ECA/PHSD/PAM/9$/3[3b(vii)]
Development Management Series No. 17
UNITED NATIONS
ECONOMIC COMMISSION FOR AFRICA
Public Administration, Human Resources and Social Development Division
ENHANCING THE CAPACITY FOR PUBLIC EXPENDITURE PLANNING AND FORECASTING FOR IMPROVED PUBLIC
SECTOR MANAGEMENT IN AFRICA
JUNE 1996
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TABLE OF CONTENTS
INTRODUCTION l
SECTION I. Background Issues
SECTION II. Macro-Policy Framework for Public Expenditure
Planning and Forecasting
- Financial Framework for Public Expenditure
Planning and Forecasting 10
SECTION III. Operationalizing the Budget System for Improved
Public Expenditure Planning and Forecasting 19
Operational Constraints 24
SECTION IV. Conclusion and Policy Suggestions 26
(a) Conclusion
(b) Policy Suggestions 27
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INTRODUCTION
The dimension of fiscal crisis in African countries continues to increase since the last decade. Weak macro-economic policies, widespread deficiencies in the management of the public sector, lack of institutional and human capabilities, feeble political commitment to restore financial stability, unstructured public investment programmes and other exogenous factors continue to deepen the fiscal crisis. Weak macro-economic policy within which to build critical capacities in public financial management systems to secure maximum efficiency and effectiveness in planning, forecasting and use of public financial resources is singled out as outstanding challenge. This paper examines background issues in the development of macro-economic policies in African countries (Section I), the macro-policy framework for public expenditure planning and forecasting, (Section II), budget systems in practice in Africa and their constraints on public expenditure planning and forecasting (Section III) and draws conclusion and makes policy suggestions (Section IV).
The objectives of the paper are:
1. to review the linkages between public expenditure and public sector
management;
2. to examine policies and practices relating to public expenditure planning and forecasting for improved public sector management;
3. to examine the role of the budget system in improving public expenditure planning and forecasting and the constraints which it encounters;
4. to draw conclusions and make policy suggestions on measures to improve public expenditure planning and forecasting for improved public sector
management.
SECTION I: BACKGROUND ISSUES
There are long standing discernible linkages between public expenditures and public sector management. These linkages can be traced to the origin of the interventionist role of government at the time of Independence. At that time, particularly in centralized economies, government was looked upon as an employer, a consumer and an entrepreneur. In open market economies, government played a major role of being a single largest employer and a provider of goods and services which no private firm could provide. This phenomenon meant that as the economy developed in the post-independence era, there was a corresponding progressive expansion or growth in government expenditures.
One of the key functions of the public sector was to allocate resources among alternative uses in the economy and to determine the pattern of production as well as the quantum thereof. The resource allocation was achieved through the budgeting process. Apart from the allocation functions, the public sector also performed the functions of distribution of income and wealth, stabilization of the economy, economic growth etc. In essence,
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therefore, the public sector commanded the performance of the economy through the allocative functions, distributional functions, stabilization functions and goals for economic growth. However, to some extent, the private sector, too, was used as an institution for performing some of these functions. For example, allocations could be achieved through the interplay of market forces of demand and supply as established by consumer behaviour and producer motives for gains.
Besides economic justification for government interventions, there were also tacit political motives. For example, many African governments shared in the view that meaningful political independence could best be attained after economic independence which could be measured in terms of elevated role of the state in economic affairs. It was a political esteem for African governments to have the state enjoying a lion's share in the economy on behalf of its people. They viewed market forces as ploys by foreign powers for their own gainful missions. The memories of pre-independence economic exploitation were still too fresh in their minds to have faith in private sector participation in the economy.
National development objectives, policies and strategies were laid down in successive periodic (five-year) development plans. In general, the plans lacked the characteristics of comprehensive planning systems. However, gradual steps were taken to improve them.
These included; measures to adopt clearer specification of objectives and determination of policy instruments for socio-economic development (emphasising improving the living standards of the people and agricultural productivity). Further steps were taken to focus attention on consolidating administration and encouraging greater participation of the indigenous people in the economy. Unfortunately those developments were characterized by lack of macroeconomic framework to indicate government public sector investment priorities and the commitments of the government to the investment programmes. That meant that the plans were outside the framework of budgetary indicators of resource availability. The outcome was the general weakness of public sector performance in boosting the economy.
This weakness led to further efforts to transform the national development plans and reorient them to focus greater attention on macroeconomic performance, sectoral developments and the adverse effects of public institutions on the economy. Drastic changes were made with most African countries shifting from the fixed-term plans to rolling development plans which could be prepared concurrently with the annual budget estimates describing, in details, the Public Investment Plan over a given period (two-three years). In some countries (Swaziland) the aim was, and continues to be, to integrate the development rolling plans with other documents covering the following areas:
* a periodic development review, which assesses performance and attempts to draw out implications for future policy and implementation.
• national development strategy which sets general policy directions for 5-10 years and provides considerable certainty about government's priorities;
policies and programmes; and
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* a semi-annual monitoring process which reports on physical and financial implementation of the capital budget.^
The system of developing the public sector within the framework of budgetary indicators of the amount of resources available was a clear evidence of the nexus between the structure of public expenditure and the magnitude of the public sector. Thus any discussion of public expenditure planning and forecasting should logically be within the context of public sector itself. In other words, an increase in public expenditure ought to be construed in the context of an increase in the size of public sector.
