Budget Reforms, MTMF & MTBF Md. Abdur Rahim Khan National Consultant (Senior Assistant Secretary) Finance Division 28/01/2007

Objectives of the Session After completion of this session participants are expected to Be familiar with the weaknesses of present budgeting; Reforms in Budgeting Medium Term Macroeconomic Framework Medium Term Budget Framework Process and steps of MTBF

National Budget Objectives The objectives of The Budget can be broadly categorised as follows: Maintain macro-economic stability Reduce poverty Foster sustainable growth Carry on economic and structural reforms, economic liberalization, human resource development and good governance

Weaknesses of Budgeting Incremental; Missing link between Rev. & Dev. Budget; Centralized or top-down approach; Bureaucratic not demand driven; Expenditure driven not strategic; Lack of performance measurement to ensure VFM; Not realistic.

Need for Reform: Future Direction From incremental approach to performance-orientated budgeting. Introduction of a Medium-Term Budgetary Framework (MTBF) based on Medium-term Macroeconomic Framework (MTMF). Integration of non-development and development budget. Maintaining sustainable budget deficits.

Need for Reform: Future Direction-How Augmentation of more domestic resource particularly through widening VAT and Income Tax net. Further augmentation of non-tax revenue. Further expenditure rationalization through prioritization. Resorting to more concessional borrowing for financing budget deficits.

Need for Reform: Future Direction-How (Contd..) Value for money/performance orientation in statutory audit. Ex post evaluation and tracking surveys to measure performance and impact. Enactment of public money and budget management law

Medium Term Macroeconomic Framework (MTMF) MTMF is done by Financial programming in the context of a macroeconomic framework involving the accounts of the key sectors: Real sector (national accounts) External sector (balance of payments) Fiscal Sector (general or central government) Monetary sector (monetary authorities)

Financial Programming: Definition A financial program is a comprehensive set of coordinated policy measures aimed at achieving a set of economic objectives Building blocks of financial programs are— (a) objectives (b) policy measures (c) forecasting -- these are interrelated A financial program is typically developed in comparison with a baseline scenario for an economy to construct the macro framework

Preparation of MTMF Projections and Forecast of National Accounts, Balance of Payments, Fiscal Account and Monetary sector Aggregate Projections is Supported by Detailed Projections Fiscal Forecast Includes: -Revenue Forecasts -Overall Expenditure Framework -Forecast of Financing Requirements/Availability -Debt Servicing Projections -Projection of Discretionary Spending

Interrelationships among Macroeconomic Accounts Government Revenues Grants Expenditures Current Capital Financing Domestic Financing Banking Sector Non-Bank Sector External Financing National Accounts Private Consumption Public Sector Consumption Private Investment Public Sector Investment Exports of goods and non-factor services Imports of goods and non-factor services GDP GNDI Current Account Exports Imports services Transfers Capital and Financial Account Direct Investment Medium/Long-Term Capital Short-Term Capital Deficit or Surplus: Change in International Reserves Deposit Money Banks Net Foreign Assets Bank’s Reserves Net Domestic Assets Credit to Public Sector Credit to Private Sector Other Assets Net Foreign Liabilities Liabilities with monetary authorities Liabilities with the private sector Monetary Authorities Net International Reserves Net Domestic Assets Credit to Public Sector Credit to Banks Other Assets Net Foreign Liabilities Reserve Money

Interrelationships among Macroeconomic Accounts National Accounts Private Consumption Public Sector Consumption Private Investment Public Sector Investment Exports of goods and non-factor services Imports of goods and non-factor services GDP GNDI Government Revenues Grants Expenditures Current Capital Financing Domestic Financing Banking Sector Non-Bank Sector External Financing Current Account Exports Imports services Transfers Capital and Financial Account Direct Investment Medium/Long-Term Capital Short-Term Capital Deficit or Surplus: Change in International Reserves Deposit Money banks Net Foreign Assets Bank’s Reserves Net Domestic Assets Credit to Public Sector Credit to Private Sector Other Assets Net Foreign Liabilities Liabilities with monetary authorities Liabilities with the private sector Monetary Authorities Net International Reserves Credit to Banks Reserve Money

Steps in MTMF: Basic Approach Prepare baseline scenario to identify main problems, causes, and policy areas for reform Set objectives and targets Establish initial policy package Make consistent sectoral forecasts to see if objectives are achieved. If not, change policies or objectives. Keep iterating until objectives are achieved.

Objectives of MTMF Aggregate Revenue & Expenditure Ministry/Division wise Income-Expenditure Ceiling Formulate Medium Term Expenditure Plan Role out Medium Term Budget Framework (MTBF) Sustainable Budget Deficit

Evolution of the MTBF Concept Introduced in some of the high income countries in the late 1970s and 1980s Budget planning tented to be incremental and short-term with little attention given to the effectiveness and efficiency of public spending programs (Australia, New Zealand and the UK were among early reformers.) From mid 1990s World Bank started promoting the introduction of MTBFs in developing and transitional countries Key concern in these countries were to achieve greater realism in budget planning and to strengthen the linkages between government policies and strategies and budget resource allocations

What is Medium Term Budgetary Framework (MTBF)? Medium Term Budgetary Framework (MTBF) is a multi-year approach to budgeting that provides a medium term framework for government receipts and expenditure. MTBF links the spending plans of government to its policy objectives and requires a credible estimate of resources available for expenditure.

