Relations among PFM, Fiscal and Macroeconomic Policies by Tarun Das

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Interrelations among PFM, Fiscal Policy and Macroeconomic Policy
-Tarun Das, Macroeconomic Adviser

Extract from Alice in Wonderland, Lewis B. Carroll Page-2

• “Would you tell me please, which way I • That depends a great deal on where
ought to go from here?” asked Alice. you want to get to,” said the cat.
• “I don’t care much where.,” said Alice. • “Then it does not matter which way you
go,” said the cat.

Budget preparation without LTFP/MTEF Page-3

Eventually Alice realized that it matters a great deal to know “where to go” and “how to get
there”. The same lesson is true for any Budget Formulation. Budget Preparation without
Medium Term Macroeconomic Framework, Long Term Fiscal Policy and Medium Term
Expenditure Framework faces the same problem as that of ‘Alice in Wonderland’.
Contents of Presentation Page-4
Policies versus reforms
Objectives of economic reforms
Broad categories of policies
Stylized Policies and Reforms
Requisites for Success of Reforms
Concluding observations
1.1 What is policy or public policy? Page-5
Policy is defined as a “purposive course of action followed by an agent or set of agents” with a
focus on public policy with the understanding that public policy is not restricted to government.
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 Relations among PFM, Fiscal and Macroeconomic Policies by Tarun Das

Public policy could be either “national public policy” or “global public policy”. What makes
policies public is not that they are adopted and implemented by the government, but that they
affect the public interest.

1.2 What is a Reform?

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Reform means “any fundamental change in the existing policy or in the institutions”.
Institutions include laws, acts, regulations, rules and organizations to implement policies”.
Routine or marginal changes in institutions or policies may not be called reforms. We need to
have drastic, basic and fundamental changes. However, reforms need not be revolutionary.
Reforms formulation requires a critical analysis, review and evaluation of the existing policies.
This can be facilitated if there exists a research department or a policy window in a Ministry.

2.1 Rationale and Purpose of Reforms Page-7

Reforms are designed and implemented to (a) correct imbalances in Supply and Demand for:
Output, Employment, Money supply, Foreign exchange reserves, Government finance. And (b)
correct instability in the growth rate, prices, interest rate and exchange rates etc.

2.2 Core objectives of reforms Page-8

(a) To enhance productivity, efficiency and international competitiveness of different sectors of
the economy, (b) to achieve sustained growth with price stability, fiscal sustainability, equity and
social justice, and (c) to impart dynamism to the overall growth process.

2.3 Desirable features of reforms Page-9

Must be Gradual, Step by Step, Evolutionary, not guided by a Big Bang Approach or Shock
Therapy or Revolutionary Ideology;
Must satisfy nationality constraint;
Must satisfy regional/ international commitments (WTO, Environment, WB/IMF)
Agency constraint (ideology of present govt.)
General consensus by stakeholders
Reforms must have a “human face” (least sacrifice by people in the transitional period).
No reforms can succeed unless we are able to make the people march along with us.

3.1 Broad categories of policies Page-10

Macroeconomic Policies Sectoral policies
1. Fiscal policy 1. Agriculture policy
2. Monetary policy 2. Industrial policy
3. Trade/Tariff policy 3. Energy policy
4. Financial policy 4. Transport policy
5. Wage & price policy 5. ICT policy
6. Policies to deal with any 6. Banking policy
component of the NAS identity 7. Education policy
Y = C+I+ST+X-M 8. S&T, R&D policy
9. Environment policy

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3.2 Macroeconomic Framework & policies (presented in Box-1) Page-11

Box-1: Basic Structures of Macroeconomic Sub-models and Inter-linkages

REAL SECTOR CENTRAL GOVERNMENT

National Accounts Revenues
• Taxes and non-taxes
GDP at current market prices • Grants
• Private consumption Expenditures
• General govt. consumption • Current
• Capital
• General govt. investment Overall balance
• Private investment Financing
• Exports of goods and • Domestic financing (net)
Non-factor services • Banking system
• Imports of goods and • Nonbanking sector
Non-factor services • External financing (net)

