiency; trust; fairness. Fosters: reform in public financial management, public expenditure, tax administration, tax policy, macro-fiscal. Doesnt: restrict government decision space

II. A Definition of Fiscal Transparency

Being open to the public about the structure and functions of government, fiscal policy intentions, and public sector accounts and projections (Kopits and Craig). Providing ready access to reliable, comprehensive, timely, understandable, and internationally comparable information on government activities (wherever performed).
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What is Budget Comprehensiveness?

The soundness of budget systems can be judged by the following by its comprehensiveness for example: comprehensiveness, Is the coverage of government operations complete? Are estimates gross or does netting take place?
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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 promote 12 codes of practice of economic governance in public and private sectors Three transparency standards were developed by IMF: fiscal transparency, monetary and financial policy transparency, and economic data. Other standards covered accounting, auditing, etc. A Code of Good Practices on Fiscal Transparency was formulated, which was extended in 2001 and revised in 2007. Now identifies 45 good practices, within four pillars Reports on Standards and Codes (ROSCs) assess a countrys observance of these codes and are intended to promote greater financial stability by: assisting countries in strengthening economic institutions; supporting Fund and Bank work; and informing the private sector.

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

Open budget processes:

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 be provided to the public.

Assurance of integrity:
Quality of fiscal data, internal oversight, and external scrutiny.
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IV. The 2007 Revisions to the FT Code

- Clarified many existing good practices. - Introduced nine extensions:
Publish a periodic report on long-term public finances. finances 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 the Codenow linked with the Resource Revenue Guide. Includes extensive country examplesOECD, emerging market and developing economies. Also illustrates best practices and basic requirements. Available in many languages
Revised and extended in 2007

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 Reviews current position and progress made against good practice standards: systematic but tailored to country circumstances Includes staff commentary with recommendations, including prioritization and timeline 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
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91 Countries have Published Fiscal ROSCs

By IMF Department
63.6% 60% 48.6% 43 8% 43.8% 40% 38.6% 36.4%

By Level of Development
83.3% 80% 68.8% 60% 46.7% 40% 36.4%

20%

20%

0% EUR WH MCD AFR APD

0% 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 Comprehensive integrated accounting system (not AFR and Comprehensive, resource-rich) Budget classification

Low Levels of Observance

Identification of fiscal risks (statement, contingent liabilities, etc) Identification of quasi-fiscal activities of non-financial public enterprises (OK for advanced) External assessment of fiscal and macro forecasts.
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Attributes of Fiscal Transparency: Global Averages

Forward Estimates 1.0 Tax Expenditure 0.8 0.6 0.4 Final Accounts 0.2 Internal Audit Contingent Liabilities QFA-Financial Sector QFA-NonFinancial Public Enterprises

Realism of the Estimates Independent Expert Forecast overview External Audit

Debt

Mid term Report

Fiscal Data Medium Term Quantitative Macroeconomic Framework New Policies Policy Objectives Fiscal Risks

Budget Coverage Budget Classification Accounting System

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Attributes of Fiscal Transparency: Resource-Rich Economies

All Forward Estimates 1.0 0.8 0.6 0.4 Final Accounts 0.2 Internal Audit Debt Rich Resource Economies Tax Expenditure Contingent Liabilities Realism of the Estimates Independent Expert Forecast overview External Audit

QFA-Financial Sector

QFA-NonFinancial Public Enterprises

Mid term Report

Fiscal Data

Budget Coverage

Medium Term Quantitative Macroeconomic Framework New Policies Policy Objectives Fiscal Risks

Budget Classification Accounting System

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Source: IMF FTU

VI. Other Assessments of Fiscal Transparency

Open Budget Initiative (IBP); 59 countries (2006); 85 countries (2008) Oxford O f d Analytica A l ti surveys; 27 countries. ti 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
1.0 R = 0.51 Open Budget Initia ative 0.8
Oxford Analytic ca R = 0.57 0.8
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Oxford Analytica - ROSCs

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1.0

0.6 0.4 0.2 0.0 0 0.2 0.4 ROSCs 0.6 0.8 1

0.6

0.4 0.1

0.3

0.5 ROSCs

0.7

0.9

Source: IMF FTU & OBI

Source: IMF FTU & Oxford Analytica

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Extractive Industry Transparency Initiative (EITI)

Revenue flow transparency is main focus. Full reconciliation of publicly accessible information on tax revenues received and payments made by companies is main aim. Requires credible audit of payments and revenues; and comprehensive coverage. Civil society must be actively engaged. EITI Candidate status so far achieved by 15 candidate countries, and potentially 13 more. No country is yet EITI compliant IMF supports through Guide, TA, Training, etc.
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VII. Why is Fiscal Transparency Important?

