Budget Cycle and Policy Based Budgeting and Its Indicators in Nepal

1
Budget Cycle and Policy Based Budgeting and Its
Indicators in Nepal

• Pushpa L. Shakya
• Joint Secretary
• NPC Secretariat

2
Outline of Presentation

• Introduction
• Public Financial Management (PFM)
• Medium Term Expenditure Framework (MTEF)
• Annual Budgets
• Linkages Between MDGs, TYP, MTEF and Annual
  Budget
• PFM Indicators
• Issues
• Way Forward

3
1. Introduction

• Most of the LDCs endowed with limited resources.
• They need to use these resources in priority
  sectors effectively.
• Planning system was introduced in the then Soviet
  Union since 1928.
• Adopted and spread after 1940s in the developing
  world.
• Adopted mixed economy.
• Nepal introduced economic plan more than five
  decades ago.

4

• Formulation of macroeconomic framework and
  policies for the Periodic plan.
• GDP Targets
• Total investment requirements public and
  private
• Estimate of required resources
• Revenue
• Public expenditures
• External sources grants and loan
• Domestic borrowings

5
2. Public Financial Management (PFM)

• Public Financial Management (PFM) is very crucial
  for any government.
• PFM includes
• sound planning system,
• good management of government budget (government
  revenue, expenditure and debt management,
  reimbursement),
• procurement and accounting, recording, financial
  reporting and auditing etc.

6
Objective of PFM

• The main objective of PFM system is
• To improve efficiency in fiscal operations and
  enhance government accountability and
  transparency.
• To improve control over public expenditure
• It helps to reduce fiduciary risk and ensure
  effective utilisation of domestic as well as
  foreign financial resources .

7
Public Expenditure Management (PEM)

• Public expenditure is a crucial instrument in
  promoting growth, reducing poverty and income
  inequality, and enhancing human development.
• Pro-poor public budget should ensure
• - access to public resources, employment
  opportunities, education, health, safe drinking
  water and a safe environment to live.
• .

8
But, Public expenditure backed by insufficient
resources and high borrowings can - bring
macro economic instability and high inflation
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

9
Objectives of Public Expenditure Management

• Improving budgetary outcomes at three levels
• Aggregate fiscal discipline, through maintaining
  a hard budget constraint (through expenditure
  control)
• Allocation of resources consistent with policy
  priorities (strategic allocation)
• Efficient and effective use of resources
• -Input
• -Output
• -Outcomes

10
3. Why MTEF?

• To address the weaknesses in the Public
  Expenditure Management systems in developing
  countries the MTEF approach has been developed.
• 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.

11

• The MTEF Approach
• The MTEF is a three-year framework of public
  expenditure within which available domestic as
  well as foreign resources are allocated between
  various economic sectors. It 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.

12

• 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, sect orally and at the
  ministerial/departmental levels.

13
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
• .

14

• Strategic Allocation of Resources
• development of three year integrated sect oral
  and/or ministerial allocations cognizant of
  strategic plans developed by each Sector/Ministry
  
• Efficiency and Effectiveness in Resource use
• definition of clear objectives, outputs and
  costed activities which reflect
  sectoral/ministerial objectives, and ways of
  improving efficiency so as to achieve better
  results with limited resources.

15
MTEF worked as

• Linking annual programs and budget with sectoral
  and periodic plan
• Prioritizing programs along with costing, outputs
  and expenditures in accordance with the plans
  objectives and targets
• Adjusting annual expenditure programs of the Plan
  to a level consistent with resources availability
  while maintaining macro economic stability
• Ensure resource availability

16
MTEF in Nepal

• MTEF initiated in 2002/03 along with the Tenth
  Plan
• Introduce prioritization criteria (regular
  /current and development/capital)
• Unit costing
• Performance based budget release system
• Able to eliminate or merge more than 200 projects
  initially
• Per project budget increased
• Budget for P1 projects increased
• Pro-poor and pro-gender budget initiated
• Budget deficit contained at desired level
• Macroeconomic stability achieved

17

• The implementation of the MTEFs has helped the
  Government to
• maintain fiscal discipline,
• prioritize programs/projects within the framework
  of realistic resources, and
• bring them to manageable size with a strategic
  orientation towards key sectors and activities.
• The MTEF has in fact become a key instrument for
  the Government to
• operationalize the Plan by prioritizing the
  plan/program/project according to the changing
  resource situation and

18

• strongly linking the annual programs and budget
  with the plan objectives and strategies.
• Through the MTEF, government expenditure has been
  brought within a more realistic budgetary
  framework
• by prioritizing projects/programs,
• by focusing on implementation and monitoring of
  expenditures, and
• by introducing performance-based budget
  releases.