Literature on the public sector shows that its concept in an economy may be interpreted as reflecting budgetary transactions, public enterprises, public regulations and other concerns. (For example, the influences of the preferences or choices of the individuals which decision-makers may have to take into account in formulating budget proposals). Indeed, in democratized societies, voters can overexpand or underexpand the public sector^. The government budgetary transactions are key indicators of the structure of the public sector as such transactions are mostly of public character. The ratio of the aggregate resources committed to fund the budgetary transactions roughly indicates the volume of public expenditures. It is a rough or approximated indicator because of possible overcommitting of funds or underutilization thereof due to various reasons.
The linkages between public sector and public expenditure raise some crucial questions if viewed, in particular, within the context of decentralization and privatization. The first question is, does decentralization increase the public sector and public expenditures? The second question is, does privatization reduce the public sector and public expenditures? These questions are important in discussing issues of improving public expenditure planning and forecasting. Their importance arises from the fact that firstly, there is now, more than ever before, a growing awareness that big governments are out of fashion and that the interventionist role of the state in the economy should be reduced so that governments do less but do it efficiently. Huge civil services should be downsized since they are apt to be poor, unproductive, inefficient and ineffective. Secondly, decentralization and privatization are, themselves, at the center-stage of public sector reforms in African countries. With respect to decentralization, reference may be made to a training workshop on "Strengthening Financial Management and Accountability for Regional Development in Ethiopia", held in Debre Zeit, Ethiopia, from 25-29 December 1995, where participants identified certain aspects of decentralization. Those aspects included: fiscal decentralization, human resource decentralization, political decentralization (power sharing) and participatory decentralization
1/ Ministry of Planning and Development, Economic Planning Office, The Rolling Plan Period, 1989-1995, Mbabane, April 1995.
2/ Richard Musgrave, Pegg B. Musgrave - Public Finance in Theory and Practice, second Edition, pp.102-103, (McGraw-Hill Book Company).
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(popular participation)^. Participants identified decentralization as entailing revenue-sharing and regional expenditures and privatization as an emerging phenomenon advocating the sale of loss-making state enterprises in order to achieve some measure of fiscal balance, in particular, reducing budget deficit. It should be pointed out, however, with respect to participants* notion of privatization that, in practice, privatization also entails the sale of enterprises that are doing fine.
Looking at decentralization in the context identified, what would be a realistic assessment of its influence on the magnitude of the public sector and the aggregate share of public expenditures to Gross Domestic Product of a decentralized economy? What would be its impact on the efficiency and effectiveness of public expenditure planning? The logical view is that on the aggregate, decentralization increases the size of the public sector and consequently that of public expenditure. Viewed in this context, then decentralization may be criticised as violating the principles of public sector reforms which advocate streamlining and cuts in public expenditure. However, an argument can be raised that fiscal decentralization emphasises fiscal delegation of authority and control for efficiency and effectiveness of public expenditure. Whichever way, decentralization has implications on public expenditure planning and forecasting.
In connection with privatization, Julian Samboma in an articles entitled "Privatization Scramble in South Africa", argues that privatization is a weapon in the government's armoury with which to slash government spending and reduce the budget deficit which, at 6% of gross domestic product (GDP) is perceived as being too high and unsustainable^.
However Armando Castelar Pinheiro and Ben Ross Schneider on "Fiscal Impact of Privatization in Latin America" argue that "The goal of achieving fiscal balance through privatization is misplaced because the revenue generated are rarely large or timely enough to bring the budget deficit under control. They point out that in Mexico, Argentina, Brazil and Chile fiscal crises preceded and encouraged the decision to privatise, but only in Argentina
did the revenues from privatization contribute significantly to fiscal adjustment^.
The article developed a model incorporating time preference and longer term fiscal impacts which showed that major benefits could be expected only under rare circumstances.
3/ United Nations Economic Commission for Africa, Public Administration, Human Resources and Social Development Division. Report of a Training Workshop on Strengthening Financial Management and Accountability for Regional Development in Ethiopia. ECA/PHSD/PAM/95/5[4(b)], p.34.
4/ Julian Samboma - Privatization Scramble Begins - African Business, February, 1996 No.207, p.20.(IC Publications Ltd.).
5/ Armando Castelar, Pinheiro and Ben Ross Schneider - The Fiscal Impact of Privatisation in Latin America - Journal of Development Studies, Vol. 31, No.5, June 1995, p.751 (Published by Frank Cass, London).
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Page5 Politicians continue to tout the fiscal benefits of privatization perhaps to gain support or signal their commitment to economic reform.
Hie basic argument is that it is fiscal crises that prompt political leaders to privatise state-owned enterprises but the fiscal crises cannot be solved by mere temporary lump sums proceeds from privatization. Moreover, the revenues from privatization are often too small and come too late to solve fiscal crises. Admittedly, in the short run, proceeds from privatization can reduce government expenditure utilized for monitoring and controlling and subsidizing public enterprise. This may somewhat reduce the size of the public sector.
However, the benefits may be offset by greater demands by the privatized firms on government to provide more infrastructure, tax concessions and other investment conditions in the name of improving production, efficiency, creating employment etc. To meet those demands, triggers ad-hoc public spending.
Having examined the linkages of public expenditure to public sector, it is perhaps logical to move on to discuss the macro-policy framework within which public expenditure planning and forecasting should be developed; a task which is tackled in the next section.
SECTION II: MACRO-POLICY FRAMEWORK
The macro-policy framework is both a milestone and a pathway for public expenditure planning and forecasting. It is a milestone in the sense that it lays the ground within which to devise comprehensive government programmes which concretely express the policy objectives and priorities for development. It is a pathway in the sense that it indicates how to plan public expenditure in a manner that is consistent with the national development priorities or even at best, in a manner that favours the growth of public expenditure toward the high priority activities which government wants to undertake.
