The Impact of Public Finance Management on Spending on Agriculture in Ethiopia


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IFPRI-ESSP2 Conference
October 22-24, 2009

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The Impact of Public Finance Management on Spending on Agriculture in Ethiopia

  1. 1. ETHIOPIAN DEVELOPMENT RESEARCH INSTITUTE The impact of public finance management on  spending in agriculture in Ethiopia  Alemayehu Geda Dawit Birhanu ESSP – II Conference October 22‐24, 2009 October 22 24 2009
  2. 2. Plan of Presentation • Introduction – Hypotheses – Motivation and Approach • Federal‐level planning – Macro framework Macro‐framework – Sectoral planning at the federal level • Local level planning – PSNP and OFSP – Other agricultural expenditures Other agricultural expenditures • Conclusions and Policy Implications INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  3. 3. Introduction  • The loose link between policies, planning and budgeting  impacts economic outcomes.  • The impact of the above nexus is discussed in:  – Andrews and Moon (2004), Alonso, Judge and Klugman  (2005), Booth, Christiansen, and Driscoll (2005) • Little has been done in terms of understanding budget Little has been done in terms of understanding budget  practices and procedures across the developing world  (especially in Ethiopia).  – The CABRI‐OECD‐AfDB collaborative initiative constitutes  h CA I O C Af ll b i i ii i i the only prominent study on the topic   INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  4. 4. Hypotheses • Budget outlays are made based solely on indicative targets Budget outlays are made based solely on indicative targets  that are set independently from each other • Public Investment Programs (PIP) are made in accordance Public Investment Programs (PIP) are made in accordance  with investment programs proposed by the respective  ministries, independently from one another • Annual budgets are products of a brand of incremental   budgeting that depends largely on previous allocation  g g p g y p decisions and hence little rigorous economic analysis • Hence procedures may have ignored inter sectoral Hence, procedures may have ignored inter‐sectoral  relationships and demand constraints as well as economic  feasibility INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  5. 5. Motivation and Approach • Objective: To understand the implication of the budget planning  procedure for efficiency of public spending in agriculture. • Qualitative approach for this study – A forthcoming companion study provides quantitative estimates of  spending efficiency • Methodology – Comprehensive review of budget policy documents • B d Budget and investment program planning and preparation procedures di l i d i d • Expenditure performance, the capacity for monitoring and evaluation – Focus group discussions  INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  6. 6. Sample and Focus Group Discussions • The approach we adopted to shed some light on planning,  budgetary practices and procedures in Ethiopia has three parts: – Comprehensive discussions of budget and investment program Comprehensive discussions of budget and investment program  planning and preparation procedures, and expenditure performance  and the capacity for monitoring and evaluation with the Ministry of  Finance and Economic Development (MoFED) p ( ) – Similar discussions as above with the Ministry of Agriculture and Rural  Development (MoARD) Development (MoARD) – Woreda level focus discussions, in addition to the general provisions of  budget preparation, on specific cases of public investment programs  budget preparation on specific cases of public investment programs by the two Ministries focusing on agriculture INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  7. 7. Federal Level Budget Formulation: A brief discussion • Pre‐reform period budget formulation employed the incremental  budgeting system. • The reform emphasizes long‐term development objectives. • Centralized the budget formulation (merged planning and budget Centralized the budget formulation (merged planning and budget  formulation) • Four stages: planning, preparation, legislation, and implementation Four stages: planning, preparation, legislation, and implementation  & control. • Stakeholders: MoFED, NBE, MoARD, Council of Ministers, Office of  , , , , the Federal General Auditor  INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  8. 8. Federal Level Planning Examined • The Macro‐Economic Fiscal Framework (MEFF) h i i l k( ) – Macro‐projections (real sector, monetary‐BoP) – The Aggregate Resource Envelope (ARE) • Domestic resource projections – Real and nominal GDP growth – Tax elasticity Tax elasticity – Import projections – Exchange rate developments – Inflation – Anticipated tax and non tax revenue • Foreign resource projections – Development partners’ commitments – Historical trends on disbursements INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  9. 