## 1mkdea2022004 - Executive Summary ## Source details **Canonical URL:** [1mkdea2022004 - Executive Summary](https://www.imf.org/-/media/files/publications/cr/2022/english/1mkdea2022004.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1mkdea2022004.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1mkdea2022004.pdf.json) --- ### Executive summary — purpose and management - PEFA assessment provides a snapshot of the country’s PFM system performance to support government in defining PFM reform priorities. - Previous assessment: 2015; current assessment follows recommended interval. - Conducted by the International Monetary Fund and the World Bank; Ministry of Finance and other country institutions primary beneficiaries. - Assessment informed evaluation of implementation of the PFM Reform Program 2018-2021 and preparation of new reform program. - PFMRP 2018-2021 was completed; a number of reforms implemented; assessment identified further remaining areas for improvement. ### Main strengths of the PFM system - Budget formulation, credibility and transparency - Deviations of executed versus original budget are within manageable levels, except revenue side in 2020 due to the pandemic. - Composition deviations include reallocations from capital to recurrent budget coupled with capital underspending. - Annual budget and budget execution reports presented in line with administrative, economic, functional and program classification; in-year reporting is more aggregated and does not provide all classifications. - Fiscal information is transparent and publicly accessible. - Transfers to lower levels of government are rule-based, transparent and equitable. - Budget calendar appropriate and generally adhered to; ceilings provided to budget users do not cover total expenditures for which they are responsible. - Budget execution - Predictability of available funds robust; underpinned by cash flow forecasting and monitoring. - Hard controls at payments stage ensure execution within approved allocations and against quarterly commitment ceilings. - Available records on expenditure arrears report low stock of arrears. - Internal controls, including payroll controls, generally sound. - Public procurement is competitive, transparent, with appropriate complaints mechanism. - External audit and parliamentary scrutiny - State Audit Office (SAO) is financially and organizationally independent and conducts audits per annual plan and international standards. - SAO audits central government’s budget execution report annually and publishes audit report; timely (3-4 months after receiving financial statements, except 2020 due to pandemic). - Effective follow-up of audit recommendations by auditees. - Parliamentary review procedures appropriate in scope and timeliness; scrutiny of audit reports timely (within three months) and transparent, although public hearings and recommendations based on audit reports are insufficient. - Debt management - Recording and reporting of debt and guarantees generally adequate. - Ministry of Finance is single entity in charge of approving government borrowing. - Three-year debt management strategy exists; implementation monitored and publicly reported. ### Areas for continued reforms and further improvement - Medium-term perspective in planning and budgeting - Budget documentation includes expenditure estimates and ceilings for two years following the budget year but lacks analysis of deviations and explanations. - Three-year Fiscal Strategy adopted; does not include quantification of fiscal impact of policy proposals, explanations of proposed changes over three years, nor is implementation progress towards fiscal outcomes reported. - Fiscal Strategy forecasts lack elements such as interest rate projections and explanations of differences from previous forecasts. - Management of fiscal risks, public investments, and assets - Institutional set-up for monitoring fiscal risks is dispersed and includes only basic tasks and analysis, particularly for public corporations and local self-government related risk. - No dedicated regulations, guidelines or standard criteria for identification, appraisal, prioritization and selection of capital investments except for externally financed projects. - Records of major categories of financial and non-financial assets exist but are decentralized and fragmented; non-financial asset data fragmented with accuracy concerns. - Performance information and management - Program budgeting underdeveloped; program budgeting not formally adopted and remains immature. - Strategic and annual plans include program objectives, costs, expected results and performance indicators, but no established mechanism for comparing results with targets; data reliability uncertain. - SAO reviewing government performance with increasing institutional and financial coverage. - Accounting and reporting - In-year budget execution reports comparable to approved budget only at administrative and highly aggregated levels of economic classification; capture expenditures only at payments stage with no information on commitments or liabilities. - Open Finance Portal improves treasury transparency. - Annual government financial statements include only revenue and expenditures; only individual budget users prepare Balance Sheets and present assets and liabilities, but not consolidated. - Annual government financial statements submitted timely for external audit; accounting standards used in preparation are not disclosed. - Revenue administration - Comprehensive and up-to-date information on revenue rights and obligations available but revenue risk management, audits and investigations and level of tax arrears lag and register weak performance. - Timeliness of information and funds transfer related to revenue collections adequate; frequency of reconciling revenue accounts could be improved. ### Impact of PFM performance on budgetary and fiscal outcomes - Aggregate fiscal discipline - Budget execution performs well and contributes to overall fiscal discipline; deviations between budget execution and approved budget on expenditure side low to moderate. - No established mechanism preventing budget users entering contractual commitments exceeding annual and medium-term allocations and estimates. - Revenue administration challenges with risk management, tax audit and tax arrears. - Deviation of executed versus budgeted revenue: moderate seven percent in 2018 and 2019; 16 percent in 2020 due to the pandemic. - Strategic allocation of resources - Ministries adopt costed medium-term plans and link to the budget can be established; medium-term targets not binding and deviations not properly analyzed. - Performance management basic, hindering budgeting based on performance. - Weak public investment management and basic fiscal risk monitoring negatively influence strategic allocation. - Efficient service delivery - Credible budget enables implementation of service delivery expenditures though high variance in composition risks reallocations from capital to less growth-enhancing recurrent spending. - Accumulation of tax arrears can risk insufficient revenue to execute service delivery programs. - Weak program budgeting and performance management prevent meaningful analysis of service delivery efficiency. - External audit and parliamentary oversight provide additional scrutiny; further development of internal audit would contribute to improving systems and governance in service delivery units. ### Performance changes since 2015 - Overall PFM performance registered improvement compared to 2015. - Out of 28 performance indicators: 11 maintained equal rating, 11 improved scores, and 6 deteriorated scores (two due to reinterpretation of evidence). - Improvements mainly in budget formulation, budget execution and reporting, and external oversight. - Improved areas include monitoring of arrears; assessed aspects of tax administration; public procurement; internal controls; in-year budget reporting; external audit; legislative scrutiny. - Deteriorations include variance in expenditure composition and comprehensiveness of budget documentation (higher portion of directly managed EU funds); some nominal deteriorations due to reassessment of evidence (budget classifications, guidance for preparing budget submissions, debt management, accounting standards timeliness). --- ### Key statistics and selected PEFA indicator scores - Aggregate fiscal outcomes (Central Government, percent of GDP): - 2018 Total revenue 28.5; Total expenditure 30.3; Aggregate deficit (incl. grants) -1.8; Total public debt (percent of GDP) 48.4. - 2019 Total revenue 29.6; Total expenditure 31.5; Aggregate deficit (incl. grants) -2.0; Total public debt (percent of GDP) 49.4. - 2020 Total revenue 28.6; Total expenditure 36.7; Aggregate deficit (incl. grants) -8.1; Total public debt (percent of GDP) 60.2. - Deviations and variances: - PI-1 Aggregate expenditure outturn (M1) — B; outturns: 91.8 percent in 2018; 92.7 percent in 2019; 102.8 percent in 2020. - PI-2 Expenditure composition outturn (M1) — D+; economic classification variances: 16.7 percent (2018); 11.3 percent (2019); 18.2 percent (2020). - PI-3 Revenue outturn (M2) — C; aggregate revenue deviation: -7.3 (2018); -7.1 (2019); -16.1 (2020). - Selected indicator scores (excerpt): - PI-4 Budget classification: M1 B - PI-5 Budget documentation: M1 D - PI-7 Transfers to sub-national governments: M2 A A A - PI-9 Public access to fiscal information: M1 A - PI-10 Fiscal risk reporting: M2 C (sub-scores: 10.1 D; 10.2 C; 10.3 B) - PI-13 Debt management: M2 A (13.1 B; 13.2 A; 13.3 A) - PI-14 Macroeconomic and fiscal forecasting: M2 C (14.1 D; 14.2 C; 14.3 B) - PI-15 Fiscal strategy: M2 C (15.1 D; 15.2 A; 15.3 D) - PI-19 Revenue administration: M2 C (19.1 A; 19.2 C; 19.3 D; 19.4 D*) - PI-24 Procurement: M2 A (all subdimensions A) - PI-27 Financial data integrity: M2 B+ (27.1 A; 27.2 A; 27.3 B; 27.4 B) - PI-29 Annual financial reports: M1 D+ (29.1 C; 29.2 A; 29.3 D) - PI-30 External audit: M1 C+ (30.1 B; 30.2 C; 30.3 A; 30.4 A) - PI-31 Legislative scrutiny of audit reports: M2 C+ (31.1 A; 31.2 D; 31.3 D; 31.4 A) *Source: 1mkdea2022004 - Executive Summary* --- ### 1.1 Financial overview — public sector structure and fiscal performance (2018–2020) ### Public sector structure and entities - Central government sub-sector: budgetary central government (BCG), social security funds (3: Health Insurance Fund, Employment Agency, Pension and Disability Fund), extrabudgetary units (10 regulatory/other agencies + 10 entities legally public corporations but classified as central government extra-budgetary units per GFSM 2014). - Budgetary central government: 95 first level budgetary units with 310 subordinate or second level budget units. - Sub-national government: 81 municipalities with 585 subordinate units and 151 public corporations. - Non-financial public corporations at central level (legally organized): 33 (including units that should be classified as central government EBUs). - Central bank: NBRNM. - Financial public corporation: North Macedonia Bank for Development Promotion (NMBDP). ### Fiscal management and COVID-19 impact (selected figures) - Fiscal balances improving each year since 2014 until COVID-19 in 2020; under-execution of capital expenditure contributed to earlier improvements. - COVID-19 impact in 2020: - Revenues fell by 1 percent of GDP. - Spending on containment measures increased by 5.2 percent of GDP. - Central government deficit increased to 8.4 percent of GDP. - Public debt rose to over 60 percent of GDP. - Key aggregate fiscal data (Central Government, percent of GDP): - 2018 Total revenue 28.5; Total expenditure 30.3; Aggregate deficit (incl. grants) -1.8; Primary deficit -0.6; Net financing 1.8; General Government Debt (MKD bn) 267,160; Ratio of general government debt to GDP 40.43; Public debt (MKD bn) 319,906; Total public debt (percent of GDP) 48.4. - 2019 Total revenue 29.6; Total expenditure 31.5; Aggregate deficit (incl. grants) -2.0; Primary deficit -0.8; Net financing 2.0; General Government Debt (MKD bn) 280,180; Ratio of general government debt to GDP 40.6; Public debt (MKD bn) 340,686; Total public debt (percent of GDP) 49.4. - 2020 Total revenue 28.6; Total expenditure 36.7; Aggregate deficit (incl. grants) -8.1; Primary deficit -6.9; Net financing 8.1; General Government Debt (MKD bn) 340,302; Ratio of general government debt to GDP 51.2; Public debt (MKD bn) 399,979; Total public debt (percent of GDP) 60.2. ### Central government budget financial structure (2020, MKD millions) — selected consolidated figures - Budgetary units revenue indicated: 117,784* (note: earmarked revenues collected by the BCG and transferred to SSFs have been eliminated). - Social security funds: 115,857 revenue; 115,714 expenditure. - Consolidated total (BCG + SSFs): revenue 189,554; expenditure 243,421; transfers to (-) and from (+) other units of general government 20,073; liabilities 15,630. - Extra-budgetary units: revenue 210,627; expenditure 259,051. - Total (1/ (5=3+4)): values preserved from source table. --- ### 1.3 Legal and regulatory arrangements for PFM — framework and reforms ### Constitutional and legislative framework - Constitution highest legal act; Parliament adopts laws regulating PFM. - (Organic) Budget Law provides overall legislative framework for key PFM elements; thematic laws and by-laws further regulate specific areas. ### Organic Budget Law and Annual Budget Law (selected features) - OBL covers formulation and execution of annual budget and medium-term budgeting including three-year Fiscal Strategy; prescribes functioning of the STA; includes section on fiscal discipline and mentions PIFC, public debt and public assets. - Annual Budget Law: - Determines planned revenue and expenditures and serves as principal act for managing public finances in given budget year and three-year development budget. - Presents budget expenditures in economic, functional, administrative and program classifications; revenue presented by source of funding. - Includes information about planned borrowing, breakdown of state guarantees, and main projects financed by loans and IPA funding. - Adopted by end of year for next year. - Opportunities for public participation limited; no legal provisions requiring public participation. ### Accounting, reporting and final accounts - Law on Final Accounts comprises annual government financial statements; Balance sheets prepared by individual budget users but not consolidated at BCG level. - Proposed Law on Final Accounts and SAO opinion submitted to Parliament by June 30 for previous year. - Budget accounting regulated by Law on Accountancy of the Budget and Budget Users; Article 23 defines financial statements of budget users as statement of revenue and expenditure and balance sheet. - Supporting by-laws: Rulebook on Form and Content of the Balance Sheet and Revenue and Expenditure Statement; Rulebook on Accounting of Budget and Budget Users; Rulebooks on income and expenditure classification, Chart of Accounts. ### Revenue administration and principal revenue agencies - PRO and Customs Administration principal revenue agencies; collected 91.6 percent of revenue in FY 2020. - Comprehensive legal framework for revenue administration: separate legislation for tax administration, customs, administrative procedures, audit, and all taxes and social security contributions. - Key instructions in use: Instruction for manner of registration, allocation, refund and transfer of public revenues; Instruction on form and content of payment instruments for domestic transactions. ### Public internal financial control (PIFC) - PIFC Law (last amended 2015) and by-laws set general internal control arrangements and requirements; covers FMC, IA, and Central Harmonization Department (CHD). - FMC objectives aligned with international good practice; implementation envisaged through COSO components. - At assessment time, FMC provisions covered all revenues, expenditures, assets and liabilities of budget users, social insurance funds and sub-national units (not public corporations). - IA provisions cover independence, rights and responsibilities; standards from IPPF issued by the IIA. - CHD responsible for PIFC policy formulation, coordination, monitoring, methodological guidance and capacity development. ### PFM Reform Program (PFMRP) 2018-2021 and reform management - PFMRP priorities (seven): Improved Fiscal Framework; Revenue Mobilization; Planning and Budgeting; Budget Execution; Transparent Government Reporting; Internal Control; External Control and Parliamentary Oversight. - PFM Council and PFM Working Group coordinate reforms; operational monitoring assigned to priority coordinators and measure leaders. - PFMRP fully costed; 2021 Action Plan financing just over 50 percent national sources, remainder donor support; financing gap known and addressed with development partners. - Draft new OBL and associated by-laws expected to strengthen critical reforms. ### Recent and ongoing reform actions (high-level) - Revenue mobilization: PRO modernization, VAT refunds improvements, automatic data exchange. - Budget execution: technical specification for new integrated FMIS to replace TrIS. - Public procurement: secondary legislation development; new concession and PPP legislation under development and expected 2021 adoption. - Debt management transparency: inclusion of public corporations’ financial performance in Fiscal Strategy; arrears data published quarterly. - SAO: capacity development including performance auditing. - Many reforms depend on adoption of draft OBL. --- ### Pillar summaries (selected findings and numeric evidence) ### Pillar One — Budget reliability (PI-1, PI-2, PI-3) - PI-1 Aggregate expenditure outturn (M1): B. - Aggregate expenditure outturn (percent): 2018 91.8; 2019 92.7; 2020 102.8. - Absolute deviation of actual versus approved between 2.8 percent and 8.2 percent over 2018–2020. - PI-2 Expenditure composition outturn (M1): D+ (sub-scores: function B; economic type D; contingency A). - Expenditure composition variance by function: 2018 9.6; 2019 8.7; 2020 17.8. - Expenditure composition variance by economic classification: 2018 16.7; 2019 11.3; 2020 18.2. - Average contingency expenditure as percent of total BCG expenditure: three-year average 0.06 percent (2018 0.04; 2019 0.05; 2020 0.1). - PI-3 Revenue outturn (M2): C. - Aggregate revenue deviation (percent): 2018 -7.3; 2019 -7.1; 2020 -16.1. - Revenue composition variance (percent): 2018 12.4; 2019 13.7; 2020 17.1. ### Pillar Two — Transparency of public finances (PI-4 to PI-9) - PI-4 Budget classification: B. - Common chart of accounts; administrative, economic, functional, program and source of funds classifications; bridge table to GFSM 2014; budget formulation based on GFS “Group” level (3 digits). - PI-5 Budget documentation: D. - Budget documentation for 2021 fulfilled five elements; basic element 3 (current year budget in same format) Not met; basic element 4 (aggregated budget data for current and previous years for all classifications) Not met. - Fiscal Strategy elements sometimes not available in advance of budget submission. - PI-6 Central government operations outside financial reports: D+ (6.1 C; 6.2 D; 6.3 C). - Extrabudgetary expenditure not included in ex-ante and ex-post reports <10 percent of BCG expenditure in 2020. - Extrabudgetary revenue not included in reports >10 percent of BCG revenue in 2020. - About 22 percent of extrabudgetary entities’ financial reports submitted within six months; about 55 percent within nine months. - PI-7 Transfers to subnational governments: A. - Over 90 percent of central government grants distributed through transparent formulae; LGUs receive 4.5 percent of previous year's VAT revenue and 3 percent of current year's PIT yield in their area. - PI-8 Performance information for service delivery: D+ (8.1 C; 8.2 C; 8.3 C; 8.4 D). - SAO carried out 19 performance audits during last three completed fiscal years; SAO average coverage of expenditures managed by audited ministries over last 3 years: 14 percent. - Internal audits in 2019: 161 total; performance audits among them 4 (2.4 percent). - PI-9 Public access to fiscal information: A. - Fiscal information published on MoF and Parliament websites within required timeframes. ### Pillar Three — Management of assets and liabilities (PI-10 to PI-13) - PI-10 Fiscal risk reporting: C (10.1 D; 10.2 C; 10.3 B). - UPEA monitors 29 entities; timeliness of receipt of PE financial statements: mixed (13 within 6 months, 10 within 9 months, 6 not within 9 months for 29 PEs). - PE arrears and debt (guaranteed and non-guaranteed) 1.6 and 9.2 percent of GDP as of September 2020. - Municipal arrears and debt outstanding 0.6 and 0.8 percent of GDP, respectively, as of September 2020. - Significant contingent liabilities reported: guaranteed public debt 8.3 percent of 2020 GDP; net exposure to financial sector 26.4 percent of 2017 GDP; PPP risk 6.4 percent of 2020 GDP (no consolidated PPP reporting yet). - PI-11 Public investment management: D+ (11.1 C; 11.2 D; 11.3 C; 11.4 C). - External funding share of capital budget: 30 percent (2019); 38 percent (2020); 37 percent (2021). - No national guidelines for appraisal, selection or costing for domestically funded projects; SPP and SEA provide selection criteria for some projects. - Major PESR projects listed with project costs (MKD): - Construction of highway A2, section Kicevo - Ohrid: 25,373,989,538 - Construction of express road Stip - Radovish: 3,948,416,000 - Construction of expressway Kumanovo - border with R. Bulgaria, section Rankovci - Kriva Palanka: 3,609,099,000 - PI-12 Public asset management: D+ (12.1 C; 12.2 D; 12.3 D). - Law on Use and Disposal of State-owned and Municipal-owned Assets (2019) applies; records fragmented; cadaster issues noted; asset disposal information decentralized. - PI-13 Debt management: A (13.1 B; 13.2 A; 13.3 A). - DMIS upgraded 2020; Public Debt Registry and Registry of Issued Sovereign Guarantees maintained; PDMS 2021-2023 in place and publicly reported. ### Pillar Four — Policy-based fiscal strategy and budgeting (PI-14 to PI-18) - PI-14 Macroeconomic and fiscal forecasting: C (14.1 D; 14.2 C; 14.3 B). - Macroeconomic forecasts included in Fiscal Strategy; interest rate projections not explicitly elaborated. - PI-15 Fiscal strategy: C (15.1 D; 15.2 A; 15.3 D). - Fiscal Strategy prepared and adopted; fiscal impact of policy proposals not fully quantified; reporting on fiscal outcomes not comprehensive. - PI-16 Medium-term perspective in expenditure budgeting: C (16.1 B; 