medium term expenditure framework for implementing poverty reduction strategies dr. yan wang...
TRANSCRIPT
Medium Term Expenditure Framework for Implementing
Poverty Reduction Strategies
Dr. Yan [email protected]
for NEEDS Implementation Workshop, Abuja, Nigeria
March 7-10, 2005
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“A budget is much more than
a collection of numbers.
A budget is a reflection of
a nation’s priorities, its needs, and its
promise.”
Alexander Hamilton
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Overview Outline
Introduction of MTEF
International experiences: African countries
Pre-conditions of MTEF and Issues To Be Addressed
More capacity building /training needed
Implementation Strategy for Nigeria: to be discussed
Introduction of MTEF
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What is a MTEF?
A tool for linking policy, planning &
budgeting over a medium-term ( 3 years) at
the Government-wide level;
It consists of a top-down resource envelope
& a bottom-up estimation of the current &
medium-term costs of existing policies;
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What is a MTEF?
Matching of policy priorities and budget in
the context of the annual budget process; and
Involves rolling over this exercise every year
by incorporating policy changes.
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Objectives of MTEF
Improved macroeconomic balance esp. fiscal discipline
Integrating policy priorities (identified in NEEDS) into
annual budget: Resources allocated to priorities – to ensure
credible policy. Better inter- and intra-sectoral resource allocation Greater budgetary predictability for line ministries by
providing mid-term perspective (3-5 yrs) Enhancing operating efficiency: high quality, low cost Greater accountability for public expenditure
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What can it do?
If successfully applied, MTEF can
Improve macroeconomic balance by developing a
multi-year resource framework (expenditure &
revenue);
Assist in improving resource allocation between &
across sectors;
Improve predictability of funding for line
ministries.
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MTEF: 6 stagesSTAGESTAGE CHARACTERISTICSCHARACTERISTICS
I.I. Development of Macroeconomic Development of Macroeconomic FrameworkFramework
•Macroeconomic model that projects revenues and Macroeconomic model that projects revenues and expenditure in medium termexpenditure in medium term
II.II. Development of Sectoral ProgramsDevelopment of Sectoral Programs •Agreement on sector objectives, outputs, and activitiesAgreement on sector objectives, outputs, and activities•Review and development of programs and sub-programsReview and development of programs and sub-programs•Program cost estimationProgram cost estimation
III.III. Development of Strategic Development of Strategic Expenditure FrameworkExpenditure Framework
•Analysis of inter- and intra-sectoral trade-offsAnalysis of inter- and intra-sectoral trade-offs•Consensus-building on strategic resource allocationConsensus-building on strategic resource allocation
IV.IV. Definition of Sector Resource Definition of Sector Resource AllocationsAllocations
•Setting medium term sector budget ceilingsSetting medium term sector budget ceilings
V.V. Preparation of Sectoral BudgetsPreparation of Sectoral Budgets •Medium term sectoral programs based on budget ceilingsMedium term sectoral programs based on budget ceilings
VI.VI. Political ApprovalPolitical Approval •Presentation of budget estimates to cabinet and Presentation of budget estimates to cabinet and parliament for approvalparliament for approval
Central Agencies Cabinet Minister
Medium Term Expenditure Framework
Setting Fiscal Targets Allocation of Resources to Strategic Priorities
Economic and Fiscal Update
Fiscal Framework Statement Report
Budget Policy Statement
Corporate Plans
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MTEF Process (simplified)
Sectoral Budget
Preparation
Macro-economic
forecasting
Sectoral Ceiling
Setting for multi years
Fiscal Target
Total Expenditure
SettingFor multi
years
New sectoral
demand for t+2
(priority/cost)
Annual Budget
Formulation
Updated costestimate of
existingpolicy/program
Experiences in Africa
Source: Houerou and Taliercio 2002
Year of
Initiation
Scope and format Government level and length of period
Ghana 1996 All sectors/recurr/cap Central, 3 years
Kenya 1998 All sectors/recurr/cap Central, 3 years
Malawi 1996 All sectors/recurr/cap Central, 3 years
Rwanda 1999 15/20 sector/recurr Central and regional
S. Africa 1997 All sectors/recurr/cap Cen/prov/local, 4yrs
Tanzania 1998 7 sectors/recurr/cap Central, 3 years
Uganda 1992 All sectors/recurr/cap Central/local, 3yrs
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Lessons from International Experiences
