Enhancing Public Financial Management in Lebanon: Budget Coverage, Consequences, & Recommendations

Budget Coverage : Consequences & RecommendationsMounir Rachedpresident of LEAMay 2016 Overall public financial management (PFM) in Lebanon? PFM comprises two areas: budget preparation & Budget execution Full coverage is key to proper budgeting

I. Budget process • II. Budget coverage • III. Coverage and budgeting • IV. Coordination between current and capital spending • V. Cash management and coverage • VI. Transparency, Governance, and Fiduciary risk

I. Budget process • Development Strategy-priorities • Medium-term macroeconomic framework: Outlook for economic performance • Interrelated with:

I. Cont.. • Budget preparation Revenue estimates (tax policy) Expenditure level and composition (expenditure Policy) Financing Public debt

I. Cont .. • Budget execution Spending process/procurement(unified) Cash management Debt management Accounting Auditing-internal ad external control THE PROCESS CAN NOT BE IMPLEMENTED WITHOUT FULL COVERAGE

II. Budget coverage • An integral part of budget preparation and execution One of the five budgeting principles IT IS NOT SIMPLY ADDING NUMBERS TO BUDGET • Lebanon does not adhere to recommendations of International institutions in PFM (unified & universal budget) • Allows annexed & exceptional budgets

II. • Coverage presents itself as one of the main obstacles in reforming public finance.

II. • 19 percent of government spending is outside the regular budget.

II.Extra-Budgetary Funds-EBF • Include both current and capital spending • CDR is the largest • Independent Municipal Fund (I.M.Fund) • Social security

II.EBFs-CDR • It’s budget is only approved by COM • Manages foreign financed development spending but not counterpart funds

II.EBFs-Ind.Mun.Fund • Earmarked revenue but not all disbursed to municipalities- eleven taxes and fees. • Their actual expenditure is less than 3% of current budget • Allocation problems to towns and projects • Their budgets are not integrated in overall budget strategy

II.EBFs-NSSF (social security) • Should be integrated with central government budget and be: • part of government’s social safety network • As government collects social security payments and finances shortfalls

II.EBFs-others • Many activities are not disclosed to the government and the Ministry of Finance • Council of the South. • Fund for the Displaced • The Higher Relief Committee

II.Standard Criteria for coverage • All revenues should be in the budget • All expenditure should be in the budget • Revenue and expenditure should be classified on the same basis- IMF GFS 2002 guidelines

II. • Coverage is diluted when transactions are on net basis: • Municipalities electricity bills are deducted from their allocations • Municipalities finance Civil Defense • EDL provides subsidy to government and subsidized by government

II.Quasi-fiscal operations • BDL subsidies to banks and other activities • In part, cost of maintaining a fixed exchange rate through a high interest rate differential • Subsidies should be transparent and reflected in budget (coverage). • BDL losses are monetized rather than being covered by MOF (also lost revenue)

II.Contingent liabilities • loan guarantees to PEs. should be revealed in budget • Should be part of stock of debt

II.Government lending • No clear distinction between lending to PEs and subsidies.

III. Coverage and budgeting • Dual budgeting: capital & current budgets leads to: • Macroeconomic framework & • Medium-Term Expenditure Framework (MTEF): • MTEF links between policy priorities and public expenditure.

III. Cont… • MTEF determines allocation between line ministries • Allocation between current and capital spending • A macroeconomic framework and MTEF can’t be prepared adequately when full coverage is lacking

III. Cont.. • Undermines the “ top-down” approach to proper budgeting

III. Cont… • Ministerial ceilings can’t be appropriately set • Performance indicators can’t be set Essential in assessing performance

IV. Coordination problem between current and capital spending • Lack of integration (full coverage) leads to : -Inefficient capital/labor mix -Shortage of equipment and facilities -Insufficient provision for maintenance -Shortage of counterpart funds - Fragmented responsibilities for current/capital spending

IV. Cont… • Exampls: • Power plants without adequate transmission and distribution grids • Waste treatment plants with insufficient (or absence)delivery

IV. Cont.. • Need complementarity between: • MOF-planning, management & internal control • COM • Legislative dimension • Can’t be achieved without integrated budget

V. Cash Management and Budget Coverage • Cash planning and management is an integral part of public expenditure management • Main objective is to prevent un-anticipated borrowing that could disrupt monetary policy • Efficient use of idle balances • Avert accumulation of arrears-informal financing and debt accumulation

V. cont… • Good practices in Cash management - Treasury Single Account (TSA) • Ability to make accurate short-term cash inflows and outflows forecast • Coordination between debt maturity and cash flows

V. Cont… • Government is developing a cash management unit and a TSA is partially functional

VI. Transparency, Governance, and Fiduciary risk • Government has made some progress Comprehensive (coverage) public finance is key to reduce Fiduciary risk/transparency.

VI. Cont.. • Improvements needed to fulfill code: • Multi-year budget framework • Inclusion of all government activities • Eliminate extra-budgetary and quasi-fiscal activities • Improve expenditure control • Enhance external audit • Advance economic and financial information

VI.Cont… • Have all government liabilities transparent and known END

Enhancing Public Financial Management in Lebanon: Budget Coverage, Consequences, & Recommendations