Update on the 2012/13 draft Budget

Update on the 2012/13 draft Budget OboyOfilangItorong Director General of Budget Ministry of Finance and Economic Planning

Outline • Macroeconomic Overview and Outlook • 2012-13 planning process • Priorities of the 2012-13 budget • Financing the budget • Planned Expenditure for 2012-13 • Conclusion

Macroeconomic Overview • The shutdown of oil production has resulted in extreme imbalances in the external economy and in the budget. In order to finance the budget, the government has to: • Raise non-oil revenue, • Cut public expenditure • Find alternative sources of financing. • In order to ensure external balance when foreign reserves are depleted: • Imports have to be cut through a restrictive fiscal policy. • Sufficient foreign loans or income in foreign currency has to be secured. • The Government is progressively taking action through austerity measures to limit the economic damage and gradually adjust to the new situation.

Outlook for Economic Growth • The NBS produced the first ever estimates of Gross Domestic Product (GDP) for South Sudan: SSP 30.4 billion in 2010. • Oil accounted for 71% of GDP. • The direct effect of the oil shutdown will therefore be a contraction in GDP of around 71% . • The total effects will be even higher as the austerity measures lead reduced domestic demand and a contraction in the non-oil economy • It is vital that we focus on growth in the non-oil economy in the years ahead. • The Government is working to promote foreign direct investment (FDI) to ensure prompt construction of a refinery, cement factory and power plant which will stimulate domestic economic growth and employment and reduce the need for imports and foreign currency • State Governments are being encouraged to promote agricultural production as quickly as possible to reduce poverty and limit the need for foreign currency

Budget Execution – 2011/12 • Spending in the first nine months of the fiscal year exceeded budget primarily because of increased salaries for Defense and Organized Forces and spending for organizations not included in the 2011 budget (Universities, Customs, Bank of South Sudan, National Security Office • Spending during the Austerity Budget approved by the Assembly for April to June 2012 is expected to be within the approved total, though it may be necessary to request Assembly approval of some realignment between chapters and agencies

2012/13 Planning & Budgeting Process • Planning and budgeting were combined into a single process for 2012-13. • The process began in late February with a training workshop where agencies and donors were informed of the implications of the shut down of oil production and the need for austerity. • Spending agencies were given indicative ceilings for 2012-13 amounting to SSP 7.8 billion, and austerity guidelines to plan and budget for the coming year. • While salary ceilings remained the same, operating and capital ceilings were calculated as a percentage of the draft 2011-12 budget: • 90%- Defense • 80%- Organised Forces, Health, Education, Agriculture, Petroleum, Water Resources, Humanitarian Affairs • 15%- SS Reconstruction & Development Fund, Local Government Board • 46%- All other spending agencies • In March, agencies and donors met as sector working groups to review budget submissions, and prepare Sector Aid Financing Plans and Budget Sector Plans for 2012-13 • Following discussions with the Austerity Measures Committee and the Council of Ministers, the draft 2012-13 budget was reduced to SSP 6.4 billion and presented to the NLA on June 19th 2012.

Key Reflections on 2012/13 Planning Process • In an effort to take stock of lessons learnt during the 2012/13 Planning Process, MOFEP undertook internal review and circulated a note to spending agencies and development partners for comments (see handout) • Purpose and Objectives: There was a need for clearer communication regarding the aims and objectives of the planning and budgeting process, as well as the objectives of the SWGs. • Leadership and Membership of SWGs: SWGs would benefit from a minimum level of seniority to facilitate decision-making on issues on strategic issues. Senior managers should delegate responsibility of drafting of documents to more junior officers. • Engagement and functions of SWGs: Attendance of spending agencies and development partners at SWG meetings was mixed; the perceived lack of credibility of budget ceilings discouraged some development partners to participate, and substantial cuts discouraged some spending agencies from engaging. • Quality and timeliness of outputs: Nearly all agencies submitted their budgets late, and some failed to comply with guidelines particularly those restricting agencies for budgeting for certain line items. Sector aid financing plans varied in quality, but 9 sectors submitted. The quality and comprehensiveness of donor aid reporting was mixed.

Measures for Improvement

Priorities of the 2012/13 Budget The key priority for 2012/13 is to minimise the negative impacts of the shutdown on the economy and people of South Sudan. This means: • Seeking alternative sources of revenue or borrowing to finance the budget; • Seeking external borrowing to finance imports; • Avoiding policies that aggravate inflation, such as borrowing from the Central Bank. • Reprioritising expenditure to ensure minimal resources are put to the best use: • Significant reduction in expenditure • Elimination of non-essential functions of government

Financing the budget The 2012/13 budget will be financed by: • Non-oil revenues • Tax revenues: PIT, Customs, Excise, Business Profit Tax, Sales Tax/VAT • non –tax revenues- fees and charges • Drawing down government reserves • Domestic Loans • Foreign Loans and Petroleum and Mining Concessions

Non-oil RevenueUpdate • Since independence we have initiated a comprehensive tax reform program to increase non-oil revenues. • We have clarified the allocation of taxes between National and State governments and centralised collection of shared taxes. • States that lose revenue as a result of these reforms will be compensated by a share of the National Sales Tax Collections. • MoFEP is finalizing contracts with commercial banks who will collect tax and non-tax revenue directly from the public to ensure that all collections are deposited in the Single Treasury Account and not diverted for other purposes. • Based on these reforms, the non-oil revenue estimate for 2012-13 is SSP 700 million.