Openness about government structure and functions, fiscal policy intentions and processes, and government accounts. Citizens rights to information Increase accountability (including to and by legislature) and reduce corruption 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 & Fiscal Transparency
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24.0 21.0

Credit Ratings: Regression Fit

3 Residual Ratings 2 1 0 -1 -2 -3 R2 = 0.11

GE: stand. variable e

18.0 15.0 12.0 9.0 6.0 6 9 12

-4 -0.3

-0.2

-0.1

0.1

0.2

0.3

0.4

Source: IMF FTU

ROSCs

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18

21

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Source: IMF FTU

Residual Fiscal Transparency

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Thanks!

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Regional Workshop on Budget Transparency and Comprehensiveness October 20 22, 2009

Session 2 Coverage of the Budget Problems, Challenges and Opportunities
Mohan Joseph Public Financial Management Advisor IMF - East AFRITAC

Outline of Presentation
General principles of budgetary coverage

Current budgetary coverage of AGAs/ SAGAs / EBFs / etc. in select African countries Role of EBFs in government expenditures, and fiscal risks posed 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

Defining General Government Public Sector General Government Central Government

1. Central (state) budget Line ministries, constitutional bodies, agencies and their h d headquarters t and d local l l budgetary units 2. Extra-budgetary funds 3. Semi-Autonomous and Autonomous Government Agencies and Institutions

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Local Government
State/Regional Governments, District Governments, Municipalities and Rural Councils, and their budget users Any local government owned extra-budgetary funds or semi-autonomous agencies

Public enterprises

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

Problems of Current budgetary coverage of AGAs / SAGAs / EBFs / etc. in select African countries
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, 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

Problems of budgetary coverage of AGAs / SAGAs / EBFs / etc. in select African countries ( contd.)
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 6% of f GDP 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

Role and importance of EBFs in govt. expenditures

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 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

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 position 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)

Mainstreaming EBFs under Treasury control and Parliamentary oversight

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 Increase information of activities in budget documents 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

General practices followed by OECD nations in regulating EBFs

Agency Model adopted for better allocation of resources

Operates with degree of autonomy: Established through law Functions within rules set by government and under a MTBF framework Financed through combination of:
o Own sources o Earmarked contributions o Transfers from state budget

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General practices followed by OECD nations ( contd.)

In UK

A governance and financial regime established for non departmental bodies Allows All agencies i t to operate t th their i own budgets Subject to common PFM standards established by Treasury for accounting, reporting, audit etc.

Improving budgetary coverage of external aid

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 p budget g classification and p presentation (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

Integrating capital and recurrent budgets

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 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 Adopt Ad t a precise i and d common d definition fi iti th through hl law 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 present significant fiscal risks Consolidate fiscal operations of sub-national governments and EBFs with central government Strengthen and reform country PFM systems for enhanced capture of aid on budget Increase coverage of project aid on budget through integration 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 enhance Transparency and Comprehensiveness? By

Florence N. Kuteesa Public Sector Budgeting Expert

Organised by IMF East AFRITAC October 2020-22, 2009, Bank of Tanzania Conference Center, Zanzibar

Outline
Background Major areas of concern related to transparency and comprehensiveness p of the budget g Extent to which regulations enhance transparency and comprehensiveness Lessons learnt

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

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Issues related to comprehensiveness & transparency Process Comprehensiveness Transparency Is the forecast open to assessment & verification by outside experts? Difficulties related to process handled by two departments (Finance and Planning) Majority of stakeholders hardly understand assumptions and parameters & find it difficult to comprehend projections. Sometimes basis for allocation not clearly explained. Weak link between ceilings , outputs and program. Not published in some countries. Not known to some key stakeholders .

Macroeconomic & fiscal Quality and reliability estimates forecasting (i.e estimated regarding GDP, domestic revenue, expenditure, deficit financing, savings & investment)

Medium Term Expenditure ( determine sector allocations (ceilings) ,

Inadequate coverage & and mainstreaming of external resources into the ceilings- false ceilings.

Issues related to Comprehensiveness & Transparency Process

Formulation of expenditure priorities and budget estimates

Comprehensiveness
Inadequate budget scrutiny of offbudget funds or EBFs and potential project aid . Projections are not provided for all donor funded program. Projects not captured in Budget and appropriation bill. bill Both National & Sector Budget Policy papers lack in-depth and objective analysis of budgetary issues In most cases submissions hardly provide sufficient policy guidance and thus provide input to the national budget policy paper sent to Cabinet.

