Reports on Observance of Standards and
REPORT ON THE
OBSERVANCE OF STANDARDS AND CODES (ROSC)
I. Fiscal Transparency
Prepared by the Fiscal Affairs Department
February 22, 2001
1. This report assesses fiscal transparency practices in Mozambique, in light of the provisions of the IMF Code of Good Practices on Fiscal Transparency: Declaration on Principles. The authorities have completed the fiscal transparency questionnaire prepared by the IMF staff. This assessment has two parts: the first describes current practices, and was prepared by the IMF staff on the basis of responses to the questionnaire and additional information gathered from the authorities; the second part provides a commentary by the IMF staff on fiscal transparency in Mozambique, and offers some recommendations based on the assessment.
A. Clarity of Roles and Responsibilities
2. The constitution and its regulations provide a clear definition of the role and responsibilities of the central government and the subnational governments. Government at the subnational level in Mozambique consists of 33 independent municipalities (autarquias), each with its own budget, and ten provinces, plus 124 districts belonging to the central government.2 The reform currently underway to disengage the state from the economy has clarified the role of the central government and its relationship with the private sector by liberalizing markets and prices and giving greater autonomy to state enterprises.
3. Extrabudgetary activities are significant in Mozambique relative to the size of the budget, despite the fact that legislation requires universal coverage by the state budget. These activities are related essentially to external aid funds (grants) as well as the funds generated by budgetary entities that form part of their own resources (retained revenues).3 Some special funds (the Agrarian Fund and the Roads Maintenance Fund, for example) as well as resources of the Social Security Institute also fall outside budgetary procedures.4 Moreover, such extrabudgetary spending is not subject to systematic monitoring, control, and evaluation. Despite the fact that the Ministry of Planning and Finance (MPF) is setting up a standardized financial control system to track all foreign sources of budgetary financing, the related expenditures are still made in noncompliance with budgetary procedures.
4. In general, government involvement in the private sector is being cut back through a process of disengagement and market liberalization. The government's heavy equity participation in private enterprises reflects the country's past interventionist policies. Public enterprises, and the limits on their activities and independence with respect to the government, are clearly defined by law,5 and the state controls 100 percent of their capital. The enterprises that have been privatized, or are in the process of privatization, were holdovers from the time prior to the early 1990s when the state dominated the economy. As a result of that tradition, the government also has shareholdings in a large number of productive enterprises: it owns more than 80 percent of the capital in ten companies,6 and holds a minority interest (less than 50 percent) in a further 70 companies including banks. Government plans call for the gradual reduction of these interests. There is still a program for granting concessions for railroads and port activities.
5. Intergovernmental fiscal relations are simple, clear and relatively recent in Mozambique. Local government, represented by the municipalities that were created in 1997 is firmly established in legislation:7 municipalities have political, administrative, and financial autonomy and control over their assets.8 They have their own clearly defined sources of revenue,9 in addition to the resources they receive from the state budget through statutory tax sharing transfers and negotiated funding. However, the definition of their expenditure responsibilities is still unclear and there some overlap with central government responsibilities.. The legislation allows the municipalities to incur debt, and budget execution is subject to both internal (local) and external control, which is exercised by the Office of the General Inspector of Finance (Inspecção Geral de Finanças-IGF) from the MPF and by the Administrative Tribunal.
6. The Bank of Mozambique does not engage in fiscal activity. Although in recent years the Bank has provided no financing to the budget, and has not engaged in any apparent quasi-fiscal activities, the central bank's legislation does not specifically prohibit such activities.The Bank of Mozambique is legally independent.10 It has the status of a public enterprise, with a mandate to preserve the value of the national currency, and it enjoys administrative and financial autonomy. The President of the Republic appoints the governor and the vice-governor of the Bank of Mozambique and the Prime Minister appoints its board of directors. Members of the board are appointed for a term of four years and may only be dismissed for just cause. The Bank of Mozambique's annual operational balance is distributed as follows: 50 percent is transferred to the state budget, and the remainder is used to capitalize the Bank of Mozambique itself.11 An independent committee sets both the rediscount interest rate and the norms for bank participation in open market operations. The country has a floating exchange rate regime, and there is no direct control by the Bank of Mozambique.
7. The banking and financial system is predominantly owned and controlled by the private sector. The banking system was essentially in state hands until 1990 when it went through an intense process of privatization. However, the government has retained a minority shareholding interest in some banks.12 All banks, including foreign banks, have free access to the market. Although the government maintains no development banks or financial agencies, there have been some budgetary funds aiming to support priority activities.13 There are no rules, obligations, or requirements to direct lending to priority sectors or activities, nor are there any preferential interest rates.