9. Federal Level Planning Examined (cont.) • Should bring together experts from MoFED, NBE, FRCA • Bulk of the workload rests on MoFED Bulk of the workload rests on MoFED • Macro‐projections make use of trend regressions (pretty  much independently for sectors) much independently for sectors) • GDP forecasts are generated using lagged values of GDP  growth trends aligned with PASDEP targets. growth trends aligned with PASDEP targets • Does not systematically introduce predictability in pledged  funds  funds INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  10. 10. Federal Budget Formulation • Indicative planning figures are developed based on the  Macro‐Economic Fiscal Framework • Expenditure ceilings and guidelines • Preparation of budget proposals by MoARD  • Appraisal by MoFED • Federal budget drafting  INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  11. 11. Federal Budget Formulation (cont.) • MoFED does not compare impact and return across projects to  make budget decisions. • Selection among projects is done independently of budget  formulation and bases on sector development programs and  PASDEP.  PASDEP • The link between outcome and targets in PASDEP is weak • Related to PASDEP is the Macro‐Economic Fiscal Framework and  hence the capacity to do that central framework • Sector development programs are developed and managed by the  Federal Government.  INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  13. 13. Budget Planning Process:  Agriculture and Rural Development • Policy documents note that Agriculture and Rural  Development is an overriding priority of the government  • ARD does not have a comprehensive sector program – Capacity constraints limit planning • Little attention is paid to the sector by the International Little attention is paid to the sector by the International  Financial Establishment, unlike health (HSDP) or education  (ESDP) INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  14. 14. Budget planning process: ARD (cont.) • Th f The focus of ARD in PASDEP f ARD i PASDEP – Enhancing the productive capacity of smallholder farmers – Promoting diversification Promoting diversification  – Shifting to a market based system  – Ensuring food security at the household level and; g y ; – Strengthening emergency response and reducing  vulnerability • Programs such as Food Security, Productive Safety Net,  Agricultural Extension, Small and Large Irrigation, Improved  Agricultural Extension Small and Large Irrigation Improved seeds reflect the focus on strategies for immediate gains.  INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  15. 15. The Food Security Programme: PSNP, OFSP and Resettlement • Starting in 2005, the Productive Safety Nets Programme (PSNP)  has been implemented as part of a broader Food Security Program 1. Productive Safety Net Program (PSNP) 1 Productive Safety Net Program (PSNP) • Labor intensive public works (PW) building productive  community assets • Transfer payments in cash rather than food in some areas to Transfer payments in cash rather than food in some areas to  encourage market development • Direct Support (DS): unconditional transfers to labor‐scare  households including elderly and disabled households including elderly and disabled 2. Other Food Security Programs (OFSP) • Makes available packages of services such as: fertilizer, credit,  other inputs or assets 3. Resettlement to other locations with more productive land INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  16. 16. Food Security Program Budget Breakdown Source: World Bank (2008), Ethiopia Agriculture and Rural  Development Public Expenditure Review, 1997/98 – 2005/06  INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  17. 17. Agriculture and Rural Development Planning   • MoARD, in most cases does not apply standard economic and  financial analyses to make a selection among competing  projects.  j t • There is a general, albeit questionable, assumption that the  benefit of some proposed project can be scrutinized without  utilizing standard techniques. • Reliance on subjective assessment • No attention to inter sectoral linkages No attention to inter‐sectoral INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  18. 18. Agriculture and Rural Development Planning (cont.)  • MoARD has built up little in terms of the capacity to  systematically prioritize projects/programs.  –h h haphazard prioritization systems  d i iti ti t • Lack of unifying technical methodology in prioritizing has  meant production and productivity enhancing  projects/programs are slightly more favored than others. • MoARD does not compare notes with others (Ministries,  NGOs) and hence does little to minimize redundancy and  duplication of efforts duplication of efforts INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  19. 19. Agriculture and Rural Development Planning:  Findings  from Focus Groups • M ARD’ programming offices’ general focus appears to be  MoARD’s i ffi ’ lf b designing day‐to‐day work plans and, give insufficient  attention to projects design.  • In the less likely event that these units have come up with  involved project plans, their contents have been broadly  involved project plans their contents have been broadly unoriginal, and with extensive similarities with better  designed project plans. • The capacity of sector ministries, including MoARD, in linking  budgets with physical outcomes, at the end of every fiscal  year, is negligible, while MoFED, itself, lacks the capacity to do  an involved project appraisal. INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  20. 20. Local Level Planning: PSNP and OFSP • A series of local administrative structures – “Food Security Task  Forces” ‐ have been established to assist in the selection of public  works projects, to liaise with programme staff, to keep records,  p j , p g , p , monitor implementation and identify households who should  receive benefits • There has been a relatively high level of beneficiary involvement in  the PSNP; between 20 and 30 percent of households report being  involved in the selection of public works activities. • Between 85 and 90 percent of households perceive that their  community has benefitted from the construction or rehabilitation  of roads, schools and soil and water conservation , INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  21. 21. Local Level Planning for Other Programs: Findings from Focus Groups • Capacity constraints are more severe at smaller units of  administration (Woreda, Kebele). ( , ) • With hundreds of Woreda units dispersed across the country,  neither MoFED, nor regional finance and agricultural bureaus  neither MoFED nor regional finance and agricultural bureaus are equipped with the capacity to appraise, monitor or  evaluate projects handled at the Woreda level • Woreda planning units claim “the capacity of MoFED to  scrutinize the execution of projects and its push for efficient  utilization of financial resources is withered”.  INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  22. 22. Local Level Planning for Other Programs: Findings from Focus Groups (cont.) • Little attention paid for need assessment at Woreda level (reflect  national priority even if not fit woreda needs/ incentive skewed to  budget good performers) • Even in a best‐performing Woreda unit, both contemporaneous and  inter‐temporal linkages were missing. • Concerns of detractors cannot be readily dismissed (political  considerations…) • Excessive expectations on weredas performance without the  necessary accompanying resources. INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  23. 23. Conclusions • The merging of MoF and MEDaC may have led to long‐ terms policy issues being sidelined. • The discussions justify the need to internalize inter‐sector  linkages. • Wider participation of stakeholders in the budget  formulation process is essential (particularly by NBE, FRCA) • Curbing delays in reporting, building the system of  monitoring and evaluation will be instrumental in  tabulating physical outcomes  t b l ti h i l t INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  24. 24. Conclusions (2) • High staff turn‐over calls for an appropriate incentive scheme or  employing staff as consultants • Restructuring planning and programming offices at line ministries  by creating capacity. – Mechanisms of prioritization, linkages and coordination – Linking 5, 3 and 1 year plans technically/measurably [Annual‐MEFF‐ PASDEP.] • Weak relationship between federal ministries and regional Woreda Weak relationship between federal ministries and regional, Woreda  level bureaus.  – Especially in Agriculture – M&E is based on report of reporting agency M&E is based on report of reporting agency – Rule of thumb is the rule not the exception in Sector/Agr/ Plan INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  25. 25. Conclusions (3) • What needs to be done – Improving the process of formulation of MEFF Improving the process of formulation of MEFF – Improving inter‐sectoral linkages and appropriate planning  and budgeting at line ministries:  – Improving the link between capital and recurrent Improving the link between capital and recurrent  expenditure as well as long term (PASDEP) and medium  term plans (MEFF): – Promoting participation and Aligning Incentives Promoting participation and Aligning Incentives – Focusing on performance and sequencing reforms – Improving problems in Stretching resources as well as  down‐top Planning, as well as delays in reporting  down top Planning as well as delays in reporting INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM
  26. 26. Conclusions: What Needs to be Done (cont.) • Strong relation between MOFED and MoARD on: • Lack of skilled experts and high staff turnover in both. • Weak relationship between MoFED and MoARD on technical level level, • Weak relationship between Federal ministries and the regional bureaus and down to the Woreda level. • Not enough attention is given to planning and programming sections at ministerial levels. • Poor quality information/data and time concept in budget preparation and and. • Poor accountability • Urgent need to build capacity at MoARD and MoFED Urgent need to build capacity at MoARD and MoFED • Need technical experts (collaborative MA/MSc) INTERNATIONAL FOOD POLICY RESEARCH INSTITUTE – ETHIOPIA STRATEGY SUPPORT PROGRAM