Medium Term Expenditure Framework for Implementing

Poverty Reduction Strategies

Dr. Yan Wangywang2@worldbank.org

for NEEDS Implementation Workshop, Abuja, Nigeria

March 7-10, 2005

         

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“A budget is much more than

a collection of numbers.

A budget is a reflection of

a nation’s priorities, its needs, and its

promise.”

Alexander Hamilton

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Overview Outline

Introduction of MTEF

International experiences: African countries

Pre-conditions of MTEF and Issues To Be Addressed

More capacity building /training needed

Implementation Strategy for Nigeria: to be discussed

Introduction of MTEF

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What is a MTEF?

A tool for linking policy, planning &

budgeting over a medium-term ( 3 years) at

the Government-wide level;

It consists of a top-down resource envelope

& a bottom-up estimation of the current &

medium-term costs of existing policies;

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What is a MTEF?

Matching of policy priorities and budget in

the context of the annual budget process; and

Involves rolling over this exercise every year

by incorporating policy changes.

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Objectives of MTEF

Improved macroeconomic balance esp. fiscal discipline

Integrating policy priorities (identified in NEEDS) into

annual budget: Resources allocated to priorities – to ensure

credible policy. Better inter- and intra-sectoral resource allocation Greater budgetary predictability for line ministries by

providing mid-term perspective (3-5 yrs) Enhancing operating efficiency: high quality, low cost Greater accountability for public expenditure

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What can it do?

If successfully applied, MTEF can

Improve macroeconomic balance by developing a

multi-year resource framework (expenditure &

revenue);

Assist in improving resource allocation between &

across sectors;

Improve predictability of funding for line

ministries.

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MTEF: 6 stagesSTAGESTAGE CHARACTERISTICSCHARACTERISTICS

I.I. Development of Macroeconomic Development of Macroeconomic FrameworkFramework

•Macroeconomic model that projects revenues and Macroeconomic model that projects revenues and expenditure in medium termexpenditure in medium term

II.II. Development of Sectoral ProgramsDevelopment of Sectoral Programs •Agreement on sector objectives, outputs, and activitiesAgreement on sector objectives, outputs, and activities•Review and development of programs and sub-programsReview and development of programs and sub-programs•Program cost estimationProgram cost estimation

III.III. Development of Strategic Development of Strategic Expenditure FrameworkExpenditure Framework

•Analysis of inter- and intra-sectoral trade-offsAnalysis of inter- and intra-sectoral trade-offs•Consensus-building on strategic resource allocationConsensus-building on strategic resource allocation

IV.IV. Definition of Sector Resource Definition of Sector Resource AllocationsAllocations

•Setting medium term sector budget ceilingsSetting medium term sector budget ceilings

V.V. Preparation of Sectoral BudgetsPreparation of Sectoral Budgets •Medium term sectoral programs based on budget ceilingsMedium term sectoral programs based on budget ceilings

VI.VI. Political ApprovalPolitical Approval •Presentation of budget estimates to cabinet and Presentation of budget estimates to cabinet and parliament for approvalparliament for approval

Central Agencies Cabinet Minister

Medium Term Expenditure Framework

Setting Fiscal Targets Allocation of Resources to Strategic Priorities

Economic and Fiscal Update

Fiscal Framework Statement Report

Budget Policy Statement

Corporate Plans

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MTEF Process (simplified)

Sectoral Budget

Preparation

Macro-economic

forecasting

Sectoral Ceiling

Setting for multi years

Fiscal Target

Total Expenditure

SettingFor multi

years

New sectoral

demand for t+2

(priority/cost)

Annual Budget

Formulation

Updated costestimate of

existingpolicy/program

Experiences in Africa

Source: Houerou and Taliercio 2002

Year of

Initiation

Scope and format Government level and length of period

Ghana 1996 All sectors/recurr/cap Central, 3 years

Kenya 1998 All sectors/recurr/cap Central, 3 years

Malawi 1996 All sectors/recurr/cap Central, 3 years

Rwanda 1999 15/20 sector/recurr Central and regional

S. Africa 1997 All sectors/recurr/cap Cen/prov/local, 4yrs

Tanzania 1998 7 sectors/recurr/cap Central, 3 years

Uganda 1992 All sectors/recurr/cap Central/local, 3yrs

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Lessons from International Experiences

