1. Medium Term Expenditure Framework for Implementing Poverty Reduction Strategies Dr. Yan Wang for NEEDS Implementation Workshop, Abuja, Nigeria March 7-10, 2005
         

2. a collection of numbers. A budget is a reflection of
“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
In Nigeria, the National Eco Empowerment and Development Strategy: NEEDS has articulated a vision, a determination of Nigerian government and people, we now need to translate the target and policies into budgetary allocations in a MTEF and annual budget process.

3. 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

4. Introduction of MTEF

5. 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;

6. 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.

7. 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

8. 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.

9. MTEF: 6 stages STAGE CHARACTERISTICS
Development of Macroeconomic Framework
Macroeconomic model that projects revenues and expenditure in medium term
Development of Sectoral Programs
Agreement on sector objectives, outputs, and activities
Review and development of programs and sub-programs
Program cost estimation
Development of Strategic Expenditure Framework
Analysis of inter- and intra-sectoral trade-offs
Consensus-building on strategic resource allocation
Definition of Sector Resource Allocations
Setting medium term sector budget ceilings
Preparation of Sectoral Budgets
Medium term sectoral programs based on budget ceilings
Political Approval
Presentation of budget estimates to cabinet and parliament for approval

10. Medium Term Expenditure Framework
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

11. MTEF Process (simplified)
Macro-economic forecasting
Fiscal
Target
Total Expenditure
Setting
For multi years
Sectoral Ceiling
Setting for multi years
Annual Budget
Formulation
Updated cost
estimate of
existing
policy/program
New sectoral demand for t+2 (priority/cost)
Sectoral Budget
Preparation

12. Source: Houerou and Taliercio 2002
Experiences in Africa
Year of
Initiation
Scope and format
Government level and length of period
Ghana
1996
All sectors/recurr/cap
Central, 3 years
Kenya
1998
Malawi
Rwanda
1999
15/20 sector/recurr
Central and regional
S. Africa
1997
Cen/prov/local, 4yrs
Tanzania
7 sectors/recurr/cap
Uganda
1992
Central/local, 3yrs
Source: Houerou and Taliercio 2002

13. 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

14. Preliminary lessons from MTEF experience
The importance of initial PEM conditions. The MTEF is a complement to – not a substitute for -- basic budgetary management reform:
Budget comprehensiveness –including donors’; off-budget items,
Classification – integrate capital and recurrent budgets;
Budget execution. Timely reporting (publication)
Timely audit (and publication) underpinned by sanctions against misappropriations of resources.
2. Sequencing and phasing of the MTEF reform:
Phased vertically (macro, sector, service delivery)
Piloted horizontally (across sectors)
Timing and elements tailored to capacity

15. An ideal country case
Consensus on priorities built through the participatory process, built on ongoing programs. Lower priority activities dropped/scaled down
Comprehensive“Critical to the success of the PRSP is the need to implement only the PRSP”
PRSP-budget link is central: Budget preparation & scrutiny by MOF to ensure that line agency budget submissions are consistent with the PRSP
Transition phase for donor activities:
Existing projects “grand fathered”
All new projects must fit within PRSP priorities
Annual review vehicles, envisaged as country’s central policy review process
PER – expenditures & impacts
PRSP review (annual progress report) complemented by a comprehensive review every three years

16. Need for patience and perseverance:
Prioritisation and costing will likely need continuing improvement in the context of implementation and monitoring of the first PRSP
Prioritization and costing will only be possible if the PRSP is linked to the budget process
MTEF can be valuable:
The MTEF should be integrated with existing budget processes
the institutional arrangements for the MTEF & PRSP should be consistent in both exercises, and recognize the central role of Ministry of Finance
Phasing-in of MTEF, by sector and functions, needed

17. Pre-Conditions of MTEF, and Issues To Be Addressed

18. 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

19. 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

20. 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

21. 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”

22. Use of budget margin Serves as a Bumper for Budget margin
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

23. 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

24. 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

25. 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

26. 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

27. Capacity Building is needed on all these aspects: More training can be provided
How to Improve Budget Structure and Scope ?
How to improve the incentive system
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

28. Implementation Strategy for Nigeria Some suggestions and followed by discussion by Victoria Kwakwa

29. 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

30. 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

31. Strategies for Nigeria
To be discussed by Victoria Kwakwa and representatives from the government