MEDIUM TERM EXPENDITURE FRAMEWORK Pushpa L Shakya

Presentation Outline Introduction Weaknesses in budgetary processes in developing Countries Why MTEF? Its rationale or importance The MTEF approach/concept Main objectives of the MTEF The MTEF Process Linkages between policy, plan and annual program Institutional arrangements for MTEF Achievements and implications of MTEF in Nepal Problems/challenges in the formulation of MTEF Way forward

INTRODUCTION Public expenditure is an important tool for: promoting inclusive, sustainable, high and broad based economic growth, increasing employment opportunities, reducing income inequality and enhancing human development. These are also the goals of a fiscal policy of the government of most of the developing countries like Nepal. However, if these goals of the fiscal policy are to be attained the public expenditure has to be managed properly. In this context, Public Expenditure Management (PEM) is very essential to achieve the targeted goal of the economic policy (fiscal policy) of the government.  

In the PEM these goals are achieved through; a) proper allocation and efficient utilization of public resources. b) proper balance between macroeconomic stability and economic growth. It is the key instrument available to the government to affect intended intervention for inclusive development and achievement of the goal of LDC graduation by 2022, SDGs and middle income country by 2030. The national strategy of poverty reduction and achievements of above goals can, therefore, be made effective through the proper management of public expenditure.

Public expenditure backed by insufficient resources and high borrowings can: create macro economic instability and high inflationary situation reduces the purchasing power of the people, and erodes competitive advantages. PEM is the way in which public resources are allocated and managed in pursuit of: Fiscal discipline Strategic allocation of resources consistent with policy priorities Efficient and effective use of resources

Weaknesses in Budgetary Processes in Developing Countries No proper linkages between the policies, planning and budget, resulting to failure of development plans. Priorities and policies are not always clearly spelt out. Limited or no involvement of Cabinet in these decisions reducing ownership of the decisions. Programs and projects are under funded.. A large number of projects are proliferated and budget is thinly dispersed.

Lack of transparency in the classification of government resources: Lack of transparency in the decisions within Government: Lack of mechanisms for contestability: Not all resources are included in the total resource envelope: Lack of predictability in the allocation of resources:

Why MTEF? Its Rationale or Importance The MTEF approach has been developed to address the weaknesses in the Public Expenditure Management Systems in developing countries. It is a tool to: - To link annual programs and budget with Medium-Term Plan. - To prioritize program and budget according objectives and policies. - To select sectoral programs within the budget ceiling. - To ensure allocation of resources for prioritized program.

The MTEF Approach/ Concept MTEF was first introduced in Australia and then in Africa and other developing countries. MTEF is increasingly becoming important device to budgetary management in developing countries. In the MTEF approach, a three-year or four year forecast for the public expenditure is made. In other words, the MTEF is a three-year framework within which available total resources for the government (domestic as well as external/foreign resources) are allocated between various sectors.

The MTEF can also be described as: A process for matching limited resources with unlimited needs. An integrated system through which all resources (government and donor) are allocated on the basis of policy priorities. A medium term focus into resource planning, so as to plan ahead for changes in policy and expenditure reallocations. Enhancing predictability in the flow of resources, nationally, sectorally and at the ministerial /departmental levels.

Main objectives of the MTEF Fiscal Discipline: Fiscal discipline is maintained by developing a consistent Macroeconomic Framework that prescribes a comprehensive and realistic hard budget constraint, within a stable macro economy; Strategic Allocation of Resources: Development of three year integrated sectoral and/or ministerial allocations cognizant of strategic plans developed by each Sector/Ministry; Efficiency and Effectiveness in Resource use: Definition of clear objectives, outputs costed activities ,and ways of improving efficiency so as to achieve better results with limited resources

The other objectives of MTEF are: Devolve responsibility to line managers so that they can make decisions on how best the given resources could be used. Focus on performance and emphasis on the output and outcomes. Improve the transparency and predictability of public resources. Ensure policy and funding predictability to line ministries and increase their autonomy in the use of resources in line with national policy priorities so that they can plan ahead and the programs can be made sustainable.  