Transparency
Weak link between estimates and outputs. Criteria for allocation of grants to lower governments not understood. Key stakeholders hardly involved in prioritization within a sector. Inadequate data to assess the appropriateness of intentions and reliability of estimates? Budget documentation are hardly scrutinized by stakeholders either due to either lack of access, or not user-friendly or late submission. Limited adherence to a Budget calendar, if its in existence

Issues related to Comprehensiveness & Transparency Process

Involvement of policy makers and lawmakers in the budget process

Comprehensiveness
Inadequate capacity for in-depth analysis undermining strategic guidance & political oversight. Legislative constraints for objective scrutiny and debate on the budget. g

Transparency
Legislators do not have opportunity to contribute to formulation of fiscal policies before tabling the budget. The decision makers do not understand the decision making g process, neither have access to the same data as planners, nor understand budget documentation. Legislators generally seem to feel their review is mechanical and too rushed.

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Issues related to Comprehensiveness & Transparency Process Comprehensiveness Transparency

Basis for determination of cash ceilings not understood. Are stakeholders given accurate forecasts in time to facilitate program changes? Do they receive explanations for under funding or for additional funding, including periodic macroeconomic forecasts? Poor predictability of resources Procurement process is hardly open and the selection not subject to objective scrutiny? Transactions are not properly recorded and neither subject to strict internal audit verification.

Execution of Limited cash undermines the Budget comprehensive approach to execution. including cash flow Categorization of budget ( priority and non- priority ) tends to encourage g a disaggregated gg g approach ( favor politically powerful MDAs)

Issues related to Comprehensiveness & Transparency Process

Domestic Revenue Collection Debt Management

Comprehensiveness

Transparency
Do payers and collectors have ready access to current policies, regulations, and laws?

Is all relevant information related to debt management published and implications explained? Inadequate coverage on actual expenditure, performance, outputs, plus issues of operational efficiency . Hardly examine options to deal with issues nor provide recommendations for policy proposals.

Although information is published , some stakeholders are unaware of it.

Fiscal Monitoring

Stakeholders not given information needed to facilitate monitoring outputs & and report potential irregularities. Audit and other reports are neither accessible and/ nor published 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 of 1999, Chapter 6 and 7 Public Entities and executive authorities . Defines a national and provincial public entity( government business enterprise or aboard, commission, .fund). Categorization and list of all public entities in a schedule and guides on how to handle unlisted entities. Provides for the role of the accounting authorities, budgeting, financial managements and information to be 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 constrained resource 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 and implementation. Encourages full disclosure of resource allocations, which in turn enhances incentives for better targeted and more efficient utilization of resources by ministries/departments and regions Increases predictability in resource allocations so that the spending agencies can plan ahead with certainty and increased autonomy. Enhances a participatory process: that allows convergence of top top-down with bottombottom-up processes in planning, budgeting, monitoring and 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 and integration and outputs in terms of required strategic guidance. Articulates the institutional machinery (i (i.e e SWGs or Pillar taskforces) responsible for spearheading the process including:
composition, scope of work, and 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. Principles of prudent fiscal management ( fiscal policy, policy performance & output orientation , minimization of fiscal risks, borrowing policy) Establishment of a parliamentary budget office, Monitoring and reporting on the revenues and expenditures i.e monthly publication of revenues and quarterly compliance reports

Budget Act 2001(Uganda) and Fiscal Management Act (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 all levels. Provides a criteria for sharing the national resources between the centre and lower governments. g Guides on the type of fiscal transfers provides certainty about level of funding and enhances predictability. Establishment of an independent institution to guide and oversee the 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 adopt a toptop-down and bottombottom-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. p y in the system y of classified Enhance transparency expenditure, while limiting accessibility. Provide for the handling and reporting on classified expenditure by the Auditor General. Provide for consideration by Parliament of the report of 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 programming Use of government systems Joint analytical work Joint dialogue Joint review of monitoring progress.

Spells out the principles and procedures of mainstreaming AID into the MTEF and budget. Clarifies duties and functions of each key stakeholder in mobilization, programming, disbursement and reporting to reduce duplication and confusion 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 that implications for other sectors or crosscross-cutting issues are handled. handled Assessment of resource implications for institutional set-up, staffing, capital and operational inputs so as to direct prioritization and sequencing of public action. Advise on the affordability in terms of human resource implications and funding proposals over the medium term.

Lessons learnt
Regulatory framework is necessary but not sufficient. Incentives are required to foster meaningful and constructive compliance. Well-functioning systems that promote integrity and trust are vital. Quality and timely documentation with strategic guidance are criticalcritical- to minimize redundancies & wastage. Political commitment coupled with concerted effort to enforce the regulations is paramount.

Ahsanteni Sana (Thank You)

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