1. Medium-Term Budgeting in Moldova Progress and Future Challenges February 2008

2. 2 General context In 2002 Government introduced MTEF as a method of strategic budget planning MTEF reform was introduced with the World Bank and DFID support MTEF – one of the main elements in the agenda of strengthening public finance management

3. 3 Key objectives under the MTEF Initiative  Policy Linkage – the National Public Budget is a key instrument through which government policies are realised.  Comprehensiveness – medium-term budget planning covers all public revenues and expenditures.  Realism – government programmes must be planned against a realistic assessment of available resources.  Prioritisation – programme planning must recognise budget constraints, include cost analysis, and allow for reallocation of resources to higher priority areas.

4. 4 MTEF – Core Elements Macro-fiscal framework Macro-economic forecast Macro-economic forecast Public revenue framework Public revenue framework Deficit and financing resources Deficit and financing resources Analysis of inter-sector budget issues EGPRSP implications for expenditure allocations EGPRSP implications for expenditure allocations Wage bill analysis Wage bill analysis Inter-government financing Inter-government financing Public Investments Public Investments Expenditures priorities analysis  Between the sectors  Within the sectors (expenditures strategies) Expenditures ceilings  By types of budgets  By sectors and central Public Authorities (state budget)

5. 5 MTEF schedule January – Launching the process, the issuance of methodological indications January to March – Development of the macro- fiscal framework, sectorial expenditure strategies, and the establishment of resource ceilings March - Finalisation of MTEF and discussions with the MTEF Coordination Group April – Submission of MTEF to the Government By 1 st May – approval of MTEF by the Government

6. 6 The link between MTEF and the Yearly Budget It is an integrated part of the yearly budget planning cycle It is prepared before the development of budgeting instructions It sets the strategic framework for the further budget planning It is updated and extended yearly, in order to keep a three-year perspective

7. 7 MTEF – Linking Policy and Budget Processes National Policy Update Annual Budget MTEF Resource Framework for Public Expenditure Strategies and Programme Priorities Sector Resource Ceilings and Spending Priorities Detailed Resource Allocations Dec-May Jun-Nov Sequencing

8. 8 MTEF Coverage State Budget  Basic Component  Special Funds  Special means  Foreign financing of the projects (besides technical assistance) ATU Budgets State Social Security Budget Health Insurance Fund Sectoral coverage  Education  Health care  Social protection  Agriculture  Culture and tourism  Defense  Justice  Science  Environmental protection  Road and transport  Sport and youth ATU level (territorial)  10 ATU-s

9. 9 MTEF and External Financing MTEF includes primarily externally financed investment projects Grants financed technical assistance that is not administered by the MoF is not part of the MTEF. Uncertainties over future aid commitments has made it difficult to forecast external financing in outer years of MTEF. Increased levels of donor support requires better harmonization and integration of external financing into the National Public Budget.

10. 10 Working Group for macroeconomic framework Responsible – Ministry of Economy Working Group for fiscal policy and resource framework Responsible – Ministry of Finance Working Group for public expenditure policy and priorities Responsible – Ministry of Finance Budget Synthesis Department within Ministry of Finance Sector Working Groups (education, health, social protection, agriculture, culture, defense and s.o.) Responsible – Relevant Line ministries MTEF Coordination Committee Responsible – Ministry of Finance Organizational Chart of the MTEF Process Government Sector Finance Divisions of the MoF Public investmentWagebill

11. 11 Stakeholder involvement MTEF Coordination Group  a consultative body in the decision making process  wider participatory approach (Parliament, Presidency, Government, public authorities, trade union, syndicate)  detailed discussions and regular meetings Government involvement  takes final decision on the MTEF proposals  a earlier involvement in the decision making process and a better coordination with MTEF Coordination Group proposal is required Parliament engagement  MTEF provides context for discussion of annual budget  a more strategic approach to budget debate in Parliament is required

12. 12 Sector Working Groups (SWG) Participatory approach (inter-ministerial)  Representatives of different public authorities, obligatory MoF and MoET  It is recommended to include representatives of Local authorities, social partners and civil society (NGO)  Nominal composition is revised annually at the beginning of MTEF process Line ministry – key role  Leads and manages the activity of SWG  Takes decision and is responsible for sector expenditure strategy preparation  A strong collaboration between policy formulation units and budget units is required Submit sector expenditure strategies and reports to the MTEF coordination Group and MoF

13. 13 Sector Working Groups – Main Functions Help line ministries in development of sector expenditure strategies within MTEF Monitoring of MTEF sector strategies and programs Participate in discussion of main sector policy issues, linked to the budget, and Changes in the priorities in resource allocation at sector level

14. 14 How has the MTEF Changed the Budget Planning Process in Moldova?  MTEF is an integrated part of the extended annual budget cycle (initial phase)  Provides a strategic and comprehensive framework for budget development (3 year perspective) Covers all the National Public Budget Components Covers all the National Public Budget Components Includes sector and inter-sector analysis Includes sector and inter-sector analysis  Budget process has become more transparent and participatory Is approved by the Government in a participatory manner Is approved by the Government in a participatory manner Is published in the Official Gazette (Monitorul Oficial) and on the WEB site Is published in the Official Gazette (Monitorul Oficial) and on the WEB site

15. 15 The Challenges Ahead  Institutional capacities and processes for policy development, programme planning and budgeting require further development.  Policy frameworks should take more account of capacity and budgetary constraints.  Constraints and prioritisation issues must be more explicitly addressed at the political level.  More space has to be created within budgets to accommodate new policy- led spending initiatives.  Political level engagement in the budget planning process has to be broadened and strengthened.  Presentation of the governments budgetary plans has to be improved – both to Parliament and to civil society. Although much progress has been made since the MTEF initiative was first introduced five years ago, policy-based budgeting in Moldova is still at an early stage of development.

16. 16 Priorities in Taking Forward the MTEF Initiative  Better integration between policy development and budget planning processes and calendars.  Introduction of improved procedures for assessing fiscal impact in policy decision making processes.  Development of policy units in sector ministries.  Introduction of a budget programme classification linking resource allocations to policies and strategies.  A stronger emphasis on identifying efficiency reforms in order to create the space within budgets to fund new initiatives.  Improvements and better integration in MTEF and Budget presentation – a greater focus on what ministries plan to achieve.

17. 17 The Fiscal Context and Challenge  Over the last five years the National Public Budget has increased by more than 50% in real terms.  Revenue growth has been driven by economic recovery and the rapid rise in remittance financed imports.  Revenues have increased form 34% of GDP in 2003 to 40% of GDP in 2007 and are high compared with other countries of similar levels of economic development.  Over the medium-term revenues and expenditures are expected to grow at considerably reduced rates as: economic growth and the growth in remittances moderate;economic growth and the growth in remittances moderate; policies emphasise the need to reduce the currently high levels of government expenditure.policies emphasise the need to reduce the currently high levels of government expenditure. Moldova can expect to face a much more challenging fiscal environment within which to address its key public spending priorities.