Integration of multi-year planning with annual budget
- MTEF and annual budgeting is one process
Realistic macroeconomic forecasting; honest revenue projection
Separation of total budget from detailed program
Clarification of new roles of MOF/line ministries
Capacity building and incentives for MOF/line ministries
Development of feedback mechanism
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Preliminary lessons from MTEF experience
1.1. The importance of initial PEM conditions. The MTEF is a The importance of initial PEM conditions. The MTEF is a complement to – not a substitute for -- basic budgetary management complement to – not a substitute for -- basic budgetary management reform:reform:
Budget comprehensiveness –including donors’; off-budget items, Budget comprehensiveness –including donors’; off-budget items, Classification – integrate capital and recurrent budgets; Classification – integrate capital and recurrent budgets; Budget execution. Timely reporting (publication) Budget execution. Timely reporting (publication) Timely audit (and publication) underpinned by sanctions against Timely audit (and publication) underpinned by sanctions against
misappropriations of resources. misappropriations of resources.
2. 2. Sequencing and phasing of the MTEF reform:Sequencing and phasing of the MTEF reform: Phased vertically (macro, sector, service delivery) Phased vertically (macro, sector, service delivery) Piloted horizontally (across sectors)Piloted horizontally (across sectors) Timing and elements tailored to capacityTiming and elements tailored to capacity
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An ideal country case1.1. Consensus on priorities Consensus on priorities built through the participatory process, built through the participatory process,
built on ongoing programs. Lower priority activities dropped/scaled down built on ongoing programs. Lower priority activities dropped/scaled down
2.2. Comprehensive“Comprehensive“Critical to the success of the PRSP is the need to Critical to the success of the PRSP is the need to implement only the PRSP”implement only the PRSP”
3.3. PRSP-budget link is central: PRSP-budget link is central: Budget preparation & scrutiny by Budget preparation & scrutiny by MOF to ensure that line agency budget submissions are consistent with the MOF to ensure that line agency budget submissions are consistent with the PRSPPRSP
4.4. Transition phase for donor activities:Transition phase for donor activities:• Existing projects “grand fathered”Existing projects “grand fathered”• All new projects must fit within PRSP prioritiesAll new projects must fit within PRSP priorities
5.5. Annual review vehicles, Annual review vehicles, envisaged as country’s central policy envisaged as country’s central policy review processreview process
• PER – expenditures & impactsPER – expenditures & impacts• PRSP review (annual progress report) complemented by a PRSP review (annual progress report) complemented by a
comprehensive review every three yearscomprehensive review every three years
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Need for patience and perseverance: Need for patience and perseverance: Prioritisation and costing will likely need continuing Prioritisation and costing will likely need continuing
improvement in the context of implementation and improvement in the context of implementation and monitoring of the first PRSPmonitoring of the first PRSP
Prioritization and costing will only be possible if the Prioritization and costing will only be possible if the PRSP is linked to the budget processPRSP is linked to the budget process
MTEF can be valuable: MTEF can be valuable: The MTEF should be integrated with existing budget The MTEF should be integrated with existing budget
processesprocesses the institutional arrangements for the MTEF & PRSP the institutional arrangements for the MTEF & PRSP
should be consistent in both exercises, and recognize should be consistent in both exercises, and recognize the central role of Ministry of Financethe central role of Ministry of Finance
Phasing-in of MTEF, by sector and functions, neededPhasing-in of MTEF, by sector and functions, needed
Pre-Conditions of MTEF, and Issues To Be Addressed
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Pre-conditions for Implementing MTEF
There may be different views on pre-
conditions. This is one view: We need
Strong political support MOF /NPC’s willingness/commitment - clear understanding of MTEF and incentives - strong leadership within MOF
Line ministries’ compliance - proper incentives: discretion and policy
prioritization
Capacity building for MOF and line ministries
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How to Build Macro Forecasting Capacity in MOF?
