©2000 International Monetary Fund
October 3, 2000
Russia, and Other Countries of the
Former Soviet Union
An Assessment of IMF Technical Assistance
Barry H. Potter and Jack Diamond
I Executive Summary
This summary presents the results of an internal self-evaluation of the technical assistance provided by the IMF to help develop treasuries in the Baltics, Russia, and other countries of the former Soviet Union.1 The findings from the assessment are intended principally for those interested in the development of these transition economies, but should also be of wider relevance to those involved in delivering technical assistance on public sector institutional reform.
The assessment follows the standard approach to such evaluation work. It first considers whether the basic goal of setting up treasuries has been achieved and whether the resultant reforms are relevant and sustainable. Then, it reviews the costs of the inputs, the outputs, the efficiency with which the technical assistance was delivered, and the effectiveness of the particular program. The assessment also considers the factors that influenced the relative efficiency, effectiveness, and impact of the program in different countries. Finally, the work on the treasury systems is viewed in the wider context of budget and fiscal management in these economies, and some conclusions are drawn about the need for and targeting of further technical assistance in these areas.
Most of the Organization for Economic Cooperation and Development (OECD) economies rely on so-called treasury systems, operated by their ministries of finance, to manage government financial resources. These systems provide payment processing, accounting, reporting, and financial management services for central government on a comprehensive, and often centralized, basis. In more advanced economies, they are based on a networked computer system that integrates all of these functions for the finance ministry, line ministries, and spending units, and which may include further modules for budget preparation, debt management, extrabudgetary funds, or local governments.
In 1992 comparable systems did not exist in the Baltics, Russia, and other countries of the former Soviet Union. Of these 15 countries, only Uzbekistan has not yet introduced a treasury system. In every case, the development of the treasury system has required a fundamental and deep reform of the previous institutional processes and structures.
The extent of the IMF's involvement in those reforms varied from country to country. But in 14 of the 15 countries,2 technical assistance from the IMF has played a major role: first, by developing an appropriate treasury concept for these economies; second, by fine-tuning the concept into an appropriate model, country by country; and, third, by assisting in the implementation of the system. Good information is available on 13 countries where the IMF's Fiscal Affairs Department has provided assistance, the exception being Belarus.
Progress to Date
There are four major components in building a treasury system: the creation of a treasury department within the finance ministry that collects revenues and makes government payments; the concentration of government financial resources in a Treasury Single Account (TSA) in the central bank; the introduction of a modern accounting regime for government operations through a Treasury General Ledger (TGL); and the development of financial management and planning for the government sector.
The basic goal of building treasury systems in the Baltics, Russia, and other countries of the former Soviet Union, as a major institutional reform of the finance ministries and of government financial management, has largely been met. The components are, to some extent, in place in most of these economies, although the existing treasuries are at different stages of development. Table 1.1 summarizes the relative progress in these countries.3 Much better progress has been made, however, in setting up the first two components--a treasury payment system and a basic Treasury Single Account--than in introducing a Treasury General Ledger, or developing a capacity for financial management. As yet, no treasury in any of these countries fully meets all of the functional standards described in this paper. As of the end of 1999, Latvia and Kazakhstan had the most advanced systems. But in Armenia, Azerbaijan, Estonia, Georgia, the Kyrgyz Republic, Lithuania, and Turkmenistan, substantial (if still incomplete) reforms have also been achieved, primarily in reforming treasury departments and setting up the Treasury Single Account. The basic elements at least of a Treasury General Ledger accounting regime are also in place. Further improvements now aim to make coverage of the system more comprehensive (for example, in Lithuania); to upgrade accounting regimes (all countries) and, in particular, to move from cash controls to liability (commitment) controls (and, thus, begin to tackle the serious problems of payment arrears); and to develop financial planning (all countries). Progress has stalled in the Kyrgyz Republic, while in Turkmenistan, a large and growing proportion of government transactions remain outside the treasury system. Moldova and Ukraine4 have made less, albeit solid, progress.
In Russia and Belarus (where information is limited) there has been some, but varying, progress in setting up a treasury payment system and a basic Treasury Single Account. There is still insufficient consolidation of government monies, however, with too many extrabudgetary funds and other bank accounts outside the Treasury Single Account. Rather less progress has been achieved on the fundamental changes planned to the accounting regime. In these countries, excluding technical improvements in the management of external debt, little reform of financial planning and management has occurred.