It is common for most developing countries to have a three to five-year rolling development plan as their framework for preparation of annual public expenditure (i.e. public investment and recurrent budgets). The responsibility for framing development plan differs from country to country. For example, the plan can be drawn under the guidance of a National Planning Commission (Zambia), the Ministry of Economic Planning (Swaziland), Ministry or Department of National Development and Economic Planning (Sierra Leone and Malawi). Of importance to know, however, is that these institutions perform virtually similar
duties.^ It is common practice in modern times to accompany the national development plan
with the national development strategy. This document specifies policy guidelines and provides clear and detailed set of instructions to remove any ambiguities that may be contained in the national development policy objectives.6/ United Nations - Government Financial Management in Least Developed Countries - United Nations Department of Technical Co-operation for Development ST/TCD/SER.E/15, New York, 1991, p.40.
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Within the context of the macro-policy framework, the broad areas which influence the structure of public expenditure and against which the process of public expenditure planning and forecasting ought to be carried out include: the demographic structure, the civil service and government structure, the infrastructure, the structure of public investment, peace and stability, water supplies, livestock population, culture, fuel supplies, basic necessities of life etc. Each of these factors has either budgetary linkages or supportive and regulatory implications on each sector of the economy with which it is closely connected. Broadly, the sectors include; education and training sector, the general public services sector, transport and communication sector, public order, safety and defence sector, water resources management sector, recreation and culture sector, fuel and energy sector, housing and community sector, manufacturing and mining sector, commerce sector etc. Table 1 illustrates different sectors expressed in monetary terms in the case of Swaziland during 1995/96. It also shows sectoral projections for the period 1997/98.
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Table I. Summary of Capital Expenditure on
Planned4 Agriculture,Forestry&Fisheries Manufacturing&Mining Commerce Education&Training Health SocialSecurity&Welfare Recreation&Culture PublicOrder,Safety&Defence GeneralPublicServices Housing&CommunityAmenities Transport&Communications Fuel&Energy WaterResourcesManagement TOTALSectoralProgramme1995/96-1997/98 CapitalExpenditure(E'000] 1995/96 26,033 34,103 1,331 37,922 15,408 2,366 5,121 41,701 80,877 25,517 124,771 1,497 18,118 414,755
1996/97 18,853 31,694 6,000 43,309 17,832 0 3,647 41,601 88,737 36,950 156,345 956 73,982 529,906
1997/98 18,558 18,199 9,001 18,102 18,743 0 10,600 35,927 67,549 38,841 212,216 0 66,729 514,465
Future Years 6,787 5,965 2,498 39,410 31,370 0 15,271 29,132 5,937 19,896 115,374 0 79,012 350,652
%Share 1995/96- 1997/98 4.3 5.8 1.1 6.8 3.6 0 1.3 8.2 16.3 7.0 34.5 0.2 10.9 100 Source:DevelopmentPlan1995/96-1997/98EconomicPlanningOffice-Ministryof EconomicPlanningandDevelopment,Mbabane,April1995.p.99. Key:E=Emalangeni(plural) ILilangeni=US$3.50
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Below is the illustration of the linkages,
(i) Demographic structure:
This one is linked or connected with the following sectors:
* education and training sector
• health sector
* social security and welfare sector
• housing and community amenities
(ii) Civil service and government structure:
These are connected with the general public services sector, including constitutional, social, political and cultural structures.
(iii) Infrastructure:
Basically infrastructure is connected with transport and communication, dams and irrigation schemes, but they may still be more depending on demand for extra infrastructural support
(iv) Public investment
Broadly, this cuts across all sectors but is commonly associated with
both the manufacturing and mining sectors and the commerce sector depending on the practices in individual countries.
(v) Water supplies
This is connected with water resources management (vi) Fuel and energy
In African countries there are wood fuel, gas, paraffin and petroleum fuel.
Perhaps the responsibilities for these types of fuel and energy could be determined according to prevailing circumstances.
(vii) Basic necessities of life
These may be connected with both the housing and community amenities and agricultural sectors.
(viii) Livestock population
This is connected with the agricultural sector
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Page 9 In order to assess the budgetary linkages for the purpose of planning and forecasting public expenditure, it is important to identify, too, non-budgetary linkages arising out of government intervention. These may include; the regulatory system, non-fiscal incentive mechanisms, and other supportive services. Further, it is important to establish the types of the sources of funds to finance these activities. For example, are the activities to be financed from loans in which case planners must plan and forecast expenditure on interest and consider cost-benefit thereof? Are the activities to be financed from user fees in which case government incurs no expenditure? Are goods or services to be consumed now or by future generations in which case expenditure thereon may be waived and deferred to future consumers? (some form of generational cost-sharing). Finally, are goods and services to be consumed by current consumers in which case they should be financed from taxes?
What is the significance of the linkages? The linkages help to indicate activities, that an individual sector may have to provide by virtue of its relation to a particular national structure. For example, the demographic structure (population) of a country, if analysed, will provide information on the rate of growth, age groups etc. The age classification will indicate number of people who are too old and unemployed, the economically active group, the school or university age groups and the below school age etc. With this information, planners may forecast trends in population growth by age groups, life expectancy, of the old and unemployed to forecast expenditure required to assist the old age. For school-going age group, information will help decide on how to provide primary education, secondary education, post-secondary education, teacher training, special education, adult and non-formal education, distance education, pre-school education, manpower, physical facilities, schools' furniture, teachers' houses etc. For the children, information is required on availability of nutrition, medical care, or special clinics, the number of disable or mentally impaired.