8. Fiscal management responsibility is clearly defined and coordinated by the MPF. Budget management is based on a clear separation of powers between the executive, legislative, and judicial branches of government and the powers of the ministry of planning and finance are clearly defined in law.
9. The present legislative framework for fiscal management is not comprehensive and has some critical weaknesses. The Framework Law (Lei de Enquadramento) partially regulates public finances.14 Some stages in the expenditure process, for example, commitment and verification, are neither defined nor recorded. The lack of such records makes it impossible to identify the existence of any payment arrears during budget execution. The law allows a supplementary budgetary period of three months. This excessively long carry-over period means that during the first quarter of the fiscal year expenditures may be imputed to either the past or current year budget, and it also lengthens the time taken to consolidate and audit the public accounts. A comprehensive public finance law is needed to consolidate all aspects of budgetary preparation, execution, records and accounting, control, and accountability. The authorities are proposing some reforms in this area and moving toward a comprehensive law.
10. Contingencies are explicitly considered in the budget and budgetary mechanisms for adjustment during the year are transparent. Budget legislation calls for a Contingency Fund, provided through a provisional annual allocation15 managed by the MPF to deal with unforeseen expenditure needs that cannot be postponed. Budget amendments are permitted through the contingency fund mechanism, within the total limits established by law. In addition, there are also budget amendments resulting from adjusting constant price spending limits to current prices.16 The budget law approved by the National Assembly sets overall limits on spending items (by economic, functional, and organic classification), and the National Assembly's budget committee examines an annex to the law, setting details within those overall limits. There is flexibility in changing individual budgetary items, provided that the overall limits approved in the budget law are respected.
11. Direct budget subsidies are favored over quasi-fiscal activities, although legislation is permissive in this respect. As noted earlier, the Bank of Mozambique has no quasi-fiscal activities (investments, equity participation in enterprises, grants, and preferential loans) but current legislation does not explicitly prohibit such activities. As regards nonfinancial public enterprises, legislation specifies the form of subsidies as transfers, although the government may also determine pricing and financing policies. The government has legal authority to guarantee debt incurred by any state enterprises, and to on-lend to its enterprises.
12. Tax legislation is transparent and information on the tax system is widely available. The levying of all major taxes is fully covered by legislation.17 For more than 90 percent of tax revenues--including Value Added Tax (VAT), excise taxes, and customs duties--there exist clear, up-to-date legislation with supporting published regulations and procedures. For the remaining taxes--taxes on income and profits and other taxes and duties--legislation either is unclear or out-of-date, but the authorities are planning reforms in this area. The VAT law of 1999 reduced discretionary concessions considerably, and these are now low. Information on the major taxes is also widely available through brochures and circulars. Information on customs procedures and the entire customs tariff, data on exports and imports, and simplified and standard documents are available over the Internet. However, transparency of some tax exemptions (import duties, VAT, and consumption tax) granted for noninvestment purposes could be improved by using means such as specific budgetary allocations.
13. In the case of the VAT and customs duties, there are regulations governing the conduct of public servants and the rights of taxpayers. These laws are new and have been improved after various reforms, especially in the customs area. Observance and enforcement of this legislation has been satisfactory, and the authorities are taking steps to ensure the integrity of public officials in the tax area. Over the last three years, for example, under the Crown Agents' administration program, all customs officials have been subjected to an appraisal. Several have been dismissed for reasons of inadequate performance or conduct, and new officials have been recruited.
B. Public Availability of Information
14. Information on the public sector is limited to that contained in the budget law and in the reports provided through the annual Government General Accounts Report (Conta Geral do Estado-CGE). The annual state budget is published after its approval by the National Assembly in December of each year. Central and provincial government revenues are classified by economic category and spending by institutions is subjected to economic and, at the global level, functional, and territorial classification. In general, these classifications apply uniformly to budget, accounting, and reporting. A summary of revenues and expenditures shows the overall balance and its financing. However, a substantial part of the externally financed capital spending--off budget activities--is not included. Actual budgetary information on the previous year is also provided, but no forecasts for future years are included. The government recently began to publish all budgetary legislation, as well as the annual budget for the current and the preceding two years, on the Internet.
15. No information on guarantees, endorsements, or contingent liabilities of the public sector is provided in the budget documents. Information on the public debt is limited to annual external debt service, and there are no established limits on new indebtedness.
