public finance management reforms

8/14/2019 Public Finance Management Reforms

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03/06/10 PFM-Tarun Das-Economic Reforms 1

Interrelations Among PFM, Fiscal Policy andMacroeconomic Policy

-Tarun Das, Macroeconomic Adviser, MOF.Gambia

Formerly Economic Adviser, MOF, India


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Budget preparation withoutLTFP/MTEF

Eventually Alice realized that it matters agreat deal to know where to goand how toget there.

The same lesson is true for any BudgetFormulation.

Budget Preparation without Medium TermMacroeconomic Framework, Long Term FiscalPolicy and Medium Term ExpenditureFramework faces the same problem as that of

Alice in Wonderland.


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Contents of this presentation

1. Policies versus reforms

2. Objectives of economic reforms

3. Broad categories of policies4. Stylized Policies and Reforms

5. Requisites for Success of Reforms

6. Concluding observations


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1.1 What is policy or publicpolicy?

Policy is defined as a purposive course ofaction followed by an agent or set of agents

with a focus on public policy with theunderstanding that public policy is notrestricted to government.

Public policy could be either national publicpolicy or global public policy.

What makes policies public is not that they are

adopted and implemented by the government,but that they affect the public interest.

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1.2 What is a reform? Reform means any fundamental change in the

existing policy or in the institutions

Institutions include laws, acts, regulations, rules andorganizations to implement policies.

Routine or marginal changes in institutions or policiesmay not be called reforms. We need to have drastic,basic and fundamental changes.

However, reforms need not be revolutionary.

Reforms formulation requires a critical analysis, reviewand evaluation of the existing policies.

This can be facilitated if there exists a researchdepartment or a policy window in a Ministry.

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2.1 Rationale and Purpose of Reforms

Reforms are designed and implemented to(a) correct imbalances inSupply and Demand

for:

Output

Employment

Money supply

Foreign exchange reserves

Government finance, etc.

(b) correct instability in the growth rate, prices,

interest rate and exchange rates etc.


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2.2 Core objectives of reforms

To enhance productivity, efficiency andinternational competitiveness of different

sectors of the economy

To achieve sustained growth with price

stability, fiscal sustainability, equity andsocial justice, and

To impart dynamism to the overall growth

process.


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2.3 Desirable features of reformsa) Must Gradual, Step by Step, Evolutionary, not guided

by a Big Bang Approach or Shock Therapy orRevolutionary Ideology;

b) Must satisfy nationality constraint;

c) Must satisfy regional/ international commitments

(WTO, Environment, WB/IMF)

d) Agency constraint (ideology of present govt.)

e) General consensus by stakeholders

f) Reforms must have a human face (least sacrifice by

people in the transitional period).

g) No reforms can succeed unless we are able to makethe people march along with us.


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3.1 Broad categories of policies

Macroeconomic

1.Fiscal policy

2.Monetary policy

3.Trade/Tariff policy

4.Financial policy5.Wage & price policy

6.Policies to deal withany component of the

NAS identityY = C+I+ST+X-M

Sectoral

1.Agriculture policy

2.Industrial policy

3.Energy policy

4.Transport policy5.ICT policy

6.Banking policy

7.Education policy

8.S&T, R&D policy

9.Environment policy

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i k li i


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3.2 Macroeconomic Framework & policies

Accounting identities

Strong accounting relationships

NATIONAL A/C & REAL SECTORS

Private consumptionGeneral government consumption

Private investmentGeneral government investment

Exports of goods and nonfactorservices

Imports of goods and nonfactorservices

National Accounts

EXTERNAL SECTOR

Balance of Payments

CURRENT ACCOUNT Exports of goods and nonfactor

services Imports of goods and nonfactor

servicesFactor services (net)

Transfers (net)Official Private

CAPITAL ACCOUNTDirect investmentMedium/long-term capital (net)Short-term capital (net)

Overall balanceChange in net foreign assets

CENTRAL GOVERNMENT

Revenues Grants

Expenditures Current

CapitalOverall balanceFinancing

Domestic financing (net) Banking system

Nonbanking sector External financing (net)

Net foreign assets

Banks' reserves

Net domestic assets: Net credit to central govt.

Credit to private sectorOther items (net)

Liabilities to monetaryauthorities

Private sector deposits

Monetary Authorities

Deposit Money Banks

MONEY & FINANCIAL SECTORS

Net foreign assets

Net domestic assets: Net credit to central govt. Credit to banks

Other items (net)

Reserve money


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3.3 Broad Categories of IMF Policies

Macro stabilization policies and structuraladjustment policies/ reforms .

Macro Stabilization policies aim at reducingmacro economic imbalances by attacking(reducing) demand.

Structural adjustment policies aim atincreasing supply by improving efficiency &productivity and ensuring fair allocation ofresources among various sectors.