Integration of multi-year planning with annual budget

- MTEF and annual budgeting is one process

Realistic macroeconomic forecasting; honest revenue projection

Separation of total budget from detailed program

Clarification of new roles of MOF/line ministries

Capacity building and incentives for MOF/line ministries

Development of feedback mechanism

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Preliminary lessons from MTEF experience

1.1. The importance of initial PEM conditions. The MTEF is a The importance of initial PEM conditions. The MTEF is a complement to – not a substitute for -- basic budgetary management complement to – not a substitute for -- basic budgetary management reform:reform:

Budget comprehensiveness –including donors’; off-budget items, Budget comprehensiveness –including donors’; off-budget items, Classification – integrate capital and recurrent budgets; Classification – integrate capital and recurrent budgets; Budget execution. Timely reporting (publication) Budget execution. Timely reporting (publication) Timely audit (and publication) underpinned by sanctions against Timely audit (and publication) underpinned by sanctions against

misappropriations of resources. misappropriations of resources.

2. 2. Sequencing and phasing of the MTEF reform:Sequencing and phasing of the MTEF reform: Phased vertically (macro, sector, service delivery) Phased vertically (macro, sector, service delivery) Piloted horizontally (across sectors)Piloted horizontally (across sectors) Timing and elements tailored to capacityTiming and elements tailored to capacity

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An ideal country case1.1. Consensus on priorities Consensus on priorities built through the participatory process, built through the participatory process,

built on ongoing programs. Lower priority activities dropped/scaled down built on ongoing programs. Lower priority activities dropped/scaled down

2.2. Comprehensive“Comprehensive“Critical to the success of the PRSP is the need to Critical to the success of the PRSP is the need to implement only the PRSP”implement only the PRSP”

3.3. PRSP-budget link is central: PRSP-budget link is central: Budget preparation & scrutiny by Budget preparation & scrutiny by MOF to ensure that line agency budget submissions are consistent with the MOF to ensure that line agency budget submissions are consistent with the PRSPPRSP

4.4. Transition phase for donor activities:Transition phase for donor activities:• Existing projects “grand fathered”Existing projects “grand fathered”• All new projects must fit within PRSP prioritiesAll new projects must fit within PRSP priorities

5.5. Annual review vehicles, Annual review vehicles, envisaged as country’s central policy envisaged as country’s central policy review processreview process

• PER – expenditures & impactsPER – expenditures & impacts• PRSP review (annual progress report) complemented by a PRSP review (annual progress report) complemented by a

comprehensive review every three yearscomprehensive review every three years

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Need for patience and perseverance: Need for patience and perseverance: Prioritisation and costing will likely need continuing Prioritisation and costing will likely need continuing

improvement in the context of implementation and improvement in the context of implementation and monitoring of the first PRSPmonitoring of the first PRSP

Prioritization and costing will only be possible if the Prioritization and costing will only be possible if the PRSP is linked to the budget processPRSP is linked to the budget process

MTEF can be valuable: MTEF can be valuable: The MTEF should be integrated with existing budget The MTEF should be integrated with existing budget

processesprocesses the institutional arrangements for the MTEF & PRSP the institutional arrangements for the MTEF & PRSP

should be consistent in both exercises, and recognize should be consistent in both exercises, and recognize the central role of Ministry of Financethe central role of Ministry of Finance

Phasing-in of MTEF, by sector and functions, neededPhasing-in of MTEF, by sector and functions, needed

Pre-Conditions of MTEF, and Issues To Be Addressed

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Pre-conditions for Implementing MTEF

There may be different views on pre-

conditions. This is one view: We need

Strong political support MOF /NPC’s willingness/commitment - clear understanding of MTEF and incentives - strong leadership within MOF

Line ministries’ compliance - proper incentives: discretion and policy

prioritization

Capacity building for MOF and line ministries

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How to Build Macro Forecasting Capacity in MOF?