What is MTBF? (Contd.) MTBF requires decision makers to balance what is affordable in aggregate against the policy priority of the country. MTBF consists of a top-down resource envelop, a bottom-up estimation of the current and medium term cost of existing policy and, ultimately the matching of these costs with available resources.

MTBF The Main Features A medium term outlook to budget planning – 5 years Linking policy priorities to resource allocations – Vision 2021/NSAPR to budget Emphasizing the efficient use of limited public resources 18

Objectives of the MTBF improving macroeconomic stability by matching expenditure and resources as projected in the Medium Term Macroeconomic Framework (MTMF) ensuring stability in budgetary management in the short-term, keeping the public expenditure within a sustainable limit in the medium and long term and accelerating pro-poor economic growth at the same time enhancing the participation and role of the line ministries in the budget preparation process improving predictability of policy as well as funding by providing a medium term view of policy objectives and resource availability, so that line ministries can prepare plan for forward expenditure

Objectives of the MTBF (Contd.) allocating resources between and within sectors/ministries according to the strategic priorities ensuring proper, efficient and effective use of resources by establishing a more explicit linkage between the PRSP and other policy documents and line ministries’ objectives, policies and resource allocation removing the demarcation between the development and non-development budget gradually by joint programming of development and non-development spending establishing a system for measurement of performance of ministries/divisions and subordinate offices, so that a clear indication of the desired output from the inputs provided through the budget can be shown.

Differences Between Traditional & MTBF Traditional Budgeting MTBF Prepared for 1 year For 3-5 Years with 1 Year Actual & 4 years Projections Divided into 2Segments-Non-dev & Dev No Separation between Non-dev & Dev Incremental Focus on Strategic Objectives to Link Activities/Programs Expenditure Driven-No Question for Output/Performance Performance Oriented and Establish linkage between SO & Activities

Differences Between Traditional & MTBF Traditional Budgeting MTBF FD Plays deciding Role Ensure participation of the Line Ministry/Divisions Chance for Duplication of Expenditure line No Chance for Duplication of Expenditure Line No Realistic Projection for Revenue receipts Realistic Revenue Projection under MTMF Priority Depends on Political Will Priority Determined by the PRSP/Policy Document

Success Achieved: MTBF Approach Macro economic forecasting PRIORITIES NSAPR/National Policy Documents RESOURCES ACTIVITIES OUTPUTS OUTCOMES Ministry Objectives 23

Success Achieved: MTBF Approach (Cont.) Strategic phase Resource Allocation phase Budget Call Circular I Issued October Budget Call Circular II Issued March 24

Strategic Phase Provide a direction for the ministry Inject a sense of purpose into the ministries activities Decide WHO we are, WHAT we do, and WHERE we are going (3 W!!!) Provide a 1+4 year projection of total aggregate budget allocation – development and non-development 25

The Strategic Phase (Contd.) Budget Call Circular I – Ministry Budget Framework (MBF) - Contents: Mission Statement to reflect the management’s vision of what the ministry seeks to do and become The medium term strategic objectives The key activities Key performance indicators Targets against which performance can be measured Prioritisation of the use of resources Assess the poverty and gender impact of the strategies Initial allocation of aggregate development and non-development resources for 3 years 26

Detailed Resource Allocation Phase Budget Call Circular II The MBF (BCCI) will be evaluated by FD and PC. Based on this evaluation, and considering any changes in macro economic trends the ministry resources ceilings may be slightly revised Within the revised ceiling the ministry must undertake a detailed allocation of resources The resources are applied to achieve the targets and KPIs contained in the MBF 27

MTBF Budget preparation process 2015-16 2011-12 2012-13 2013-14 2014-15 Develop Objectives, strategies and targets Annual Budget Outer year forecasts Update Objectives, strategies and targets Annual Budget Outer year forecasts

Stages involved in MTBF Preparation of Macroeconomic and Fiscal Framework Line Ministry Statement of Strategic Spending Priorities Expenditure Review and Setting Resource Ceiling Preparation of Budget Circular Preparation of Departmental Estimates Review/Finalization of Estimates by the Respective Ministry Review of Proposed Estimates by FD and PC and Discussion with Line Ministries Compilation and Finalization of Budget/MTBF Presentation of Budget/MTBF to Parliament

Outcome of this Session Weaknesses of existing budget process Reforms in financial Management MTMF MTBF Differences Between Traditional Budgeting System & MTBF Procedure – Stages Involved in MTBF

Let’s think in our next session Is It A ‘Good’ Budget Five Questions Let’s think in our next session

Thank you Any Question