1. No category

Medium Term Expenditure Framework
for Implementing
Poverty Reduction Strategies
Dr. Yan Wang
[email protected]
for NEEDS Implementation Workshop,
Abuja, Nigeria
March 7-10, 2005
“A budget is much more than
a collection of numbers.
A budget is a reflection of
a nation’s priorities, its needs, and its promise.”

Alexander Hamilton
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Overview Outline

Introduction of MTEF

International experiences: African countries

Pre-conditions of MTEF and Issues To Be Addressed

More capacity building /training needed

Implementation Strategy for Nigeria: to be discussed
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Introduction of MTEF
What is a MTEF?
 A tool for linking policy, planning &
budgeting over a medium-term ( 3 years) at
the Government-wide level;
 It consists of a top-down resource envelope
& a bottom-up estimation of the current &
medium-term costs of existing policies;
5
What is a MTEF?
 Matching of policy priorities and budget in
the context of the annual budget process;
and
 Involves rolling over this exercise every
year by incorporating policy changes.
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Objectives of MTEF

Improved macroeconomic balance esp. fiscal discipline

Integrating policy priorities (identified in NEEDS) into
annual budget: Resources allocated to priorities – to ensure
credible policy.

Better inter- and intra-sectoral resource allocation

Greater budgetary predictability for line ministries by
providing mid-term perspective (3-5 yrs)

Enhancing operating efficiency: high quality, low cost

Greater accountability for public expenditure
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What can it do?
If successfully applied, MTEF can
 Improve macroeconomic balance by developing
a multi-year resource framework (expenditure &
revenue);
 Assist in improving resource allocation between
& across sectors;
 Improve predictability of funding for line
ministries.
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MTEF: 6 stages
STAGE
CHARACTERISTICS
I.
Development of Macroeconomic
Framework
•Macroeconomic
II.
Development of Sectoral Programs
•Agreement
III.
Development of Strategic
Expenditure Framework
•Analysis
IV.
Definition of Sector Resource
Allocations
•Setting
V.
Preparation of Sectoral Budgets
•Medium
VI.
Political Approval
•Presentation
model that projects revenues and
expenditure in medium term
on sector objectives, outputs, and activities
•Review and development of programs and sub-programs
•Program cost estimation
of inter- and intra-sectoral trade-offs
•Consensus-building on strategic resource allocation
medium term sector budget ceilings
term sectoral programs based on budget ceilings
of budget estimates to cabinet and
parliament for approval
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Medium Term Expenditure Framework
Setting Fiscal Targets
Economic and
Fiscal Update
Central Agencies
Allocation of Resources to Strategic
Priorities
Fiscal Framework
Statement Report
Budget Policy
Statement
Cabinet
Corporate Plans
Minister
MTEF Process (simplified)
Macroeconomic
forecasting
Fiscal
Target
Updated cost
estimate of
existing
policy/program
Total
Expenditure
Setting
For multi
years
New sectoral
demand for t+2
(priority/cost)
Sectoral
Ceiling
Setting for
multi years
Annual
Budget
Formulation
Sectoral
Budget
Preparation
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Experiences in Africa
Year of
Initiation
Scope and format
Government level
and length of period
Ghana
1996
All sectors/recurr/cap
Central, 3 years
Kenya
1998
All sectors/recurr/cap
Central, 3 years
Malawi
1996
All sectors/recurr/cap
Central, 3 years
Rwanda
1999
15/20 sector/recurr
Central and regional
S. Africa
1997
All sectors/recurr/cap
Cen/prov/local, 4yrs
Tanzania
1998
7 sectors/recurr/cap
Central, 3 years
Uganda
1992
All sectors/recurr/cap
Central/local, 3yrs
Source: Houerou and Taliercio 2002
Lessons from
International Experiences

Integration of multi-year planning with annual budget
- MTEF and annual budgeting is one process

Realistic macroeconomic forecasting; honest revenue projection

Separation of total budget from detailed program

Clarification of new roles of MOF/line ministries

Capacity building and incentives for MOF/line ministries

Development of feedback mechanism
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Preliminary lessons from MTEF experience
The importance of initial PEM conditions. The MTEF is a
complement to – not a substitute for -- basic budgetary management
reform:

Budget comprehensiveness –including donors’; off-budget items,

Classification – integrate capital and recurrent budgets;

Budget execution. Timely reporting (publication)

Timely audit (and publication) underpinned by sanctions against
misappropriations of resources.
2. Sequencing and phasing of the MTEF reform:

Phased vertically (macro, sector, service delivery)

Piloted horizontally (across sectors)

Timing and elements tailored to capacity
1.
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An ideal country case
Consensus on priorities built through the participatory process,
1.
built on ongoing programs. Lower priority activities dropped/scaled down
2.
Comprehensive“Critical to the success of the PRSP is the need to
3.
PRSP-budget link is central: Budget preparation & scrutiny by
implement only the PRSP”
MOF to ensure that line agency budget submissions are consistent with the
PRSP
Transition phase for donor activities:
4.
•
•
Existing projects “grand fathered”
All new projects must fit within PRSP priorities
Annual review vehicles, envisaged as country’s central policy
5.
review process
•
•
PER – expenditures & impacts
PRSP review (annual progress report) complemented by a
comprehensive review every three years
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


