Outline

1. Improving Budget Credibility: Budget Formulation ProcessbyFlorence N. KuteesaPublic Financial Management Advisor IMF East AFRITAC.Seminar on Budget Management and Public Financial Accountability in Sub-Saharan Africa, 18-22 June, 2007 Pretoria, South Africa.

2. Outline • Evolution of budget credibility • Fundamentals of budget credibility • Basic components of good budget preparation • Lessons Learnt: • MTEF, • Fiscal Frameworks • Expenditure plans • Budget Calendar, • Consultations, • Donor coordination • Emerging new mandates and responsibilities

3. Evolution of Budget Credibility Ownership Agreement on Priorities: Translation of political aspirations and developments needs into policies, actions & budgetary policies Assurance Link policy making and budgeting MTEF and Budget reflect agreed priorities. Robust sytems of budget classification. Confidence: Ouputs and Impacts: Conversion of expenduture into public goods. Demonstrated impact as desired. Trust Enhanced predicatility of resources. Minimise deviation between appropriation and expenditures

4. Fundamentals of Budget Credibility • A credible budget is a first requirement of effective public financial management. • A sound budget preparation process- first necessary step but not sufficient. • This requires: • Sound macroeconomic forecasts coupled with robust resource inflow forecasts • Alignment, harmonisation, transparency and predictability of donor funds. • Forward planning horizon and budget framework that provide greater predictability of policy and funding and affordable expenditure plans. • Functioning budget execution systems that align actual and planned spending except under unforeseen and unavoidable circumstances • Performance orientation of the budget that encourages strategic allocation of resources at all levels and emphasis on efficiency and effectiveness in use allocation of resources • Incentive framework with predictable rules and processes that change behavior of stakeholders and NOT only promote mere compliance • Transparency and access to information plus mechanisms for accountability and political involvement and oversight • Three Cs: clarity, commitment and consistency

5. Basic components of good budget preparation • Reliable macro-fiscal forecasts that result in a reliable budget framework(s) • Top down process and hard budget ceilings • All claims on spending should compete on equal footing at appropriate levels of decision-making • Real budget constraint and strategic priorities drive decision-making at all levels • Bottom –up process with reliable, affordable and strategic expenditure plans • Decision-making and accountability at appropriate levels • Existence and sharing of information • A predictable budget calendar • Broad generic and time bound activities • Clear roles and responsibilities • Political involvement, oversight and commitment • Public transparency and accountability • Institutional arrangements like SWG, joint reviews, public hearings etc • Key incentive to ensure formal rules are followed

6. Lessons Learnt : MTEF • While MTEFs are accepted as neccessary tools for budget credibility, reformers continue to search for the imperatives for an effective, sustained MTEF: • Lay the foundation (get the basics right): MTEF is a complement to and not a panacea or substitute for basis PFM reforms. • MTEF should not be seen as a narrow technical tool, but an approach for changed system encompassing all best practises • MTEF approach should be integrated into the budget process from the start (Progressive prioritisation within medium term frameworks towards detailed estimates) • Get the macrofiscal context right: sound macroeconomic forecasts and realistic resource envelope • Forward estimates should roll over to form baseline for budget year (Planning discipline, better medium term predictability and scope for prioritisation) • Provision of appropriate incentives and political support. • Adopt the MTEF to existing capacity: phasing allows estimation of aggregate resource envelope and gradual development of quality sector strategic plans and expenditures. • Are there pre-conditions? (macro-fiscal stability and political committment and consistency)

7. Fiscal and budget framework(s) • Reliable macro-economic and fiscal framework important first step in MTEF/budget process • Fiscal policy determination with medium term targets. • Includes aggregate revenue, expenditure and deficit/surplus, and • Financing of deficit • Transparency on assumptions and forecasts prior to budget finalisation • Comprehensiveness of framework: all sources of revenue, all expenditures should be aggregated in transparent, appropriate structure, including • Off budget expenditures; Donor funds and all donor-funded expenditures; All own revenues, including fees; Transfers to state owned enterprises. • Should include assessment of risk • Sensitivity of framework to changes in macro-economic variables (Rain-fed economy and donor inflows. Risk factors to liquidity and expenditure forecasts • Rather err on side of conservatism to support predictability of funding • Fiscal framework translates into linked budget framework(s) and in turn to expenditure framework for spending agencies (eg sectors or ministries). • Distinctions between fiscal, budget and expenditure frameworks handy, but beware, terminology use differs