16.2 D; 16.3 B; 16.4 D). - Aggregate expenditure ceilings for budget year and two following years were not approved by Government before first budget circular for 2021-23 process. - PI-17 Budget preparation process: C+ (17.1 A; 17.2 D; 17.3 C). - Budget calendar generally adhered to; budget circular guidance incomplete for total funds; executive submitted budget to Parliament within statutory timelines but not always at least two months before fiscal year. - PI-18 Legislative scrutiny of budgets: B+ (18.1 A; 18.2 B; 18.3 A; 18.4 A). - Parliamentary Budget Office created in 2020; procedures stable and respected; Parliament approves budget before start of fiscal year. ### Pillar Five — Predictability and control in budget execution (PI-19 to PI-26) - PI-19 Revenue administration: C (19.1 A; 19.2 C; 19.3 D; 19.4 D*). - PRO and CA account for 91.6 percent of revenue in FY 2020 (PRO and CA revenue 170,941 MKD million; total 186,585 MKD million). - PRO modernization ongoing; ITIS core modules expected operational in 2022. - Revenue arrears: PRO reported MKD 16,810 million (82.96 percent of arrears); CA reported MKD 3,454.4 million (17.04 percent). - Total stock of tax arrears at end of fiscal year: 30,454 (MKD million) tabled in source. - Total PRO arrears at end of fiscal year: 27,000* (data caveat: excludes interest on some streams). - Share of tax arrears in total revenue collections (2/1, percentage): 16.32. - Tax arrears older than 12 months: 9,895; PRO portion older than 12 months: 6,478**; CA portion older than 12 months: 3,417. - PI-20 Accounting for revenue: C+ (20.1 A; 20.2 A; 20.3 C). - STA used for collections; MoF has daily access to revenue information; reconciliations: PRO monthly, CA daily; assessments not reconciled. - PI-21 Predictability of in-year resource allocation: A (21.1 A; 21.2 A; 21.3 B; 21.4 A). - STA consolidation daily; liquidity projections updated weekly; quarterly commitment ceilings provided and updated monthly. - PI-22 Expenditure arrears: B+ (22.1 A; 22.2 B). - Total reported arrears (thousand MKD): 31 Dec. 2020: 392,857; 31 Dec. 2019: 349,070; 31 Dec. 2018: 1,034,434. - Ratio (arrears considered for assessment / total actual expenditure): 31 Dec. 2020 0.22%; 31 Dec. 2019 0.23%; 31 Dec. 2018 0.73%. - PI-23 Payroll controls: B+ (23.1 B; 23.2 A; 23.3 B; 23.4 B). - Centralized payroll calculation covers close to 70 percent of total CG expenditure; retroactive adjustments under 0.10 percent of total salaries in 2020. - PI-24 Procurement: A (all subdimensions A). - 2020 procurement: number of contracts 32,253; total value MKD 56,072,187,702; represents 8 percent of GDP and 23 percent of budget. - Competitive procurement value MKD 53,627,981,315 (95.64 percent). - ESPP covers tendering process; PPB administers ex-ante control thresholds. - PI-25 Internal controls on non-salary expenditure: B+ (25.1 B; 25.2 B; 25.3 A). - Commitment controls via TrIS E-commitment module; exemptions for amounts under MKD 300,000; registration controls against annual appropriation. - PI-26 Internal audit: C+ (26.1 A; 26.2 B; 26.3 C; 26.4 C). - MoF CHD reports 91 established IAUs with over 130 internal auditors as of May 2021; internal audit reports issued: 2020 142; 2019 180; 2018 214. - Management response to IA recommendations: 2017 34.2 percent; 2018 52 percent; 2019 66.1 percent; 2020 60.1 percent. ### Pillar Six — Accounting and reporting (PI-27 to PI-29) - PI-27 Financial data integrity: B+ (27.1 A; 27.2 A; 27.3 B; 27.4 B). - STA accounts daily reconciled; 6,935 active STA accounts reconciled daily (detailed level). - PI-28 In-year budget reports: C+ (28.1 C; 28.2 B; 28.3 B). - In-year reports prepared and published monthly within four weeks; reports comparable to approved budget at administrative and aggregated economic classification levels; expenditure captured at payment stage only. - PI-29 Annual financial reports: D+ (29.1 C; 29.2 A; 29.3 D). - Final Account limited to revenue, expenditure and cash balance; submission for external audit timely for FY 2019; accounting standards not disclosed in Final Account. ### Pillar Seven — External scrutiny and audit (PI-30, PI-31) - PI-30 External audit: C+ (30.1 B; 30.2 C; 30.3 A; 30.4 A). - SAO: 183 approved staff positions; 105 filled; audits follow ISSAIs; annual audit report submitted to Parliament (timing for FY 2019 delayed to 7 months due to state of emergency). - External audit follow-up: 70 percent of recommendations where 90-day deadline passed were in process of implementation in 2019. - PI-31 Legislative scrutiny of audit reports: C+ (31.1 A; 31.2 D; 31.3 D; 31.4 A). - Parliamentary scrutiny of SAO annual report timely; hearings on individual audit findings limited; Parliament does not issue a separate set of recommendations or systematically follow up SAO recommendations. --- ### Overall analysis and priority actions (policy implications) ### Aggregate fiscal discipline and fiscal risk management — implications - Budget execution and cash management systems support aggregate fiscal discipline; however: - No mechanism preventing budget users from entering commitments exceeding appropriations and medium-term ceilings. - Fiscal risk monitoring is fragmented; lack of consolidated overview reduces ability to anticipate/manage fiscal shocks. - Recommendation focus: strengthen consolidated fiscal risk reporting (including PEs, LGUs, PPPs), formalize PPP reporting and develop standard criteria for guarantees and contingent liabilities monitoring. ### Medium-term planning and public investment management — implications - Medium-term framework exists but requires: - Quantification of fiscal impact of policy proposals in Fiscal Strategy. - Clear explanations of deviations between forecast vintages. - Standardized appraisal, selection and costing rules for domestically financed investment projects. - Recommendation focus: adopt appraisal and selection standards, consolidate project pipeline and integrate recurrent cost estimates in budget documentation. ### Revenue administration — implications - PRO modernization (ITIS) expected to improve arrears aging and reporting (ITIS core modules operational in 2022 per source). - Current arrears management weaknesses: high share of arrears older than 12 months; inability to generate comprehensive age profiles for all revenue streams. - Recommendation focus: prioritize ITIS deployment, implement comprehensive compliance improvement plan, improve tax audit coverage and reconciliation procedures with Treasury. ### Transparency, reporting and accountability — implications - Fiscal transparency strong in publication access (PI-9 A) but budget documentation incomplete (PI-5 D) and annual financial statements limited (PI-29 D+). - Parliamentary scrutiny timely but limited in hearings and follow-up recommendations. - Recommendation focus: enhance budget documentation to include current year comparable data, financial assets projections, fiscal risk statements and quantified policy impacts; strengthen parliamentary capacity for hearings and follow-up. ### Internal controls and internal audit — implications - PIFC legal framework in place; implementation uneven across entities; internal audit coverage high in nominal terms but quality and responsiveness need improvement. - Recommendation focus: strengthen CHD capacity, ensure IA quality assurance, improve management response rates to IA recommendations. --- *Source: 1mkdea2022004 - Executive Summary and chapter extracts from the provided PDF.* ### Executive Summary ...................................................................................................... ### 1mkdea2022004 - Executive Summary ### Document structure and coverage - Executive Summary .......................................................................................................... 7 - 1. PFM Context in North Macedonia ............................................................................... 13 - 2. Detailed analysis of PFM performance ........................................................................ 24 - 3. Overall analysis of PFM systems ................................................................................ 121 - 3.1. PFM strengths and weaknesses .......................................................................................................... 121 - 3.2. Effectiveness of the internal control framework ................................................................................ 123 - 3.3. Performance changes since the 2015 assessment ............................................................................. 124 - Annex 1: 2021 Performance indicator summary ............................................................ 127 - Annex 2: Summary of observations on the internal control framework ......................... 135 - Annex 3: Sources of information ................................................................................... 138 - Annex 3A: Related surveys and analytical work ........................................................................................ 138 - Annex 3C: Sources of information used to extract evidence for scoring each indicator ........................... 147 - Annex 4: 2021 Performance change summary ............................................................... 152 - Annex 5 - Calculations for PI-1, PI-2 and PI-3 (2016 Framework) .................................... 164 - Annex 5a - Calculations for PI-1, PI-2 and PI-3 (2011 Framework) ............................................................ 172 ### Pillars and performance indicators (Detailed analysis, starting p.24) - PILLAR ONE: Budget reliability - PI-1. Aggregate Expenditure Outturn .......................................................................................................... 24 - PI-2. Expenditure composition outturn ....................................................................................................... 25 - PI-3. Revenue outturn .................................................................................................................................. 26 - PILLAR TWO: Transparency of public finances - PI-4. Budget classification ............................................................................................................................ 28 - PI-5. Budget documentation ........................................................................................................................ 30 - PI-6. Central government operations outside financial reports .................................................................. 32 - PI-7. Transfers to subnational governments ................................................................................................ 35 - PI-8. Performance information for service delivery ..................................................................................... 37 - PI-9. Public access to fiscal information ....................................................................................................... 41 - PILLAR THREE: Management of assets and liabilities - PI-10. Fiscal risk reporting ............................................................................................................................ 43 - PI-11. Public investment management ........................................................................................................ 50 - PI-12. Public asset management .................................................................................................................. 56 - PI-13. Debt management ............................................................................................................................. 59 - Pillar FOUR: Policy-based fiscal strategy and budgeting - PI-14. Macroeconomic and fiscal forecasting .............................................................................................. 63 - PI-15. Fiscal strategy .................................................................................................................................... 66 - PI-16. Medium-term perspective in expenditure budgeting ....................................................................... 68 - PI-17. Budget preparation process .............................................................................................................. 71 - PI-18. Legislative scrutiny of budgets .......................................................................................................... 74 - PILLAR FIVE: Predictability and control in budget execution - PI-19. Revenue administration .................................................................................................................... 79 - PI-20. Accounting for revenue ...................................................................................................................... 84 - PI-21. Predictability of in-year resource allocation ....................................................................................... 85 - PI-22. Expenditure arrears ............................................................................................................................ 88 - PI-23. Payroll controls .................................................................................................................................. 91 - PI-24. Procurement ...................................................................................................................................... 94 - PI-25. Internal controls on non-salary expenditure ...................................................................................... 99 - PI-26. Internal audit .................................................................................................................................... 101 - Pillar SIX: ACCOUNTING AND REPORTING - PI-27. Financial data integrity .................................................................................................................... 106 - PI-28. In-year budget reports ..................................................................................................................... 109 - PI-29. Annual financial reports ................................................................................................................... 111 - PILLAR SEVEN: External scrutiny and audit - PI-30. External audit ................................................................................................................................... 114 - PI-31. Legislative scrutiny of audit reports ................................................................................................. 118 ### Annexes and supporting materials - Annex 1 through Annex 5a covering: - 2021 Performance indicator summary (Annex 1) ......................................................................................... 127 - Summary of observations on the internal control framework (Annex 2) ..................................................... 135 - Sources of information and related surveys (Annex 3, 3A, 3C) .................................................................. 138, 138, 147 - 2021 Performance change summary (Annex 4) ............................................................................................ 152 - Calculations for PI-1, PI-2 and PI-3 under 2016 and 2011 Frameworks (Annex 5 and Annex 5a) .............. 164, 172 ### Abbreviations and acronyms (selected) - AG Auditor General - BCG Budgetary Central Government - BU Budget User - CA Customs Authority - CG Central Government - CHD Central Harmonization Department - CIT Corporate Income Tax - COFOG Classification of Functions of Government - CRMU Compliance Risk Management Unit - DMIS Debt Management Information System - EC European Commission - EO Economic Operator - ESPEO Electronic System for Reporting and Recording of Liabilities - ESPP Electronic Procurement System - EU European Union - ERP Economic Reform Program - FID Financial Inspection Department - FS Fiscal Strategy - FY Fiscal Year - GDP Gross Domestic Product - GFSM Government Financial Statistics Manual - GTI General Tax Inspectorate - GRNM Government of the Republic of North Macedonia - HIF Health Insurance Fund - IAU Internal Audit Unit - IFRDMD International Relations and Debt Management Department - IFRS International Financial Reporting Standards - IMF International Monetary Fund - INTOSAI International Organization of Supreme Audit Institutions - IPA Instrument for Pre-Accession Assistance - JSC Joint Stock Company - LGSU Local Self Government Units - LGU Local Government Unit - LTO Large Taxpayer Office - MC Ministry of Culture - ME Ministry of Economy - MES Ministry of Education and Science - MESP Ministry of Environment and Spatial Planning - MKD Macedonian Denar - MLSG Ministry of Local Self Government - MoF Ministry of Finance - MOTC Ministry of Transport and Communication - NBRNM National Bank of the Republic of North Macedonia - OBL Organic Budget Law - PDMS Public Debt Management Strategy - PE Public Enterprise - PEFA Public Expenditure and Financial Accountability - PESR Public Enterprise for State Roads - PFM Public Financial Management - PIM Public Investment Management - PIT Personal Income Tax - PPB Public Procurement Bureau - PPL Public Procurement Law - PPP Public-Private Partnership - PRO Public Revenue Office - RNM Republic of North Macedonia - SAC State Appeals Commission - SAO State Audit Office - SPP Single Project Pipeline - SSC Social Security Contributions - STA Single Treasury Account - TrIS Treasury System - UPEA Unit for Public Enterprises and Agencies - VAT Value Added Tax - WB World Bank *Source: 1mkdea2022004 - Executive Summary* ### Executive Summary ### Executive Summary ### Purpose and management - This PEFA assessment provides a snapshot of the country’s PFM system performance to support the government in defining PFM reform priorities. - The previous assessment was conducted in 2015; the current assessment follows the recommended time period between assessments. - The assessment was conducted by the International Monetary Fund and the World Bank, with the Ministry of Finance and other relevant country institutions being the primary beneficiaries. - The assessment informed evaluation of the implementation of the PFM Reform Program 2018-2021 and the preparation of a new reform program. - The Public Financial Management Reform Program (PFMRP) 2018-2021 was completed and a number of reforms were implemented; the assessment identified further remaining areas for improvement. ### Main strengths of the PFM system - Budget formulation, credibility and transparency - Deviations of executed versus original budget are within manageable levels, with the exception on the revenue side in 2020 due to the pandemic. - Deviation in the composition of expenditure and revenue is more significant and includes reallocations from capital to recurrent budget coupled with capital budget underspending. - Annual budget and budget execution reports are presented in line with administrative, economic, functional and program classification; in-year reporting is more aggregated and does not provide all classifications. - Fiscal information is transparent and publicly accessible. - Transfers to lower levels of government are based on a rule-based, transparent and equitable system. - Budget calendar is appropriate and generally adhered to; ceilings provided to budget users do not cover the total expenditures for which they are responsible. - Budget execution - Predictability of available funds for budget execution during the year is robust and underpinned by suitable cash flow forecasting and monitoring. - Hard controls at the payments stage ensure budget execution within approved allocations and against quarterly commitment ceilings. - Available records on expenditure arrears report low stock of arrears. - Internal controls, including payroll controls, are generally sound. - Public procurement is competitive, transparent, with an appropriate complaints mechanism in place. - External audit and parliamentary scrutiny - The State Audit Office (SAO) is financially and organizationally independent and conducts audits in line with its annual audit plan and international standards. - SAO audits central government’s budget execution report annually and in a timely manner (3-4 months after receiving the financial statements, with the exception in 2020 due to the pandemic) and publishes the audit report. - There is effective follow-up of audit recommendations by auditees. - Procedures and practices for the parliament’s review of the annual budget are appropriate in terms of scope and timeliness; scrutiny of audit reports is timely (within three months) and transparent, although public hearings and recommendations based on audit reports are insufficient. - Debt management - Recording and reporting of debt and guarantees are overall adequate. - The Ministry of Finance is the single entity in charge of approving government borrowing. - There is a three-year debt management strategy whose implementation against objectives and indicators is monitored and publicly reported. ### Areas for continued reforms and further improvement - Medium-term perspective in planning and budgeting - Budget documentation includes expenditure estimates and ceilings for two years following the budget year, but analysis of deviations from such estimates and ceilings in the next budget cycle and related explanations are not provided. - A three-year Fiscal Strategy is adopted; it does not include quantification of the fiscal impact of policy proposals, explanations of proposed changes in revenues and expenditures over the three-year period, nor is implementation progress towards fiscal outcomes reported. - Fiscal Strategy includes macroeconomic and fiscal forecasts which lack some key elements, such as interest rate projections, and explanations of differences from previous forecasts. - Management of fiscal risks, public investments, and assets - Institutional set-up for monitoring fiscal risks is dispersed and includes only basic tasks and analysis, particularly for public corporations and local self-government related risk. - No dedicated regulations, guidelines or standard criteria for identification, appraisal, prioritization and selection of capital investments except for externally financed projects. - Records of major categories of financial and non-financial assets exist but are decentralized and fragmented; data for non-financial assets is fragmented with concerns about accuracy. - Performance information and management - Program budgeting practices are underdeveloped; program budgeting has not been formally adopted and remains at