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Concept note for updating yemen pfm action plan

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  • 1. CONCEPT NOTE FOR UPDATING YEMEN 2005 PFM REFORM ACTION PLAN Government – Development Partners PFM Group – Coordination Meeting August 28th 2013 Prepared by Jean Marc Lepain EU PFM Expert Introduction A joint Government – Development Partners Coordination Group was established in February 2013 with the objective of improving donor- Government coordination in support of PFM activities in Yemen. The Group held its first coordination meeting on February 5th this year at which time an agreement was made whereupon a new process that naturally led to updating the PFM reform strategy. The action taken included (a) with the assistance of the IMF, developing a Coordination matrix to map donor assistance to the PFM sector as well as Government’s technical assistance needs, and (b) with the assistance of the EU, updating the 2005 PFM Action Plan and merging all existing plans related to the PFM sector into one single plan in order to avoid overlapping and duplication of donor assistance. The EU experts arrived in Yemen on June 15th and immediately started consultation with the main PFM stakeholders (Ministry of Finance, Finance Institute, Ministry of Planning and International Cooperation, Ministry of Local Administration, Social Fund for Development, etc.) as well as with the donor agencies. This consultation led to a consensus on calling upon the PFM Group to hold its second meeting to achieve the following objectives:    To express Government’s commitment to develop the Action Plan and development partners’ commitment to support it; To agree on the Action Plan format and time horizon; To discuss the consultative mechanism to be put in place (Steering Committee, Working Groups, etc.). Importance of Developing a New PFM Action Plan The implementation of the Transitional Programme for Stabilisation and Development agreed between GOY and the donors appears very slow-moving. One reason is the absence of adequate PFM mechanism, especially in the areas of budget planning and budget execution. The Action Plan will address this issue as a top priority objective to accelerate implementation of current economic projects. Reforms undertaken since 2008 have been lacking a strategic direction. Ministries, Departments and Government agencies have been approaching directly the donors who have responded based on their preferences. The result is perceived as a very fragmented donor assistance lacking a systematic approach of needs. The Action Plan will define Government’s priority and allow donors to align their assistance based on these priorities. The present liquidity crisis cannot be solved only through budget support. It requires restoring macroeconomic sustainability of the fiscal policy and budget credibility; these issues need also to be addressed by the Action Plan as one of its top priority objectives. 1
  • 2. The 2005 PFM Action Plan The existing PFM Reform Action Plan was prepared in 2005 covering the years 2005-2008 and since then has never been updated. The Action Plan itself does not cover all PFM Reforms undertaken and only partially covers AFMIS implementation. Revenue management reforms are not included in the Plan. Following the approval of the Action Plan by the Cabinet, a Partnership Agreement was signed in May 2006 between the GRY and the Development Partners. The Partnership Agreement expressed the commitment of the Development Partners to financially support the PFM Reform Action Plan. UNDP was chosen as project coordinator on behalf of the development partners and in September signed with the GRY an agreement entitled “Implementation of PFM Reform Action Plan” with the objective of supporting the implementation’s first phase. UNDP’s role ended in June 2009. Since then there has not been any measure for updating the PFM Reform Action Plan, or any new agreements between the GRY and Development Partners for further financing of reforms. Financing of new activities has been done on a bilateral basis without any coordination between donors. The Action Plan is divided into four components: 1. General budget reforms 2. Enhancing control and financial accountability 3. Procurement 4. Improving competence and skills in public finance No report exists that would indicate to what extent the Action Plan has been implemented. A number of measures such as commitment management, cash management, etc., are still in the implementation phase. A PEFA assessment was conducted in 2008 and highlighted a number of weaknesses in the PFM system, but it is not known to what extent the issues have been addressed as there were no systematic follow-up activities. Under Component 2, a new Budget Classification and Chart of Account were introduced based on GFS/COFOG standards and the introduction of a functional classification. High priority was given to FMIS implementation which consumed a lot of energy and resources with the consequence that most reforms undertaken under component 1 and 2 have been AFMIS-centric. The budget formulation process has realized some quality of improvement but still confronts some challenging problems due to dual budgeting resulting from the separation between the recurrent and investment budget. 2