The MTEF Process The MTEF approach involves both a top-down and bottom up approach of estimating total resource availability for a three years period and dividing these resources between ministries based on priorities of the government/plan. 1. Estimation of the Resource Envelope: determination of the total resources available, within the context of a stable macroeconomic setting. And this should be based on a consistent macro economic framework

1. Projections of domestic and External (donor) inflow including: Domestic revenues Foreign grants and loans Government domestic borrowings 2. From the bottom up, ministries need to prepare budget on the basis of Strategic Plan. The sector Plan set out the Ministry's objectives; output and activities from which an activity-based budget is prepared. Bottom up requirements from each spending sector/agency of the funds required a) For Current Expenditures Wages and salaries Office equipment's.

b) For Development/Capital Expenditure To implement existing development budget policy objectives and target. To implement new policy initiatives 3. Matching demands (needs/requirements) with likely resource availability Ministries are required to priorities their activities and related costs within the ceilings and guidelines provided from the NPC.

Linkage between SDGs, Periodic Plan, MTEF and Annual Plan/Programs Annual Program with trimester Breakdown MTEFs Business Plans Periodic Plan & Implementation National Human Development Report SDGs New Periodic Plan :

Linkages between Policy, plan and annual program/Budget Broad guidelines Broad development indication e.g. LDC Graduation, Constitutional policies, Education policy, Health sector Stategy, Policy ADS Plan Include the major policy for implementation Macro indicators e.g. GDP growth rate, reduction of poverty, Increase irrigation facility rate by x%, MTEF Tool for linking plan with annual programs Prioritization of Projects/Programs Tool for PFM Link inputs with outputs Annual Program Actual implementation of periodic plan Set annual sectoral targets Resource backup

Institutional Arrangement for MTEF A Steering Committee at the NPC Technical aspects relating to the analysis and formulation of appropriate policy and strategy options. Monitoring of policy implementation and Evaluation of the outcomes of policy to improve decision making.

2. Sector working groups at Ministerial level Coordination of policy implementation and review, and budget preparation and execution. Ensuring transparent and discussion on issues and strategy with the whole range of stakeholders. Reviewing progress of sector plan implementation, monitoring and evaluation Preparation of sectoral MTEF Operationalising strategic sector plans and planning for specific outputs and activities. Undertaking intra-sectoral ministerial departmental and program resource allocation. 3. MTEF Working Group at the NPC Secretariat to coordinate all the works and functions of the MTEF preparation

MTEF in Nepal Since FY 2002/03 the Tenth Plan, the MTEF was introduced. The Tenth Plan and the MTEF were prepared simultaneously The aim was: restoring macroeconomic stability through maintaining strict fiscal discipline, pursuing prudent domestic borrowing and monetary policies, and promoting economic growth through appropriate sectoral policies and structural reforms.

Achievements and Implications of MTEF Implementation in Nepal A number of positive results have been realized after the implementation of MTEF exercise. maintain fiscal discipline, Allocative efficiency has been improved through linking annual budget with the periodic plan’s priorities, Unit costing Per project budget increased Budget for P1 projects increased Number of projects has been significantly reduced Performance based budget release system

Pro-poor and pro-gender budget initiated pro-poor expenditures increased . The govt. agencies are now able to do multi-year contract for carrying out the construction works regarded as a credible framework for donor’s assistance in Nepal. identified potential areas of cooperation. Inter-linkages between objectives, targets and outputs has been established. Prioritizing programs along with costing, outputs and expenditures in accordance with the plan’s objectives and targets Ensure resource availability

Problems/Challenges in the MTEF: MTEF also needs review and refinement to make it more realistic, credible and successful. Some deficiencies has been seen in the MTEF process can be spelt out as below: Delays in the formulation of MTEF on time Not legally binding document Political commitment is important for effective use of MTEF, however it seems lacking. Not been developed sector specific criteria Resource gap not properly reflected by the MTEFs. Budget allocation is not tied up with performance result Lack of proper monitoring of the performances.

Way Forward: Making MTEF binding or mandatory Institutionalization and Internalization of MTEF Capacity building at all levels and concerned agencies Costing realistically and using it in the budgeting Develop and use sector specific criteria Ensuring proper prioritization, Prioritize the programs and projects before approval and budgeting Fitting costs within sector ceilings in line with priorities identified. Improving M & E system