MONETARY SECTOR
Balance of Payments Monetary Authorities
CURRENT ACCOUNT • Net Foreign Assets
• Exports of goods and Net domestic assets:
Non-factor services • Net credit to central
• Imports of goods and govt.
Non-factor services • Credit to banks
• Factor services (net) • Other items (net)
• Transfers (net) • Reserve money
• Official
• Private
Deposit Money Banks
Banks' reserves
• Net Foreign Assets
CAPITAL ACCOUNT Net domestic assets:
• Net credit to central
Direct investment
govt.
Medium/long-term • Credit to private sector
capital (net) • Other items (net)
Short-term capital (net) • Liabilities to monetary
Overall balance authorities
Change in net foreign Private sector deposits
assets

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Relations among PFM, Fiscal and Macroeconomic Policies by Tarun Das

3.3 Broad Categories of IMF Policies Page-12

 Macro stabilization policies and structural adjustment policies/ reforms .
 Macro Stabilization policies aim at reducing macro economic imbalances by attacking
(reducing) demand.
 Structural adjustment policies aim at increasing supply by improving efficiency &
productivity and ensuring fair allocation of resources among various sectors.

3.4 These Policies Encompass Page-13

Macro Stabilization Policies
• Fiscal policies
• Monetary policies
• Tariff policy
• Exchange rate policy
• Wage-income-price
policies
Structural Adjustment Policies (Structural Reforms)
• PFM Reforms
• Governance Reforms
• Legal Reforms
• Institutional reforms
• Financial sector reforms
• Factor market reforms- Land, Labor, Capital
• External trade and investment reforms
• Reforms in agriculture, industry & infrastructure
• Public sector reforms
• Social sector reforms
• Environment reforms

3.5 Definition of Fiscal Policy Page-14

• Fiscal policy includes the taxation and expenditure policies of the govt, which are
normally implemented by the MOF.
• The basic objective is to maintain macroeconomic stability, to boost savings,
investment, employment and growth.
• Other objective is to attain fairer distribution of wealth and other social goals
through desirable tax structure and expenditure allocation for different sectors.

3.6 Definition of Monetary Policy Page-15

• Monetary policy refers to the regulation of money supply and interest & exchange
rates.
• It is implemented by the Central Bank as the regulator for the financial sectors
and the primary dealer of treasury bills.
• Since government borrowing is influenced by fiscal policies, there are strong
linkages between monetary and fiscal policies.
• It may not be advisable for a Central Bank to assume that they are completely
independent of the Ministry of Finance.
3.7 Definition of Macroeconomic Policy Page-16
• The thrust of the macroeconomic policy is not only macroeconomic stability, but
also to attain inter-sectoral, inter-regional and inter-generational equity.
• In addition to fiscal and monetary policies, macroeconomic policies include many
other policies which are required to sustain high economic growth with moderate
inflation and stability in interest and exchange rates.
• Macroeconomic policies include poverty reduction/employment generation
programs.
• Above all they include policies to boost savings and investment and to attain
balanced sectoral and regional growth.
3.8 PFM Reforms aim at upgrading systems, methods, procedures and institutions at
every stage of budget cycle Page-17
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Relations among PFM, Fiscal and Macroeconomic Policies by Tarun Das

Strategic Budget
Planning Preparatio
Review n

PFM Reforms

Budget
Monitoring Auditing/ Executio
Accountin n
/ Reportin g
Evaluation g

4.1 Exact Scope of Reforms Depend on Page-18

a. Socio-economic-political context
b. Agency constraint- ideology of present govt.
c. How far have we progressed in reforms?
d. Where do we want to go?
e. How to prioritize, sequence these reforms with what speed and intensity?
f. What are their likely impact on economic growth, inflation, employment and poverty?
g. What is our role and capacity in the implementation of these reforms?
h. There does not exist a universal and unique set of reforms which holds good for all
countries at all times. Reforms cannot be blindly imported from other countries and must
be owned by a country.