19

• The MTEF has facilitated donors
• to design their assistance strategies and make
  funding decisions for new projects, as the
  framework is based on clear vision/mission,
  objectives, output, activities, with the focus on
  prioritized areas to attain national objectives.
• The MTEF has become credible guide to resources
  planning, programming and monitoring both for the
  Government and the development partners.

20
Deficiencies in the Formulation of 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.

21
Annual Budgets

• Approval of Programs and Projects
• Proposals forwarded to National Planning
  Commission by LM in a prescribed format (33
  points form).
• Logical Framework
• Project screening criteria
• Foreign aid policy
• Approved projects are included in the after
  annual budget for implementation budget
  discussion.
• Annual work plans have to be forwarded to NPC for
  approval with monitorable indicators.

22
Budgetary Process

• District Budget ceiling and guidelines send to
  the DDCs by NPC before end of Kartik.
• Resource Committee meeting (chaired by VC of
  NPC) By last week of Mangsir.
• Budget call circulars with budget ceilings,
  guidelines and format send to LMs by NPC By
  Poush second week.
• LMs send budget proposal to NPC and MoF- By
  Chaitra first week.
• Program discussion in NPC- Start from Chaitra
  third week

23

• Budget discussion in MoF- Start from Baishak
  third week.
• Approval of Annual Development Program by NPC
  chaired by the PM- third week of Ashad.
• Approval of the Budget by the Cabinet- Third week
  of Ashad
• Finalisation of budget and presentation in the
  parliament by Finance Minister third week of
  Ashad
• Publication of Annual Development Program Part
  Two by NPC last week of Ashad.
• Approval of annual program by NPC- by second week
  of Shrawan.

24

• Linkage between MDGs, TYP, MTEF and Annual
  Plan/Programs

25
Problems

• Lack of ownership and sustainability
• Poor peoples participation
• Time overrun / Cost overrun
• Lack of proper Quality- at- Entry
• Inadequate Supervision Mechanism
• Frequent transfer of project staff
• Procurement delays / inadequate control
• Lack of financial accountability
• No proper devolution/ delegation to local self
  government units.

26
Issues and challenges

• Not all stakeholders are involved in project
  cycle
• Policies, annual budget and their implementation
  are not fully consistent with each other
• Non-budgetary expenses are significant and
  increasing
• Programs are not approved on time

27

• Current budget size is in increasing trend.
• Dependency on foreign resources is still high.
• Over demand of budget than given budget ceiling
• Allocation of insufficient budget for projects
  (mainly in infrastructure related projects).
• Continuation of unsustainable and cost
  ineffective projects.

28
public financial management Performance
IndicatorsPolicy- based Budgeting

• PEFA Indicator 11 Orderliness and participation
  it the annual budget process
• NPC used to initiate the annual budget-and MTEF
  formulation process.
• Assessment of impacts of the budget on the
  macro-economic, fiscal and sector policies is
  required
• Active and effective participation by other
  M/D/As as well as the political leadership in the
  budget formulation process,

29

• Full participation requires an integrated
  top-down and bottom-up budgeting process,
  involving all parties in an orderly and timely
  manner, in accordance with a pre-determined
  budget formulation calendar is required.
• The calendar should allow for passing of the
  budget law before the start of the fiscal year as
  well as for sufficient time for the M/D/As to
  realistically prepare their detailed budget
  proposals as per the guidance.

30

• Delays in passing the budget may create
  uncertainty and delays in some government
  activities, including major contracts.
• Clear guidance should be provided in the budget
  circular and the budget formulation manual,
  including budget ceilings for ministries and
  agencies.
• the political leadership should actively involved
  in the setting of aggregate allocations ,
  particularly for sectors, from an early stage of
  the budget preparation process.
• Budget should be linked with plan,policies and
  priorities of the government

31

• Assessment
• Existence of an adherence to fixed budget
  calendar.
• Clarity/comprehensiveness of political
  involvement in the guidance of the preparation of
  budget submissions (budget circular or
  equivalent).
• Timely budget approval by the legislature or
  similarly mandate body (within the last three
  years).
• Rating PI-11 C

32

• A clear annual budget calendar exists but some
  delays are often experienced in its
  implementation. The calendar allows M/D/As
  reasonable time (at least two months from receipt
  of the budget circular). (B)
• A comprehensive and clear budget circular is
  issued to M/D/As by the NPC, which reflects
  ceilings approved by the Resource Committee. This
  approval takes place after the circular
  distribution to M/D/As but before MDAs have
  completed their submission. (B)
• The budget has been approved with more than two
  months delay in two of the last three years. (D)

33

• Indicator 12 Multi-year perspective in fiscal
  planning, expenditure policy and budgeting
• Expenditure policy decisions must be aligned with
  the availability of resources in the medium-term
  perspective because it has multi-year
  implications.
• Multi-year fiscal forecasts of revenue,
  expenditure and deficit financing (including
  reviews of debt sustainability involving both
  external and domestic debt) must be the
  foundation for policy changes.