MOF plays a key role in macro forecasting for fiscal policy purpose - strong need to increase institutional capacity - consideration of social/political factors
Coordination mechanism with MoF, CB of Nigeria, public/private research institutes
Formula for conservative forecasting for budgeting - in Canada, add 0.5-1% to forecasted interest rates
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How/Who Decide Total Budget & Sectoral Ceiling? (1)
Two stage approach: total envelope setting sectoral allocation
Total budget setting - macro/fiscal targets, social/political demands - new sectoral demands and updated costs estimates
Sectoral allocation - national policy priority - determined within total budget : zero-sum game
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How/Who Decide Total Budget & Sectoral Ceiling? (2)
Final draft is prepared by MOF in consultation with the President
Send draft to cabinet meeting for consensus building - sectoral ceiling is not revealed until total decided - in Sweden, 2-3 days’ cabinet retreat
In case of disagreement, final decision is made by President
“It is President who holds ultimate responsibility of budget”
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Use of budget margin
Serves as a Bumper for 1) macro forecasting deviations
2) ‘inevitable’‘unexpected’ demand
3) President’s new initiatives under exceptional situations
Budget margin
= total envelope – aggregate of sectoral ceiling * in Sweden, 3.33% in 1997, and 0.05% in 2003
Unused margin to be used to accelerate debt payment
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How much sectoral ceiling is binding?
In principle, no breach is allowed
Amendment allowed for substantial macroeconomic change (cost estimate basis)
Exception is explicitly identified ex-ante with MOF’s consent, through cabinet meeting
1) ministry makes trade-off within sectoral cap
2) trade-off between ministries within total budget
3) budget margin to be used
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How Much Discretion Allowed for Line Ministries?
Sectoral priority discussed and agreed
between MOF and line ministries Line ministries prepare own budget request
within provided ceiling & priority line
monitoring and coordination mechanism
Incentive for efficient spending - allowed to carry-over certain % of savings to ministries
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How to Build Incentive System?
For MOF /NPC ?- Shift to higher level, macro decision-making
by integrating national policy priorities with budgeting
- Close interaction with President
For Line Ministries
- Budgetary Discretion to prioritize policies
- Flexibility in implementing policy and executing budget
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How to Ensure Line Ministries’ Accountability? (1)
Ministers hold ultimate responsibility over performance
MOF /NPC plays a role as a watchdog Performance management serves as a feedback mechanism for increased discretion
Linking budgeting with accounting system Information system needs to be integrated between MOF, NPC, and line ministries, and Office of Statistics
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Capacity Building is needed on all these aspects: More training can be provided
How to Improve Budget Structure and Scope ? How to Improve Budget Structure and Scope ?
How to improve the incentive systemHow to improve the incentive system
How to make line ministries accountable for delivery?How to make line ministries accountable for delivery?
Performance Management System
- utilized as information gathering and analysis
- long-term, phased approach is desirable
- need to adopt realistic short-term approach - pilot projects to introduce output-based indicator development and performance evaluation system
- expand into all programs with outcome indicators
Implementation Strategy for NigeriaSome suggestions and followed by discussion by Victoria Kwakwa
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Creating Enabling Environment for MTEF
Use MTEF as an instrument to alter status quo
Fiscal reform along with Public Sector reform
Leadership and Capacity Building
- champion of reform and creating a core team
- motivating self-development and capacity building Performance oriented environment in government
- e.g., regulation-free organizations
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Implementation Strategy [a suggestion]
Stage I : top-down approach - macroeconomic forecasting and fiscal target setting - setting total and sectoral ceiling prior to program details
Stage II : bottom-up approach (Gradual Approach) - line ministries’ discretion within sectoral ceiling and priority - allowing discretion on operating costs
Stage III :incorporation with performance management - well-functioning information system - performance information reflected in budgetary decision
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Strategies for Nigeria
To be discussed by Victoria Kwakwa and To be discussed by Victoria Kwakwa and representatives from the governmentrepresentatives from the government