4.2 Stylized Fiscal Policies and Reforms Page-19

a) Sector-neutral fiscal policies
b) Reduction/ rationalization of taxes and duties
c) Putting limits on fiscal deficit/ primary deficit
d) Medium Term Fiscal Policy
e) Widening tax base & enhancing tax buoyancy
f) Simplifying rules and procedures for taxes
g) Strengthening tax administration
h) Strict expenditure control
i) Effective cash management
j) Introduction of VAT
k) Introduction of Fringe Benefits Tax, Cash Transactions Tax, Securities Transactions
Tax, Service Tax, Minimum Alternative Tax
l) Phasing out of tax holidays for SEZs

4.3 Stylized Monetary/ Financial Policies Page-20

a) Introduction of inflation targeting.
b) Sector-neutral monetary policies
c) Developing capital, bond, debt markets
d) Introducing Basle norms for capital adequacy ratio and non-performing assets
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e) Modernization and liberalization of insurance, pensions and provident funds

f) Market determined deposit, lending & TB yields
g) Liberalization on the entry of foreign banks
h) Abolition of directed lending by the govt.
i) Reforms & setting up regulatory bodies for Insurance/Savings/ Provident/ Pension Funds
j) Introducing innovative financing schemes (BOT, BOOT, BOLT) for infrastructure

4.4 Stylized Industrial Policy Page-21

a) Abolition of licenses and physical restrictions on industry
b) Corporatization or privatization of State regulated monopolies of public utilities and trade
c) Setting up independent regulatory authorities for key sectors
d) Open door policy for foreign direct investment and technology transfer
e) Acts enacted on consumer rights, IPR, independent regulatory authority
f) Outdated Companies Act replaced by Competition Act

4.5 Stylized External sector Policy Page-22

a) Abolition of licenses and physical restrictions on trade
b) Foreign investment policy
c) Import substitution policies replaced by export promotion policies
d) Sector-neutral tariff policies
e) Abolition of foreign exchange control,
f) Full convertibility of currency on current account
g) Almost full convertibility of capital account for non-residents
h) Market determined exchange rates

4.6 Other Macroeconomic Policies Page-23

a) Decentralization of planning,
b) Sound institutional framework,
c) Civil services reforms
d) Liberalization of labor markets and laws
e) Land reforms
f) National Environment Policy
g) National Population Policy
h) National Transport Policy
i) National Energy Policy
j) National Agriculture Policy
k) National Education policy
l) National Health Policy

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4.7 Scope and Purpose of PFM Reforms Page-24

a) Enhance fiscal discipline and accountability,
b) Strengthen operational systems and methodology for budget preparation, execution,
accounting, auditing, reporting, monitoring and evaluation
c) Improve public finance management systems
d) Improve procurement systems for govt.
e) Modernizing budget information system
f) Review institutional and legal framework and acts for public finance management
g) Improve forecasting techniques for budget planning and financial planning
h) Improve techniques for asset/ debt/ aid/ project management.

4.8 Stylized Public Finance Reforms- A Page-25

a) Fiscal Responsibility and Budget Management (Budget Honesty) Act
b) Expenditure control and MTEF
c) Medium Term Financial Planning
d) Improved systems and methods for asset/ debt/ aid/ project management
e) Setting up Contingent Liability Fund
f) Upgrading inspection, internal/external audit
g) Improving audit and accounting system
h) Coordinating fiscal reforms at local govts
i) Setting up Privatization Commission/ Dept.
j) Setting up an independent Public Debt office
k) Rationalization of user charges for public utilities, public goods and services