an immature level. - Strategic and annual plans include program objectives, costs, expected results and performance indicators, but there is no established mechanism for comparing results with targets and reliability of available data is uncertain. - SAO is reviewing government performance with increasing institutional and financial coverage. - Accounting and Reporting - In-year budget execution reports are comparable to the approved budget only at administrative and highly aggregated levels of economic classification; they capture expenditures only at the payments stage with no information on commitments or liabilities. - The Open Finance Portal is an improvement in transparency of treasury operations. - Annual government financial statements include only revenue and expenditures; only individual budget users prepare Balance Sheets and present assets and liabilities, but these are not consolidated. - Annual government financial statements are submitted timely for external audit; accounting standards used in their preparation are not disclosed. - Revenue Administration - Comprehensive and up-to-date information on revenue rights and obligations is available but revenue risk management, audits and investigations and level of tax arrears lag behind and register weak performance. - Timeliness of information and funds transfer related to revenue collections is adequate; frequency of reconciling revenue accounts could be improved. ### Impact of PFM performance on budgetary and fiscal outcomes - Aggregate fiscal discipline - Budget execution performs well and contributes to overall fiscal discipline; deviations between budget execution and approved budget on the expenditure side are low to moderate. - Hard controls at payments stage ensure spending within approved allocations, but there is no established mechanism preventing budget users from entering contractual commitments which exceed annual and medium-term allocations and estimates. - On the revenue side, revenue administration faces challenges with risk management, tax audit and tax arrears. - Deviation of executed versus budgeted revenue registered a moderate seven percent in 2018 and 2019, and 16 percent in 2020 as a consequence of the pandemic. - Strategic allocation of resources - Ministries adopt costed medium term plans and a link between those documents and the budget can be established; medium-term targets are not binding and deviations are not properly analyzed. - Performance management and measurement of results are basic, hindering budgeting based on performance. - Weak public investment management and basic fiscal risk monitoring negatively influence strategic allocation of resources. - Efficient service delivery - A reasonably credible budget enables implementation of service delivery expenditures, though high variance in composition of expenditures risks reallocations from capital to less growth-enhancing recurrent spending. - Accumulation of tax arrears can risk insufficient revenue to execute service delivery programs. - Weak program budgeting and performance management prevent meaningful analysis of the efficiency of service delivery. - Well performing external audit by the SAO and parliamentary oversight provide additional scrutiny; further development of internal audit would contribute to improving systems and governance in service delivery units. ### Performance changes from previous assessment (2015 to 2021) - Overall PFM performance registered an improvement compared to 2015. - Out of 28 performance indicators, 11 indicators maintained equal rating, 11 indicators registered improved scores, and 6 indicators showed deteriorated scores (two due to reinterpretation of evidence against scoring criteria). - Improvements primarily relate to budget formulation, budget execution and reporting, and external oversight. - Improved areas include monitoring of arrears; assessed aspects of tax administration; public procurement; internal controls; in-year budget reporting; external audit; and legislative scrutiny of the budget proposal and final account. - Scores deteriorated on the extent of variance in expenditure composition during the last three years and on comprehensiveness of information included in budget documentation (on account of a higher portion of directly managed EU funds). - Some nominal deteriorations relate to reassessment of evidence (budget classifications, guidance for preparing budget submissions, debt management indicator). - On annual financial statements, timeliness dimension changed due to COVID-related disruptions and accounting standards dimension was scored lower due to reinterpretation of evidence. ### Key statistics and assessment scores - Aggregate fiscal outcomes and deviations - Deviation of executed versus budgeted revenue: moderate seven percent in 2018 and 2019; 16 percent in 2020. - PEFA indicator overview (selected entries) - PI-1 Aggregate expenditure outturn: M1 B - PI-2 Expenditure composition outturn: M1 B D A D+ - PI-3 Revenue outturn: M2 C C C - PI-4 Budget classification: M1 B - PI-5 Budget documentation: M1 D - PI-7 Transfers to sub-national governments: M2 A A A - PI-9 Public access to fiscal information: M1 A - PI-10 Fiscal risk reporting: M2 D C B C - PI-13 Debt management: M2 B A A A - PI-14 Macroeconomic and fiscal forecasting: M2 D C B C - PI-15 Fiscal strategy: M2 D A D C - PI-19 Revenue administration: M2 A C D D* C - PI-24 Procurement: M2 A A A A A - PI-27 Financial data integrity: M2 A A B B B+ - PI-29 Annual financial reports: M1 C A D D+ - PI-30 External audit: M1 B C A A C+ - PI-31 Legislative scrutiny of audit reports: M2 A D D A C+ *Source: 1mkdea2022004 - Executive Summary* ### 1.1 Financial overview ### 1.1 Financial overview ### Public sector structure and entities - Central government sub-sector comprises: budgetary central government, social security funds, and extrabudgetary units. - Budgetary central government: 95 first level budgetary units with 310 subordinate or second level budget units (agencies, departments). - Social security funds (central government sub-sector): 3 (Health Insurance Fund, Employment Agency of the Republic of North Macedonia, Pension and Disability Fund). - Extrabudgetary entities: 10 (regulatory and other agencies) plus 10 entities legally organized as public corporations but classified as central government extra-budgetary units (EBUs) according to GFSM 2014. - Health Institutions partly financed from the budget: 108. - Sub-national government: 81 municipalities with 585 subordinate units and 151 public corporations. - Non-financial public corporations at central level (legally organized): 33, including 10 institutional units that should be classified as central government EBUs according to GFSM 2014. - Central bank: National Bank of the Republic of North Macedonia (NBRNM). - Financial public corporation: North Macedonia Bank for Development Promotion (NMBDP). - Other supervisory agencies mentioned: Securities and Exchange Commission, Insurance Supervision Agency, Agency for Supervision of Fully Funded pension insurance. ### Fiscal management and performance (2018–2020) - Fiscal balances had been improving each year since 2014 until the COVID-19 crisis in 2020; under-execution of budgeted capital expenditure contributed to earlier improvements. - COVID-19 impact in 2020: - Revenues fell by 1 percent of GDP. - Spending on containment measures increased by 5.2 percent of GDP. - Central government deficit increased to 8.4 percent of GDP. - Public debt rose to over 60 percent of GDP. Key aggregate fiscal data (Central Government, percent of GDP): - 2018 - Total revenue 28.5 - – Own revenue 28.1 - – Grants 0.5 - Total expenditure 30.3 - – Noninterest expenditure 29.1 - – Interest expenditure 1.2 - Aggregate deficit (incl. grants) -1.8 - Primary deficit -0.6 - Net financing 1.8 - – External 2.5 - – Domestic -0.8 - General Government Debt (MKD bn) 267,160 - Ratio of general government debt to GDP 40.43 - Public debt (MKD bn) 319,906 - Total public debt (percent of GDP) 48.4 - 2019 - Total revenue 29.6 - – Own revenue 29.0 - – Grants 0.6 - Total expenditure 31.5 - – Noninterest expenditure 30.4 - – Interest expenditure 1.2 - Aggregate deficit (incl. grants) -2.0 - Primary deficit -0.8 - Net financing 2.0 - – External 0.4 - – Domestic 1.5 - General Government Debt (MKD bn) 280,180 - Ratio of general government debt to GDP 40.6 - Public debt (MKD bn) 340,686 - Total public debt (percent of GDP) 49.4 - 2020 - Total revenue 28.6 - – Own revenue 28.1 - – Grants 0.5 - Total expenditure 36.7 - – Noninterest expenditure 35.5 - – Interest expenditure 1.2 - Aggregate deficit (incl. grants) -8.1 - Primary deficit -6.9 - Net financing 8.1 - – External 5.8 - – Domestic 2.3 - General Government Debt (MKD bn) 340,302 - Ratio of general government debt to GDP 51.2 - Public debt (MKD bn) 399,979 - Total public debt (percent of GDP) 60.2 Source of tables: State Statistical Office, Ministry of Finance. ### Financial structure of the central government budget (2020, MKD millions) - 2020 Central government (Budgetary units (1); Social security funds (2); Consolidated total (of 1 and 2) (3); Extra-budgetary units (4); Total 1/ (5=3+4)): - Revenue, Expenditure, Transfers to (-) and from (+) other units of general government, Liabilities, Financial assets, Nonfinancial assets: figures presented in the source table include: - Budgetary units: 117,784* (note: earmarked revenues collected by the BCG and transferred to SSFs have been eliminated) - Social security funds: 115,857; 115,714 - Consolidated total (of 1 and 2): 189,554; 243,421; 20,073; 15,630 - Extra-budgetary units: 210,627; 259,051 - Notes: - (1) corresponding to budgetary central government (BCG) - (2) as presented in the Final Account of the Budget of the RNM - * Earmarked revenues collected by the BCG and transferred to SSFs have been eliminated. ### Budget definitions (legal and PEFA assessment mapping) - "Budget of the Republic of Macedonia" — Legal definition: “annual plan of revenues and other inflows and appropriations. It includes the central government budget and the Funds budgets” - PEFA assessment term: Consolidated budget of BCG and SSFs - "Central government budget" — Legal definition: “annual plan of revenues, other inflows and appropriations. It covers the budget users of the central government and includes the basic budget, the donation budget, the loan budget and the budget of self-financing activities” - PEFA assessment term: BCG budget - "Basic budget" or "Core budget" — Legal definition: “annual plan of revenues, other inflows and appropriations for financing the basic competencies of the budget users” - PEFA assessment term: Tax and non-tax revenues and expenditures of BCG budget users (excluding earmarked inflows: loans, grants and self-financing) - "Funds budgets" — Legal definition: “annual plans of revenues, other inflows and appropriations for financing the Funds activities regulated by law” - PEFA assessment term: SSF’s budgets - "Development Program Plan" — Legal definition: “mid-term review of programs for development investments” - PEFA assessment term: Development budget Source: Law on Budgets (Article 2), annotated by the PEFA assessment team. ### Institutional arrangements for public financial management (PFM) - Government policy and regulation at national level: responsibility of 16 line ministries subordinated to the Prime Minister; strategic planning coordinated by the General Secretariat of the Government (oversees Government four-year Work Program and ministries’ three-year strategic plans). - PFM system: relatively decentralized; Ministry of Finance (MoF) leads policy and procedures via issuance of rulebooks, coordination of budget preparation, execution, and public internal control. - MoF central roles include: formulating and monitoring fiscal policy; preparation and implementation of the budget; public internal financial control; managing internal and external public debt; integrating fiscal and monetary policies in cooperation with the Central Bank. - MoF organizational elements (selected): - Agencies (with legal entity status) and departments include: Public Revenue Office (PRO), Customs Administration (CA), Public Procurement Bureau, Directorate for Financial Police, Directorate for Financial Intelligence, State Foreign Exchange Inspectorate, Treasury Department, Department for Budgets and Funds, Macroeconomic Policy Department, Tax and Customs Policy Department, Central Harmonization Department (PIFC), Internal Audit Department, Financial Affairs Department, Financial System Department, Department of Legal Affairs, IT Department, Department for International Financial Relations and Public Debt Management, Department for Financial Inspection and Coordination for Combating Fraud against EU Funds, Department for Central Financing and Contracting, Department for Asset Management for IPA funds, and an Independent unit for Strategic Planning. - Department responsibilities (selected): - Tax and Customs Policy Department: drafts laws/bylaws and policies for taxation, fees and customs; harmonizes customs regulations; analyzes free trade agreements and avoidance of double taxation and prevention of tax evasion. - Macroeconomic Policy Department: prepares macroeconomic projections and policies underpinning the medium-term fiscal strategy; coordinates Economic Reform Program; prepares monthly and quarterly reports. - Budgets and Funds Department: develops medium-term fiscal strategy; proposes allocation for operating and capital expenditure; develops laws/policies for Budget preparation, adoption, and execution; approves redistributions and reallocations during execution; monitors finances of local government units, public enterprises, and agencies. - Treasury Department: maintains register of budget users; manages accounts within the single treasury account (STA); prepares liquidity projections; manages MKD and foreign currency payments; keeps budget accounting records; approves financial plans of budget users; operates Treasury Information System (TrIS); organized with central unit and 17 regional offices. - Central Harmonization Department (PIFC): coordinates and improves public internal financial control across financial management and control, internal audit, and harmonization; mission includes building a system aligned with EU acquis, ensuring reasonable use of public funds, decentralized management accountability, and independent internal audit. - Internal Audit Department: organizes and performs internal audits in the MoF per legal regulations and international standards. - International Financial Relations and Public Debt Management Department: manages public debt and guarantees to minimize risk and cost; liaises with international/bilateral financial institutions; monitors implementation of foreign loan and donation projects; works to maintain an efficient and liquid government securities market; harmonizes legislation with EU laws. - Other PFM roles outside MoF: - General Secretariat: strategic planning and selection/monitoring of public investment projects. - Public-Private Partnerships (PPP) unit, Ministry of Economy: leads PPP law development, maintains PPP register, evaluates feasibility studies. - Secretariat for European Affairs (SEA): manages single project pipeline. - State Audit Office (SAO): independent external auditor with mandate covering BCG budget, SSFs, budget spending units, local governments, public enterprises and other beneficiaries of public funds; required to submit annual report to Parliament within six months of year-end. ### Assignment of key PFM functions and responsible entities (summary) - Macroeconomic and fiscal forecasting: MoF Macroeconomic Policy Department and MoF Budgets and Funds Department. - Budget preparation (including medium-term framework): MoF Department for Budgets and Funds, with inputs from budget users. - Budget execution: Budget users manage authorized budgets; Treasury Department manages BCG budget through TrIS and processes payment requests; Health Insurance Fund processes health care invoices. - Fiscal risk monitoring: MoF Department for Budgets and Funds monitors PEs’ and LGUs’ financial performance; International Relations and Debt Management Department monitors debt-related risk and contingent liabilities; Deposit Insurance Fund and NBRNM monitor financial risks. - Public investment management: Individual budget users implement capital projects; General Secretariat ensures alignment with Government 4-year plan; SEA manages single project pipeline. - Public assets management: Budget users manage assets; Property and Affairs Administration manages sales/leasing/expropriations; State Cadaster Office records immovable property. - Debt management: MoF International Financial Relations and Debt Management Department. - Revenue administration: MoF Department for Income, Tax and Customs develops revenue policy; Public Revenue Office and Customs Administration collect bulk of central government revenues; CG EBUs collect certain revenues under legal basis. - Payroll administration: Budget users maintain decentralized personnel records and prepare payroll; MoF Budgets and Funds Department reviews and approves. - Public procurement: Budget users manage procurement; Public Procurement Bureau coordinates and monitors; State Commission on Public Procurement Appeals provides legal protection. - Internal audit and Financial Management and Control: Budget users implement day-to-day; MoF Central Harmonization Department develops policy and methodology; MoF Financial Inspection Department undertakes ex-post compliance inspections. - Accounting and Financial reporting: MoF sets accounting policy; MoF Financial System Department manages standards; MoF Treasury Department manages General Ledger through TrIS and prepares consolidated final account; budget users report final accounts separately and maintain auxiliary records. - External audit: State Audit Office for all public funds. - Oversight and Scrutiny: Parliament, the Budget and Finance Committee. *Source: 1mkdea2022004 - 1.1 Financial overview* ### 1.3 Legal and regulatory arrangements for PFM ### 1.3 Legal and regulatory arrangements for PFM ### Constitutional and legislative framework - The Constitution of the Republic of North Macedonia is the highest legal act and provides fundamental principles of legality, defining executive, legislative and judiciary power and stipulating responsibilities of the Government, Parliament, the President and courts. - Parliament holds legislative power and adopts laws, including those regulating the PFM area. The Government (executive) implements legislative provisions related to PFM. - The (Organic) Budget Law provides the overall legislative framework for key elements of the PFM system; additional thematic laws and by-laws further regulate specific areas. ### Organic Budget Law and Annual Budget Law - The (Organic) Budget Law includes provisions related to formulation and execution of the annual budget and describes the process of medium-term budgeting, including preparation of the three-year Fiscal Strategy. - The law prescribes the functioning of the STA as the core element of the public collections and payments system and includes provisions regulating budgetary accounting and reporting. - The law includes a section on fiscal discipline, including fiscal rules, with general mentions of public internal financial control, public debt and public assets (further regulated by separate laws). - The Annual Budget Law: - Determines planned revenue and expenditures and serves as the principal act for managing public finances in a given budget year and three-year development budget. - Includes overall revenue and expenditures of the BCG, as well as for individual budget users. - Presents budget expenditures in line with economic, functional, administrative and program classifications; revenue is presented by source of funding. - Includes information about planned borrowing for the budget year, breakdown of state guarantees, and main projects financed by loans from international financial institutions and EU support through the Instrument for Pre-accession Assistance (IPA) funding. - Is adopted by the end of the year for the next year. - Opportunities for public participation are limited, as there are no legal provisions requiring public participation. ### Accounting, reporting, and final accounts - The Law on Final Accounts comprises the annual government financial statements and presents revenues received and expenditures for the year. - Balance sheets are prepared by individual budget users, but are not consolidated at the level of BCG in the final account. - The proposed Law on Final Accounts and the opinion of the State Audit Office are submitted to the Parliament by June 30 of the current year for the previous year. - Budgetary accounting and reporting are primarily regulated by the Law on Accountancy of the Budget and Budget Users: - Financial statements of budget users are defined as the statement of revenue and expenditure and the balance sheet. - Article 23: financial statements with the accompanying explanation represent the Final Accounts of the budget user. - Additional by-laws include the Rulebook on the Form and Content of the Balance Sheet and Revenue and Expenditure Statement and the Rulebook on Accounting of the Budget and Budget Users. - By-laws supporting formulation and execution include Rulebooks on: - (i) income classification, - (ii) classification of expenditures, - (iii) Chart of Accounts, - (iv) Content of Individual Accounts in the Chart of Accounts. ### Revenue administration and principal revenue agencies - Revenue administration is subject to a comprehensive legal framework specifying roles and responsibilities of revenue collecting entities and payers. - The Public Revenue Office (PRO) and Customs Administration are the principal revenue agencies which collected 91.6 percent of revenue in FY 2020. - Separate legislation exists for tax administration, customs administration, administrative procedures (general, tax and customs) and audit, and for all taxes and social security contributions. - Important instructions in use include: - Instruction for the manner of registration, allocation, refund and transfer of public revenues. - Instruction on the form and content of payment instruments for domestic transactions. ### Other PFM-related legislation - Separate legislation regulates external audit, public procurement, internal control and internal audit, public debt, and public assets management. - The Law on SAO governs external audit within the public