Public Financial Management: Concept and Importance

Financial Management Management of resources for achieving optimum outputs Flow of financial resources – Input, process, output Internal Control – Regulations, procedures, Approval/Scanctions External Scrutiny – Audit, Public Hearing Financial Responsibility and

Management of financial resources : Financial Management Management of public resoruces Result of Resource use Fiscal Policy Government/Institutions Effective Efficient Transparent Accountable Public Financial Management Laws Systems Procedures Organizations

Public Financial Management Public Sector General Government Public Corporations Central Government State Governments Local Governments Public Non-Financial Corporations Public Financial Corporations Budgetary Entities Other Social Sectors Extra Budgetary Entities

PFM Concept PFM deals with government finance, Government administers and controls resources of the country on behalf of the citizens through PFM PFM is concerned with handling of public purse/Money Management of revenue and expenditure in a broader sense. Needs to be guided by laws, systems, procedures and organizations. Should guarantee the effective, efficient, transparent and sustainable use of resources. Should have mitigate the risk associated with finance. Should serve the interest of the people at large. Enables Government to fulfil its fiduciary role on behalf of the owners of the nations resources

PFM Objective and Process Objectives Improve Fiscal transparency Strengthen political accountability for fiscal and budgetary outcomes Define a medium term fiscal process Ensure that fiscal policy guides budgetary policy Ensure fiscal discipline and sustainability Preserve macro-fiscal stability Address inter generational equity concerns 1. Financing (fiscal ) framework 2. Budget Preparation (resource allocation) 3. Budget Approval 4. Budget Execution 5. Accounting and Reporting 6. Oversight, Scrutiny and Audit PFM Process

Scope of PFM PFM deals with the efficient allocation of public resources, distribution of income and macroeconomic stabilization of the country; Taxation and revenue management, Borrowing and debt management, Budgeting and expenditure management, PMF procedure and organizations, Responsibility and accountability, Oversight, scrutiny and Audit

Importance of Public Finance Management planning, programming and budget preparation Efficient allocation of resources increased tax base, compliance Revenue collection budget releases, procurement and expenditure management Delivery of services to the people reporting, monitoring and control Management and operational efficiency parliamentary oversight and external audit Accountability to the people:

Borrowing and debt management, Budget & Borrowing influenced by wider Policies and Operations A country's borrowing policy should be consistent with its macroeconomic objectives Economic Growth targets Contain inflation levels Limit budget deficit to certain level Keep credit & money Supply under control Macroeconomic Objectives Multilateral debt Bilateral debt Export Credits Mixed Credits Private/Commercial External Debt Treasury Bills Bonds/Stocks Loans/ Overdraft Promissory notes Arrears Domestic debt Used for deficit financing, Conditional or unconditional Soft or hard loan Categorized as Bilateral and Multilateral Received directly or reimbursable Internal Debt ( National or Domestic loan ): External Debt ( Foreign or International loan): outward and inward Multilateral, Bilateral institutions or individual. Institutions: NPC, MoF, FCGO, NRB, Donors, MDA's

Budgeting Authorization for use of public fund Strategic allocation/distribution of resources Macroeconomic Projections Fiscal target (fiscal policy) Revenue Projection Borrowing and other flows available Expenditure Projection Adjust expenditure as of resources Assess affordable fiscal envelope Fiscal and monetary policy Debt Fiscal deficit Aid flows Budget Process and Institutions: MOF, NPC, ….

Budgeting Process Govt revenue & Grants from donors How govt will spend the funds If Expenditure > Revenue = Budget deficit How to fund the deficit? Always by borrowing

Expenditure management Issuance of Budget Program approval Authorization Process and expenditure Accounting and Reporting External Scrutiny / Auditing 1. 2. 3. 4. 5. 6.

PFM Functional Framework of Nepal Legal Framework Institutional Framework PAC Constitution Legislative/Parliament Civil society Organizations OAG Executive/Government Acts /Regulation NVC Ministry of Finance (Budgeting and Financing) External Scrutiny and Audit Macroeconomic policies Taxation Expenditure Reporting IRD FCGO Working policies DOC Ministries, Agencies field offices Accounting RID Process/Directives Execution Financial Institutions/Banks

PFM Implementation Structure of Nepal - Central President Judiciary Legislative Parliamentary Committees (PAC) Constitutional Bodies (OAG) Others: Dev. Partners, CAN, ASB, Ind. Acc. Auditors, CSOs PFM Implementation Structure of Nepal - Central Central Bank Commercial Banks Consolidat ed Fund Executive (OPMCM) MOF FCGO DTCOs NPC Line Ministries Departments Paying Offices PPMO, NVC

Taxation and revenue management, "No taxation without representation." Tax rate needs to be imposed by Act. Parliament Audit Observations Tax Decision Government OAG Tax Accounting & reporting MoF Tax Administration Reports, Budget allocation, distribution RMIS FCGO Banking Arrangement RAS/ASYCUDA Concerned office Public/Stakeholders/Taxpayer

PFM Reform PFM is taken as an essential part of development process. PFM changes the manner of governance by mobilizing the public resources in the area of strategic importance. PFM Reform enables desirable fiscal and budgetary outcomes; Aggregate fiscal discipline : budgetary & fiscal risk control; Strategic allocation of resources; priority and policy based Efficient service delivery: using resources for best PSD PFM reform needs to be implemented as part of an overall strategy - reforms should be part of an overall strategic movement towards change (holistic public sector reform initiative) in order to enhance operations and outcomes in the public sector.

PFM Reform ….. Principally PFM reform is focused in the following guiding areas; country leadership - in setting/managing the PFM reform strategy and action plan. PFM diagnostic - in an integrated and coordinated manner with appropriate tools in regular timing and scope as of country needs. Capacity building - adding value to government decision-making cycles. Framed within a multi-year horizon, sequenced around agreed priorities, and built upon a coordinated approach. Linked to a robust monitoring and evaluation framework.

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