4.9 Stylized Public Finance Reforms-B Page-26

a) Strategic Business Plans for Budgetary Bodies
b) Modernizing Budget preparation
c) Introduction of Zero Based Budgeting, Program Budgeting, Performance Based Output
Budgeting, etc.
d) Introduction of IFMIS
e) Modernizing Accounting System
f) Introduction of Accrual Accounting
g) International best practices on auditing
h) Introduction of performance auditing in addition to financial compliance auditing
i) Strengthening ICT for budget preparation, implementation, monitoring, review and
performance evaluation

5.1 Prerequisites for Successful Reforms Page-27

a) To break the nexus among vested interests so that reforms can be implemented,
b) To reorient the role of public policies,
c) To change the mind-set of bureaucrats,
d) To redefine the role of government,
e) To develop fair and efficient markets,
f) To build up efficient institutions,
g) To involve all stakeholders in the process of reforms from the very beginning

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5.2 Reorientation of Public Policies Page-28

a)To create enabling environment for public-private partnership
b)To link fiscal incentives to productivity
c) To create fiscal space for growth
d)To streamline public investment
e)To make development and growth inclusive,
f) To repair market failures
g)To strengthen structures and institutions
h)To put emphasis on consultations, flexibility, decentralization, selectivity, outcomes,
outputs, implementation, monitoring, evaluation and co-ordination of policies

5.3 Redefining the role of Bureaucracy Page-29

There is need for a distinct change of mind set of the government officials at all levels from
top to bottom:
a) From a controller to an enabler
b) From a supplier to a facilitator
c) From an operator to a policy maker
d) From a regulator to a trustee of social equity and environmental sustainability

5.4 Redefining the role of govt. Page-30

a)Emphasis is on the so-called LPG- Liberalization, Privatization and Globalization
b)Both well governed state and well functioning markets are essential for high growth and
sustainability.
c) Government and free markets should supplement and complement each other.
d)Good Governance requires strengthening independent judiciary, Free Press, NGOs.
e)Government to withdraw from sectors where private participation is more productive
f) But, scope of govt. to remain large in social sectors and infrastructure.

5.5 Markets and Institutions Page-31

a) Efficient markets are essential for rapid and successful economic development.
b) But the real markets are neither competitive nor perfect. Government’s role is to correct
market imperfections and repair market failures by strengthening institutions.
c) Institutions play an important role in developing fair, competitive, inclusive, efficient, and
integrated markets.
d) Institutions are also essential for implementing and evaluating public policies.

5.6 Role of Public Institutions Page-32

Success of reforms requires solid public institutions:
a) To protect property rights,
b) To regulate market agents,
c) To maintain macro-economic stability,
d) To ensure social equity and justice,
e) To provide social safety nets,
f) To resolve conflicts.
All these help in reducing transactions costs, encourage work efforts, and provide incentives
for fair competition.

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5.7 Building Efficient Institutions Page-33

a) Institution building is diverse involving all stakeholders viz. legislature, judiciary,
government, bureaucrats, policymakers, corporate bodies and civil society.
b) It is an evolutionary and cumulative process, and requires open mind by all
stakeholders to accept new ideas and innovations, to have respect for each other and to
reward merits.
c) Most of the institutions that support markets need to be developed by the government for
regulating, stabilizing and legitimizing their scope and functions.

5.8 Implications for Govt. Officials Page-34

a) Knowledge and ICT are now the most valuable assets of a budgetary entity
b) Risk Management is an important task.
c) Other important tasks are forecasting, modeling, monitoring and evaluation
d) Emphasis on decentralization, multi-stakeholders’ consultation, risk sharing, joint
responsibility and accountability

6.1 Concluding Remarks Page-35

a) In recent years the Gambia has made significant progress of reforms in fiscal and
financial sectors.
b) The proposed Public Finance Reforms are in the right direction.
c) Carried to their logical ends, these reforms would make the Gambia as one of the most
dynamic economies of Africa within next five years.
d) All of us will have to play a distinct role in that exciting process of reforms management.

Thank you for your

attention-
Have a Good Day