Enhancing Budget Reforms for Sustainable Development in Armenia

1. Focusing and integration PEM reforms to ensure they ‘matter’ Bank work in Armenia, 2005 Matthew Andrews ECSPE

2. Background and context • Armenia’s policy domain: PRSP • August 2003 • January 2004, action plan to implement PRSP 2004-2006 • Armenia’s budget reform: • MTEF reform initiated in 2002 • The major reform (there have been others) • New Budget Law, July 2003 • Introduced various ‘budget rules’ incl. 5% GDP limit for deficit, current expenditure limits (similar to Golden Rule) • Other reforms generally focused on establishing the basis of budget execution • Treasury single account • GFS compliance in reporting

3. ‘Focus’ evident in the MTEF • Introduction of disciplined macro-framework • Forecasting • Deficit rule, provides economic basis for determining budget envelope, given forecasts • Formal review by MTEF Committees • Budget ceilings introduced through MTEF process • Results (not all about MTEF):

4. Focus beyond fiscal discipline • PRSP called for improved allocations of expenditures • actual targets • Actual goals • Including • More infrastructure spending • Better spending in the social sectors • Focus = Actual improvements in outcomes

5. MTEF focus on introducing policy orientation to spending • Introduce strategic planning • Methods and training • Within ceilings • Identify programs (costed, with objectives, etc.) • Pilots special attention • Labor and Social (02), Culture and Youth (04), Education and Science (04), Health (04) • From 2004, all budget entities included in MTEF (but with different levels of development)

6. Some results • Improvements in expenditure allocation • Not in all areas (infrastructure, for example) and Not at optimal levels • But social expenditures grew more than rest of budget • allocations reflect improved poverty reduction focus in budget

7. Focus beyond allocations—what about budget quality? • PRSP identified actual service provision goals • eg. Improve availability and quality of health care and education • Introduce some monitoring and reporting • MTEF and program budget reforms has focus at detailed level • Identifying objectives, programs, performance measures • Focusing organizations on these • But major questions about improvements • Results and process change • Limits to reform • MTEF reform approach not carried through in rest of system • Program allocation, but highly detailed cash management and reporting • High level of Treasury control, not conducive to ‘managerial efficiency’ but rather to managerial compliance • Difficult to assess service improvements because reporting still financial only

8. Ambiguities in the PEM system • Focus differences in the budget planning/ execution processes • Focus differences in the budget planning/ reporting and audit processes • Budget entities asked to plan by objective • Budget entities asked to execute and report by line item • In many places this leads to problems • If not report by program, how cost by program? • If manager assessed on conformance with controls, how create incentives for managers to manage for results?

9. Beyond 2005/2006…The need for focus and integration • The reform focus has obviously had an impact • But still far to go • Macro models could be improved, subject to ‘competitive’ comparison • Program identification still a problem, even in pilots • Move beyond pilots? • New PRSP, new MTEF phase, new reform initiatives now in place • Accounting reform (IPSAS) • Internal audit reform • External audit reform • Public administration reform • Procurement reform

10. Major opportunities, but…need to remain focused, and to develop an integrated vision moving ahead

11. What mean by integration 1: Thinking about the processes as ‘parts’ of one system National and Sectoral Policy Review and Development Process 1. Strategic Budgeting(policy-budget connection, resource envelope, ceilings) 6. External Audit and Accountability 2. Budget Preparation PEM System 3. Resource ManagementFinancial resources (revenue, customs, debt, cash), procurement, personnel and capital management 5. Accounting and Reporting 4. Internal Controls, Internal Audit and Monitoring

12. What mean by integration 1: A consistent approach throughout the system • ‘Reform’ = change • Change to what? • In PEM, change means different kind of control, accountability, incentive, focus • Most basic approach: • Start: No real system, informal • Level 1: Control and regulation—fiscal discipline • Level 2: Structured discretion—allocation quality • Level 3: Performance orientation—managerial efficiency • Do reforms throughout the system foster a consistent focus ‘level’?

13. Thinking about different levels 0. Informal, weak PEM systems Limited accountability, transparency, weak discipline, poor budget quality. BUDGETS INFORMAL, UNRELIABLE 1. Regulation and control Reforms entrench control and high level of discipline, reliable budget--but little attention to spending quality. Ex-ante control focus. BUDGET NOW FORMAL, RELIABLE, BUT NOT VERY STRATEGIC Focus: Fiscal discipline, control Measures: Deficit, adherence to ceilings… 2. Structured discretion Reforms blend ex-ante and ex-post controls, and move towards enhancedroles for central agencies and budget users. BUDGET FORMAL, AND SOME THOUGHT ABOUT STRATEGY – PROGRAMS, etc. Focus: Allocations direction Measures: How money allocated, some service improvement 3. High discretion, performance-orientation Emphasis on ex-post controls, with budget users held accountable for performance. BUDGET FORMAL, FOCUS ON STRATEGY, EFFICIENCY. Focus: Allocations quality Measures: Cost efficiency, service quality

14. Where is Armenia now? Equivalent of a 3: Looking for results!!!! National and Sectoral Policy Review and Development Process 1. Strategic Budgeting: (2 in some areas, 0 in others) 6. External Audit and Accountability: 2. Budget Preparation: (1) (0-1) PEM System 3. Financial resource management: Personnel, capital, procurement: (1) 5. Accounting and Reporting: (1) 4. Internal Controls, Audit and Monitoring: (0-1) (0-1)

15. Implications for sequencing reforms ahead • Too much to expect system will achieve a ‘level 3’ (performance-oriented, efficient) status in medium term • It could get to a ‘level 2’ status? • Need to build level 1 systems where lacking: • HR, capital, procurement management • Internal controls, audit, monitoring • External audit • Need to consolidate level 2 gains in MTEF, and build on these: • Make sure MTEF pilots planning properly, gradually increase number (2 per year?), strengthen forecasts, etc. • Gradually build budget prep, cash management, accounting and reporting systems to level 2 • Decrease controls in allocations, introduce ‘program’ and ‘objective’ reporting (tie to PRSP) • Introduce selected internal controls, audit and monitoring regimes, and some external audit activities (some financial/performance auditing)

16. Important thoughts… • Implications of the pilot approach • 4 ministries ahead of others in strategic budgeting • Future reforms should focus on these first: • Relaxation of treasury controls, introduction of internal audit, etc. • Future reforms in all areas should seek to expand pilots gradually • Integration over m any parties—split ‘Reform space’ • These are great ideas, but what can we really achieve? • Is there broad acceptance of the reform direction? • PRSP advocates=want a level 3 system! • MTEF advocates=want a level 2 system! • Treasury advocates=want a level 1 system! • Is there appropriate ‘authorizing mechanisms’ to get there? • Is there appropriate ‘ability’ to get there?

17. Moving system in one direction difficult because different ‘reform spaces’ • Budget dept. = fairly high reform space for moving to level 2 • Treasury = less reform space • Internal audit = less reform space

18. Implications for reform? • In high reform space areas • Listen to counterparts • Let them define the technical direction • Assist in implementation • In lower reform space areas • What interventions are required to build reform space? • ‘Softer’ interventions so crucial to reform • Remember, the aim is to get everyone moving towards the same ‘level’ system