16. Final accounts reports are limited to government agency transactions. The annual CGE covers the accounts of all government agencies except for the autonomous institutions and public enterprises (for which an annex to the general accounts provides a brief summary of revenues and expenditures). The general accounts include revenues, expenditures classified by economic, administrative, functional and territorial category, balances, financing and general information on financial assets and liabilities. There is no reference or specific information on extrabudgetary activities. The time limits for preparing the accounts are excessively long: the government has nine months, after ending the fiscal year, to submit the CGE to the administrative tribunal, which must then issue its report and technical opinion by August 31 of the following year, and send it to the National Assembly.
17. The Administrative Tribunal report and its opinion must be published in the Bulletin of the Republic and must certify the accuracy, regularity, legality, and economic and financial correctness of the accounts and of the government's fiscal management. The comments and observations of the tribunal must be accompanied by responses from the targeted organs. The 1998 CGE is the first to be analyzed in this way.
18. Timeliness and periodicity of fiscal reports are being improved. As of the first quarter of 2000, the government began to publish a quarterly report on budget execution, thereby offering a better and more regular dissemination of fiscal statistics and promoting fiscal transparency. This is a significant step forward in terms of public access to the government's fiscal accounts, which will now be available within forty-five days after the end of the quarter in question. The report contains a summary of budget execution by the government and an economic classification of revenues, while expenditures are classified by economic, administrative, functional, and territory. The government has committed itself to regular publication of this report and in the future intends to include improved data on financing.
C. Open Budget Preparation, Execution, and Reporting
19. The government prepares a five-year fiscal outlook, which is revised annually.18 This document presents an overview incorporating the main macroeconomic variables, investment plans, sector and social programs, and annual budgetary forecasts. One objective of this exercise is to set a framework for determination of annual budgetary expenditure sustainability over the medium term. Forecasts of debt service and new financing are included, although there is no explicit analysis of the long-term sustainability of borrowing capacity. Despite the excessively optimistic forecast of the main macroeconomic variables (economic growth, among others) in the outlook, it is nonetheless a useful methodological exercise for defining and outlining the limits of long-term expenditures and new expenditure commitments, in particular capital spending. Although the document is used to guide preparation of the annual budget, it is not presented together with the budget proposal nor is it published, and its macroeconomic assumptions and parameters are not subject to comparison against estimates and projections by other entities outside the government.
20. The budget documents now published do not allow an analysis of budgetary changes during the course of the year since there is no initial information on the budget or subsequent amendments that can be used for purposes of comparison.
21. There are no defined budgetary objectives that can be measured and assessed against results. Budgetary revenues are classified in economic terms as current (fiscal and nonfiscal) and capital funds, while expenditures are classified in three ways: organizational, functional, and economic. Little detail is provided, however. The functional classification, for example, is too broad (Health, Education, etc.) and contains no specific budgetary programs to support fiscal policies and performance budgeting.
22. There are few indicators of the government's fiscal situation in the budgetary documentation or in the CGE. The only indicator of fiscal policy provided in the budgetary documents and published information relates to the overall balance.
23. There is no declaration or explanation of the accounting principles used in the budget documents. Accounts are kept on a cash basis, and the system is decentralized; each unit records its operations, which are subsequently consolidated by the accounting department of MPF. The accounting process is manual in nearly all institutions--although a start has been made at computerizing these records in some ministries--and there is no overall balance sheet integrated with budgetary execution. The accounting system does not record or identify arrears, because only the payment stage is recorded. Information on government purchase orders is available but there is no complete record on commitments.
24. Some accounting reforms are being proposed to improve budget execution and reporting. The government is considering a reform of the accounting system19 that would include: (a) accounting plans that would articulate budgetary accounting with the balance sheet; (b) coverage of the central administration, the provinces and the social security fund, and all entities dependent on the state budget; and (c) a double-entry bookkeeping system that would record all stages of revenue and expenditure management (forecasts, revenues, allocation, commitment, verification, and payment). In addition, the proposal calls for implementation of an integrated financial administration system, embracing all activities related to budgeting, cash management, accounting, and control.
25. The central government has a well-structured internal audit, but it suffers from a lack of material, financial, and personnel resources needed to properly supervise the various state entities. The internal audit control system functions independently in each ministry or entity and its main purpose is to conduct financial audits of budgetary execution. The IGF,20 in the MPF, coordinates and issues auditing standards and procedures and provides comprehensive training for inspectors. The IGF conducts audits of public enterprises, the provinces and projects financed with external funds. There is an audit schedule that covers public enterprises (an average of four audits per year) and the 33 municipalities, which are visited at least twice during each local administration's term of office. The IGF also oversees tax and customs collections. Currently, about 40 audits per year are being performed and the reports are sent to the ministries of the respective areas, which are expected to carry out the recommendations. If compliance is not satisfactory in the view of the inspector general, these recommendations will be sent to the office of the attorney general.