sector, including role, mandate, scope, organization, and nature of audits. - The Law on Public Debt defines provisions for new borrowing, institutional responsibilities and reporting and management of public debt. - The Public Procurement Law (PPL) prescribes procurement rules and requirements. - Use, management, and disposal of public assets are governed primarily by the Law on Managing State Property and the Law on Use and Disposal of State-owned and Municipal-owned Assets. - Primary legislation related to local self-governments comprises the Law on Local Government and the Law on Financing Local Self-Governments. ### Medium-term planning documents and strategies - The Fiscal Strategy covers a three-year period on a rolling basis and provides framework guidance for PFM, including medium-term fiscal targets. - Additional strategies include those related to the State Audit Office, Public Debt Management, Tax System Reform and Public Revenue Office. - The Economic Reform Program (ERP): - Sets out major structural reforms for a three-year period. - The MoF coordinates the annual ERP, which contains a medium-term macroeconomic and fiscal policy framework and detailed overview of structural reforms. - ERP is based on the fiscal strategy, the adopted annual budget, public debt management strategy and other sectorial strategies, and is submitted to the European Commission after adoption by the Government no later than January 31 each year. ### Internal control framework (PIFC) - North Macedonia is reforming its public internal financial control (PIFC) system in line with EU accession priorities; objectives aim to align management, control and internal auditing with internationally recognized principles, standards and good practices. - Developments in 2019-2021 were framed in the Government’s PIFC Policy Paper. - The Public Internal Financial Control Law (last amended 2015) and supporting by-laws set out general internal control arrangements and requirements. - The PIFC Law covers the three “pillars of PIFC”: financial management and control (FMC), internal audit (IA), and a committed central harmonization unit at the MoF (CHD). - Primary provisions are elaborated in implementing rulebooks, FMC manual, internal audit manual, code of ethics, model internal audit charter and others. - Legislation in policy development, coordination and civil service are being aligned with EU Administrative Space principles. - Coverage of the PIFC Law: - At assessment time, FMC provisions covered all revenues, expenditures, assets and liabilities of budget users, social insurance funds, and sub-national government units (but did not extend to public corporations). - FMC objectives align with international good practice: compliance, value-for-money, safeguarding assets, and timely reporting. - FMC implementation envisaged through five interrelated components based on COSO: control environment, risk assessment, control activities, information and communication, and monitoring. - Internal audit (IA) provisions cover auditors’ independence, rights and responsibilities, and criteria for IA unit establishment; standards prescribed are from the IPPF issued by the IIA. - Responsibilities are clearly assigned under law: - Heads of entities must set up, operate, monitor, evaluate and report on internal control systems. - Managers must manage entrusted resources legally compliant, economical, efficient, and effective. - Financial affairs units have prescribed duties including segregation of duties. - Decentralized functionally independent IA units provide assurance and consulting on governance, internal control and risk management. - In the MoF, the Central Harmonization Department (CHD) has overall responsibility for PIFC policy formulation, coordination, monitoring, methodological guidance and capacity development. - Monitoring, reporting and external scrutiny: - CHD annual reports monitor development and functioning of internal control based on self-reported FMC and IA implementation by organizations. - CHD conducts quality reviews of internal controls in individual organizations. - MoF’s Financial Inspection Department provides ex-post verification of regularity (compliance) of financial transactions. - The SAO examines functioning of internal control during financial, compliance and performance audits. ### PFM Reform Program (PFMRP) and reform management - The government’s current PFMRP covers 2018-2021 and was developed after the 2015 PEFA assessment; it is the main strategic and operational guidance for planned reforms to improve efficiency and effectiveness of public spending. - PFMRP priorities (seven) correspond to major PFM functions and are complemented by PFM sub-area strategies: - Improved Fiscal Framework - Revenue Mobilization - Planning and Budgeting - Budget Execution - Transparent Government Reporting - Internal Control - External Control and Parliamentary Oversight - Priorities are broken down into measures with annual action plans and a logical framework of qualitative and quantitative indicators. - Complementary documents and instruments: - In 2018-2020, diagnostics included FTE (2018), PIMA (2020), TADAT (2021), and Tax DIAMOND (2020); OECD SIGMA monitoring using the Principles of Public Administration (PPA) was conducted concurrent with the PEFA assessment; Open Budget Survey provides independent view biennially. - PFMRP implementation: - The PFM Council and the PFM Working Group (PFM WG) coordinate reforms; all relevant PFM institutions are represented. - Operational monitoring is assigned to priority coordinators and measure leaders. - PFMRP implementation is reported at least biannually to the Government by the PFM WG through the PFM Council. - An updated Decision (October 2021) mandates PFM WG members to develop the new PFM Strategy, coordinate implementation, monitor, evaluate and report progress. - As of October 2021, civil society organizations (CSOs) and development partner representatives are included as observers in the PFM WG. - PFMRP documents (program, action plan, reports, policy dialogue conclusions) are publicly available; monitoring reports identify cross-cutting issues such as donor coordination and capacity constraints. - Measures are reported as achieved/partially achieved/not achieved and include forward-looking risk assessments. - Government expects technical assistance support in 2021-2023 to address capacity constraints. - The PFMRP is fully costed; the 2021 Action Plan shows financing is just over 50 percent from national sources and the remainder through donor support; the financing gap is known and addressed with development partners. ### Recent and on-going reform actions (high-level) - Progress and ongoing work across areas with remaining improvements needed: - Revenue mobilization: efforts to improve tax collection, VAT refunds, automatic data exchange, modernization of the PRO, and professional and ethical standards. - Budget execution: technical specification prepared (with technical assistance) for a new integrated Financial Management Information System (FMIS) to replace current TrIS. - Public procurement: continued development of secondary legislation; new concession and PPP legislation under development and expected to be adopted in 2021. - Debt management transparency: inclusion of public corporations’ financial performance in the Fiscal Strategy; arrears data published quarterly. - Statistics: improved alignment with ESA 2010. - SAO: continued institutional capacity development, including performance auditing. - Many critical reforms depend on adoption of the new draft organic budget law (OBL) and associated by-laws; planned reforms under improved fiscal framework, planning and budgeting, and transparent government reporting will be particularly strengthened by the draft OBL. ### Institutional considerations (leadership, coordination, sustainability, transparency) - PFM reforms are led by the MoF in coordination with other institutions through the PFM Council and PFM WG; all relevant country PFM institutions are represented. - Operational monitoring assigned to priority coordinators and measure leaders; implementation is reported biannually to Government. - Transparency: - PFMRP implementation characterized by high transparency; main documents publicly available. - CSOs and development partners invited to discuss reported progress. - Measures are tracked with achieved/partially achieved/not achieved statuses and forward-looking risk assessments. - Financing: - PFMRP financing: just over 50 percent national; remainder donor-supported; financing gap addressed through dialogue with development partners. ### Pillar One: Budget Reliability — overall performance and key statistics - Pillar I focus: whether the government budget is realistic and implemented as intended (measured by comparing actual revenues and expenditures with the original approved budget). - Overall assessment: the annual budget is generally reliable, with low to moderate deviations in aggregate actual expenditures and revenues compared to the original budget. - Key aggregate figures and variances: - Deviation of total expenditures: - 91.8 percent in 2018, - 102.8 percent in 2020. - Variance in expenditure composition by economic category was high — over 15 percent in 2018 and 2020. - Deviations largely due to under-execution of the capital budget and overspending on transfers and subsidies. - Contingency reserve: on average 0.06 percent of BCG expenditures. - Deviations in aggregate budget revenues: - Around 7 percent in 2018 and 2019, - Slightly over 16 percent in 2020 (largely due to COVID-19 impact). - Variance in revenue composition: high — tax and non-tax revenues were overestimated, social security contributions were underestimated. ### PI-1. Aggregate Expenditure Outturn (M1) - Indicator scope: measures extent to which aggregate budget expenditure outturn reflects the amount originally approved; coverage is BCG (central level Budget Users and transfers to the three Social Security Funds). - Assessment basis: budget and actual expenditure for the last three completed years 2018, 2019 and 2020; detailed calculations presented in Annex 5. - Indicator score reported: PI-1. Aggregate expenditure outturn (M1) — B. - Sub-dimension score: 1.1. Aggregate expenditure outturn — B. *Source: IMF staff assessment as presented in the chapter "1.3 Legal and regulatory arrangements for PFM" of the provided PDF.* ### 1.1 Aggregate expenditure outturn ### 1.1 Aggregate expenditure outturn ### Aggregate expenditure outturn — summary findings - Data sources: audited final accounts of the Budget of the Republic of North Macedonia for 2018 and for 2019, and unaudited reports for 2020. - Absolute deviation of actual budget expenditures versus approved expenditure in the last three completed fiscal years (2018, 2019 and 2020) was between 2.8 percent and 8.2 percent. - Budget outturn for those years ranged between 91.8 percent and 102.8 percent. - Table of totals (in MKD million): - 2018: Budget 154,324,721; Actual 141,694,691; Aggregate expenditure outturn (percent) 91.8 - 2019: Budget 163,395,691; Actual 151,517,166; Aggregate expenditure outturn (percent) 92.7 - 2020: Budget 170,241,447; Actual 174,936,364; Aggregate expenditure outturn (percent) 102.8 - Assessment judgment: Since the variations in two of the three years covered are between 90 and 110 percent, the rating for this dimension is B. *Source: Assessment team calculations based on the annual budget laws and final accounts* --- ### PI-2. Expenditure composition outturn — overall score - Indicator/Dimension Score: PI-2. Expenditure composition outturn (M1) D+ - Coverage: BCG - Assessment period: fiscal years 2018, 2019, and 2020. - Sub-dimensions and scores: - 2.1 Expenditure composition outturn by function B - 2.2 Expenditure composition outturn by economic type D - 2.3 Expenditure from contingency reserves A ### 2.1 Expenditure composition outturn by function — findings - Measurement: difference between originally approved budget and end-of-year outturn by administrative/functional classification at administrative level (twenty main budgetary votes), excluding contingency items and interest on debt. - Variance by budgetary votes: - 2018: 9.6 percent - 2019: 8.7 percent - 2020: 17.8 percent - Main sources of variation: - 2018 under-execution by: Ministry of Transport and Communication (51.3 percent), Ministry of Finance (47.3 percent), Ministry of Agriculture, Forestry and Water Economy (42.3 percent). - 2019 and 2020 largest variance for: administrative head of Government of Republic of North Macedonia, due to overspending largely related to measures to mitigate the impact of COVID-19. - Assessment judgment: Since variations were less than 10 percent in two of the past three years, score for this dimension is B. ### 2.2 Expenditure composition outturn by economic type — findings - Measurement: difference between approved budget and end-of-year outturn by economic classification during last three years, including interest on debt but excluding contingency items. - Variance by economic classification: - 2018: 16.7 percent - 2019: 11.3 percent - 2020: 18.2 percent - Main contributors to high variances: significant under-execution of capital expenditure and over-execution of transfers and subsidies across the assessment period. - Assessment judgment: As variations in two of the past three years exceeded 15 percent, rating is D. ### 2.3 Expenditure from contingency reserves — findings - Measurement: average amount of expenditure actually charged to a contingency vote over the last three years. - Legal framework highlights: - Budget Law (Article 11): permanent and current budget reserves for natural disasters and unforeseen events. - Appropriations in permanent reserve cannot be reduced with reallocations during the year but can be increased. - Total volume of reserve funds shall not exceed 3 percent of the total current expenditures of the budget. - Aggregate actual expenditure charged to contingency reserve as proportion of total BCG expenditure: - 2018: 0.04 percent - 2019: 0.05 percent - 2020: 0.1 percent - Three-year average: 0.06 percent - Assessment judgment: Since average charged to contingency was less than 3 percent, rating is A. --- ### PI-3. Revenue outturn — overall score - Indicator/Dimension Score: PI-3. Revenue outturn (M2) C - Coverage: BCG - Assessment period: fiscal years 2018, 2019, and 2020. - Note: Calculations include social security contributions as per PEFA guidance. ### 3.1 Aggregate revenue outturn — findings - Measurement: extent to which revenue outturns deviate from the originally approved budget. - Aggregate revenue deviation (percent): - 2018: -7.3 - 2019: -7.1 - 2020: -16.1 - Largest contributors to variance: tax revenues, social security contributions and non-tax revenues. - Tax and non-tax revenues were overestimated. - Social security contributions were underestimated. - 2020 deviation significantly higher due to COVID-19. - Assessment judgment: Since actual revenue deviation in two out of three years was under 8 percent of total revenue, rating is C. ### 3.2 Revenue composition outturn — findings - Measurement: variance in revenue composition over past three years. - Composition variance (percent): - 2018: 12.4 - 2019: 13.7 - 2020: 17.1 - Major sources of variance: estimates of income and profit tax together, VAT and excise, and social security contributions contributed most to misalignment with budget law estimates. - 2020 deviation significantly higher due to COVID-19. - Assessment judgment: Since variance in two out of three years was lower than 15 percent, rating is C. --- ### Pillar Two: Transparency of Public Finances — key points and institutional context ### Overall performance: key strengths and weaknesses - Budget presentations use economic, functional, organizational and program classifications; bridge tables enable presentation in line with GFSM2014. - Budget documents lack: - comparable current year budget data with the budget proposal, and - aggregate data for both current and previous years at the detailed level for program or functional classifications. - Public access to fiscal information is very good; reports are published on respective websites in a timely manner. - Coverage gaps: - Financial reports do not capture activities of certain regulatory agencies (including the Agency for Electronic Communication and 5 smaller entities), 6 regulatory agencies and 10 public corporations that should be classified as EBUs per GFSM 2014. - Activities of public health institutions’ self-financed activities and some donations excluded from the budget are not captured. - Revenue and expenditure from EU funds directly managed by the EU Delegation are excluded; indirectly managed EU funds are included within the budget. - Transfers to local self-government units: transparent, rule-based, and timely. - Program budgeting: not formally adopted; early stage of implementation. Programs and planned performance are presented by most budget users, but: - Results framework is not uniform. - Quality of service delivery information varies across institutions. - No mechanism for comparing results against plans. - Resource receipts by service delivery are inconsistently reported (e.g., Health Insurance Fund reports payments to health institutions, but no information on resources received by schools). - SAO prepares and publishes effectiveness and efficiency evaluations; number increasing. Internal audit units have begun undertaking some evaluations. ### Institutional roles - Macroeconomic forecasting: Ministry of Finance (MoF) Macroeconomic Policy Department. - Fiscal policy, public finance management and budgetary process improvement: MoF Budget and Funds Department. --- ### PI-4. Budget classification — findings - Indicator/Dimension Score: PI-4. Budget classification B - Assessment year: 2020 (last completed fiscal year); coverage BCG. - Key features: - Common chart of accounts used for budget preparation, execution and reporting. - Classifications used: administrative (organizational), economic (economic classification), function/subfunction (functional), program classification, and source of funds classification. - Classifications regulated by Budget Law and Rulebook on Income Classification and Rulebook on Classification of Expenditures. - Standard bridge table maps economic classification to GFSM 2014. - Functional classification follows COFOG; functional derived from organizational and program classifications via documented bridge table. - Budget formulation uses: (i) organizational classification, (ii) economic classification on a 3 digit level for presentation and approval, (iii) full functional classification (4 digit level), (iv) program classification, and (v) source of funds classification. - Transaction tracking: STA and Treasury Information System (TrIS); 24-digit account code per transaction (10 digits administrative, 5 digits source of funds, 6 digits economic classification, 2 digits program classification, 1 digit control number). - Reporting: Final Account follows format of adopted budget across all classifications; in-year reports can be produced in these formats. - Consistency supported by E-Budget and TrIS centralized IT systems. - Limitation: Budget formulation is based only on the “Group” level of the GFS standard – 3 digits; therefore score is B. --- ### PI-5. Budget documentation — findings - Indicator/Dimension Score: PI-5. Budget documentation D - Time period: last budget submitted to Parliament (2021 Budget); coverage BCG. - Budget documentation consists of five documents: - annual budget, - Fiscal Strategy, - revised Fiscal Strategy, - Debt Management Strategy, - Final Account. - Timing and content regulated by Budget Law and Public Debt Law; Fiscal Strategy and annual budget to be adopted by Government by May 31; Final Account to be submitted to Parliament by June 30. - Supplementary budget: no obligation or predetermined time frame; not considered part of budget documentation for assessment. - Budget documentation for the 2021 annual budget (elements listed with adoption/submission dates where provided): - The Fiscal Strategy of the Republic of North Macedonia for 2021-2023 (FS 2021-2023); adopted on July 28, 2020. - The Revised Fiscal Strategy of the Republic of North Macedonia for 2021-2023 (with prospects until 2025); adopted on December 10, 2020. - The Public Debt Management Strategy of the Republic of North Macedonia for 2021-2023 (with prospects until 2025) (PDMS 2021-2023); adopted on December 10, 2020. - The 2021 Budget Law Proposal; submitted to the Parliament on November 10, 2020 and adopted on December 20, 2020. - The Final Account for 2019; submitted to the Parliament on October 13, 2020. - Identified shortcomings: - Detailed structure of the annual Budget Law with several thousand budget lines across classifications makes systematic comparison of revenue and expenditure estimates of the current year budget proposal and the previous year outturn difficult. - Specific element compliance for FY 2021 (selected elements): - Basic element 1. Forecast of fiscal deficit or surplus or accrual operating result: Met (Y). Provided in the Budget 2021 and in FS 2021-2023 (Table 3) and in Revised FS 2021-2023. - Basic element 2. Previous year’s budget outturn, presented in the same format as the budget proposal: Met (Y). The Final Account for 2019 was prepared in the same format as the budget proposal; submitted October 13, 2020; budget proposal submitted November 10, 2020. - Basic element 3. Current fiscal year’s budget presented in the same format as the budget proposal: Not met (N). Current year (2020) data is presented in same format as budget proposal (2021) for revenue and expenditure by economic classification, but not for functional classification, government programs or development programs; hence no direct comparison possible. - Basic element 4. Aggregated budget data for both revenue and expenditure for all classifications used, including data for the current and previous year with a detailed breakdown of estimates: Not met (N). This data is not included in the budget documentation for all classifications used. *Italicized source attribution line below.* *Source: 1mkdea2022004 - 1.1 Aggregate expenditure outturn (Assessment team calculations based on the annual budget laws and final accounts).