PFM Measures in Response to the Global Financial Crisis

1. PFM Measures in Response to theGlobal Financial Crisis Duncan Last Fiscal Affairs Department, IMF1 CABRI Annual Seminar, Dakar, April 2009 1 The views expressed in this presentation are those of the author and not necessarily those of the IMF.

2. Implications for budgets • Reduction in tax and customs revenues • Pressure to introduce stimulus packages • Pressure to introduce poverty safety nets (social programs) • Likely reduction in available donor funds Basically budgets are going to be severely strained

3. Range of budgetary policy responses that can be taken • Increase revenue to GDP ratio (currently many countries are below potential) • Cut spending • Eliminate waste and encourage efficiencies in spending • Delay wage rises and other inflationary measures • Introduce employment creating capital spending (food for work type programs) • Improve climate for investment and regional market development • Look for efficiencies/economies in other parts of general government (local governments, autonomous agencies, extra-budgetary funds)

4. The Crisis - an “Opportunity” to Strengthen PFM Systems Some immediate measures • Rigorous application of prioritization in spending – top-down approach when faced with immediate shortfalls • Improved validation and control of spending • More rigorous control and audit of payrolls Measures that will take a little more time but could deliver quick results • Systems to prevent and monitor arrears – commitment control and arrears reporting • Systems to improve management of available cash – in-year cash flow planning and control over cash resources • Systems to improve in-year monitoring of macro-economic and fiscal situation • Strengthened systems for regular, timely and robust general government fiscal reporting • Measures to strengthen respect for the PFM legal framework – making sanctions effective • Measure to tighten controls over semi-autonomous agencies and extra-budgetary funds Need a crisis task force to coordinate policy and PFM responses, and monitor their impact. Also need to review staff skills needed to design and implement these measures.

5. Immediate PFM Measures (1) Prioritizing spending • Establish clear and well understood spending priorities: is there a prioritized spending list established and publicized? Is MoF in a position to manage a prioritized crisis spending approach? • Change requirement: requires MoF to prepare a spending priority list. • Objective: to limit spending overruns and to ensure that all spending commitments can be funded, to avoid build up of arrears. • Implementation issues: MoF requires Cabinet endorsement to ensure common discipline and adherence to priorities. Budget officers may not have adequate authority to “police” spending. • Implementation approach: establish and publish a priority list for spending, e.g. 1. debt service, 2. other statutory obligations, 3. wages, 4. recurrent costs, 5. on-going capital spending, 6. transfers

6. Immediate PFM Measures (2) Improved validation and control of spending • More questioning of spending before it takes place: do 5 people need to travel on mission – would 3 or even 2 not suffice? Has the procurement process delivered value for money? Is an expert really needed, when staff are available to do a particular task? • Change requirement: requires budget officers (in line ministries as well as MoF) to have a more rigorous analytical approach to their job, and to pull in (or work with) other staff (accountants, internal auditors) to help with this task. • Objective: spending ministries need to be put on notice that it is no longer “business as usual”, and that there is a need to look for efficiencies in spending. Capacity objective is to develop the “challenge” function. • Implementation issues: MoF budget officers work may need support and backup from senior MoF officials, including the Minister, who may need to ensure colleagues in other ministries are on board. • Implementation options: ask the line ministries to come up with their own savings, and if they do not (or if the savings identified are not adequate), then it becomes the budget officers responsibility to propose enforced cuts.

7. Immediate PFM Measures (3) More rigorous control and audit of payrolls/pensions • Opportunity to “clean up” payrolls/pensions: is the payroll/pension payment system “clean”? Is the payroll/pension system regularly reconciled through physical verifications? • Change requirement: willingness to address payroll/pension issues. • Objective: ensure that the payroll/pension list reflects the reality on the ground, and adheres to the prevailing rules and regulations. • Implementation issues: Adequacy of current procedures to ensure payroll/pension oversight and coordination with spending ministries and implementing agencies. Rigorous identification of beneficiaries. Adequacy of systems to reconcile departmental and central payroll/pension lists. • Implementation options: carry out employee census, introduce/implement severe sanctions for ghost worker and/or “double dipping”. Pay to bank accounts (avoiding cash as much as possible). Involve internal and external audit in checking payroll/pension payments. Ensure regular validation and audit of computerized payroll/pension data. Eliminate or regularize off-payroll employees.

8. Other Quick Results PFM Measures (1) Systems to prevent and monitor arrears • Anticipate/avoid arrears build-up, or at least ensure central control over arrears: do arrears exist now, and if so, are the systems in place to monitor and clear them? How prepared is the MoF to prevent the build-up of arrears in this current crisis? • Change requirement: strengthen commitment control (limit/eliminate exceptional procedures), and introduce arrears reporting. • Objective: to deal with arrears before they become an unmanageable problem. • Implementation issues: absence of systematic commitment control (where this is absent) and/or lack of enforcement. Ability to hide arrears. • Implementation options: enforce commitment control through unique identifier systems which are notified to suppliers. Implement severe sanctions for failure to routinely report arrears.