26. The procurement and bidding rules for government purchases of goods and services are relatively clear and well defined, but are not always fully observed. The purchase of goods and services in the public sector is regulated by a decree21 that sets out tendering procedures. Tendering is required for procurement above a minimum threshold, and bids are judged against objective criteria. There is an official public registry of suppliers that imposes certain minimum requirements. A 10 percent margin of preference is awarded for domestic goods of comparable quality.
27. The rules governing public employment and the payment of public service wages and salaries are clearly specified. Vacancies are required to be filled through public competition. Nevertheless, much hiring is done directly, given the difficulty of holding competitions. Control over personnel, salary policy and payment is centralized; however, the government still has to update the comprehensive public payroll register (numbering some 109,000).
28. Fiscal reporting is done primarily through the annual CGE. These are presented to the legislature 20 months after the close of the fiscal year. As of the first quarter of 2000, the government began to publish the Government Budget Execution Report on a quarterly basis, with a lag of 45 days after the close of the quarter. The MPF also publishes very general information on the public finances, including revenues, expenditure classified by economic purpose, and the overall deficit, in a quarterly bulletin known as the Analysis of Economic and Social Trends. Local governments, which are still in the process of being set up, will submit their annual accounts to the administrative tribunal for verification. The bank accounts of budgetary entities are reconciled against their accounting records on a monthly basis.
D. Independent Assurances of Integrity
29. The capacity of the independent audit body needs to be strengthened. The Administrative Tribunal is legally independent from the executive and enjoys administrative and financial autonomy. The constitution stipulates that the tribunal conducts audits of government accounts, including the various funds, public enterprises, the provinces and municipalities.22 Its president is appointed by the government and confirmed by the National Assembly, for a term of five years, and may not be removed from office except for serious dereliction of duty. The Tribunal is expected to conduct ex ante and ex post supervision over contracts relating to personnel, public works, loans, concessions, and the supply and provision of services. The Tribunal is also responsible for issuing a technical opinion and judgment on the CGE, consolidating all public sector accounts, and sending them to the National Assembly. In addition to this consolidation, the tribunal should also examine the accounts of budgetary institutions (numbering some 300), which must deliver their annual information to the tribunal by June 30th of the following fiscal year. The law does not stipulate the time limit within which the tribunal must issue its audit report for each institution. Private external auditors assess the balance sheets of the central bank and of certain public enterprises.
30. There is no auditing of the performance of institutions and budgetary programs. Although the law stipulates that accounts be assessed according to the criteria of economy, efficiency and effectiveness in public spending, this evaluation procedure still does not apply to the government accounts.
31. Public scrutiny of macroeconomic policies is very limited. The macroeconomic forecasts and assumptions, on which the budget is based, although available, are not provided in detail to the public or independent agencies.
32. The National Statistics Institute (Instituto Nacional de Estatistica-INE) was created in 1996 as an institution under public law with its own administrative and financial autonomy.23 The INE is the central executive organ of the national statistics system, and its regulations govern statistical procedures in detail.24 It reports to the council of ministries and the President of the Republic appoints its senior management. Despite its up-to-date and comprehensive legal mandate, the INE still needs to strengthen its administrative and technical capacity for managing the country's basic statistics. Public information is still sporadic and is restricted to that derived from the census, which is conducted in principle every ten years, and from the national statistics yearbook (produced in July, with a summary appearing in February/March), and the price index.25 The country has not yet applied all of the standards stipulated by the IMF's General Data Dissemination System (GDDS).
33. There have been a number of positive developments in fiscal transparency in Mozambique in recent years. The legal framework establishing the separation of powers, fiscal management, and controls is relatively new with much still in a consolidation phase. Although various public-sector institutions and legal provisions have been in existence for only a short time, the reforms completed or underway have broadened the degree of transparency.
34. A number of the basic requirements of the Code are being met and improvements are being made in a number of areas. Of particular significance are the creation of the Administrative Tribunal, with its clearly defined functions, the state's disengagement from direct participation in the economy (still underway), and the reforms that have been undertaken in the taxation area, particularly through the introduction of the VAT and modernization of customs legislation and administration. Tax and customs legislation are generally transparent or steps are being taken to improve transparency as part of reform. It will still take some time for these new structures to perform effectively and to meet all the expectations attendant on them. Meanwhile, the government's decision-making process is now oriented towards achievement of greater fiscal transparency and efficiency in the public sector.
35. The authorities are aware, however, that further improvement is required in a number of areas. The following suggestions have been discussed and generally agreed with the authorities.