NORMATIVA

This indicator considers the link between budgeting and policy priorities in the medium-term perspective and the extent to which costing of the implications of policy initiatives is integrated into the budget formulation process.

(i) Preparation of multi -year fiscal forecasts and functional allocations

The BPGs contain a “Budget Frame” that shows projections of resources by type and expenditures according to broad economic classification over the medium term (five years ahead under the 5 Year National Development Plan, starting with the BPGs for 2011/12-2015/6, 3 years ahead previously on a rolling basis). The Budget Frame is estimated on the basis of a macroeconomic forecasting model (MACMOD) used to forecast real GDP growth and a Financial Programming Model (FPM) used to project the overall spending ceiling over the medium term on the basis of forecasts of real GDP growth and targets for inflation, international reserves coverage of imports and borrowing consistent with debt sustainability.

The PAD received TA from IMF and MEFMI in the use of these models, but has been self-reliant since 2008.²¹The ‘Background to the Budget and Medium Term Framework’, issued after the budget is approved, also shows the Budget Frame

The Policy Analysis Department (PAD) is responsible for the Budget Frame, which is shown in the PBG and Budget Speeches. It indicated that the second year of the Budget Frame does not as yet indicate the starting off point for preparing next year’s budget, partly due to uncertainty of resource projections, including those related to assistance from development partners. The cash rationing system used to execute the annual budget (PI-16) is symptomatic of such uncertainty, even during the year, let alone over the medium term. The annual BPGs do not explain the differences between the projections made now for the next few years and the projections made for the same years one year from now.

The budget documentation does not show medium term spending projections on an MDA by MDA basis or on a functional basis, although MDAs make such projections as part of their budget submissions. The Ministry of Education indicated that it does not take the second year of its MTEF (prepared through the PBG) seriously under the cash-constrained environment and the related high incidence of expenditure arrears (PI-4). As indicated under PI-11, the projections are at objectives-linked activity level and therefore could in principle (after some simplification) be used as a basis for introducing a robust Medium Term Expenditure Framework (MTEF).

The introduction of the Five Year National Plan in 2011/12 complicates the strengthening of the MTEF. The three year rolling MTEF previously in place, facilitated, albeit imperfectly, re-calibration each year (i.e. re-prioritisation of existing spending, introduction of new spending, fiscal space permitting). The FYNP is fixed, however, implying an improbable accurate knowledge of overall fiscal resources available near to the end of the FYNP, that objectives and priorities will remain unchanged, and that the medium-term perspective will diminish towards zero. . ²²

(ii) Scope and frequency of debt sustainability analysis

Aided by assistance through PFMRP 3, PAD has strengthened its capacity to conduct debt sustainability analysis (DSA). It prepared its first and second DSAs in 2010 and 2012

21 The PAD provided the assessment team with a copy of a report prepared by the Financial Programming Working Group during January-February, 2013 to review economic developments during the first half of 2012/13 and to revise the forecasts and targets for 2013/14-2016/17. The exercise drew participants from MoF, POPC, BoT, National Bureau of Statistics, TRA and IMF Resident Office.

22 As noted in a paper prepared by the Fiscal Affairs Department (FAD) of IMF in April 2011 – “Improving Preparation,

respectively, the first of which was used as input to GoT’s Medium Term Debt Strategy, dated June 2011 (PI-17). The DSAs cover both external and domestic debt. Prior to 2010, DSA was conducted only by IMF/World Bank within the context of the IMF’s Article IV consultation reports and the Policy Support Initiative (PSI), also supported by IMF. The PAD’s DSA is taken into account in the dialogue between IMF and GoT on the parameters underpinning the PSI. The planned integration of all debt management responsibilities under one office (PI-17) should support the continuation of DSAs and the strengthening of their robustness.

(iii) Existence of sector strategies with multi-year costing of recurrent and investment expenditure

Sector strategies have been prepared, inter alia, by the Ministries of Education, Health, and Infrastructure Development (now called Works), covering both central and local government. The largest sectors are Education, Roads, Health, Agriculture, Energy and Water respectively, the budgeted expenditures of which comprise 19.5%, 12.7%, 8.5%, 7.2%, 4.8% and 4% respectively, and, in total, 57 percent of total government expenditure (i.e.

combined central and local).²³

Apart from the Health Sector Strategic Plan (2010-2015, replacing the previous one for 2006-10), the strategies are not costed. The Health plan is costed, representing 8.5% of total government expenditure. but is not necessarily fiscally realistic, as it shows a sizeable resource gap under the expectation that this will be filled. Moreover, the Health plan may not take into account the extent of donor activity in the health sector, as some of this activity is off-budget (e.g. USAID projects) and not reflected in off-budget documentation. Global Fund activities – significant in terms of financial magnitude -- however, are now on budget. None of the plans indicate any sense of prioritization and logical sequencing of activities, taking into account capacity constraints.