Hie population structure can also provide information on various socio-economic factors like income under which the rich are compared with the poor or sex where males are compared to the females or occupation where modern sectors are compared with traditional sectors and location where the urban are compared with the rural. The information is essential in identifying groups to which public expenditure ought to be targeted.
Population structure also provides information on the working group, in particular, the civil servants. Such information is required on the number of employees who are about to retire, since expenditure planning and forecasting should be made for that. The average post- retirement life expectancy should be known to avoid overestimation or underestimations. In countries that are structurally adjusting their economies, through, inter-alia. strengthening the civil services, and improving the efficiency and effectiveness of public expenditures, many people are retrenched. In the case of Ghana, for example, the money that is saved from retrenchment is used to improve the salaries and incentives of the remaining smaller number of employees. It is also used to buy more materials and equipment (computers, calculators etc.) to improve productivity of the retained employees. This means therefore, in essence, retrenchment exercises should be within time frame of the plan period to allow proper planning of the expenditure from savings on retrenchments.
Within the macro-policies, African countries develop financial frameworks which they use as guidelines to public expenditure planning and forecasting. A few examples of selected
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countries discussed in the next section show a great deal of similarities of the financial frameworks. The frameworks state the principles or the intention of government policy in a given period, the objectives of the policy and the underlying assumptions to safeguard the principles.
FINANCIAL FRAMEWORK FOR PUBLIC EXPENDITURE PLANNING AND FORECASTING
The major task is to design a financial framework that will be in line with programme activities for the plan period. The basis of a financial framework is usually the expected economic performance over the plan period and the estimates and policy directions as spelt out in the budget speech. The financial framework outlines the dominant principles for the plan period which sets important assumptions for socio-economic development for the plan period. As a matter of fact, the assumptions become built into the forecasts. We illustrate below some approaches to the design of financial framework in selected African countries.
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Country Swaziland
Structure of Financial Framework:
Plan Period (1994/95 -1997/98) Principles
The emphasis for government policy is to adhere to the principles of sound economic
management in order to minimize the adverse effects of external forces.
Policy Objectives
• to ensure control on expenditures
• to broaden the revenue base
* to provide an environment which is conducive to retaining existing economic
activities
• to attract new investment
Assumptions Changes in economic performance indicators and economic policies implemented by neighbouring countries (i.e.
South Africa)
* inflation averaging 13%
* linkage of Lilangeni to the Rand
• Stable political environment and confidence in macro:economic
management capacity in South Africa. This assumption is essential because of heavy reliance of the country on revenue receipts from the
Southern African Customs Union (SACU) largely dominated by South Africa.
Source: Prepared from data collection from the Development Plan 1995/96 -1997/98 - Economic Planning Office - Ministry of Economic Planning and Development - Mbabane, April, 1995.
ECA/PHSD/PAM/9#3[3b(vM)] Page12 Inrelationtothesameperiod,thetrendsinpublicexpenditureprojectionsarereflectedintable3below. Table3.showsbudgetprojectionsforbothrevenueandexpenditurefortheperiod1996-1997/98in Swaziland. Table3: Revenue&Grantst -CustonsOnionReceipts -CoapanyTax -incomandGradedTax -SalesTax -OtherRevenue TotalRevenue -Grants TotalRevenueandGrants Expenditure&MetLanding* RacurrentXxpanditura -Personnal -GoodshSarvicaa -SubsidiaskTransfers -Zntarast TotalRecurrentExpenditure CapitalExpenditure NetLending TotalCapitalExpendituret HatLending TotalExpand,tHatLending Surplus/Deficit Doaestic
Financing(Set) ExternalFinancing(net)
Estintes1994/95 Anount 1994/95 566.1 242.0 93.1 152.5 109.9 1163.6 39.2 1202.8 531.0 269.7 219.0 27.4 1047.1 476.3 -39.0 437.3 1484.4 -281.6 241.4 40.2
andBudget (BMillion] 1995/96 744.0 246.0 115.8 160.0 111.2 1397.0 25.4 1422.4 630.0 279.1 193.2 32.0 1134.3 357.6 15.3 373.1 1507.4 -65.0 n.a. n.a.
Projections 1996/97 652.0 224.5 126.4 205.0 125.1 1535.0 24.9 1559.9 715.1 301.4 202.9 32.9 1252.3 404.3 0.0 404.3 1656.6 -96.7 n.a. n.a.
1995/96-1997/98 1997/96 748.6 255.3 142.2 236.3 138.9 1521.3 24.4 1545.7 811.6 325.5 213.0 37.4 1387.5 456.9 0.0 456.9 1644.4 -298.7 n.a. n.a.
Average Growth p.a. {'94-'97> 15.01 2.71 23.6% 24.51 12.4% 14.3% 21.1% 13.4% 23.6% 9.9% -1.4% 16.6% 15.1% -2.2% 11.5% _
Average share (r94-*97) 50.8% 16.9% 6.4% 13.5% 8.5% 98.0% 2.0% 100.0% 41.4% 16.1% 12.8% 2.0% 74.3% 26.1% -0.4% 25.7% 100.0% - •oarce;MinistryofEconomicPlanningandDevelopment-DevelopnentPlan1995/96-1997/96,Mbabane,April1996,p.92.