Need for patience and perseverance:
 Prioritisation and costing will likely need continuing
improvement in the context of implementation and
monitoring of the first PRSP
Prioritization and costing will only be possible if the
PRSP is linked to the budget process
MTEF can be valuable:
 The MTEF should be integrated with existing budget
processes
 the institutional arrangements for the MTEF & PRSP
should be consistent in both exercises, and recognize
the central role of Ministry of Finance
 Phasing-in of MTEF, by sector and functions, needed
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Pre-Conditions of MTEF, and Issues To
Be Addressed
Pre-conditions for Implementing MTEF

There may be different views on pre-conditions. This is
one view: We need

Strong political support

MOF /NPC’s willingness/commitment
- clear understanding of MTEF and incentives
- strong leadership within MOF

Line ministries’ compliance
- proper incentives: discretion and policy prioritization

Capacity building for MOF and line ministries
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How to Build Macro Forecasting
Capacity in MOF?

MOF plays a key role in macro forecasting
for fiscal policy purpose
- strong need to increase institutional capacity
- consideration of social/political factors

Coordination mechanism with MoF, CB of Nigeria,
public/private research institutes

Formula for conservative forecasting for budgeting
- in Canada, add 0.5-1% to forecasted interest rates
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How/Who Decide
Total Budget & Sectoral Ceiling? (1)

Two stage approach:
total envelope setting

sectoral allocation
Total budget setting
- macro/fiscal targets, social/political demands
- new sectoral demands and updated costs estimates

Sectoral allocation
- national policy priority
- determined within total budget : zero-sum game
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How/Who Decide
Total Budget & Sectoral Ceiling? (2)

Final draft is prepared by MOF
in consultation with the President

Send draft to cabinet meeting
for consensus building
- sectoral ceiling is not revealed until total decided
- in Sweden, 2-3 days’ cabinet retreat

In case of disagreement,
final decision is made by President
“It is President who holds ultimate responsibility of budget”
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Use of budget margin

Serves as a Bumper for
1) macro forecasting deviations
2) ‘inevitable’‘unexpected’ demand
3) President’s new initiatives under exceptional situations

Budget margin
= total envelope – aggregate of sectoral ceiling
* in Sweden, 3.33% in 1997, and 0.05% in 2003

Unused margin to be used to accelerate debt payment
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How much sectoral ceiling is binding?

In principle, no breach is allowed

Amendment allowed for substantial macroeconomic
change (cost estimate basis)

Exception is explicitly identified ex-ante
with MOF’s consent, through cabinet meeting
1) ministry makes trade-off within sectoral cap
2) trade-off between ministries within total budget
3) budget margin to be used
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How Much Discretion
Allowed for Line Ministries?


Sectoral priority discussed and agreed
between MOF and line ministries
Line ministries prepare own budget request
within provided ceiling & priority line

monitoring and coordination mechanism

Incentive for efficient spending
- allowed to carry-over certain % of savings to ministries
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How to Build Incentive System?
For MOF /NPC ?
- Shift to higher level, macro decision-making
by integrating national policy priorities with budgeting
- Close interaction with President
For Line Ministries
- Budgetary Discretion to prioritize policies
- Flexibility in implementing policy and executing budget
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How to Ensure
Line Ministries’ Accountability? (1)

Ministers hold ultimate responsibility over performance

MOF /NPC plays a role as a watchdog
Performance management serves as a feedback
mechanism for increased discretion



Linking budgeting with accounting system
Information system needs to be integrated between
MOF, NPC, and line ministries, and Office of Statistics
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Capacity Building is needed on all these aspects:
More training can be provided

How to Improve Budget Structure and Scope ?

How to improve the incentive system

How to make line ministries accountable for delivery?

Performance Management System

- utilized as information gathering and analysis
- long-term, phased approach is desirable
- need to adopt realistic short-term approach
- pilot projects to introduce output-based indicator
development and performance evaluation system
- expand into all programs with outcome indicators
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Implementation Strategy for Nigeria
Some suggestions and followed by discussion by Victoria Kwakwa
Creating Enabling Environment for MTEF

Use MTEF as an instrument to alter status quo

Fiscal reform along with Public Sector reform

Leadership and Capacity Building
- champion of reform and creating a core team
- motivating self-development and capacity building

Performance oriented environment in government
- e.g., regulation-free organizations
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Implementation Strategy [a suggestion]

Stage I : top-down approach
- macroeconomic forecasting and fiscal target setting
- setting total and sectoral ceiling prior to program details

Stage II : bottom-up approach (Gradual Approach)
- line ministries’ discretion within sectoral ceiling and priority
- allowing discretion on operating costs

Stage III :incorporation with performance management
- well-functioning information system
- performance information reflected in budgetary decision
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Strategies for Nigeria

To be discussed by Victoria Kwakwa and
representatives from the government
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