Full ex-ante costing of sector strategies is difficult in a decentralized environment, particularly in the case of the education and health sectors, where a significant proportion of expenditure is at local authority level: 60% for education, 46% health. Nevertheless, fiscally realistic costing of strategies takes place through the annual budget process, as the budget submissions prepared by MDAs (PI-11), contain medium term expenditure projections, which, through the costed activities, are explicitly linked to the policy objectives embodied in the strategies. In this sense, the submissions in effect represent the fiscally realistic costing of the strategies. The future recurrent costs implied by committed capital investments are not necessarily fully taken into account, however. According to the Budget Department in MoF, some MDAs are more diligent than others in projecting such recurrent costs, though, on the other hand, politicians tend to accord higher priority to development budgets rather than recurrent budgets.

iv) Linkages between investment budgets and forward expenditure estimates

The annual budget is divided into a recurrent budget and development budget. The latter appears in the budget documentation on a project by project basis and contains a significant

23 BBMTF for 2013/14-2015/16, Annex 2.

element of DP funding, a significant amount of which covers recurrent expenditure (as noted in the 2010 assessment). Since 2011/12, the Planning Commission, situated in the Office of the President, has been re-exerting its authority over the preparation of the development budget, thereby potentially increasing the degree of separation between the two budgets. The Planning Commission’s authority mainly rests, however, in the choice of projects to be included in the Development Budget, which is still prepared simultaneously with the Recurrent Budget under the guidance of the annual Planning and Budgeting Guidelines (PBG).

Selection of projects during the budget preparation process tends to be based on sector strategic plans, though, as these plans are not costed and prioritised, the linkages tend not to be tightly defined.

As indicated under dimension (i), the budget preparation process generates forward expenditure estimates through the use of the PBG templates. The methodology does not require the recurrent cost implications of committed/completed investment projects to be explicitly identified in the templates. They may be identified, however, through the ‘units’

column (i.e. units, for example, the number of teachers to be recruited is likely to increase, due to new schools being built). According to Budget Department, some ministries are better at doing this than others, particularly in the case where donors are funding a capital project and require that the associated operating costs should be included in the development budget (particularly the case for the Ministries of Health and Education, both major ministries). The preferable situation would be for GoT to finance these costs directly through the recurrent budget, but budget constraints have tended to preclude this. Even so, the implications may not be fully taken into account in the case of GoT-funded capital projects.

PI (M2) Score 2010 PEFA

Score 2013 PEFA

Assessment

PI-12 C C+ Performance has improved in terms of debt sustainability analysis (ii)

(i) C C No change in performance. The Budget Frame provides projections over the medium term (5 years starting with the 2011/12 budget) for resources and spending on an aggregated and broad disaggregated basis and only at an economic classification level in terms of expenditure. Differences between second year of this year’s Frame and the first year of the next year’s Frame are not explained.

(ii) B B Performance has improved through MoF undertaking its first Debt Sustainability Analysis (DSA) in 2010 and its second in February 2012. Previous to this, DSAs were conducted by IMF/World Bank with little Government ownership of the process. Thus the 2010 assessment rated this dimension too high.

PI

(M2) Score 2010 PEFA

Score 2013 PEFA

Assessment

(iii) C C No change in performance. Sector strategies have been prepared for several years for at least the 6 largest sectors, the expenditures of which comprise about 55% of combined central and local authority expenditure. The strategies tend to be un-costed or not consistent with fiscal realities. The costings are generated in large part, however, through the completion of the forms used by MDAs to prepare their annual budget submissions; costings are based on planned activities, themselves derived from objectives consistent with the strategies. The process is the same as during the period covered by the 2010 assessment.

The 2010 assessment scored C on the basis of strategies being fully costed for most sectors, but not being consistent with fiscal forecasts. The first part of this sentence seems incorrect, as the strategies appear not to have been fully costed.

Nevertheless, performance appears unchanged.

(iv) D C Performance is unchanged. Development projects tend to be selected on the basis of sector strategies, which themselves tend to be consistent with overall national plans. Though the process is far from perfect, some ministries (e.g. Health, one of the major ministries) are more diligent than others in incorporating the recurrent cost implications of committed development projects into the forward estimates that they prepare each year through the PBG. Budget constraints have led, through GoT-DP agreements, to these estimates being included in the development budget rather than the recurrent budget.

The situation has not changed since the 2010 assessment. The PBG forms for preparing forward estimates are unchanged, and these forms allow the recurrent cost implications of committed development projects to be included. The D rating in the 2010 assessment appears to be too low; the PBG process is not even mentioned.