ECA/PHSD/PAM/96/3[3b(vii)] Page13 Table4.StructureofFinancialFramework PlanPeriod1991-1996 coutry Mauritania
Principles Tolowertheconsolidatedfiscal deficitto3.4ofGDPIn1994andto restoreequilibriuminthebudgetby 1995.Inthelightofthis, expendituresshouldaverage26%ofGDP andthendeclineduringperiod1994- 1996.Thegoalwastoreorient expenditure*towardbasiceducation andhealthservicesandtochangethe structureoftheeconomytobenefit thenostprofitablesectorsand activitiesandconsequentlypromote sustainabledevelopment
PolicyMeasures •toenhancetheefficiencyof publicoutlays •toreducetheoverall volumeofthepublic expendituresinlinewiththe objectiveofincreasingthe levelofinternalsavingsand de-ejophaslzetheIntervention ofthepublicsector
assmptioos ■redectioaindefenseowtlays eachyearafterallowingfor iaflatioa •stricteaforceaeatofsubsidies orcurrenttransfers ■improv—eatlatargetingof macroecomomieandfiaaacial ■■aaagemaatdecisioes -availabilityofUtermal domesticaadexternalresources 'exogenousfactors(doaor domtuu,highoilprices, droplaexportfro*fishery sector)etc. ScarceiPreparedfromdatacollectionfromMauritaniaPublicExpenditureReview-ReportMo.10973,April,1994,WorldBank,WashingtonD.C.
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The financial framework in Mauritania during the plan period indicated above focused mainly on human resource development (education and health)- It did not necessarily cover other
sectors.
Taking example of education sector, the trends in public expenditure projections during that same period 1991-1996 are reflected in table 5 below. There are no available comparative figures to indicate reductions in expenditures under items shown in the assumption column. However, it can logically be argued that the operating expenditure on education were guided by the principles of the financial framework for the period.
ECA/PHSD/PAM/96/3[3b(vii)] Page15 Table5showsprojectionsofoperatingexpensesforPublicEducationforthe1991-1996 programinMauritania. Table5.ProjectionsofOperatingExpensesforPublicEducation (inmillionsofcurrentUM) Level/TypeofMwcatloa CentralServices MBD ILMandIPS BasicEducation GeneralSecondaryEducation TeachingExpenditures Scholarships SecondaryTeacherTraining TeachingExpenditures Scholarships TechnicalSecondaryEducation TeachingExpenditures Scholarships(local) Scholarships(abroad) HigherEducation TeachingExpenditures Scholarships(local Scholarships(abroad) TOTALforHED TotalOperatingBudget HEDpercentage
1991 146.00 83.00 63.00 1,259.00 1,156.00 1,054.00 102.00 97.00 53.00 44.00 108.00 80.00 20.00 8.00 B11.00 428.00 223.00 160.00 3,577.00 16,764.00 21.34
1992 14B.92 84.66 62.26 1,372.31 1,187.63 1,085.62 102.00 99.86 55.66 44.00 116.00 68.00 20.00 8.00 823.84 440.84 223.00 160.00 3,746.55 17,266.92 21.71
1993 151.90 86.35 65.55 1,495.82 1,220.19 1,116.19 102.00 102.88 58.B8 44.00 124.60 96.60 20.00 6.00 837.07 454.07 223.00 160.00 3,932.66 17,784.93 22.11
199« 154.94 86.08 66.86 1,630.44 1,253.74 1,151.74 102.00 106.06 62.06 44.00 134.48 106.48 20.00 6.00 850.69 467.69 223.00 160.00 4,130.35 16,318.48 22.55
1995 158.04 89.84 68.20 1,777.16 1,286.29 1,186.29 102.00 109.41 65.41. 44.00 145.13 117.13 20.00 8.00 864.72 481.72 223.00 160.00 4,342.77 18,868.03 23.02
199C 161.20 91.64 69.56 1,937.13 1,323.88 1,221.88 102.00 112.94 68.94 44.00 156.64 128.64 20.00 6.00 879.17 496.17 223.00 160.00 4,571.16 19,434.07 23.52
Annl Rateof Orowth 2.01 2.0* 2.0% 9.0* 3.0% 0.0* 5.4* 0.0% 10.0% 0.0% 0.0% 3.0% 0.0% 0.0% 5.0% 3.0% SourcesMauritaniaPublicExpenditureReview,ReportHo.10973April,1994-WorldBank-WashingtonD.C.
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It should be recalled that in the past, the economy of Mauritania was dominated by the public sector. Indeed, the public sector played a critical role with huge expansion of government services and wide administrative control over most sectors of the economy; a situation that was characterized by inappropriate investment programs.
However, subsequent initiatives were undertaken to change investment policy in favour of profitable sectors and activities. There was emphasis on prudence in fiscal management and opportunities were extended to the private sector to participate in the economy. There was steadfast recognition of the need to target public expenditure in line with the availability of internal and external resources. In order to mobilize more resources, the banking system was improved. In the public services, the institutional framework was improved and bureaucratic procedures simplified.
Table 6. Structure of Financial Framework Plan Period 1993/94
Country Tanzania
Principles The budget restructuring Scenario in Tanzania incorporated into the projections the
underlying assumption that the overall budget deficit, then calculated at 8.9% of GDP was progressively reduced to 6.8% of GDP
Policy Measures
• to change Tanzania's budget system to be in line with budgetary practices in other African countries
• reduce subventions to urban councils and let the councils collect more revenue
Assumptions
• staff retrenchment
* reduction in parastatals
* progress in restructuring
* reduction in budget deficit
* increased performance incentives for
unretrenched staff
Source: Prepared from data collected from Tanzania Public Expenditure Review-Report
Number 7559-TA, 1989, World Bank, Washington D.C.Development of the budget in Tanzania is influenced by the government's strong commitment to rural development which grants autonomy to Regional Administration and also
gives responsibilities to District and Urban Councils for public services such as primary
education, primary health care, water supplies and rural roads. Tanzania's budget is made of three components. These are (1) the consolidated fund services from which debt services aremet. (2) the ministerial supply recurrent votes of ministries and (3) the regional supply (funds
votes to cover recurrent costs of the Regions).