* ### 5. Deficit financing, describing its ### 5. Deficit financing, describing its anticipated composition ### Deficit and sources for financing - Y Table 4: Deficit and Sources for its financing of the FS 2021 – 2023 and Revised FS 2021 - 2023 (referenced as evidence that this element is met). - Note: Revised FS 2021-2023 was not available in advance or at the time of the budget submission. ### Macroeconomic assumptions - Assumptions of GDP growth, inflation and exchange rate are included in the FS 2021-2023. - While incorporated in the macro forecasts, the estimates of interest rates are not explicitly elaborated. ### Debt stock - Y Within the Fiscal Strategy (chart 19) there is information for latest stock of public debt. - The debt management strategy (consistent with the data of Fiscal Strategy) projects the medium-term debt path, Table I: Public Debt Trend in PDMS 2021-2023. - Note: The PDMS 2021-2023 was not available in advance or at the time of the budget submission. ### Financial assets - N No cash balances or other financial assets and projected movements are shown in budget documentation. - Information on cash balances is available from the Final Account but not on other financial assets. ### Summary information on fiscal risks and contingent liabilities - N In the Fiscal Strategy 2021-2023 risks related to fiscal projections and to guarantees are discussed. - Summary information on other specific risks (related to PPPs, arrears, PEs, local governments, etc.) is not provided. - Guaranteed debt is reported in the PDMS 2021-2023. ### Budget implications of new policy initiatives and major public investments - N Changes to revenue and expenditure caused by new policy initiatives and major new public investments are included in the projections. - New policy initiatives and major new public investments are not separately explained or quantified in the budget documentation. ### Documentation on medium-term fiscal forecasts and tax expenditures - Y Table 3: Budget of the Republic of North Macedonia 2019-2023 of the FS 2021-2023 and Revised FS 2021-2023 (documentation of medium-term forecasts). - N Tax expenditures are not reported. ### Aggregate assessment of budget documentation completeness - The budget documentation fulfills five elements, including two of the four basic elements and three of the eight additional elements, and the dimension score is D. ### PI-6. Central government operations outside financial reports (M2) - Overall dimension score: D+ - 6.1 Expenditure outside financial reports: C - Extrabudgetary expenditure not included in ex-ante and ex-post financial reports amounted to less than 10 percent of budgetary central government expenditure in 2020. - 6.2 Revenue outside financial reports: D - Extrabudgetary revenue not included in ex-ante and ex-post financial reports amounted to more than 10 percent of budgetary central government revenue in 2020. - 6.3 Financial reports of extrabudgetary units: C - About 22 percent (by value of expenditure) of financial reports are submitted to the government within six months and about 55 percent within nine months of the end of the financial year. - The majority of extrabudgetary units submit financial reports within nine months of the end of the financial year. ### Structure and coverage of extrabudgetary operations - North Macedonia’s public sector comprises over 1,300 separate units of various legal forms. - The Single Treasury Account (STA) system: - Comprises a STA in the MoF and a separate STA in the Health Insurance Fund. - Transactions of the other two SSFs are executed in the STA in the MoF. - Coverage: All cash transactions of all budget users at all levels of government (except extrabudgetary operations) are conducted within the MoF STA. - Extrabudgetary entities (with exception of public health institutions) are not part of the STA system. - Own source revenues and grant funded expenditures of public health institutions are not included in STA (i.e., are extrabudgetary operations). - No formal register or list of public entities exists; exact number of institutions varies by source. - Four main sources of extrabudgetary operations: - 6 regulatory agencies and 4 independent and other entities (central public sector entities which should be part of the BCG budget according to GFSM 2014). - 10 PEs classified as central government according to GFSM statistical rules (e.g., Public Enterprise for State Roads (PESR)). - Revenue and expenditure of 108 public health institutions originating from self-financing activities and donations. - Revenue and expenditure originating from the European Union (EU) funds (under IPA II and IPA III) and directly managed by the EU with only the co-financed portion shown in the budget. ### PI-7. Transfers to subnational governments (M2) - Overall dimension score: A - 7.1 System for allocating transfers: A - About 60 percent of revenues of the 81 local government units (LGUs) take the form of grants from central government. - About 2 percent of revenues are from external grants; the rest are LGUs’ own revenues (property taxes and other local charges). - More than 90 percent on average of central government grants are distributed through a transparent, formulae-based system with clear objective factors (e.g., population, pupil numbers, surface area). - LGUs receive 4.5 per cent of the previous year's VAT revenue. - LGUs' own revenues include 3 per cent of the current year's yield in their respective geographical area from personal income tax. - 7.2 Timeliness of information on transfers: A - The MoF issues guidance to LGUs about the amounts of government grants and other factors for next year’s budget by the end of September each year (by September 30th as required under Article 19 of the Budget Law). - The adopted budget allocation is identical to the allocation indicated within the Budget Circular. This deadline is respected. - LGUs' budgets should be approved before the beginning of the year to which they relate; LGUs are free to fix their own budget calendars otherwise (Law on Financing of Local Self Government Units, Articles 27 and 28). ### Local government revenue summary (selected figures, MKD millions) - LGUs' Own Revenues: Outturn 2018: 11,534; Outturn 2019: 13,011; Circular 2020: 10,094 - Loans: Outturn 2018: 274; Outturn 2019: 524; Circular 2020: 954 - Formula-based Central Government grants: Outturn 2018: 18,055; Outturn 2019: 19,095; Circular 2020: 21,375; Budget 2020: 21,375; Supplementary Budget 2020: 21,442; Outturn 2020: 21,374 - Primary education: Outturn 2018: 9,423; Outturn 2019: 9,830; Circular 2020: 11,113; Budget 2020: 11,113; Supplementary Budget 2020: 11,144; Outturn 2020: 11,144 - Secondary education: Outturn 2018: 4,378; Outturn 2019: 4,624; Circular 2020: 5,069; Budget 2020: 5,069; Supplementary Budget 2020: 5,082; Outturn 2020: 5,082 - Culture: Outturn 2018: 250; Outturn 2019: 277; Circular 2020: 297; Budget 2020: 297; Supplementary Budget 2020: 324; Outturn 2020: 324 - Social Protection- elderly homes: Outturn 2018: 465; Outturn 2019: 555; Circular 2020: 555; Budget 2020: 555; Supplementary Budget 2020: 555; Outturn 2020: 555 - Kindergartens: Outturn 2018: 1,518; Outturn 2019: 1,783; Circular 2020: 2,095; Budget 2020: 2,095; Supplementary Budget 2020: 2,093; Outturn 2020: 2,077 - Fire-fighting: Outturn 2018: 288; Outturn 2019: 310; Circular 2020: 400; Budget 2020: 400; Supplementary Budget 2020: 401; Outturn 2020: 349 - VAT grant: Outturn 2018: 2,152; Outturn 2019: 2,216; Circular 2020: 2,346; Budget 2020: 2,346; Supplementary Budget 2020: 2,343; Outturn 2020: 2,343 - Other Central Government grants: Outturn 2018: 776; Outturn 2019: 861; Circular 2020: 1,323 - Total Central Government grants: Outturn 2018: 18,831; Outturn 2019: 19,956; Circular 2020: 22,697 - Formula-based as percentage of total: Outturn 2018: 95.9%; Outturn 2019: 95.7%; Circular 2020: 94.2% - External grants: Outturn 2018: 844; Outturn 2019: 698; Circular 2020: 679 - Total LGU revenues: Outturn 2018: 31,483; Outturn 2019: 34,189; Circular 2020: 34,424 ### PI-8. Performance information for service delivery (M2) - Overall dimension score: D+ - 8.1 Performance plans for service delivery: C (coverage: fiscal year 2021) - 8.2 Performance achieved for service delivery: C (coverage: fiscal year 2020) - 8.3 Resources received by service delivery units: C (coverage: 2018-2020) *Source: 1mkdea2022004 - 5. Deficit financing, describing its anticipated composition.* ### 8.4 Performance evaluation for service delivery D ### 8.4 Performance evaluation for service delivery D ### Context and legal framework - North Macedonia has not formally adopted program, performance, or results-based budget systems, but some elements of performance planning and program-based budgeting are in place. - The legal framework requires budget users (BUs) to include the strategic priorities of the Government in their budgets through government programs and subprograms. - Budget users must prepare three-year strategic plans covering programs and activities for realization of strategic priorities of the Government and the goals and priorities of the budget user. - The budget circular requires the strategic plan to be an integral part of the budget request and to contain quantified programs, activities, goals and priorities harmonized with the budget request. - A program classification is in place providing the structure of codes for classifying programs and subprograms in budget planning, execution, and reporting. ### 8.1 Performance plans for service delivery — findings (Rating: C) - The budget presents some program information in budget documentation; planned performance information is presented separately by line ministries. - Sample of service delivery ministries assessed: Ministry of Health, Ministry of Transport and Connections, Ministry of Agriculture, Forestry and Water Economy, Ministry of Education and Science. - The annual Budget Law presents expenditures for administrative units with a breakdown by programs. - Budget documentation includes descriptions of programs at the aggregate level with main qualitative objectives and input and output indicators. - Input indicators: standard, reflecting operational costs, included for all programs. - Output indicators: sector specific and included only for some programs. - Ministries with service delivery responsibilities prepare and publish three-year strategic plans and annual operational plans containing programs, activities, objectives, costs, expected results and success indicators (combining outcome and output indicators). - Health Insurance Fund, Pension and Disability Fund and PESR publish mid-term strategic plans and annual plans with planned programs, projects, goals and targets. - The quality of information varies across institutions. - Information on activities to be performed is estimated to be published annually for the majority (greater than 50 percent but less than 75 percent) of ministries. - Because information is produced annually on activities and published for the majority of ministries, the rating for this dimension is C. ### 8.2 Performance achieved for service delivery — findings (Rating: C) - Under the annual Budget Execution Law, specified budget users must prepare Programs for the use of funds from the Budget and submit them to the Government within 30 days from publishing the Budget in the Official Gazette. - Budget users must prepare and submit to the MoF semi-annual and annual reports on program implementation indicating whether announced performance targets have been achieved. - This information is not systematically aggregated or presented in a format that allows comparison of achieved results against performance indicators of planned programs and allocated funding. - The assessed sample ministries and social security funds publish annual reports on implementation of annual action plans of mid-term strategies with information about results achieved under each program. - The results framework for performance is not uniform and information quality varies across institutions. - Since information is not presented in a comparable format to link achieved results to planned indicators and funding, the rating for this dimension is C. ### 8.3 Resources received by service delivery units — findings (Rating: C) - The Health Insurance Fund (HIF) performs and documents all payments made to 108 public and a number of private healthcare institutions, and compiles and publishes reports on actual financing of these institutions by funding sources (own revenues, subsidies). - No information was provided on the level of actual resources provided to schools in the education sector. - Because no information on actual resources provided to schools is made available, the rating for this dimension is C. ### 8.4 Performance evaluation for service delivery — findings and rating (Rating: D) - The State Audit Office (SAO) has a legal mandate to conduct performance audits, alongside financial and compliance audits, under the Law on State Audit. - The law defines performance audit as assessment of the cost-effectiveness, efficiency, and effectiveness of the operation and use of funds in a defined area of activities or programs. - A performance audit manual provides the methodology for conducting such audits; performance audits are carried out according to the annual audit plan. - The SAO carried out 19 performance audits during the last three completed fiscal years. - Available performance audit reports focus on the efficiency and effectiveness of a specific function, policy or measure implemented by BUs, often covering multiple institutions rather than a single institution. - Examples: 2020 audits assessing effectiveness of government measures to deal with labor market risks (covering multiple ministries and institutions); 2019 audits assessing construction of gyms in primary and secondary schools (MES, 79 LSGs). - Performance audits include assessments of effectiveness of service delivery (e.g., construction of gyms) and of efficiency of administrative functions and policies (e.g., government planning related to labor market measures). - As reported by the SAO, average coverage of expenditures managed by the audited ministries (not disaggregated by service delivery programs) for the last 3 years is 14 percent. - Performance audits have also been undertaken by public sector internal auditors but to a limited extent due to internal capacity constraints: - Only 4 of the 161 internal audits carried out in 2019 were performance audits (2.4 percent), as reported in the annual report on the functioning of the Public Internal Financial Control System. - Performance audits carried out comprise on average 14 percent of total budget spending over the past three years. - The number, institutional coverage and amount of expenditure covered by performance audits is less than required for a C score; therefore the rating for this dimension is D. ### Key statistics and numeric findings - 19 performance audits carried out by SAO during the last three completed fiscal years. - SAO average coverage of expenditures managed by audited ministries over the last 3 years: 14 percent. - Health Insurance Fund pays 108 public healthcare institutions. - Internal audits in 2019: 161 total; performance audits among them: 4 (2.4 percent). *Source: 8.4 Performance evaluation for service delivery D — 1mkdea2022004* ### 9. Macroeconomic forecasts. The forecasts, as ### 9. Macroeconomic forecasts. The forecasts, as ### Availability and publication of macroeconomic forecasts - The forecasts, as assessed in PI-14.1, are available within one week of their endorsement. - Macroeconomic forecasts for the planning year and two following years (with the prospect of 2 more following years) are presented in the Fiscal Strategy. - The Fiscal Strategy is: - Prepared by the MoF and adopted by the Government (see PI-15). - Submitted to the Parliament alongside the draft annual budget as part of the budget documentation. - Published on the MoF (http://www.finance.gov.mk) and Parliament (http://www.sobranie.mk) websites after adoption by the government. - Since all the elements are published within the required timeframe, the rating for this dimension is A. ### Pillar Three: Management of assets and liabilities — overview - Pillar coverage: effective management of assets and liabilities to ensure public investments provide value for money, assets are recorded and managed, fiscal risks are identified, and debts and guarantees are prudently planned, approved and monitored. - Overall performance — key strengths and weaknesses: - Fiscal risk reporting quality is variable: - Good reporting of contingent liabilities relating to guarantees and the financial sector. - No disclosure of risks related to PPP contracts. - Oversight of the PE sector is focused on companies’ income statements with little analysis of balance sheet risks beyond arrears and PE debt reporting. - No consolidated report on the financial position of local governments. - Local government units prepare and submit annual financial reports within three months of end of fiscal years, but the reports are not audited nor analyzed from a risk perspective. - Public investment management is immature: - No national guidelines or standards for project appraisal of proposed investment projects, except projects financed externally. - Central entity exists for prioritization of major projects, but no standard criteria focusing on economic efficiency and productivity. - Records of major categories of financial and non-financial assets are decentralized and fragmented: - Fragmentation especially pronounced for non-financial assets; issues reported over accuracy of inventories and asset record keeping in individual institutions. - Information on assets is not consolidated across budgetary central government. - Work continuing on identifying non-financial assets for accruals-based financial reporting, but consistent rules have not yet been specified for asset valuations. - Only aggregate information on asset disposal is available centrally; detailed disposal information is too decentralized for meaningful analysis. - Debt management improvements identified in recent technical assistance reports include: 1. amendments to the public debt management law; 2. functionalities of the debt IT system; 3. development of the domestic debt market; 4. development of a debt management strategy; 5. development of a framework for loan guarantees and on-lending. - Recording and reporting of debt and guarantees demonstrate strong overall performance, but reconciliation practices could be more frequent. ### PI-10. Fiscal risk reporting — scope and institutional arrangements - Indicator purpose: measures extent to which fiscal risks to central government are reported. Scope is the most recent fiscal year (2020). - Coverage: - central government public corporations for 10.1, - subnational governments for 10.2, - central government for 10.3. - Institutional monitoring: - Fiscal risks are monitored by three units within the MoF: - Unit for Public Enterprises and Agencies (UPEA); - Unit for Budgets of Local Self-Government Units (UBLSU) within the MoF Budgets and Funds Department; - Unit for Policy for Public Debt Management and Risk Analysis within the International Financial Relations and Public Debt Management Department. - Their work is guided by: Budget Law, Law on Public Enterprises, Law on Local Self-Government Units, Public Debt Law, Law on Accounting for the Budget and Budget Users. - The three units report opinions on level of risk to the Government through separate channels. - Financial statements from PEs, municipalities, and central government are primary means for reporting financial positions that may constitute fiscal risks. Required content of financial statements is given in the Law on Commercial Companies and the Law on Accountancy of the Budget and Budget Users. - Publication of PE financial statements is required by law through two channels: 1. Submitted to the Central Registry (available to public for a fee; BUs free of charge). 