Non-oil revenues have increased significantly since Independence

External Financing • We are seeking foreign and domestic loans, as well as petroleum and mining concessions to fund the budget. We will also seek loans to finance key infrastructure projects. • Selling concessions for exploring natural resources will generate some income in foreign currency to finance imports in the short run. • The total amount of borrowing will be viewed against future oil revenues to avoid debt servicing becoming a heavy burden on the economy in the future • Terms of loan will be examined carefully and any with high interest rates or other onerous terms will be rejected • We will establish a transparent process to prioritize our infrastructure needs, select contractors and monitor their work to maximize the impact of our infrastructure loans

Austerity Spending Cuts • To reduce spending to a level more consistent with available resources, further cuts were made: • To reduce the huge salary bill • 50% cut on all housing allowances • Cuts to job specific allowances, and overtime and incentives • Operating and Capital expenditures have also been cut: • Elimination of funding for training and workshops except funded by donors or conducted in government facilities • Restricting foreign travel to essential government units such as Office of the President, MoFEP and Foreign Affairs • Eliminating most funding for capital: including furniture and general equipment, vehicles, construction and renovations • Reducing block grants by 25% from 2011 levels • Deferment of some planned government projects such as the Census, and reducing number of embassies to be opened.

Spending Trends • Nominal monthly spending increased from 2010 through 2011/12, then decreased with the austerity budget and the draft 2012/13 budget. • Adjusting for inflation (CPI) shows that real spending has decreased by 60% since independence. Notes: 2010: calendar year 2011: Jan – Jun 2011 2011/12: July 2011 – Mar 2012 Austerity: Apr – Jun 2012 2012/13: Draft budget

Spending protections • Although deep cuts have been made across government, spending protections continue for government priorities in the draft 2012/13 budget. • Basic salaries of employees at the national and state level will continue to be protected. • Allocations have also been made for several priority projects such as: • SSP 90 million - RSS contribution to the construction of the 40 MW Fula hydropower dam • SSP 35 million- construction of 23 schools in fulfillment of the President’s 100 day pledge, and SSP 11 million to host the 2013 Federation of East African Secondary Schools Sports Association (FEASSSA) games taking place in Juba. • SSP 56 million- to operate universities for a full academic year • SSP 40 million for purchase of drugs and SSP 11 million for the maintenance of state hospital facilities • SSP 27 million to cover costs of essential capital projects for the Ministry of Water Resources & Irrigation. • SSP 21 million- establishment of a Cooperative Bank • SSP 15 million - purchase of spectrum machines and billing equipment by the Ministry of Telecommunications & Postal Services-. • SSP 15 million- establishment of Radio and TV stations under the Ministry of Information and Broadcasting.

Planned expenditure for 2012-13 • Overall government expenditure amounts to SSP 6.4 billion. Although salaries have been cut by 22% compared from 2011-12, it remains the largest part of the budget at 46%. • Capital has been cut by 80%, transfers by only 9%, and operating and other expenditures have been cut by 47%.

Planned expenditure for 2012-13 (2) • The highest spending by sector goes to the Security and Rule of Law sectors , which comprise 60% of total allocations. • The main service delivery sectors- Education, Health, Natural Resources and infrastructure make up 17% of the budget.

Payroll Reforms • Council of Ministers directed MoLPS and MoFEP to implement the following payroll reforms to ensure that only people who are working are paid: • No salary will be paid to anyone not included in the South Sudan Electronic Payroll System • Supervisors must compare attendance sheets with payroll and certify that everyone on the payroll actually worked • MoFEP will transfer salaries directly to employee bank accounts • Ministry of Defense will implement equivalent system

Budget Execution Reforms Budget execution control procedures are being tightened in line with the Public Finance Management & Accountability Act (PFMAA), to ensure that: • Only claims which have been properly approved by accounting officers and directors general within the approved monthly expenditure limits will be paid; • All required contracting procedures have been followed, including advance approval by the Ministry of Justice and MoFEP; • Cheques are printed directly from FMIS and the manual transfer letter system is eliminated; and • Payments are made only to vendors who have delivered the goods or services in the contract.

Conclusion • In addition to seeking financing sources and reducing spending, several budget execution reforms will take effect from July 1st to improve fiscal discipline. • We are also taking measures to improve transparency and accountability throughout the budget process. The draft 2012-13 budget will be made available on the GoSS website for public scrutiny. • Significant cuts have been made, but there is room for more austerity. • The National Legislative Assembly is now debating the 2012-13 draft budget. • The shutdown of oil has led to difficult times, but by taking the correct decisions, we can lay the foundations for future prosperity.

How donors can help • MOFEP is in the process of putting together a National Aid Financing Plan, which will lay out how Development Partners can best allocate their resources during austerity. • The NAFP will review the allocation of national resources (2012/13 budget) and the cost of implementing the Government’s priorities (drawing on the South Sudan Development Initiative), and will identify the key gaps which we hope donors will support. It will also serve to strengthen donor coordination and aid effectiveness, by supporting progress towards the Aid Strategy benchmarks. • We hope our partners will be able to continue supporting basic service delivery at the same level as they have been previously doing, and would urge them against reprogramming longer-term development assistance into humanitarian aid, which can undermine institutional development. Where donors are looking to shift their support in this manner, we hope they will consult with the Government so we can agree on an outcome together.

Update on the 2012/13 draft Budget