The budgets of local government authorities are not part of the estimates presented to
parliament. However a major part of their revenue comes in the form of grants providedthrough the Recurrent Budget as transfers from the Ministry of Local Government. This
makes the budget system in Tanzania to be somewhat not quite in line with the budget
systems of other African countries. Normally, the budget systems in African countries are
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Pagel7 characterized by the recurrent and capital expenditures. However, some countries (Ethiopia) keep a separate budget in respect of Aide funds.
Table 7. Financial Framework Plan Period 1988/89 - 1992/93
Country Malawi
Principles
Selection of core expenditure program consistent with government priorities with high priorities being on social services (i.e. education and health). Developing ten-year projections for public
expenditures both overall levels and sectoral shares and strengthening the links
between the longer term strategy and budgeting process. The social development policy emphasizes
- universal basic education for school age population - equality of education for
all
- educational efficiency - education system to satisfy
the needs of the economy for skilled manpower
Policy measures
* establish realistic levels of
expenditures over the next three to five years based on macro-economic framework
• identify the cost of specific programs that are consistent with resource availability as envisaged by the development policy framework
• broaden the classification of public sector investment needs
* expand public sector investment
programmes (PSIP) to include projects of which the government should be aware like parastatal investments not involving
government directly
Assumptions
* indications of inflation and exchange rates limitations
• modification of projections from sectoral ministries by the central ministries
Source: Prepared from data collection from Malawi Public Expenditure Review-Report No. 7281, April 1990, World Bank, Washington D.C.
ECA/PHSD/PAM/96/3[3b(viOJ Page18 below.Inthehealthsector,therecurrentexpenditureprojectionsforthesameperiod1988/89-1992/93wereasreflectedintable8 Table8.HealthInvestmentandRecurrentExpenditureProjectionsforthe1988/89-1992/93 0ICTOR 1.Recurrentcost*oftheexistinghealthsystem, atcurrantlevalofsupport 2.Incrementalracurzantcostsfron: «.newinvestmentsalreadyinprocess b.correctingtheunderfundingoftheexistinghealthsystem Subtotal 3.investmentCostsofOngoingProjects Subtotal(Ongoingrecurrentcosts) Subtotal(Recurrentplusinvestmentcosts) 4.Incrementalrecurrentcostsofnevinvestment notyetinprocess■ a.immunization,maternal/childhealth,familyplanning b.CoraPSIP c.Medicalschool d.FullPSIP Subtotal(newrecurrentexpenditures}
IMS/I* 41.6 0 6.2 6.2 15.9 47.8 63.7 0 0 0 0 0
19S9/90 41.6 2.2 6.2 8.4 6.9 48.6 56.9 0 0.1 2.2 0.2 2.5
1990/91 41.6 3.7 6.2 9.9 2.4 51.5 53.9 0 0.7 5.0 1.1 6.8
1991/92 :41.S 4.4 6.2 10.6 2.1 62.1 54.3 0.4 1.9 6.5 2.6 11.4
1992/93 41.6 4.9 6.2 11.5 1.3 52.7 54.2 0.8 2.6 6.7 3.8 13.9
SOW. 5TEAM 207.8 15.2 31.2 46.4 26.9 234.2 283.1 1.2 5.3 20.6 7.7 34.7
ECA/PHSD/PAM/9fi/3/[3b(vli)]
Page 19 It should be noted, however, that the tables under the structure of financial framework are not examples of success cases in public expenditure planning and forecasting. Rather they merely indicate common efforts by African countries at providing guidelines for public expenditure projections. The other tables on public expenditure trends give a picture of how expenditure patterns can be developed within the principles of the financial framework. The countries used as examples were selected on the basis of the availability of the information. The examples of non-African countries was sparingly used since the paper focuses on Africa.
SECTION III. OPERATIONALIZING THE BUDGET SYSTEM FOR IMPROVED PUBLIC EXPENDITURE PLANNING AND FORECASTING
The previous section examined the formulation of development objectives and priorities and focused on the value of linking the objectives and priorities to public expenditure projections or the budget process. It emphasized the fundamental role that the close link between the national development plan and the budget can play in enhancing the capacity of public expenditure planning and forecasting.
This section looks at the budget process in practice and the constraints which it encounters in enhancing public expenditure planning. Basically, budgeting is a process by which national development goals and objectives are translated into monetary values. It is also used to mobilize and allocate resources among established socio-economic development priorities and other programmes and projects. The budgetary process focuses mainly on planning, co-ordinating and controlling of the resources for accomplishment of the objectives set for the period covered. It is an annual plan of the government representing, in financial terms, both the resources available and various goals. It sets limits within which spending agencies operate and serves as a yardstick
to measure their performance.^ It is thus the main instrument by which development plans are
translated into action.
By virtue of its a1locative function, the budgeting process ought to be continuous and flexible in order to respond to changes in development goals and objectives which government may, from time to time, effect over the plan period. Further, the function demands that budgeting should also be viewed as a tool of accountability and management.
The budget is an instrument for accountability in the sense that government spending ministries and agencies use it for proper control of funds and monitoring of programmes for which funds are appropriated. It is a tool for management because operationally it prescribes directly or by implications, the expenditure, period and type of expected outcome. Budget
7/ United Nations Economic Commission for Africa - Report of a National Training Workshop on Strengthening Financial Management and Accountability for Regional Development in Ethiopia. (Debre Zeit, 25-29 December 1995) ECA/PHSD/PAM/95/5
l pp-12-13.