2. Entities are required to publish financial statements independent of the Central Registry. - Recent reforms and forthcoming legislation: - Introduction of fiscal rules (ongoing) applies to BCG and LGUs. - New law dedicated to public-private partnerships (PPPs) and the new draft OBL are contemplated; these will expand information gathered, clarify roles and responsibilities, and specify reporting covering most risks identified in this Indicator. ### PI-10 scores and sub-dimensions - Indicator/Dimension Score - PI-10. Fiscal risk reporting (M2) C - 10.1. Monitoring of public corporations D - 10.2. Monitoring of subnational governments C - 10.3. Contingent liabilities and other fiscal risks B ### 10.1. Monitoring of public corporations — findings and data - UPEA monitors 29 entities: - 21 companies registered under the Law on Public Enterprises, and 8 joint stock companies registered under the Law on Commercial Companies for which the Government is majority owner. - There is no formal list or register of PEs. - Some of the 29 PEs do not meet the definition of PCs given in the GFSM 2014. - Audited annual financial statements of PEs: - Must be submitted to founders for approval (required by both laws under which PEs are incorporated). - Government is generally the founder for centrally-owned PEs, sometimes Parliament. - UPEA analyzes the statement and provides an opinion to the founder. - PE annual financial statements are typically audited by private auditors and use International Financial Reporting Standards (IFRS). - Timing of receipt by central government (for statements covering 2020, received in 2021): - Of the 29 PEs, 13, 10 and 6 were received within 6 months, 9 months, or not received within 9 months, respectively. - Selected table totals and percentages (as reported): - TOTAL PEs MONITORED BY UPEA: 36,582.50 (expenditures, MKD million) ; 11.28% (Percentage within 6 months) ; 64.01% (Percentage within 9 months) - TOTAL PEs SCORED ON DIMENSION 10.1***: 28,599.60 (expenditures, MKD million) ; 4.91% (Percentage within 6 months) ; 48.55% (Percentage within 9 months) - Specific PE examples from Table 10.1 (selected entries preserve original dates and figures): - Power plants of North Macedonia ESM, JSC - Skopje — Date received by central government: 12/08/2021 ; Expenditures 2020 (MKD million): 13,048.5 ; Percentage within 6 months: 9 ; Percentage within 9 months: 35.67% - Public Enterprise for State Roads – Skopje — Date received by central government: 15/07/2021 ; Expenditures 2020 (MKD million): 5,191.8 ; Percentage within 6 months: 9 ; Percentage within 9 months: 14.19% - JSC Water Economy of Republic of North Macedonia — Date received by central government: 21/07/2021 ; Expenditures 2020 (MKD million): 657.8 ; Percentage within 9 months: 1.80% - JSC "TEC Negotino" - Negotino — Date received by central government: 11/05/2021 ; Expenditures 2020 (MKD million): 181.8 ; Percentage within 6 months: 6 ; Percentage within 9 months: 0.50% - JSC for airport services "Airports of the Republic of North Macedonia" - Skopje — Date received by central government: 01/04/2021 ; Expenditures 2020 (MKD million): 248.0 ; Percentage within 6 months: 6 ; Percentage within 9 months: 0.68% - (Additional individual PE entries are recorded in the source table with exact dates and expenditure figures.) - Quality and analysis issues: - UPEA report does not identify if it defines expenditures differently from audited financial statements (example: 2020 expenditures reported by UPEA for PESR are not clearly aligned with those in the 2020 audited financial statement). - UPEA analysis focuses on changes in financial position from prior year and material changes in actual revenue and expenditure compared to the PE’s annual budget. - No internal guidelines for UPEA to assess risk when analyzing financial statements, nor a template for reporting its opinion to the founder. - UPEA typically has one week to submit its opinion to the founder from the date of receiving a financial statement. - Publication compliance: - By law, financial statements are to be published by PEs after approval by the founder; auditors routinely confirm compliance. - For 2019 financial statements, 27 of 29 PEs published audited financial statements. - PEs required to submit financial statements to the Central Registry by March 31 each year; in 2021 (for 2020 statements) all but two PE financial statements were submitted within the deadline. - Consolidation and presentation issues: - Some consolidated information on PEs is provided annually in the Fiscal Strategy (list of PEs monitored, income statement information for each PE for the prior year and latest available budget). - There is not a comparable list by PE of balance sheet risks. - Summary data on PE arrears and debt are published but presented by type of risk incurred by all entity types rather than grouped by PE, making it difficult to understand sum of risks by PE. - PE arrears and debt (guaranteed and non-guaranteed) are 1.6 and 9.2 percent of GDP, respectively, as of September 2020. - Scoring rationale: - Most public corporations submit audited financial reports within 9 months of the end of the fiscal year which qualifies for score C. - Excluding institutional units assessed under dimension 6.3, the majority of the remaining PCs report within 9 months, resulting in dimension score D. ### 10.2. Monitoring of subnational governments — findings and data - Purpose: assesses extent to which information on financial performance, including central government’s potential exposure to fiscal risks, is available through audited annual financial statements of subnational governments and whether consolidated report is published. - Municipal financial reporting and audit: - Municipalities are required to prepare annual financial reports, but they are not required to have them audited. - SAO has authority to audit local governments but does so selectively based on a risk assessment; SAO performs financial, compliance and performance audits; private audit firms are not used. - Annual financial reports are released only after approval by the respective Municipal Council, which has a deadline of March 15 each year. - Failure to submit reports by March 15 is a reason for dissolution of the Council. - Municipal Councils must approve the annual financial statement in open meetings, and with a formal decision. - Timeliness and submission: - In 2020 for the 2019 fiscal year, all municipalities submitted their annual financial reports within nine months of the end of 2020. - Municipalities required to submit annual financial reports to MoF by March 31. The UBLSU summarizes the data in an annex to the BCG annual Final Account, which should be completed by March 31. In 2021 (reporting on 2020), all municipalities provided information to MoF for MoF to complete the annex on time. - Municipalities required to submit annual financial reports to the Central Registry by February 28 (paper) or March 15 (electronic). In 2021, three reports were submitted past the legal deadline but were reported before nine months had elapsed. - Consolidation and analysis gaps: - A consolidated report on the financial position of municipalities is not prepared. - UBLSU does not analyze annual financial reports submitted by municipalities for fiscal risks. - Compilation of budget execution data attached to the BCG financial statement does not achieve the aim of highlighting fiscal risks. - Information on arrears and total debt of municipalities is provided annually in the Fiscal Strategy. - The stock of municipal arrears and debt outstanding is 0.6 and *Source: 1mkdea2022004 - 9. Macroeconomic forecasts. The forecasts, as (IMF PDF chapter/section).* ### 0.8 percent of GDP, respectively, as of September 2020. ### 1mkdea2022004 - 0.8 percent of GDP, respectively, as of September 2020. ### Subnational financial reporting - All subnational governments submit unaudited financial reports annually within 9 months of the close of the fiscal year, published on the individual municipality webpages. - Because the reports are not audited, the rating for this dimension is C. ### Contingent liabilities and other fiscal risks (Section 10.3) - Scope: This dimension assesses monitoring and reporting of the central government’s explicit contingent liabilities from its own programs and projects, including those of EBUs. Significant contingent liabilities are defined as those with potential cost in excess of 0.5 percent of total central government budget expenditures and for which an additional appropriation by Parliament would be required. - Two other contingent liabilities noted but not meeting the "significant" threshold: - Legal cases: typically paid by the involved BU by reallocating funds within its existing budget; no consolidated list of pending legal cases and their cost; actual payments reported in annual budget execution reports. - Contingent liabilities relating to natural disasters, epidemics, and environmental catastrophes: covered, at least in part, by the Permanent Reserve Fund. Because it is planned and budgeted, it does not constitute a fiscal risk up to the value of the Fund; funds can be added during the year if needed. See PI 2.3 for discussion of the Fund and actual expenditures in 2018, 2019, and 2020. ### Table 10.2: Significant contingent liabilities and reporting on them (summary) - Source: Government reports, PEFA team meetings, and IMF staff estimates. - Risks, sizes, legal basis, monitoring, and reporting: - Guaranteed public debt - Risk size: 8.3 percent of 2020 GDP - Legal basis: Loan covenants - Who monitors: MoF Debt Management Unit - Report: Public Debt Management Annual Report; Public Debt Management Strategy 2021-23 - Net exposure to financial sector - Risk size: 26.4 percent of 2017 GDP - Legal basis: Deposit Insurance Fund Law - Who monitors: Deposit Insurance Fund and NBRNM - Report: Deposit Insurance Fund annual report - Public-private partnerships (PPP) - Risk size: 6.4 percent of 2020 GDP - Legal basis: Individual PPP agreements - Who monitors: No central unit for all PPPs; by BU that supervises each PPP - Report: No consolidated report currently (although the new PPP law will likely require this) - Coverage note: Based on data shown in Table 10.2, guaranteed public debt and net exposure to the financial sector are reported officially and represent 84 percent of the total significant contingent liabilities. ### Recent developments and implications - Total public debt: The definition of total public debt was revised in 2019 to include non-guaranteed debt of public enterprises established by the state or municipalities and majority-owned joint stock companies, effectively acknowledging an implicit guarantee of PE regular debt. - PPPs: Since July 2020, the government has been drafting a new law dedicated to PPPs (a separate law on concessions is under consideration). The draft law has been released publicly and will clarify measures of risk and reporting for proposed and ongoing PPPs. - Guarantees / Credit Guarantee Scheme (CGS): A CGS is under active consideration to support SMEs and the export sector to mitigate Covid-19 impacts. The legal character and operational design, and thus the nature and size of risks, have not been finalized. If operational, a system of risk monitoring and reporting to the MoF should be established. - Consolidation and reporting: While two of the three contingent liabilities in Table 10.2 are reported by specialized units, there is no single report compiling all significant risks. - The Fiscal Strategy includes a section on Fiscal Risks and Sensitivity Analysis focused on deviations from medium-term macroeconomic and fiscal projections. Scenarios used in the Fiscal Strategy include: - lower economic growth - lower tax revenues by 5 percent - lower execution of capital expenditures by 25 percent - beginning in 2020, a fourth scenario reflecting the fiscal impact of the budget paying all outstanding loan guarantees - The draft new OBL includes provisions creating a Fiscal Council, under Parliament, that will monitor fiscal risks and the probability of impacting the budget and the Fiscal Strategy; this analysis is presumed to be published as a fiscal risk statement. ### Assessment and rating - Because two of three significant contingent liabilities are quantified and reported, representing over 75 percent in value, but there is no consolidated report including all significant contingent liabilities, the rating for this dimension is B. ### Public investment management (PI-11) — overview and scores - PI-11. Public investment management (M2) overall score: D+ - Sub-dimension scores: - 11.1. Economic analysis of investment projects: C - 11.2. Investment project selection: D - 11.3. Investment project costing: C - 11.4. Investment project monitoring: C - Key characteristics: - Assessment year: 2020 (latest completed fiscal year) and covers CG. - The public investment management (PIM) system is characterized as decentralized. - External sources of funding accounted for 30 percent (2019), 38 percent (2020), and 37 percent (2021) of the capital budget. - Central institutions defer to technical expertise of BUs; there are no central standards for appraisal, selection, or costing of projects. - The General Secretariat of the Government seeks to ensure development budget projects adhere to the Government 4-year plan and oversees a system to monitor implementation, primarily to identify and remove obstacles to implementation. - Coverage of the budget for capital projects is mixed: - Projects implemented by BUs, even if funded from external loans and grants, are included in the budget (except EU IPA funded projects). - Projects implemented by PEs and through PPPs are not included in the budget. - Example: The Public Enterprise for State Roads (PESR) budgeted MKD 16.0 billion in 2021, which was equal to 67 percent of the total capital spending authorized in the 2021 BCG budget. The PESR is not subject to the annual budget process, and its expenditures are not included in public official data on public investment even though it is funded primarily by earmarked public revenue and state guaranteed loans. - No project of budget users in the 2020 budget meets the criteria of major project stated in the PEFA Framework. There are 3 projects under implementation by the PESR highlighted in Table (source text truncated). *Source: 1mkdea2022004 - 0.8 percent of GDP, respectively, as of September 2020.* ### 1.1 below and are all externally financed. ### 1mkdea2022004 - 1.1 below and are all externally financed. ### Major investment projects (Table 11.1) - Ministry Responsible: Ministry of Transport and Communication (PESR) - Capital projects and Project cost (MKD): - Construction of highway A2, section Kicevo - Ohrid: 25,373,989,538 - Construction of express road Stip - Radovish: 3,948,416,000 - Construction of expressway Kumanovo - border with R. Bulgaria, section Rankovci - Kriva Palanka: 3,609,099,000 - Source: Public Enterprise for State Roads website. ### Public Investment Management (PIM) framework and reforms - MoF plans significant revisions to the PIM framework as stated in the PIM Action Plan adopted by the Government in December 2020 and reflected in the draft OBL. - IMF conducted a Public Investment Management Assessment (PIMA) in January 2020. - Reforms aim to address decentralized PIM weaknesses by: - Setting standards for appraisal, costing, and selection. - Increasing the role of the MoF in applying standards and monitoring project implementation. ### PI-11: Economic analysis, selection, costing, and monitoring of investment projects (scores and findings) - Overall assessment sections and scores provided in text: - 11.1. Economic analysis of investment projects: score C - No legal framework providing policies, standards, or procedures across BUs for appraisal, publication, or independent review. - Externally funded major projects (including PESR) subject to external funding entity standards; most require independent appraisal and publication. - Domestically funded projects: BUs develop their own appraisal criteria; often use engineers from universities/private firms; appraisals typically not published. - PPPs: no guidelines currently exist for economic analysis; new PPP law being drafted likely to address this. - 11.2. Investment project selection: score D - No published standard criteria for project selection; externally funded projects follow external entity criteria. - Single Project Pipeline (SPP), coordinated by the Secretariat for European Affairs, uses selection criteria from “Support to Western Balkans Infrastructure Investment Projects in the period 2014-2020”: - Three main criteria: (i) compliance with plans and legal framework (4 sub-criteria); (ii) impact indicators (2 sub-criteria); (iii) maturity indicators (4 sub-criteria). - For domestically funded projects, BUs set criteria independently; some follow SPP (e.g., MoTC). PPP unit in Ministry of Economy has not adopted standard PPP selection criteria. - Prioritization for budget inclusion determined by General Secretariat of the Government, focused on compliance with Government 4-year Work Program and communicated through 3-year strategic plans prepared by each BU. - Shortcomings: (i) many Government 4-year Work Program priorities not subjected to technical analysis; (ii) 4-year Work Program not detailed at project level; (iii) General Secretariat does not assess technical qualities, feasibility, and costing during annual review. - 11.3. Investment project costing: score C - Budget shows capital cost broken down by each year covered by the medium-term and includes a remainder if project exceeds three years. - Revisions to multiyear project cost estimates from one budget year to the next are not identified in budget documentation. - No legal definition of what should be included in capital costs; ambiguity over inclusion of feasibility studies, preliminary design, furniture, equipment. - For externally funded projects, costing methods set by funding entity; for domestically funded projects, each BU establishes methods. - Table 11.3 treatment summary (as in source): - Preliminary design and feasibility studies: Externally funded: typically included in agreement; Domestically funded: typically not included in project document. Budget presentation: Externally funded: either separate project, or included; Domestically funded: typically funded through special budget of BU without specifying individual projects. - Land acquisition: In project document in all cases; Budget: Externally funded: in all cases, funded domestically. Domestically funded: paid from basic budget to minimize price escalation; not included with other project components; single project budgeted for all land acquisition across active projects because of cost uncertainty. - Construction: In project document in all cases; Budget: Separate project in all cases. - Furniture and equipment: In project document in all cases; Budget: Externally funded: typically included in project. Domestically funded: often a separate project in the budget. - Project management: Externally funded: construction supervision and PIU overhead typically included. Domestically funded: construction supervision included but not BU overhead. Budget: Externally funded: included in project. Domestically funded: construction supervision costs in the project (per budget circular); overheads funded through special budget of BU without specifying projects. - Recurrent costs associated with major projects sometimes identified in project documents but not in the budget; for domestically funded projects operating and maintenance costs typically not part of project cost estimates. - 11.4. Investment project monitoring: score C - No legal framework for monitoring project implementation; standards vary by funding source. - For externally funded projects, high compliance with funding entity standards; for domestically funded projects, no standards and no central oversight. - Monitoring aspects: - Individual project monitoring: PIUs or project implementation committees monitor physical and financial progress. Externally funded: detailed progress reports prepared as required (sometimes published). Domestically funded: progress reports determined by each BU and not published. - Monitoring groups of projects: Budget reports report financial progress in-year and annually; published but may group projects so individual project progress cannot be discerned. - Government monitoring: General Secretariat manages BCG-wide monitoring; major projects: reports every six months; smaller projects: every 12 months. Reports submitted via e-Government system; Government decisions to remove obstacles are published, but progress reports are not. - Conclusion: total cost and physical progress monitored by implementing unit, but no standard procedures and published annual reports address only financial status. ### PI-12: Public asset management (scores and legislation) - Indicator scores: - PI-12. Public asset management (M2): D+ - 12.1. Financial asset monitoring: C - 12.2. Nonfinancial asset monitoring: D - 12.3. Transparency of asset disposal: D - Key legal framework and administrative arrangements (Table 12.1 overview): - The Law on Use and Disposal of State-owned and Municipal-owned Assets (2019): movable and immovable assets owned by State and municipalities; administered by MoF, Property and Affairs Administration; procedures: lease, disposal or transfer of ownership or right to use (under Government decision); electronic bidding procedure for disposal and lease. - Law on Sale and Disposal of Commercial Property held by the State: commercial real estate owned by state entities; administered by MoTC; sale and lease of commercial property; electronic bidding procedure. - Law on Mineral Resources: non-produced assets (mineral rights); administered by MoE; electronic bidding procedure. - Law on Concessions and PPP: non-produced assets; administered by MoE; electronic bidding procedure. - Law on Agriculture: non-produced assets (agricultural land); administered by Ministry of Agriculture; information not available. - Law on Construction Land: non-produced assets (construction land); administered by MoTC; sale and lease of construction land upon request of citizens; transfer to public enterprises; electronic bidding procedure managed by Association of Units of Local Self-Government (ZELS). - Law on Privatization and Lease of State/owned Construction Land: non-produced assets (construction land conversion); administered by MoF, Property and Affairs Administration; administrative procedure by request of individuals and businesses. - Findings: - SAO issued an emphasis of matter on setting up legal basis for recording state assets and their presentation in financial reports (2019 Audit Report). - No single government entity responsible for managing the government’s asset portfolio as a whole. - Financial assets: records available but fragmented; information on equity and shares from public corporations available via IFRS financial statements; receivables and loans recorded in auxiliary ledgers of individual central government institutions; consolidated performance information lacking. Score for 12.1 = C. - Non-financial assets: Property and Affairs Administration responsible for privatization/lease and expropriation but does not maintain centralized records; State Cadaster Office records immovable property; concerns over timeliness of cadaster updates; registries of movable property pending legislative changes; score for 12.2 = D. - Asset disposal: procedures exist and electronic auctions used; requirement of 20 percent bank guarantee for bids; transactions reported individually by BUs; aggregated disposals reported in budget execution reports and Final Account but without original purchase cost and disposal value; information highly decentralized; score for 12.3 = D. ### PI-13: Debt management (scores and governance) - Indicator scores: - PI-13. Debt management (M2): A - 13.1. Recording and reporting of debt and guarantees: B - 13.2. Approval of debt and guarantees: A - 13.3. Debt management strategy: A - Legal and institutional framework: - Public Debt Law (last amended 2019) sets objectives and limits, extends coverage and monitoring of public debt. Additional provisions on municipal borrowing in the Law on Financing of Local Government. - Objectives include: - financing government needs with lowest cost possible in medium and long run with sustainable risk; - identifying, monitoring and managing public debt portfolio risks; - developing and maintaining efficient domestic financial market. - MoF authorized to undertake virtually all borrowing on behalf of Government; Parliament approves total borrowing amount under financing part of annual budget law. - IFRDMD (International Financial Relations and Public Debt Management Department) organized into front, middle, back office; duties include proposing source/structure of borrowing, servicing government debt, monitoring issuers, preparing Annual Report on Public Debt Management, publishing Calendar of Planned Issues, issuing government securities, managing STA balance, monitoring foreign currency accounts with NBRNM, participating in borrowing procedures of public debt issuers, giving recommendations to public debt issuers. - Public Debt Law authorizes issuance of