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3.4 These Policies Encompass

Macro

StabilizationPolicies

Fiscal policies

Monetary policies

Tariff policy

Exchange rate

policy

Wage-income-pricepolicies

Structural Reforms PFM Reforms Governance Reforms Legal Reforms Institutional reforms Financial sector reforms Factor market reforms

- Land, Labor, Capital External trade and

investment reforms Reforms in agriculture,

industry & infrastructure

Public sector reforms Social sector reforms Environment reforms


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3.5 Definition of Fiscal Policy

Fiscal policy includes the taxation andexpenditure policies of the govt, whichare normally implemented by the MOF.

The basic objective is to maintainmacroeconomic stability, to boost

savings, investment, employment andgrowth.

Other objective is to attain fairerdistribution of wealth and other social

goals through desirable tax structureand expenditure allocation for differentsectors.


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3.6 Definition of Monetary Policy

Monetary policy refers to the regulation of

money supply and interest & exchange rates. It is implemented by the Central Bank as the

regulator for the financial sectors and theprimary dealer of treasury bills.

Since government borrowing is influenced byfiscal policies, there is strong linkages betweenmonetary and fiscal policies.

It may not be advisable for a Central Bank toassume that they are completely independent

of the Ministry of Finance.


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3.7 Macroeconomic Policy The thrust of the macroeconomic policy is

not only macroeconomic stability, but also

to attain inter-sectoral, inter-regional andinter-generational equity.

In addition to fiscal and monetary policies,macroeconomic policies include many otherpolicies which are required to sustain high

economic growth with moderate inflationand stability in interest and exchange rates.

Macroeconomic policies also include povertyalleviation and employment generationprograms.

Above all they include policies to boostsavings and investment and to attainbalanced sectoral and regional growth.


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Output Budgeting Session-2 by Tarun Das 17

.systems, methods, procedures andinstitutions at every stage of budgetcycle

StrategicPlanning

BudgetPreparation

Budget

ExecutionAccounting

Auditing/

Reporting

Monitoring

Evaluation

PFM

REFORMS

4 1 Exact Scope of Reforms


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4.1 Exact Scope of ReformsDepend on

a) Socio-economic-political contextb) Agency constraint- ideology of present govt.

c) How far have we progressed in reforms?d) Where do we want to go?e) How to prioritize, sequence these reforms with what

speed and intensity?f) What are their likely impact on economic growth,

inflation, employment and poverty?

g) What is our role and capacity in the implementation ofthese reforms?There does not exist a universal and unique set ofreforms which holds good for all countries at alltimes. Reforms cannot be blindly imported from

other countries and must be owned by a country.

4 2 St li d Fi l P li i d


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4.2 Stylized Fiscal Policies andReforms

a) Sector-neutral fiscal policiesb) Reduction/ rationalization of taxes and dutiesc) Putting limits on fiscal deficit/ primary deficitd) Medium Term Fiscal Policye) Widening tax base & enhancing tax buoyancyf) Simplifying rules and procedures for taxesg) Strengthening tax administrationh) Strict expenditure controli) Effective cash management

j) Introduction of VATk) Introduction of Fringe Benefits Tax, Cash Transactions

Tax, Securities Transactions Tax, Service Tax,Minimum Alternative Tax

l) Phasing out of tax holidays for SEZs


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4.3 Stylized Monetary/ FinancialPolicies

a) Introduction of inflation targeting.b) Sector-neutral monetary policies

c) Developing capital, bond, debt marketsd) Introducing Basle norms for capital adequacy

ratio and non-performing assetse) Modernization and liberalization of insurance,

pensions and provident funds

f) Market determined deposit, lending & TB yieldsg) Liberalization on the entry of foreign banksh) Abolition of directed lending by the govt.i) Reforms and setting up regulatory bodies for

Insurance, Savings, Provident , Pension Funds

j) Introducing innovative financing schemes such asBOT, BOOT, BOLT etc. for infrastructure


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4.4 Industrial Policy

Abolition of licenses and physicalrestrictions on industry

Corporatization or privatization of Stateregulated monopolies of public utilities andtrade

Setting up independent regulatoryauthorities for key sectors

Open door policy for foreign directinvestment and technology transfer

Acts enacted on consumer rights, IPR,independent regulatory authority Outdated Companies Act replaced by

Competition Act


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4.5 External sector Policy

Abolition of licenses and physicalrestrictions on trade

Foreign investment policy Import substitution policies replaced by

export promotion policies Sector-neutral tariff policies Abolition of foreign exchange control, Full convertibility of currency on current

account

Almost full convertibility of capitalaccount for non-residents

Market determined exchange rates


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4.6 Other MacroeconomicPolicies

Decentralization of planning,

Sound institutional framework, Civil services reforms Liberalization of labor markets and

laws

Land reforms National Environment Policy National Population Policy National Transport Policy

National Energy Policy National Agriculture Policy National Education policy National Health Policy


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4.7 Scope and Purpose of PFMReforms

Enhance fiscal discipline and accountability,

Strengthen operational systems andmethodology for budget preparation,execution, accounting, auditing, reporting,monitoring and evaluation

Improve public finance management

systems Improve procurement systems for govt. Modernizing budget information system Review institutional and legal framework

and acts for public finance management Improve forecasting techniques for budget

planning and financial planning Improve techniques for asset/ debt/ aid/

project management.