8. Reliable, Costed Expenditure Plans • Starts with review of strategic objectives and policy priorities • Requires reliable information on past spending and (eventually) achievements • Costing of baseline (or existing) programmes / activities over medium term • Costing of new policies, programs and assess affordability. • Proposals for trade-offs within ceilings at level of ministries and sectors where possible • Rationalisation of allocations with donor funding • Increasing performance & equity orientation over time important for effective and efficient spending • But reliable financial information first step

9. Role of Budget Preparation Calendar • Bedrock of predictable, disciplined MTEF oriented budget process • Synonymous with normal and agriculture calendar • Budget calendar determines • When and where top down process (resource envelope and main policy priorities) meet bottom up process (expenditure requests) • Sequencing of process, roles and responsibilities in forecasting, reviews and formulation. • Alignment of all planning and budget review related activities within the budget formulation process. Mainstreaming all consultations • Must be announced, transparent and implemented as planned • Should have legal backing as provided in the Laws and/ Financial Regulations

10. Typical MTEF/Budget Process and Calendar FIRST HALF SECOND HALF Macro fiscal policy, forecasts and framework -- Availability of Resources Political involvement through early cabinet meeting setting macro policy objectives Dissemination of indicative ceilings MTEF with ministry ceilings for 3 years prepared by MoF External funding confirmed TOP DOWN Approval of MTEF by Cabinet , Publication of MTEF Review by MoF, Approval by Cabinet Tabling in legislature Process with MoF to agree on trade-offs Ministerial and sector studies / reviews Setting of policy objectives; costing of programmes / sub programmes within indicative allocations Formulation of options deviating from baselines Final submissions Preparation of detailed estimates by ministries within ceilings BOTTOM UP Consultations

11. Consultations and Challenging budget proposals • Consultations : public hearings, organs of government , donor support, inter-sectoral, lower governments. • Legal and administrative provisions • Theme and focus • Timing, linkage and interface • Adequate understanding of budget & its operations plus analytical capacity • Specific studies, reviews and issues papers. • Address antagonistic tendencies or relationships

12. Donor funds in budget preparation and budgets Notwithstanding significant improvements, the current situation still poses challenges in enhancing budget credibility Problems with alignment, harmonisation, coordination and predictability of donor funds in budget preparation, approval and implementation phases impacts on budget credibility and effectiveness: A wide range of interests & expectations pursued by multilateral and bilateral agencies, i.e., Global Funds, UNICEF and MDGs Confusing and conflicting Difficult to align and harmonize at national and sub-national level Prevent application of legitimate predictable rules & processes. Undermine each other’s objectives, and deter legitimate accountability. Encourage fragmented budget decision making ie dual budgeting. Undermine optimal allocation of resources and sustainability. Numerous conditionalities & obligations and modalities: Budget support, basket funding, project aid etc Provides unrealistic foundation for budget formulation Undermines aggregate expenditure targets Leads to deviations between appropriated and executed budget Unpredictability of Resources

13. Emerging new mandates and responsibilities • Technical Heads of Departments play a significant role • Focus moves beyond balancing with ceilings • Strategic planning, analytical skills, costing with MTEF • More information than traditional line item budgeting • Champions of reform at all levels • Performance/Output orientation of the budget • Design TOR/Agenda for cost-effective consultations • Process more cooperation, less adverserial • Effective coordination of Consultative forums and institutions (Ministries, SWG, Donors, Sub-groups, NGO network at all levels) • Investment in effective communication, awareness raising • Consultative decision making process

14. Emerging new mandates and responsibilities • Elaborate M&E function • Broaden scope of PER beyond tracking budget outturns • Increasing attention to issues of efficiency and effectiveness. • More involvement of other stakeholders (academia and civil society) • Changed role of MOF (setting framework, coordinating and supporting complex process and reviewing allocations against priorities rather than planning at line item level) challenging • MoF driver of change-management process across government • New skills required, new systems (IT and other), new processes and structures • Requires commitment from top and management across the board • Enhanced capacity building, recruit, re-train, redeploy from other line ministries. • Reviews and Monitoring • MoF responsibilities

15. In Conclusion Message from IMF-Africa Technical Assistance Centers: Proud of our collaboration with CABRI Commitment to continued cooperation with CABRI and Support to SBOs. THANK YOU.

16. Thank you