Although Tajikistan has made only limited progress, it is rapidly catching up. But in Uzbekistan, no significant change has been achieved.
The Technical Assistance Effort: Strengths, Obstacles, and Weaknesses
The timing, amount, and form of technical assistance provided in a particular country was partly influenced by that country's basic openness to institutional reform, which in turn was affected by many political, cultural, and economic factors. But the willingness to pursue reform was also affected by factors under IMF control--whether the initial technical assistance advice was well crafted and, thus, generated a request for more help; whether the assistance was sustained on a high-quality basis; and the extent to which the IMF's European II Department was able to promote and support the IMF's Fiscal Affairs Department efforts.
In terms of overall effectiveness of technical assistance, perhaps the single most important positive element was the widespread acceptance of the treasury concept itself as developed by the IMF's Fiscal Affairs Department in 1992. The concept was accepted by most authorities in the countries discussed in this paper and by other technical assistance providers who were content to let the IMF take the lead role. This enabled good cooperation with providers of complementary assistance--both in related subject areas such as debt management and, more critically, in supporting specific technical assistance functions that the Fiscal Affairs Department has traditionally eschewed (computerization and training).
In several countries, including Georgia, Ukraine, Russia, and Tajikistan, the existence of an IMF-supported program to which progress on the treasury could be linked was a critical enabling factor. Applying conditionality under IMF programs helped to accelerate treasury reforms and generate a deeper commitment to them.
Three other factors emerged as particularly, if predictably, crucial to making technical assistance more effective in some countries than in others:
However, there were many factors that impeded the effectiveness of technical assistance and slowed the pace of treasury development. Some were external to the technical assistance effort; some reflected shortcomings in the approach adopted. Of course, such shortcomings are often easier to identify in retrospect:
The Present Capacity of the Treasury Systems
Major improvements to public expenditure management and fiscal outcomes have not yet followed from the development of treasuries in most of the countries reviewed. Some improvement in intermediate outputs—in terms of better, more comprehensive, reliable, and timely fiscal reporting; improved government accounting (particularly on the economic classification of government operations); and consolidation and management of government financial resources├has certainly been achieved. This progress has made it easier for the IMF to arrange and monitor programs and, in particular, set effective conditionality on credit to government.
But in terms of overall fiscal and expenditure management outcomes, progress is more evident in the enhanced, if still limited, capacity for short-term crisis cash management than in the better attainment of the classic goals of good public expenditure management├aggregate control, resource allocation that meets stated spending policy priorities in the budget, efficient delivery of public services, and minimization of the costs of government financial operations. Clearly, these goals have not yet been met.
A more marked improvement in public expenditure and fiscal management was, however, also seriously hindered by the hostile macroeconomic environment of perennial crisis. This eased (albeit somewhat temporarily) in most countries only in 1996 and 1997. The earlier environment was not conducive to good budget preparation. It placed too much of the burden of fiscal adjustment, for example, in response to higher-than-anticipated inflation or revenue shortfalls, on in-year action to reduce expenditure and on cash rationing by the new treasuries. Such in-year actions were inadequate and could never compensate for inappropriate spending policies and unaffordable budget plans.
Thus, setting up treasuries has been a necessary, yet by no means sufficient, step to help transform fiscal and public expenditure management in the Baltics, Russia, and other countries of the former Soviet Union. Effective reform of fiscal and public expenditure management would have required wider and deeper structural reforms in budget formulation, expenditure policies, and governance (discussed below). Until recently, the IMF has been less involved than other technical assistance providers in these areas. And the efforts of all providers have met with only limited success.
Some important practical lessons may be drawn about the content of further technical assistance on public expenditure management to the countries discussed in this paper.