government securities (short-term and long-term) denominated in domestic or foreign currency on domestic and international markets. - Requirement for a three-year Public Debt Management Strategy (PDMS) with prospects for additional two years; MoF proposes and Government adopts PDMS by May 31. - Recording and reporting (13.1; score B): - DMIS introduced 2008, upgraded 2020 with debt projections module and reporting functionalities. - Public Debt Registry and Registry of Issued Sovereign Guarantees maintained by MoF. - Public debt issuers required to submit monthly information; municipalities report quarterly, 30 days after quarter end. - Formal reconciliations with creditors carried out quarterly and monthly; major creditors provide client connection; DMIS considered up to date. DMIS audited by SAO at assessment time. - MoF publishes general government and total public debt statistics quarterly and Annual Report on Public Debt Management submitted to Parliament by 30 June. - Quarterly reconciliation frequency with most creditors results in score B. - Approval of debt and guarantees (13.2; score A): - MoF has exclusive competence for debt operations; procedures and requirements spelled out in Public Debt Law (Article 16) and secondary legislation (Manual on information collected monthly from debt issuers (2006), Rulebook on Government Securities (last updated 2009), Credit Risk Manual (2020)). - Sovereign guarantees may be issued for projects in compliance with strategic documents with available co-financing; MoF assesses creditworthiness per Credit Risk Manual but may waive requirements for projects “determined as strategic” (no criteria specified in law). - Borrowing by PEs and LGUs requires MoF consent; municipal and PE borrowing approval provided by governing bodies but requires MoF consent. - Annual borrowing approved by Government and Parliament in Financing section of annual Budget Law and must stay within Fiscal Strategy limits. - Debt management strategy (13.3; score A): - PDMS 2021-2023 (with prospects until 2025) sets amount of public debt, maximum net borrowing and sovereign guarantees in first year, and government debt structure. - Strategy contains cost/risk indicators: financing/rollover risks, foreign-currency risks, interest-rate risks. - PDMS developed by MoF with inputs across departments; fiscal assumptions updated with revised macro/fiscal data in Q3. - Outturns vs PDMS targets reported annually in Annual Debt Management Report; MoF reported realization against short- and medium-term limits for 2017-2019 showing public debt within thresholds. - Current comprehensive DMS in place and execution publicly reported; score A. ### PI-14: Macroeconomic and fiscal forecasting (scores and observations) - Indicator scores: - PI-14. Macroeconomic and fiscal forecasting (M2): C - 14.1. Macroeconomic forecasts: D - 14.2. Fiscal forecasts: C - 14.3. Macro-fiscal sensitivity analysis: B - Key findings: - Macroeconomic forecasts prepared by MoF Macroeconomic Department for Fiscal Strategy; not reviewed by external entity; Fiscal Strategy approved by Government no later than 31 May and submitted to Parliament for information only. - Forecasts cover budget year and two following years; latest Fiscal Strategy broadened scope to five-year medium-term framework (2021 to 2025). - Forecasts updated at least once a year; revisions lead MoF to propose Government corrections to budget policy. - Key macroeconomic forecasts include: real GDP growth (including demand components), average inflation rate, nominal growth of exports and imports of goods, current account balance as a percent of GDP, nominal growth of net wages, average unemployment rate, average employment rate. Interest rates are not explicitly elaborated in budget documents; exclusion leads to 14.1 score D. - Fiscal forecasts: MoF Budget and Funds Department prepares forecasts; Fiscal Strategy includes forecasts for budget year and two following years; Budget includes forecasts only for budget year. Fiscal forecasts broken down by economic classification and Appendix 1 gives medium-term expenditure estimates by administrative classification for basic budget and loans only. Underlying assumptions and differences from previous year’s projections are not explained and published as part of annual budget process; score for 14.2 = C. - Macro-fiscal sensitivity analysis: started to be published from Fiscal Strategy 2019-2021 covering four main fiscal risks: reduced economic growth, tax revenue collection lower by 5 percent, lower realization of capital expenditures, servicing of liabilities based on issued guarantees. Results presented as an average for period. ERP includes scenario analyses and sensitivity of budget deficit and debt. Sensitivity analyses prepared collaboratively across MoF departments. Given publication beginning in 2019-2021 and considering last three completed years (2018-2019-2020), score for 14.3 = B. ### PI-15: Fiscal strategy (scores and key issues) - Indicator scores: - PI-15. Fiscal strategy (M2): C - 15.1. Fiscal impact of policy proposals: D - 15.2. Fiscal strategy adoption: A - 15.3. Reporting on fiscal outcomes: D - Key findings: - Fiscal Strategy prepared by MoF covers a medium-term period of three years (latest extending to five years 2021-2025 in the Fiscal Strategy 2021-2025) and contains fiscal objectives and amounts for main estimated revenues and approved funds. - Budget execution reports published monthly on MoF website; Minister of Finance required to submit semiannual execution report to Government by July 31 plus an updated report on macroeconomic indicators and projected revenues and expenditures for budget year. - 15.1 Fiscal impact of policy proposals: brief explanations of planned policy changes are provided but not detailed or quantified for the next two fiscal years; ERP includes detailed overview of structural reforms with estimated costing and planned funding; score D. - 15.2 Fiscal strategy adoption: Fiscal Strategy prepared and adopted by Government by May 31, submitted to Parliament in practice; contains quantitative fiscal goals and targets with qualitative objectives; score A. - 15.3 Reporting on fiscal outcomes: monthly and annual Budget execution tables exist but lack narrative assessment or detailed explanations; no consistent published report that describes progress against Fiscal Strategy or explains deviations; score D. ### PI-16: Medium-term perspective in expenditure budgeting (scores and issues) - Indicator scores: - PI-16. Medium-term perspective in expenditure budgeting (M2): C - 16.1. Medium-term expenditure estimates: B - 16.2. Medium-term expenditure ceilings: D - 16.3. Alignment of strategic plans and medium-term budgets: B - 16.4. Consistency of budgets with previous year’s estimates: D - Key points: - Medium-term budget comprised of Fiscal Strategy and detailed budget. Fiscal Strategy includes medium-term fiscal plan for three years; detailed budget: one year for operating expenditures (Special Budget) and three years for capital expenditures (Development Budget). - Planned reforms relevant to medium-term budgeting: - Establishment of a Fiscal Council under the Parliament. - Publication of a Register of Public Sector Entities. - Medium-term Fiscal Strategy improvements, including preparation of a baseline scenario with separate identification of new initiatives. - Improvement of transparency (e.g., submission of data from public enterprises and local self-governing units). - 16.1 Medium-term expenditure estimates: Fiscal Strategy includes aggregate expenditure estimates by funding sources and by economic classification at second level for each medium-term year; Appendix 1 gives medium-term estimates by administrative classification for sum of basic budget and loans only; score B. - 16.2 Medium-term expenditure ceilings: shortcomings reflected in score D (details in preceding sections on ceilings excluding grant and self-financed expenditures and other limitations described elsewhere in source). - 16.3 Alignment of strategic plans and medium-term budgets: strategic plans prepared in parallel with budget preparation; many ministries prepare costed plans though not all; score B. - 16.4 Consistency with previous year’s estimates: deviations of medium-term expenditure estimates from previous years’ initial or amended estimates for same year are not explained in budget documents; score D. *Source: IMF PDF chapter/section content (1mkdea2022004 - 1.1 below and are all externally financed.).* ### Appendix 1 estimates by BU satisfy the aim of enforcing fiscal discipline. Second, because BUs are ### 1mkdea2022004 - Appendix 1 estimates by BU satisfy the aim of enforcing fiscal discipline. Second, because BUs are ### Medium-term expenditure ceilings (Dimension 16.2) - Purpose: Assess whether medium-term expenditure ceilings are applied to ministry estimates to ensure consistency with government fiscal policy; should be issued before the first budget circular. - Practice: - Expenditure estimates by BU in Appendix 1 of the Fiscal Strategy are treated as expenditure ceilings. - There is not a release of ceilings other than the Fiscal Strategy before budget circulars are issued. - Customary practice: Government approves the Fiscal Strategy (containing aggregate and ministry-level expenditure ceilings in Appendix 1) before release of the budget circular. - Exception: Approval of the 2021-2023 Fiscal Strategy was delayed due to Covid-19 and when issued did not include Appendix 1; BUs were not notified of expenditure ceilings prior to receiving the budget circular for the 2021-2023 process. - Ceilings can be allocated by BUs to operating or capital expenditures when preparing detailed budget proposals. - Authorities treat estimates, appropriation limits, and maximum amount of funds as expenditure ceilings. - Scoring: - Since the aggregate expenditure ceilings for the budget year and the two following fiscal years were not approved by government before the first budget circular was issued for the 2021-23 budget, the score for this dimension is D. ### Alignment of strategic plans and medium-term budgets (Dimension 16.3) - Objective: Measure alignment between approved expenditure policy proposals and costed ministry strategic or sector strategies. - Formal system: - Designed to implement Government’s 4-year strategic program and managed by the General Secretariat. - Focuses on ministry medium-term strategic plans; other national and sectoral strategies exist. - Practice: - Ministry strategic plans are costed and developed in parallel with the annual budget to ensure knowledge of financial constraints. - Implementation incomplete: SAO audit of the 2018 budget noted 76 percent of BUs submitted strategic plans with their budget request, of which 21 percent did not include program/activity cost data. - For the 2021 budget preparation, one third of BUs did not submit a strategic plan with their budget request (31 of 92 BUs did not submit strategic plans; data not available for 4 BUs). - Majority, not most, of BUs prepare strategic plans effectively aligned with budget proposals. - Recent updates: - Requirement for BUs to prepare annual work plans (beginning in 2019). - Information system for BUs to submit annual work plans (beginning in 2020). - Annual work plans reflect the proposed budget and add confidence that budget resources will realize strategic plans. - Scoring: - Since medium-term strategic plans are prepared for the majority of ministries, include cost information, and the majority of expenditure policy proposals align with strategic plans, the score for this dimension is B. ### Consistency of budgets with previous year’s estimates (Dimension 16.4) - Objective: Assess extent to which previous medium-term budget estimates establish the basis for the current medium-term budget; variations should be fully explained and quantified. - Practice: - MoF recognizes the need to explain changes between previous and current medium-term estimates. - The Fiscal Strategy 2020-2022 included a numerical comparison of three-year fiscal aggregates in the budget under development with the previous year’s Fiscal Strategy. - No explanation is provided for why changes occurred; at BU level, changes are not quantified. - Consistency of fiscal aggregates across Fiscal Strategies is reasonably good; Table 16.2 shows percent changes between versions for the same year in consecutive Fiscal Strategies (mix of positive and negative differences; absolute differences not unusually large). - Table 16.2: Cross-year consistency of expenditure aggregate in Fiscal Strategies* - Fiscal Strategy 2018 2019 2020 2021 2022 - 2018-2020 -1.2 percent 0.4 percent - 2019-2021 1.8 percent 0.5 percent - 2020-2022 0.3 percent -0.7 percent - 2021-2023 -2.7 percent -4.5 percent - * percent change compared to the estimate for the same year in the previous year Fiscal Strategy - Forward-looking: - Draft new OBL envisions development of baseline budget projections and separate identification of policy changes, including new initiatives. - Scoring: - Since budget documents do not provide any explanation of changes to expenditure estimates between the second year of the last medium-term budget and the first year of the current medium-term budget at the aggregate level, the score for this dimension is D. ### Budget preparation process (PI-17) — overview and scores - Indicator/Dimension Score: PI-17. Budget preparation process (M2) C+ - 17.1. Budget calendar A - 17.2. Guidance on budget preparation D - 17.3. Budget submission to the legislature C - Time periods: - Dimensions 17.1 and 17.2: last budget submitted to the legislature (2021-2023). - Dimension 17.3: last three completed fiscal years. - Coverage: BCG. ### Budget calendar (Dimension 17.1) - Legal basis: Determined primarily by the Budget Law; annual budget circular provides detailed guidance. - Applicability: Calendar applies to all BUs in the BCG. - Table 17.1: Budget calendar (selected milestones, deadlines, and actuals for the 2021-23 budget) - 1 Government approves Fiscal Strategy — Deadline: 31 May — Actual: 28 July 2020 - 2 Government approves ceilings (limits) — Deadline: 31 May — Actual: 12 June 2020 - 3 MoF issues budget circular — Deadline: 15 June — Actual: 12 June 2020 - 4 BUs submit proposed detailed budget to MoF — Deadline: 1 September — Actual: Most BUs submit draft budgets on time - 5 MoF submits detailed budget to Government — Deadline: 1 November — Actual: 30 October 2020 - 6 Government submits budget documents to Parliament — Deadline: 15 November — Actual: 10 November 2020 - 7 Parliament approves budget — Deadline: 31 December — Actual: 20 December 2020 - Observations: - Budget calendar is generally adhered to; majority of tasks completed by deadlines in 2020. - Fiscal Strategy and issuance of ceilings were delayed in 2020 due to Covid-19. - Budget calendar allows all BUs 10 weeks from receipt of the budget circular to complete detailed estimates by September 1; interpreting Appendix 1 as BU ceilings effectively gives BUs 12 weeks. - Planning for capital projects funded from external sources is ongoing through the year and culminates in the SPP; domestically funded projects developed over many months and prioritized within ceilings. - Draft new OBL proposes material changes: Fiscal Strategy completed by April 30 rather than May 30; proposed budget submitted to Parliament by October 15 rather than November 15. - Scoring: - Since a clear annual budget calendar exists, is generally adhered to, and allows all budgetary units at least six weeks from receipt of the budget circular to meaningfully complete detailed estimates on time, the score for this dimension is A. ### Guidance on budget preparation (Dimension 17.2) - Purpose: Assess clarity and comprehensiveness of top-down guidance (budget circular) including whether expenditure ceilings or allocation limits are set. - Assessment bullets (as listed in source): - Clear circular: Budget Law defines general content of the budget circular: macroeconomic forecasts in the Fiscal Strategy, strategic priorities via programs and sub-programs, expenditure ceilings by BU, technical guidance and instructions; requirements in place since 2010. - Covers all BUs: budget circular applies to all BUs included in BCG. - Covers total expenditures: expenditure ceilings apply to the basic budget and loans only, excluding self-financing and grant funds; therefore ceilings do not provide guidance on total expenditures. - Covers all year: ceilings and guidance cover the full fiscal year for each year of the medium-term budget. - Adherence to ceilings: for the 2021 budget, BUs submitted a total of 4.5 percent more than the sum of limits assigned to them. The approved 2020-2022 budget for BUs was 3.6 percent higher in total than the ceilings issued to them. - When BU ceilings are announced: for the 2021-23 budget process, BU expenditure ceilings were announced in the budget circular, not in the Fiscal Strategy, as is customary. - Scoring: - Since the budget circular does not provide expenditure ceilings for total funds, the score for this dimension is D. ### Budget submission to the legislature (Dimension 17.3) - Legal requirement: Budget Law prescribes proposed budget submission to Parliament by November 15 each year; consistent with Parliament Rules of Procedure. - Actual submissions (Table 17.1: Actual dates of budget submission for the last three completed fiscal years): - 2019-21 — 14 November 2018 - 2020-22 — 12 November 2019 - 2021-23 — 10 November 2020 - Scoring: - Since the executive did not submit its proposed budget to Parliament at least two months prior to the start of the fiscal year, the score for this dimension is C. ### Legislative scrutiny of budgets (PI-18) — overview and scores - Indicator/Dimension Score: PI-18. Legislative scrutiny of budgets (M1) B+ - 18.1. Scope of budget scrutiny A - 18.2. Legislative procedures for budget scrutiny B - 18.3. Timing of budget approval A - 18.4. Rules for budget adjustments by the executive A - Legal and institutional context: - Constitution gives Parliament power to approve the budget. - Budget Law sets guidelines such as prohibiting changes to total expenditures proposed by the executive. - Law on the Assembly and Rules of Procedure provide detailed guidance. - Parliamentary Budget Office created in 2020 to answer finance and budget questions from individual MPs. - Draft new OBL includes establishment of a Fiscal Council under Parliament to examine macroeconomic and fiscal assumptions, fiscal risks, and fulfillment of fiscal rules. - Finance and Budget Committee considering sub-committees to manage 45-day review workload. - 18.1. Scope of budget scrutiny: - Parliament reviews Fiscal Strategy (notified only at time of Government approval) and medium-term budget (including Fiscal Strategy) between November 15 – December 31 for approval. - Parliament can challenge fiscal policies, indices, medium-term macroeconomic and priorities in the Fiscal Strategy but cannot unilaterally revise them; it can re-allocate expenditures among BUs, programs, and sub-programs provided any increase is offset by equal reduction elsewhere. - Finance and Budget Committee actively scrutinizes and debates the budget; evidence in 2020: Committee meetings on 9 days between November 24 and December 5, 2020; executive officials appeared before the Committee; revisions to allocations by Parliament; some members pressed executive to revise total fiscal envelope. - Draft new OBL envisions Fiscal Council and earlier submission deadline (October 15) to allow more Parliamentary review time. - Scoring: Dimension 18.1 score is A. - 18.2. Legislative procedures for budget scrutiny: - Procedures for reviewing the budget are stable in law and Rules of Procedure (Law on the Assembly approved 2005, latest revisions 2010; Rules of Procedure initially 2010, updated 2013). - Internal organization: - Finance and Budget Committee responsible for detailed review, supported indirectly by the Parliamentary Budget Office. - Finance and Budget Committee staff: five persons. - Parliamentary Budget Office staff: six persons. - Parliament has an Internal Audit Department evaluating adherence to Rules and Procedures. - Scoring: Dimension 18.2 score is B. _Italic: Source — https://www.imf.org/-/media/files/publications/cr/2022/english/1mkdea2022004.pdf_ ### Section 15 of the Rules of Procedure ### Section 15 of the Rules of Procedure ### Parliamentary oversight and procedures - Audit reports prepared by the Audit Department of Parliament are not publicly released; indirect evidence suggests procedures are adhered to. - The Rules and Procedures Committee working group is tasked with reviewing implementation of the Rules of Procedure of the Assembly and the rules of procedure of the working bodies, and gives opinions on solutions to disputable questions. - The Committee is active (i.;e. it meets). - Openness example: debate and referral to the full Parliament of a proposal in 2020 to amend the Rules of Procedure submitted by an opposition MP (Mr. Talat Xhaferi). - No mention in the agenda of the Committee's 2020 meeting of complaints or audit findings of material violation of existing Rules of Procedure. ### Budget review procedures and public consultation - Specific Rules of Procedure apply to reviewing the state budget, including: - (i) the revised draft budget, reflecting amendments approved by the Finances and Budget Committee and adopted by Parliament, must be drafted by the executive; - (ii) an explanatory note must be attached to the revised draft budget issued by Finances and Budget Committee; - (iii) time limitations – debate cannot start for 20 days following receipt of the executive’s budget proposal and maximum number of days devoted to stages of review; and - (iv) the maximum number of minutes members can speak on the proposed budget. - By custom, the Finances and Budget Committee is chaired by a member from the major opposition party. - The Committee has authority to hold public consultation on the draft budget, but has not done so in recent years. - The Finances and Budget Committee invites representatives of the Government to answer questions on the draft budget. - Assessment outcome: since procedures to review budget proposals are approved in advance, adhered to, include internal organizational arrangements, but there is no public consultation, the score for the dimension is B. ### Timing of budget approval (Dimension 18.3) - Scoring based on most recent three years; Parliament approved the annual budget law before the start of the fiscal year in each of the last three