  • 3. Budget execution remains weak, although it is difficult to assess to what respect it is due to the liquidity crisis the country is facing or to ineffective procedures. Apparently the most successful reforms were introduced under component 2 and 4. A new procurement law was promulgated in July 2007. A High Authority for Tender Control (HATC) was created and, the former High Tender Board was restructured. During this period the Finance Institute has been strengthened and saw a considerable expansion of its activities. However both the Finance Institute and the High Tender Board need further donor support if they want to capitalize on the initial success. Significant progress was made in a number of areas which were not all programmed into the PFM Action Plan such as:     Taxation reform Introduction of the ‘ASYCUDA+’ for custom management Enactment of the Anti-corruption law Significant development in Administrative Decentralisation under the leadership of MOLA calling for more fiscal decentralization The fact that so many developments have taken place outside of the Action Plan highlights one of its weaknesses. The 2008 PEFA Assessment notes that “there has been no clear structure set up to manage directly PFM reforms. Specifically, no clear components have been defined for the PFM Reform pillar, with specific component managers tasked with clear roles and responsibilities each with a clear set of activities, target output, fully costed inputs, monitoring indicators and reviewable milestones. There are no arrangements to coordinate linkage between different PFM reforms, and no specific arrangements for managing the implementation of the reforms within line ministries.” The World Bank PFM Modernization Project In order to fill the vacuum left by lack of continuation of the 2005 Action Plan, the World Bank launched in 2009 the PFM Modernization Project. The Modernization Project had two objectives: to ensure the continuation of AFMIS implementation after UNDP withdrawal and to address some of the most pressing issues identified by the 2008 PEFA. In 2010, the Bank decided to expend considerably the project by providing a US $12M grant which also prompted a further decision to expend the PFM Modernization Project beyond the scope of FMIS implementation. The PFM Modernisation Project has five components: - Component 1: Enhancing decision-making mechanisms of budget management through commitment control, improved treasury and cash management, strengthened accounting systems, and strengthened transparency and social accountability in budget execution 3
  • 4. - Component 2: Improving Financial Management System through AFMIS and LGMIS (Loans and Grant Management Information System) implementation Component 3: Improving the capacity of public procurement institutions Component 4: Strengthening institutional capacity of the Central Organization for Control and Audit (COCA) Component 5: Project Management Although the PFM Modernization Project is an important contribution to the strengthening of PFM in Yemen and is implemented across two ministries (MOF and MOPIC), it cannot by itself cover all the needs of the various stakeholders. The PFM Modernization project will become an important component of the first phase of the new Action Plan. Development of this action plan will help planning the next phase of the project beyond 2015. The MOF – MOPIC Harmonization Project With the difficulty of implementing the Transitional Programme for Stabilisation and Development, the Yemeni leadership has become increasingly aware of the heavy price paid for a fragmented system. The response triggered the first joint attempt of MOF and MOPIC at developing a common strategy for PFM reforms through “The Executive Plan for the Harmonization of Investment Programmes and State Public Budget”. This plan intends to solve problems resulting from dual budgeting (the separation of the investment budget from the recurrent) and the misalignment of the budget with Government’s economic priorities. Considerable analytical work has been done resulting in a project matrix which identified areas of intervention and measures to be taken. More work needs to be done to convert policy measures into practical action at the procedural level, but the project seems set upon the right direction. This effort must be hailed as an important development and deserves to be placed at the heart of the new Action Plan. The Harmonization Project, which at the moment focuses exclusively on budget formulation, should be expended in the direction of budget execution since budget execution appears as the main bottleneck for the implementation of the Government economic plans. Action Plan Format What follows next are only recommendations for discussion in the Coordination Meeting and for consideration of the GRY. The Action Plan should cover all participants in public finance management, namely the Ministry of Finance, including the Finance Institute and the Revenue Authority, the Ministry of Planning and International Cooperation, the Ministry of Local Administration, the Social 4
  • 5. Fund for Development, the High Tender Board, the High Authority on Tender Control, the Central Organization for Control and Audit, the Central Statistic Office and the Central Bank of Yemen (for management of the Single Treasury Account and budget execution of ministry not part of the AFMIS network). We suggest dividing the Action Pan into two phases: the emergency phase, and the consolidation phase: (1) The Emergency Phase The Emergency Phase will cover the first years of the plan with a time horizon of 2 to 3 years (to be discussed). It will focus on emergency measures required to restore budget credibility and to facilitate the implementation of the Transitional Programme for Stabilisation and Development. (2) The Consolidation Phase Consolidation phase does not need to be planned in detail. It should identify a strategy path for moving PFM reforms beyond the restoration of budget credibility. New platforms or new components can be introduced later. At the end of the Emergency Phase a PFM Assessment (a Public Expenditure Review with a strong PFM component is recommended) will be conducted and a full-fledged PFM Strategy will be developed, giving occasion to move away from emergency measures. Based on this PFM Strategy the consolidation phase will be redesigned. However it is important at this early stage to identify probable strategic orientations in order to formulate an adequate sequencing of reforms. Structure of the action plan The Action Plan must integrate all existing plans and projects related to PFM, including fiscal decentralisation, decentralisation of planning, capacity building at all levels of Government including provincial and district levels, the Finance Institute development plan, etc. For the Emergency Phase, we recommend dividing the Action Plan into four platforms: (1) Budget Credibility, (2) Streamlining of Budget execution, (3) Accountability and transparency, (4) Fiscal decentralisation  The Budget Credibility Platform will be divided into several components; for example: macroeconomic forecasting, revenue, cash management, debt management, etc.  