The IMF's role in providing technical assistance on treasury systems is beginning to level off and will decline in terms of the resource requirement. Much of the remaining work concerns implementation, particularly computerization, where other technical assistance providers are taking the lead. There is, nonetheless, still much to be done. Some continuing IMF involvement in setting standards for the component parts of treasury systems will be necessary to complete the task. For example, key decisions on the format of accounting systems, and the development of financial planning, will be necessary. Recent experience suggests that too early a withdrawal of resident experts can cause the reform process to stall. The IMF will need to sustain the technical assistance effort along with other providers (particularly the World Bank, with whom the IMF is cooperating closely in Kazakhstan, Russia, and Ukraine), until the computerized systems are in place. Nonetheless, given resource constraints, it should be possible for the IMF to rely more on experts based in one country but able to service one or two other countries in the region.
The weaknesses as well as the strengths of the current treasury systems must be understood and acted upon. The combination of unrealistic budgeting (see below), and a treasury control system that applies mainly to cash rather than commitments, is leading to widespread cash rationing and payment arrears. There are other important factors contributing to budget management problems in many of these countries. Many of these are aspects of poor (nontransparent and nonaccountable) governance, such as: excessive numbers of off-budget accounts; the prevalence of barter, netting (often at artificial prices), and in-kind transactions; and the scope for rent-seeking action. Under these circumstances, even cash limits applied cannot be hard budget constraints. Some of these problems will be reduced in scale as treasury systems develop further over the next two or three years. But further capacity building to enhance transparency and accountability is necessary in both budget preparation and budget execution, if overall budget management is to be improved. It will also take two to three years at best (apart from Latvia) before fully integrated treasury systems can be developed.
Thus, some redirection of technical assistance within budget execution and treasury work in order to develop better interim control systems over commitments and arrears is urgently required. The IMF plans to prepare and issue guidance on these, which will build on the principles and standards set out in the Code of Good Practices on Fiscal Transparency. Measures to improve governance will also be necessary—for example, by regularizing and "encashing" barter, noncash, and nonbudgetary transactions within the treasury system. In the medium term, the fully developed treasuries will meet the main requirements of the code in this respect.
Also, despite the continuing (if reduced) need for technical assistance on treasury work, a shift of emphasis in technical assistance on public expenditure management now also needs to be made, to give more attention to the deeper-rooted problems in budget preparation and fiscal transparency/management. See Box 1.2 for a description of the main problems in budget formulation. Real changes to budget preparation also require a capacity and willingness on the part of the authorities to examine the role of the state and the spending policies that underlie the spending base. While some countries have shown flexibility on such issues in the context of IMF program negotiations, other technical assistance providers have complained of being held back from pursuing more than minor technical reforms in budget preparation.
The IMF is now preparing an illustrative standard for budget preparation, based on the Code of Good Practices on Fiscal Transparency, for the countries discussed in this paper. This could be used as a basis for providing technical assistance to individual member countries (whether from the IMF or other sources) and for broadening the terms of reference for suitably qualified treasury advisors (and replacing them where necessary) on a case-by-case basis to develop budget preparation modules as part of the treasury systems. Close coordination with other technical assistance providers will be essential, but achieving results will not necessarily be straightforward. There are also some wider lessons for the content and management of technical assistance on public expenditure management and institutional reform projects more generally.
The treasury initiative has achieved some considerable success6 because the IMF had an identifiable concept and reform package that was recognized as a need by the national authorities and was widely supported by other technical assistance providers. The absence of any major difference of view among the major providers on what needed to be done set the basis for cooperation. The IMF occupied a "strategic role" in designing the concept and model to be used country by country. This is an approach that could and should be applied more widely in other geographical areas (e.g., also in the context of fiscal transparency) where some confusion and duplication among technical assistance providers, with no sense of priorities on public expenditure management reforms, seem to be still more typical than a coordinated effort.
1The IMF's Fiscal Affairs Department has also assisted in developing treasuries in other East European countries and in Latin America.
2The exception is Estonia.
3Table 1.1 is based on the rating of outputs to date as set out in Table 3.5.
4Both Ukraine and Russia, however, seem to be making faster progress in 2000.
5First, the respective roles of the budget law, versus standard practice, were different in many of these countries--the latter being more dominant. Second, much could be achieved in changing practices by presidential decree, rather than changing the law. Thus, changes in law lagged rather than led reforms; but they were ultimately vital for ensuring good governance and transparency, once new systems were in place.
6The development of treasuries was one area on which recipient countries responded particularly favorably in the 1999 report prepared by the IMF's Office of Internal Audit and Inspection.