ECA/PHSD/PAM/96/3[3b(vli)]
Page 20
process begins by determining government goals objectives and policies. This is followed by the design of programmes. Thereafter, funds are allocated to finance the programmes. The allocation of the funds is followed by the implementation of the budget and appraisal and evaluation thereof.
At each stage of the budget process, certain functions are performed. For example, at the level of determining goals, objectives and policies, the functions involved include: data collection, recognition of economic constraints, assumptions and other inputs. At the programme development level, the functions include: projections or forecasts, establishing criteria for selection of programmes and taking note of supporting programmes. At allocation level, there is identification of short-term, medium-term and long-term programmes as well as financial plans, alternative fiscal policies and priorities and recognition, preparation and appraisal of major projects. At the level of budget implementation, the responsibilities are mainly to ensure accomplishment of targets within time and cost requirements. At the level of appraisal and evaluation, the functions include programme monitoring, reporting and adjustments and evaluation.
The chart below demonstrates the budgetary process.
Ch»rt t
^Establishment of goals, objectives,
and pollciM
Data collection) review of data; recognition of
eaonosdc and other constraints, assumptions,
and other inputs
Reporting and monitoring of programs;
adjustments and evaluation
Assignation of specific responsibility achievement of targets within
tine/cost requirements
Appraisal and evaluation
Execution of the budget
Development of programs for short, medium, and long terms
Allocation of resources
Projections and forecasts;
formulation of criteria for selection of programsf recognition of
supporting programs
Short-term, medium- term, and long-term financial plans; alternative fiscal policies; priorities
For major projects, identification, preparation, and
appraisal
Sourcet A. Premchand, Government Budgeting and Bxpeoditure Controls Theory and practice. International Monetary Fund, Washington D.C., 1983, p.39.
Notwithstanding that a budget relates to a specific fiscal year, in practice, budgeting is a continuous process dealing with diverse forces including changes in economic environment, changes in policies, changing nature of responsibilities and accountabilities of spending ministries, department and other government agencies. The budget views all these factors both in terms of expenditure and revenue perspectives.
On the expenditure perspective, a determination of total expenditure is made based commonly on two models, namely, the top-down model and the aggregate model. Under the
ECA/PHSD/PAM/9ti/3/[3b(vU)]
Page 21 top-down model, the expenditure totals or budget ceilings are established by the budget office at the central level and communicated to all government spending agencies. In determining the budget ceilings, a number of factors both endogenous and exogenous influence the decisions. For example, endogenously, there may be expenditure accruing from constantly existing legislations and policies whose justifications may have lapsed and whose costs of services tend to be inflexible; while exogenously, the factors may include resource constraints, changing socio-economic conditions etc. Other factors which may not be tangible and yet have impact on setting ceilings include; perpetual desire on the part of government to spend more in the belief to do good endlessly. Examples of such intangible influences include;
tendencies at central government quarters to wield power to increase budget ceilings by incorporating items not approved by cabinet. Unfortunately such tendencies militate against the guiding principle of public expenditure targeting namely: spending money where it is needed most and doing more with less.
On the revenue side, it is not possible to actually match expenditures with revenues except where expenditures are financed from earmarked funds. Therefore, the budget facilitates the provision of expenditure policy options and not the exact revenues for each expenditure programmes. However, broadly, the level of revenues determine the level of expenditures. For this reason, it is advisable to integrate revenue estimations with the budget cycle. For example, the budget can reciprocate the expenditure side with revenue side by assuming revenue to be given in order to determine the level of expenditures or assuming the level of expenditure and determine various packages of additional revenues to match the assumed level of expenditures. The packages of additional revenues may accrue from several sources including: improved tax collection enforcement and other new discretionary revenue measures. The rationale for each package can be established on the basis of the impact each has on such factors as production and consumption in the economy as tax has effects on them.
Apart from these measures, the revenue side of the budget can be complemented by foreign aid.
The procedures involved in the formulation of individual countries' budget have common aspects except with respect to time-frame which differs in individual countries. The example of common aspects is the division of budget process into stages at which particular functions are carried by the budget offices in consultation with other government spending ministries/departments and agencies. With respect to time-frame (starting period for budget preparation), budget offices have different starting and ending periods. So that in some countries, budget offices start early and devote more time in budget preparation while in others they start late and spend less time in budget preparations.
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adopt:
Chart 2 and fig. I demonstrate the timing processes which different countries may
Chart 2
Budget Process and Schedules - ZAMBIA (Period 1992)
Levels in budget Preparation
Budget office issues the 1992 budget guidelines with proposed budget ceilings
Budget Office and the National Commission for Development Planning (NCDP) staff meet with donors on aid projects and programmes
Visits by Budget Office and NCDP staff to ministries and provinces to advise on preparation of estimates
Submission of draft 1992 budget estimates to Ministry of Finance by ministries and provinces (based on ministry by ministry schedule)
Ministry by ministry review of submissions by Budget Office and NCDP staff
Budget Office and NCDP staff hold discussions with ministries* departments and provinces to ensure that line item allocations conform with agreed upon policies and priorities
1991 Schedules Jun
15-25
Aug
5-7
Sept
2 15
15--
15--
16-
Jan
—15
18
24
Source: Prepared from information from Report No. 11420-ZA-Public
Expenditure Review - Republic of Zambia. December 1992. (World Bank, Washington D.C.)