Streamlining of budget execution will focus on making the budget execution more effective, especially at the provincial and district level, possibly including some measures of decentralisation. 5
  • 6.     Accountability covers AFMIS and all the other ancillary activities such as chart of accounts and budget classification, business process reengineering, etc. AFMIS implementation as such will be considered as a separated component of the Action Plan. Special attention should be given to budget transparency as Yemen ranks 82 out of 95 countries in the 2012 survey. Fiscal decentralisation is a crosscutting issue. MOLA should take a leading role but decentralisation will affect economic planning, fiscal policy, tax management, budget formulation and budget execution. MOF can change the number and the structures of the platforms as long as the rationales are clear. A working group will be formed for planning each component. As recommended by the 2008 PEFA, the Action Plan must include reviewable milestones, well indentified outputs, deliverables and monitoring indicators. The Action Plan should clearly identify and quantify needs for technical assistance. Fragmentation of technical assistance should be reduced to a minimum to limit the number of potential tenders and recruitments. Special attention should be given to the reform of the Economic Unit Department as this department manages a budget nearly as large as the General Budget which has not been fully integrated into Government’s financial statements. A number of economic units should be integrated into the General Budget whereas clear principle for managing State Owned Enterprises should be introduced. The Economic Units Budget might harbour large contingent liabilities that must be taken into consideration by fiscal policy and that could represent a threat for the macroeconomic stability of the country. Fiscal decentralisation should be regarded as a cross cutting issue to be dealt with by all relevant sectors and working groups. We know that whatever forms the new constitution takes, there will be a fair amount of fiscal decentralisation taking place and that the present lack of decentralisation in budget execution is hampering the implementation of Transitional Plan for Stabilization and Development. Therefore decentralisation planning should start as early as possible, taking into consideration that a number of studies for measuring horizontal imbalance in governmental transfers to the provinces, revision of revenue and expenditure assignment, calibration of intergovernmental transfers, etc., will be necessary and might require more than a year of preparation. Management structure for the implementation of the Action Plan The Action Plan should not only be designed, but it must include a mechanism for the coordination and monitoring of its implementation. Each Ministry and Government Agency involved in the implementation of the action plan must create a steering committee. Steering committee will report to a high level Intergovernmental Committee. The Intergovernmental Committee will present reports to the Cabinet on a regular basis. We recommend the creation of a PFM Reform Secretariat located inside one of the key ministries in charge of the monitoring and the reporting. The Secretariat will report directly to the Intergovernmental Committee. 6
  • 7. Reports from the Secretariat will be made available to all members of the Donor – Government PFM Coordination Group. Consultative mechanism for preparing the Action Plan Each Ministry and Agency involved in the preparation of the action must create a dedicated Planning Committee to supervise the work of thematic working groups. Defining the structure of these working groups is the first step in the preparation of the Action Plan. The GRY must agree on a lead ministry that will coordinate the activities of the Planning Committees and consolidate the Action Plan. Action Plan preparation time table Considering that the present Coordination Meeting is the kickoff meeting for the preparation of the Action Plan, and considering the various time constraints of donors and participants, there is a consensus on the following timetable. 1. September to October 2013, preparation of the first draft of the Action Plan; 2. Beginning of November first Government – Donor Round Table for presentation of the Draft Action Plan based on a need assessment, and first comments by the donors; 3. November- December 2013 finalization of the Action Plan based on donor comments, calibration of technical assistance requests, finalization of outputs, milestone and monitoring indicators; 4. December, second Government – Donor Round Table for presentation of the final Action Plan; 5. January 2014 approval of the Action Plan by the Cabinet, appointment of the Intergovernmental Coordination Committee by the Cabinet and appointment by ministries and agencies of their Steering Committees. 7

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