9. Other Quick Results PFM Measures (2) Systems to improve in-year cash management • Separate cash from spending rights: is the MoF in a position to project cash inflows and outflows 1-3 months ahead? Is cash lying idle on bank accounts outside the control of MoF? Do revenues reach the main treasury account in a timely manner? • Change requirement: introduce effective in-year cash management systems linked to resource availability. • Objective: to ensure that MoF controls cash while ensuring that line ministries and agencies obligations are known and paid on time. • Implementation issues: willingness of line ministries and agencies to give up bank accounts with “idle” cash. Challenge of ensuring rapid transfer of revenue in-flows to main treasury account. Establishing accurate and regular cash flow plans from line ministries (at least for non-recurrent spending). • Implementation options: establish a cash management unit in MoF to prepare cash flow plans and monitor their effectiveness. Vest cash management decision-making in a cash management committee where all stakeholders are represented. Enlist the assistance of the Central Bank.

10. Other Quick Results PFM Measures (3) Strengthen in-year macro-economic and fiscal monitoring • Monitoring the macro-economic and fiscal situation will be critical: Is the MoF currently able to identify problems in a timely manner? Is this complicated by fragmented (and/or silo’ed) responsibilities? • Change requirement: ensure timely flow of relevant data to a central MoF/macro-unit. • Objective: to ensure that the MoF is able to respond to/anticipate changes in the macro-economic environment so that appropriate measures can be taken in a timely manner. • Implementation issues: fragmentation of responsibilities, absence of coordination/information sharing mechanisms. • Implementation options: strengthen the institutional arrangements for monitoring the macro-economic and fiscal situation (including in-year). Establish a macro coordination group. Ensure that the macro-unit reports regularly and participates effectively in fiscal decision-making.

11. Other Quick Results PFM Measures (4) Strengthen in-year fiscal reporting • Fiscal information will be vital to see countries through the crisis: Is the current fiscal reporting adequate? Does it cover all sectors of government intervention? Is it based on accurate accounting data? • Change requirement: improve regularity, timeliness and accuracy of fiscal reporting systems. • Objective: strengthen the importance and relevance of fiscal reporting in government decision-making. • Implementation issues: adequacy of accounting systems. Coverage of general government in fiscal reports. • Implementation options: where systems are not adequate or lack comprehensive coverage, flash reporting can be used. Reporting can be enforced through linkage with on-going funding. Where accounting systems are weak, accuracy of reports may be a longer term challenge.

12. Other Quick Results PFM Measures (5) Strengthen respect for the PFM legal framework • Lack of respect of the rules and procedures leads to fiscal indiscipline: Are the PFM rules and procedures respected? Are they adequate? Are sanctions effective? • Change requirement: instill a respect of the PFM legal framework. • Objective: ensure that the rules and procedures are rigorously followed in all financial transactions. • Implementation issues: adequacy of the legal framework. Difficult in enforcement. Power ministries. Last minute spending (e.g. top official travel). • Implementation options: increase awareness of the legal framework. Publicize sanctions for failure to comply with the PFM law and regulations. Apply sanctions in cases of transgression.

13. Other Quick Results PFM Measures (6) Improve control over autonomous agencies and extra-budgetary funds • Proliferation of autonomous agencies and extra-budgetary funds: Is this a problem? Are these entities regularly reviewed for relevance and funding arrangements? Do they control significant “idle” funds? Does the PFM legal framework apply to them? • Change requirement: reverse the recent trend in creating autonomous agencies and funds which escape proper budget scrutiny. • Objective: ensure that autonomous agencies and extra-budgetary funds are fully integrated into the budget process and subject to PFM legal framework. • Implementation issues: autonomous agencies and extra-budgetary funds are often created to avoid public service conditions for their employees – they will resist any change. Responsible line ministries may have lost control over their “charges”. Board representation may be more about sitting fees than ensuring government interest is properly represented • Implementation options: take stock of semi-autonomous agencies and extra-budgetary funds, focusing on their continued relevance, their funding arrangements, their “idle” cash balances, and their employee remuneration policies. Close those which are no longer relevant, reduce earmarked funding for those that are over-funded, strengthen board representation to ensure government policies are adequately reflected, strengthen obligations to submit financial plans, accounts and in-year fiscal reports.

14. Other Medium-Term PFM Initiatives The current crisis also provides an opportunity to initiate “structural” reforms, requiring more time to deliver results, but which will put the country in a better position in the medium-term. Measures aimed at next budget • More rigorous and systematic costing of programs • Better documentation for Parliamentarians to help them understand budgetary constraints Measures that aim to transform the way the budget is prepared and structured • Strengthen MT budget framework linked to realistic and cautious resource envelope • More robust, relevant and manageable medium-term forecasting models • Focus of improving efficiency of budget spending and creating fiscal space for new measures • Systems to improve information on outputs being targeted Longer-term measures which are resource dependent and/or require significant capacity building effort • Appropriate and sustainable supporting computerized systems • Strengthened accounting, internal and external audit capacities