34

• Expenditure policy decisions should be described
  in sector strategy documents which are fully
  costed in terms of estimates of forward
  expenditures to determine whether the new
  policies are affordable within aggregate fiscal
  targets.
• policy choices should be made and indicative,
  medium-term sector allocations be established.
• Estimation of explicit costing of the implication
  of new policy initiatives,
• clear, strategy linked selection criteria for
  investments and integrated into the annual
  budget-formulation process give complete budget
  policy link.

35

• Assessment
• Preparation of multi-year fiscal forecast and
  functional allocations.
• Scope and frequency of debt sustainability
  analysis (DSA).
• Existence of sector strategies with multi-year
  costing of recurrent and investment expenditure.
• Linkages between investment budget and forward
  expenditure estimates.
• Rating PI-12 C

36

• Forecasts of fiscal aggregates (on the basis of
  main categories of economic and functional/sector
  classifications) are prepared for at least two
  years on a rolling annual basis. Links between
  multi-year estimates and subsequent setting of
  annual budget ceilings are clear and differences
  are explained. (B)
• A DSA for at least for external debt undertaken
  once during last three years. (C)

37

• Statements of sector strategies exist for major
  sectors but are only substantially costed for
  sectors representing up to 25 of primary
  expenditure or costed strategies cover more
  sectors but are inconsistent with aggregate
  fiscal forecasts. (C)
• Many investment decisions have weak links to
  sector strategies and their recurrent cost
  implications are included in forward budget
  estimates only in a few (but major) cases. (C )

38
Governments Reform Initiatives

• The Government of Nepal has been initiating to
  improve pubic financial management
• Since the Tenth Plan strategic planning documents
  has been started to produced.
• MTEF has been introduced since the Tenth Plan.
  Similarly, MTBF has been prepared
• Treasury Single Account (TSA) has been
  implemented in 60 districts and under
  consideration to implement it in additional 15
  districts coming days.
• Public Expenditure and Financial Accountability
  (PEFA )initiatives has been taken

39

• Committed for standard accounting system,
  auditing and timely reporting
• Improving overall project management
• Project prioritisation criteria were developed
  for both Current and capital budgets
• Ensure multiyear contract
• Ensure budget release for P1 projects.

40

• Some progress has been achieved in the area of
  policy-based budget.
• Formulation of Medium Term Expenditure Framework
  (MTEF) and business plans for some sectors has
  helped to forecast the budget and its intended
  results.
• However there are some problems in the
  preparation of MTEF
• lack of political commitment on the MTEF and
  budget preparation
• Problem of internalisation and institutionalisatio
  n

41

• 3. inadequate engagement or understanding of the
  MTEF among middle and lower-level government
  officials
• 4.uneven linkages between annual budgets and
  MTEFs and
• 5. incomplete sectoral business plans (in need
  of stronger monitoring of outputs).

42
Way Forward

• For Planning
• Plan should be based on more realistic resource
  forecast.
• Formulation of realistic and implementable plan
  is required.
• Ensure inter-sectoral linkages and consistency
  while formulating plan.
• Political commitment should be ensured for
  effective implementation of plan.
• District level planning mechanism should be
  strengthened.

43

• For Budgeting
• Ensure political stability
• Political commitment on budgetary process and
  MTEF
• Provision of budget announcement day or week in
  the constitution.
• Develop project screening mechanism and sector
  specific screening approach in the NPC.
• Budget allocation has to be made in line with the
  MTEF priorities.
• Internalization/institutionalization of MTEF
  process should be strengthened.

44

• Detailed trimester work plan for
  projects/programs should be prepared by
  implementing agencies to facilitate the tracking
  of project performance.
• Unit cost of outputs and programs/projects of all
  sectors prepared by the concerned ministries for
  annual plan and the MTEF has to be updated and
  revised and use it in the budgeting..
• Capacity building is required.
• Need to prioritize the programs and projects
  before approval and budgeting
• Fitting costs within sector ceilings in line with
  priorities identified.

45
For Implementation and Monitoring

• Implementation mechanism need to be strengthened
  by establishing quality-at-entry committee.
• Necessary guidelines pertaining to effective
  project implementation have to be prepared and
  strictly followed by the line ministries.
• ME should be strengthened and quality of
  supervision should be improved.

46

• Thank You