MOF plays a key role in macro forecasting for fiscal policy purpose - strong need to increase institutional capacity - consideration of social/political factors

Coordination mechanism with MoF, CB of Nigeria, public/private research institutes

Formula for conservative forecasting for budgeting - in Canada, add 0.5-1% to forecasted interest rates

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How/Who Decide Total Budget & Sectoral Ceiling? (1)

Two stage approach: total envelope setting sectoral allocation

Total budget setting - macro/fiscal targets, social/political demands - new sectoral demands and updated costs estimates

Sectoral allocation - national policy priority - determined within total budget : zero-sum game

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How/Who Decide Total Budget & Sectoral Ceiling? (2)

Final draft is prepared by MOF in consultation with the President

Send draft to cabinet meeting for consensus building - sectoral ceiling is not revealed until total decided - in Sweden, 2-3 days’ cabinet retreat

In case of disagreement, final decision is made by President

“It is President who holds ultimate responsibility of budget”

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Use of budget margin

Serves as a Bumper for 1) macro forecasting deviations

2) ‘inevitable’‘unexpected’ demand

3) President’s new initiatives under exceptional situations

Budget margin

= total envelope – aggregate of sectoral ceiling * in Sweden, 3.33% in 1997, and 0.05% in 2003

Unused margin to be used to accelerate debt payment

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How much sectoral ceiling is binding?

In principle, no breach is allowed

Amendment allowed for substantial macroeconomic change (cost estimate basis)

Exception is explicitly identified ex-ante with MOF’s consent, through cabinet meeting

1) ministry makes trade-off within sectoral cap

2) trade-off between ministries within total budget

3) budget margin to be used

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How Much Discretion Allowed for Line Ministries?

Sectoral priority discussed and agreed

between MOF and line ministries Line ministries prepare own budget request

within provided ceiling & priority line

monitoring and coordination mechanism

Incentive for efficient spending - allowed to carry-over certain % of savings to ministries

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How to Build Incentive System?

For MOF /NPC ?- Shift to higher level, macro decision-making

by integrating national policy priorities with budgeting

- Close interaction with President

For Line Ministries

- Budgetary Discretion to prioritize policies

- Flexibility in implementing policy and executing budget

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How to Ensure Line Ministries’ Accountability? (1)

Ministers hold ultimate responsibility over performance

MOF /NPC plays a role as a watchdog Performance management serves as a feedback mechanism for increased discretion

Linking budgeting with accounting system Information system needs to be integrated between MOF, NPC, and line ministries, and Office of Statistics

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Capacity Building is needed on all these aspects: More training can be provided

How to Improve Budget Structure and Scope ? How to Improve Budget Structure and Scope ?

How to improve the incentive systemHow to improve the incentive system

How to make line ministries accountable for delivery?How to make line ministries accountable for delivery?

Performance Management System

- utilized as information gathering and analysis

- long-term, phased approach is desirable

- need to adopt realistic short-term approach - pilot projects to introduce output-based indicator development and performance evaluation system

- expand into all programs with outcome indicators

Implementation Strategy for NigeriaSome suggestions and followed by discussion by Victoria Kwakwa

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Creating Enabling Environment for MTEF

Use MTEF as an instrument to alter status quo

Fiscal reform along with Public Sector reform

Leadership and Capacity Building

- champion of reform and creating a core team

- motivating self-development and capacity building Performance oriented environment in government

- e.g., regulation-free organizations

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Implementation Strategy [a suggestion]

Stage I : top-down approach - macroeconomic forecasting and fiscal target setting - setting total and sectoral ceiling prior to program details

Stage II : bottom-up approach (Gradual Approach) - line ministries’ discretion within sectoral ceiling and priority - allowing discretion on operating costs

Stage III :incorporation with performance management - well-functioning information system - performance information reflected in budgetary decision

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Strategies for Nigeria

To be discussed by Victoria Kwakwa and To be discussed by Victoria Kwakwa and representatives from the governmentrepresentatives from the government