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4.8 Stylized Public FinanceReforms

Fiscal Responsibility and Budget Management(Budget Honesty) Act

Expenditure control and MTEF Medium Term Financial Planning Improved systems and methods for asset/ debt/

aid/ project management Setting up Contingent Liability Fund Upgrading inspection, internal/external audit

Improving audit and accounting system Coordinating fiscal reforms at local govts Setting up Privatization Commission/ Dept. Setting up an independent Public Debt office Rationalization of user charges for public utilities,

public goods and services


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4.9 Stylized Public FinanceReforms

Strategic Business Plans for Budgetary

Bodies Modernizing Budget preparation Introduction of Program Budgeting,

Performance Based Output Budgeting,Zero Based Budgeting etc.

Introduction of IFMIS Modernizing Accounting System Introduction of Accrual Accounting International best practices on auditing Introduction of performance auditing in

addition to financial compliance auditing Strengthening ICT for budget

preparation, implementation, monitoring,review and performance evaluation

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5.1 Prerequisites for SuccessfulReforms

a) To break the nexus among vested interests

so that reforms can be implemented,b) To reorient the role of public policies,

c) To change the mind-set of bureaucrats,

d) To redefine the role of government,

e) To develop fair and efficient markets,

f) To build up efficient institutions,

g) To involve all stakeholders in the process of

reforms from the very beginning


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PFM-Tarun Das-Economic Reforms 28

5.2 Reorientation of Public Policies

a) To create enabling environment for public-private partnership

b) To link fiscal incentives to productivity

c) To create fiscal space for growth

d) To streamline public investment

e) To make development and growth inclusive,f) To repair market failures

g) To strengthen structures and institutions

h) To put emphasis on consultations, flexibility,decentralization, selectivity, outcomes, outputs,implementation, monitoring, evaluation and co-ordination of policies

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5.3 Redefining the role of Bureaucracy

There is need for a distinct change ofmind set of the government officials atall levels from top to bottom:

a)From a controller to an enabler

b)From a supplier to a facilitatorc)From an operator to a policy makerd)From a regulator to a trustee of social

equity and environmental sustainability

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5.4 Redefining the role of govt.a) Emphasis is on the so-called LPG- Liberalization,

Privatization and Globalization

b) Both well governed state and well functioningmarkets are essential for high growth andsustainability.

c) Government and free markets shouldsupplement and complement each other.

d) Good Governance requires strengthening independent

judiciary, Free Press, NGOs.

e) Government to withdraw from sectors whereprivate participation is more productive

f) But, scope of govt. to remain large in socialsectors and infrastructure.

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5.5 Markets and Institutions

a) Efficient markets are essential for rapid and

successful economic development.b) But the real markets are neither competitive

nor perfect. Governments role is to correctmarket imperfections and repair market

failures by strengthening institutions.c) Institutions play an important role indeveloping fair, competitive, inclusive,efficient, and integrated markets.

d) Institutions are also essential for implementingand evaluating public policies.

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5.6 Role of PublicInstitutions

Success of reforms requires solid public

institutions:

a) To protect property rights,

b) To regulate market agents,

c) To maintain macro-economic stability,d) To ensure social equity and justice,

e) To provide social safety nets,

f) To resolve conflicts.

All these help in reducing transactions costs,encourage work efforts, and provideincentives for fair competition.

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5 7 B ildi Effi i t


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5.7 Building EfficientInstitutions

a) Institution building is diverse involving allstakeholders viz. legislature, judiciary,government, bureaucrats, policymakers,corporate bodies and civil society.

b) It is an evolutionary and cumulative process,and requires open mind by all stakeholders to

accept new ideas and innovations, to haverespect for each other and to reward merits.

c) Most of the institutions that support marketsneed to be developed by the government forregulating, stabilizing and legitimizing theirscope and functions.

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5.8 Implications for Govt. Officials

a) Knowledge and ICT are now the most valuableassets of a budgetary entity

b) Risk Management is an important task.

c) Other important tasks are forecasting,

modeling, monitoring and evaluationd) Emphasis on decentralization, multi-

stakeholders consultation, risk sharing, jointresponsibility and accountability


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6.1 Concluding Remarks

a) In recent years the Gambia has made

significant progress of reforms in fiscal andfinancial sectors.

b) The proposed Public Finance Reforms are inthe right direction.

c) Carried to their logical ends, these reformswould make the Gambia as one of the mostdynamic economies of Africa within next fiveyears.

d) All of us will have to play a distinct role in thatexciting process of reforms management.


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03/06/10 PFM Tarun Das Economic Reforms 36Economic Reforms 36

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