ECA/PHSD/PAM/96/3[3b(viO] Page23 Fig.I.MainPhasesofBudgetFonnulation-Bangladesh Stagesinbudget preparationAgency ResponsibleTIMING JulyAug.Sep.Oct.Mov.Dec.Jan.Feb.Mar.Apr.MayJuneJuly Printingandissueofforms andinstructions Preparationandsubnission ofestimates Collection,consolidation andprocessingofestimates Examination negotiation Finalizationofestimates andprinting SubmissiontotheCabinet PresentationtoParliament Authenticationbythe President
MOF MinistriesCOS& PADS MOF MOF MOF7Ministries MOF CabinetDivision Ministerof Finance President MOF:MinistryofFinance COStcontrollingOfficers PAOSiPrincipalAccountingOfficers SourcetUnitednationsDepartmentofTechnicalCooperationforDevelopment FinancialManagementinLeastDevelopedCountries,ST/TCD/SBR.E/15,p.71.Government
ECAyPHSD/PAM/96/3[3b(vii)]
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Operational Constraints
As can be seen in the example of Zambia, budget formulation begins in June and ends
in January of the following year; a period of around seven months. The time devoted to budget formulation in Zambia is, therefore, shorter. The levels in budget preparations are
somewhat fragmented, incoherent and overlapping, as can be seen in Chart 2. Such type of structure is characteristic of a weak budget formulation process. Its disadvantage is that itdoes not provide adequate opportunity to budget staff of spending ministries and other
agencies to consult, discuss budget guidelines with the staff of the Ministry of Finance andformulate and review budget implementation. It does not give them enough time to develop sound budget proposals and negotiate appropriate budgetary funds. Instead, spending ministries and agencies are given budget ceilings at short notices and are expected to make budget proposals within the limits of the ceilings. Such budget process, which does provide enough time to analyse budget proposals, encourages routinized budget procedures which lack innovative improvements. It also causes lack of co-ordination between recurrent and development budgets, lack of opportunities to prioritize proposals in order to put into best use projected expenditures. Such factors handicap efficiency and effectiveness in public
expenditure targeting. Though the Ministry of Finance issues budget calls, budget circulars, budget instructions, manuals and policy guidelines to spending ministries, it is difficult to comply with these instruments if time to consult and discuss is inadequate, and timetables for submission of budget estimates are not detailed enough.In the case of Bangladesh, budget formulation begins in July and ends in June of the
following year. The process begins soonest after the approval of the current year's budget;
almost a year before presentation of the budget. The time devoted to budget formulation is
longer. The stages of budget formulation are coherent and consistent over time. Such timingoffers good opportunity to budget staff of spending ministries and other agencies to consult,
discuss with budget staff of the central ministry in charge of budgeting, formulate and review budget implementation.Besides the country-specific constraints of budgetary process (i.e. example of Zambia),
the general weakness of the budgetary processes in most African countries is the lack of institutional framework which provides for the sharing of institutional*capability among
ministries of finance and planning, the central bank and the statistical office. The lack of theframework handicaps coordination among the institutions at technical level. To surmount the
problem posed by lack of institutional framework, some countries create joint task forces composed of senior officials drawn from the ministries and agencies to undertake importantfunctions relating to expenditure projections such as the review of key economic projections
and macroeconomic variables. For example, Ghana has established an Economic PolicyReview Committee, composed of two ministries, the secretary of finance and planning and
the governor of the central bank.Other countries (e.g Bangladesh), have an Executive Committee of the National
Economic Council, headed by the Prime Minister, meetings of which are also attended by
ECAyPHSD/PAM/96/3[3b(vii)]
Page 25
members of the Planning Commission, senior economic officers and the central bank.^ In the 1995 budget, the Zambian government made an expressed declaration to "enhance the performance of core economic and financial institutions such as the Bank of Zambia, the Zambia Revenue Authority, the Finance Ministry and the National Commission for Planning and Development"^. These efforts are evidence of the recognition by the governments of the need to strengthen institutional capabilities to allow for better co-ordination among institutions with useful information required for public expenditure planning and forecasting.
Experience shows that efforts to build or strengthen institutional capacity in public finance administration aimed at improving administrative capability were thwarted by economic crisis of the 1980s when African governments had to place greater emphasis on public sector management and human resource development for accomplishing dynamic and sustainable socio-economic development. The motive was to improve management techniques, public management policy and implementation of administrative machinery in general. Within that environment emerged budgetary reforms which responded to the economic crisis. These reforms mainly focused on short-term corrective measures rather than to examine and analyse the rationale of the budgetary process and the macroeconomic framework within which it was developed. A crisis-oriented culture of budgetary reforms was created whereby the reforms tended to be more reactive than pro-active.
Besides responding to macroeconomic crisis situations, budgetary reform measures also react against mismanagement or embezzlement of public funds, lack of financial accountability and other forms of malpractices in public sector management. Such reforms are usually not the outcome of public expenditure policy. Rather, they are the product of the outcry by the general public over malpractices in the management of public funds. Some countries (Swaziland) respond to such problems by establishing "Public Sector Management Programmes" whose main task is to examine government resource allocations, expenditure trends, organizational structure, policies and procedures of each ministry/department etc. to combat malpractices and improve public expenditure control-1^
8/ United Nations Secretariat, Eleventh Meeting of Experts on the United Nations Programmes in Public Administration and Finance , Geneva, 6-14 October 1993, Financial Resource Development, ST/SG/AC.6/1993/L.4, 9 August 1993, p.8-16.
9/ SQUARE Yaleman, Growth Budget, Report No. 11420-ZA Republic of Zambia - Public Expenditure Review. December, 1992, P.23 (World Bank, Washington DC.) 10/ Thulani Methetwa, - Time for Change, Political and Economic Monthly, vol. 9 No.6,
March 1995, p.21, Southern Review (Southern Africa Political Economy Series (SAPES).