fiscal years. - Actual dates of approval (Table 18.2): - Fiscal year 2019 — Actual date of approval: 21 December 2018 - Fiscal year 2020 — Actual date of approval: 22 December 2019 - Fiscal year 2021 — Actual date of approval: 20 December 2020 - Additional note: for 2020, the Government submitted the annual budget proposal to Parliament within the deadline established in law. - Assessment outcome: because legislature approved the annual budget before the start of the year in each of the last three fiscal years, the score for the dimension is A. ### Rules for in-year budget adjustments by the executive (Dimension 18.4) - Rules provided in the Budget Law, Articles 33-34; no more detailed implementing rules or instructions, though detailed guidance on in-year transfers can be given in the annual Law on Budget Execution. - No special prohibition on reallocating funds between capital and recurrent items; appropriated together under a program. - No limits on total size of transfers other than what is stated in detailed rules. - Table 18.3: Authority of entities to reallocate funding in the approved basic budget - BU — Reallocation of line items within subprograms within a BU budget, but (i) cannot reduce any line item by more than 20 percent, and (ii) cannot increase salaries by more than 10 percent - MoF — Reallocation between programs and subprograms within a BU budget up to MKD 5 million - Government — Reallocation between programs and subprograms within a BU budget over MKD 5 million - Parliament — Reallocation between BUs - The Budget Law permits the MoF to increase the total budget of a BU without Parliamentary approval in the case of proven increases in self-financing revenue, loans, and grants. There are no limits on such increases. Parliamentary approval is required to increase the total amount of the basic budget. - Systems enforce adherence: - BUs propose reallocations to MoF; - MoF has exclusive direct access to the e-Budget system and adjusts the BU’s budget; - e-Budget system automatically transfers the change to the TrIS, where expenditures are controlled and reported. - The SAO assesses MoF adherence to rules; SAO audits on execution are performed annually and compliance audits on MoF are regular. The SAO has not reported material errors by MoF in recent years regarding in-year budget adjustments. - Assessment outcome: clear rules exist, set strict limits on extent and nature of amendments, and are adhered to in all instances; the score for this dimension is A. ### Pillar Five — Predictability and control in budget execution: overview - Pillar scope: implementation within effective standards, processes and internal controls to ensure resources are obtained and used as intended. - Key strengths: - Revenue agencies provide comprehensive and timely information to taxpayers; electronic filing of tax returns is the default. - Risk management in Customs Administration (CA) is an area of strength. - PRO and CA carry out audits. - MoF Treasury centrally controls virtually all spending agencies’ bank accounts and has been able to forecast cash commitments and provide reliable quarterly commitment ceilings to budget users. - Liquidity Management Committee coordinates with Debt Management Department for short-term financing needs. - Use of in-year virements was orderly and transparent. - ESPEO information system represents progress in managing arrears information compared with prior PEFA assessment. - Controls over salary calculations and payments centralized in MoF performed well. - Public procurement progressively aligned with updated 2019 legal framework; ESPP information system includes functionalities to support PPB monitoring; procurement complaints management system is an area of strength. - Key weaknesses: - PRO’s 2020 audit plan derailed due to the pandemic. - Share of tax arrears is almost 11 percent of annual revenue collection. - High proportion of tax arrears older than 12 months in total arrears (almost 99.9 percent) signals many arrears may not be collectable. - In CA, around 80 percent of arrears are classified as uncollectable. - In PRO, arrears concentrated at 83 percent of total debt; PRO cannot generate reports with the age of tax debt due to obsolete tax accounting information systems and lacks information on which arrears are uncollectable. - Reconciliation slipped as data on revenue assessments are not reconciled between revenue agencies and the Treasury Department which manages the STA. - No hard central ex-ante controls preventing BUs entering into legal commitments above approved appropriations; irregularities are followed up by budget inspection. - Only records of the stock and composition of payables centrally are self-reported by budget users through ESPEO; due date information in TrIS available only at payment order stage. - Multiple large ministries have low internal audit staffing rates affecting coverage and compliance with standards. ### PI-19 Revenue administration — summary scores - Indicator/Dimension Score: - PI-19. Revenue administration (M2) C - 19.1. Rights and obligations for revenue measures A - 19.2. Revenue risk management C - 19.3. Revenue audit and investigation D - 19.4. Revenue arrears monitoring D* ### Institutional responsibilities and revenue composition - Overall revenue policy: managed by MoF Tax and Customs Policy Department. - Collecting agencies: Public Revenue Office (PRO) and Customs Administration (CA) administer and collect principal tax revenue streams and mandatory social security contributions (SSC). - PRO and CA account for 91.3 percent of total revenues collected in the Budget of the Republic of North Macedonia. - Table 19.1: Budget of the RNM revenue categories, collecting agencies and annual collection for 2020 (Amounts in MKD million; Percent of the total) - Taxes & SSC — PRO and CA — 170,941 — 91.6 - Taxes — PRO and CA — 104,377 — 55.9 - Taxes on income, profit and capital gain — PRO — 29,122 — 15.6 - Taxes on goods and services — PRO and CA — 69,011 — 37.0 - Taxes on international trade and transactions — CA — 5,734 — 3.1 - Other tax revenue — PRO — 510 — 0.3 - Social Security Contributions — PRO — 66,564 — 35,7 - Other Budget of the RNM revenue — Other — 15,460 — 8.3 - Donations — Other — 184 — 0.1 - Total — 186,585 — 100.00 - Legal framework: comprehensive legal framework for revenue administration including separate legislation for tax administration, customs administration, administrative procedures (general, tax and customs), audit, and specific legislation for all taxes and SSC. ### PRO modernization and IT systems - PRO’s Strategic Plan 2021 – 2023 sets three strategic programs: - (i) strengthening administrative capacities, - (ii) protecting against tax fraud and reducing size of gray economy, - (iii) mobilizing tax revenue. - Key activity: deployment of a new Integrated Tax Information System (ITIS) to replace outdated, fragmented systems. - ITIS core modules expected to be fully operational in 2022: Registration, Filing and Service Management, Accounting, Payments, and Refunds, Debt management, Assessments, Legal, and Audit. ### Dimension 19.1 — Rights and obligations for revenue measures (A) - PRO and CA maintain physical and online communication channels and regional/local presence: - PRO: 30 local offices (6 regional offices, 17 branch offices and 7 service points), mobile tax counters, and a Large Taxpayers’ Office (LTO). - CA: 5 customs houses, 18 customs offices and 15 border crossing points. - Outreach via social networks, electronic media, print; queries answered online, phone, or in writing. - Electronic filing and services: - In CA, filing of customs declarations electronically is mandatory; in 2020, 100 percent of customs declarations were filed electronically. - PRO: electronic filing available for all major taxes; in 2020, 98.58 percent of all VAT and 100 percent of all other tax returns were filed electronically. - PRO contact center services include: - "Schedule a meeting @" — electronic appointment scheduling for tax agents in RD Skopje contact center. - "Inform @" — online knowledge base with searchable archive of Q&A. - Redress: all decisions of PRO and CA may be appealed before the Administrative Court in administrative dispute; administrative review by a second instance body in MoF was abolished in 2015. - Assessment outcome: comprehensive and up-to-date information including redress process; score is A. ### Dimension 19.2 — Revenue risk management (C) - PRO: - Compliance Risk Management Unit (CRMU) established in 2017, functional in 2019. - CRMU developed draft risk management plans for several sectors (auto mechanic industry, cash heavy businesses) and a draft comprehensive risk register and sector-specific analyses; adopted Compliance Improvement Strategy. - No comprehensive approach covering all tax types and compliance obligations; LTO risk framework not operationalized. - Risk management partially structured and systematic, covering some categories (mainly VAT). - CA: - Systematic risk management in place for 15 years; regulated by Customs Law, bylaws, internal rules, and Risk Management Strategy 2018-2022. - Risk management department in Control and investigation sector leads activities; cyclical process with risk criteria/profiles; compliance risk register exists. - Risk management processes are comprehensive, structured, and systematic and cover all categories of revenue and taxpayers. - Assessment outcome: partially structured and systematic approaches across revenue entities; score is C. ### Dimension 19.3 — Revenue audit and investigation (D) - PRO: - General Tax Inspectorate (GTI) manages revenue audit; annual audit plan designed based on human resources. - GTI Unit for Risk Analysis and Planning of Controls determines 80 percent of the annual plan based on risk analysis; remaining 20 percent by regional directors. - Electronic selection of cases based on 54 predetermined risk rules covering all tax types. - Annual audit plans are not publicly accessible; number of executed audits published in PRO Annual Report. - In 2020, PRO realized only 47.23 percent of planned audits. In 2019, PRO exceeded its audit plan by 9.39 percent. - PRO has no tax fraud investigation function; tax crime investigation jurisdiction lies with the Financial Police office within MoF. - CA: - Department for post clearance control undertakes controls based on annual control plan using risk analysis; no compliance improvement plan; annual control plan not publicly available. - In 2020, CA planned 465 post clearance audits and investigative controls and completed 421, delivering 90.53 percent relative to the Plan. - Table 19.2 — Revenue audits and investigations planned and carried out in 2020: - Number of audits, non-tax audits and checks without findings (PRO): Total planned 9,451 — Total carried out 4,482 — Percent completed 47.23 - Number of post clearance audits and investigative controls (CA): Total planned 465 — Total carried out 421 — Percent completed 90.53 - Total: Total planned 9,916 — Total carried out 4,903 — Percent completed 49.44 - Assessment outcome: neither revenue agency has a full compliance improvement plan (PRO has plans only for some sectors); score is D. ### Dimension 19.4 — Revenue arrears monitoring (D*) - Arrears distribution in 2020: - CA reported MKD 3,454.4 million of revenue arrears (17.04 percent of total revenue arrears). - PRO reported MKD 16,810 million (82.96 percent of total revenue arrears). - Table 19.3 (partial): - 1 Total CG revenue collections — 186,585 - 2 Total stock of tax arrears at end of the fiscal year — 30,454 - Key observations: - Share of tax arrears is almost 11 percent of annual revenue collection. - High proportion of tax arrears older than 12 months in total arrears (almost 99.9 percent). - In CA, around 80 percent of arrears are classified as uncollectable. - In PRO, arrears concentrated at 83 percent of the total debt and inability to generate age reports due to obsolete tax accounting information systems limits arrears management. - Assessment outcome: score for the dimension is D*. *Source: 1mkdea2022004 - Section 15 of the Rules of Procedure* ### 2.1 PRO arrears at the end of fiscal year 27,000* ### 2.1 PRO arrears at the end of fiscal year 27,000* ### Tax arrears stock and composition - Total PRO arrears at the end of fiscal year: 27,000* - CA arrears at the end of fiscal year: 3,454 - Share of tax arrears in the total revenue collections (2/1, percentage): 16.32 - Tax arrears older than 12 months: 9,895 - PRO portion of arrears older than 12 months: 6,478** - CA portion of arrears older than 12 months: 3,417 - Share of tax arrears older than 12 months in the total arrears (4/2, percentage): 32.49 - The amount of CA arrears that is older than 12 months is 99.81 percent of the total amount of arrears managed by the CA. - A significant amount of CA arrears is classified as uncollectable: 81.39 percent. - Uncollectable arrears relate to arrears accumulated from 1999 until 2010 that were not written off. - Notes on data scope and exclusions: - * Data does not include interest accrued non-VAT revenue streams. - ** Data does not include non-VAT tax arrears older than 12 months. ### Data generation, reporting responsibilities, and system limitations - Source: PRO and CA data generated for the needs of the PEFA assessment (June 2021). - Definitions and responsibilities: - Tax arrears are defined by PRO internal documents as an unpaid due tax debt. - The Department for Analysis is in charge for monitoring and reporting on tax arrears. - Quarterly reports are prepared and tax arrears are broken down by taxpayers and revenue streams (VAT, PIT, CIT and SSC). - System and reporting limitations: - PRO can generate reports that include information on the age of tax debt only for VAT. - For other revenue streams the PRO is not able to determine the age of arrears because the tax accounting system is not capturing the age of tax debt. - PRO was not able to determine the share of uncollectable arrears. - Interest on arrears is accrued and accounted automatically for VAT only; for other revenue streams interest is not systematically accrued and accounted. Consequently, PRO does not have reliable data on interest for non-VAT revenue streams. - Planned improvements: - PRO is currently implementing improvements in the tax accounting system expected to enable accurate and timely reporting on the age of tax debt and corresponding accrued interest for all revenue streams. - It is expected that the new tax accounting system will be operational by 2022. - Assessment implication: - Based on the analysis and supporting evidence and given that the PRO is not able to determine the age of tax arrears and accrued interest (except for VAT), the score for the present dimension is D* due to lack of reliable data. ### Key findings on accounting for revenue (PI-20) - PI-20 overall score (M1): C+ - 20.1. Information on revenue collections: A - 20.2. Transfer of revenue collections: A - 20.3. Revenue accounts reconciliation: C - Procedural framework: - Collection of public revenues regulated by the Budget Law and several bylaws, including instructions for registration, allocation, refund and transfer of public revenues and payment instruments for domestic transactions. - The Instruction for the manner of registration, allocation, refund and transfer of public revenues defines accounts as sub-accounts of the system of the single treasury account (STA). - STA and reporting: - The STA is used for public revenues collection and allocations to beneficiaries (CG budget, LGU budgets, entitled institutions). - Transaction accounts are analytically systematized by type and form of fiscal obligation; specific sub-account for each type of tax to ensure required information for recording tax receipts in the Treasury Main Ledger. - 20.1 Information on revenue collections: - Since collection is done through the STA, MoF has daily access to revenue information. - PRO and CA receive payment information from the MoF Treasury Department on a daily basis. - Each payment has a mandatory identifying reference (tax identification number or unique personal identification number). - MoF issues monthly publicly available information reporting revenues disaggregated by revenue type and cumulatively for the year. - Score: A. - 20.2 Transfer of revenue collections: - Payments to STA subaccounts made through payment service providers (commercial banks or other licensed financial institutions) in cash or wire transfer. - All revenue payments are collected in the STA controlled by the MoF Treasury Department. - Score: A. - 20.3 Revenue accounts reconciliation: - Reconciliation between MoF Treasury Department and PRO is done monthly; with CA daily. - Information received from MoF Treasury on receipts to STA are processed and automatically reconciled with corresponding tax or customs debt. - Table of reconciliation practices (summarized): - PRO: Frequency Monthly — Assessments: No; Collections: Yes; Arrears: Yes. - CA: Frequency Daily — Assessments: (not reconciled); Collections: Yes; Arrears: Yes. - Given revenue agencies do not reconcile data related to assessments, score: C. ### Predictability of in-year resource allocation (PI-21) — summary of arrangements and scores - PI-21 overall score (M2): A - 21.1. Consolidation of cash balances: A - 21.2. Cash forecasting and monitoring: A - 21.3. Information on commitment ceilings: B - 21.4. Significance of in-year budget adjustments: A - 21.1 Consolidation of cash balances: - MoF Treasury Department manages comprehensive STA receiving all revenues and making all payments on behalf of BUs; BUs do not have transaction accounts in commercial banks. - Health Insurance Fund runs a separate single account for health care institutions consolidated daily except for own-source revenue and donations in the range of MKD 300 million annually (outside PI-21 scope). - All accounts are held with the NBRNM. - Information on account balances is available in real time and cash is consolidated daily across account types. - Foreign currency accounts may be opened only with MoF consent. - Score: A. - 21.2 Cash forecasting and monitoring: - MoF Treasury Department Unit for Liquidity Management and Projections holds primary responsibilities. - Annual forecast developed using top-down and bottom-up approaches for different revenue and expenditure categories; forecast updated monthly on a rolling basis and broken down by days. - Spending units must notify MoF Treasury Department of payments exceeding MKD 10 million a week in advance. - Actual inflow information is received from PRO and CA; outflow information is available from TrIS covering all BCG entities and social security funds. - Liquidity Management Committee (NBRNM, PRO, Customs, MoF Budget Department, IFRDMD) produces weekly projections and variance analysis; committee proceedings are not systematically recorded. - Score: A. - 21.3 Information on commitment ceilings: - BUs must submit quarterly financial plans with monthly breakdown to MoF Treasury Department and validate inputs in TrIS. First-level BUs incorporate second-level BUs’ plans. - Controls in TrIS prevent financial plans exceeding annual appropriation. - Quarterly financial plans are updated and approved monthly on a rolling basis, providing a quarterly horizon of limits for commitments. - Reliability conditional on quality of financial planning in institutions; MoF does not reduce financial plans as long as spending units stay within annual appropriation. - Score: B. - 21.4 Significance of in-year budget adjustments: - In-year adjustments above spending unit management are decided by Parliament for reallocations between BUs or increases in overall revenue and expenditure. - Once a year, in December, Parliament approves Decision on Reallocation between BCG BUs and Social Insurance Funds. - 2019 total size of adjustments: MKD 170 million (under 1 percent of BCG expenditure for the year excluding contingency). - 2020 total size of adjustments: MKD 1.3 billion (under 1 percent of total CG expenditure for the year), largely due to COVID-19 response. - Variance in expenditure composition in 2020 by economic classification against original budget: 18.2. - COVID-19 response specifics: - Decree May 2020: overall decrease of revenues of MKD 25.5 billion and increase of expenditure of MKD 3.2 billion, increasing the deficit by MKD 28.8 billion against the original budget. - October 2020 supplementary budget: further decrease of revenue of MKD 425 million and increase of expenditure of MKD 9.9 billion, increasing the deficit by MKD 10.3 billion. - Despite increased volume of adjustments in 2020, adjustments took place twice and remained transparent and systematic. - Score: A. ### Expenditure arrears (PI-22) — summary findings and stock - PI-22 overall score (M1): B+ - 22.1. Stock of expenditure arrears: A - 22.2. Expenditure arrears monitoring: B - Legal and reporting framework: - Payment deadlines defined in the Financial Discipline Law (2013): invoices to contractors and suppliers to be settled within 60 days (fully applicable to the government from January 2016). Payments beyond this deadline are arrears. - Law on Reporting and Recording of Liabilities (2018) defines unpaid due liabilities. - Information on arrears is available from ESPEO (Electronic System for Reporting and Recording of Liabilities), which collects self-reported data from public sector entities. Responsibility for accuracy lies with individual institutions; data is not externally verified. - ESPEO coverage and concerns: - ESPEO was developed as a stand-alone information system in 2017-2018. MoF Budget Department uses ESPEO for medium-term projections and in-year reallocations. - MoF Financial Inspection Department (FID) inspects reported irregularities. SAO audited ESPEO in FY 2020 and raised concerns over comprehensiveness: the system contained data from 1,047 entities out of 1,380 required to report. - At 76 percent of reporting institutions using the system, ESPEO data is considered representative and relevant for analysis (information available after assessment cut-off date). - 22.1 Stock of expenditure arrears — figures and trends: - For all entities reporting through ESPEO, total arrears over the three years remained around MKD 17.7 billion annually on average. - Share of arrears of reporting entities towards other public sector entities increased from nearly 40 percent at end Q4 2018 to just over 50 percent at end Q4 2020. - BCG entities (Table 22.1 figures in thousand MKD): - Total arrears of BCG entities: - 31 Dec. 2020: 605,921 - 31 Dec. 2019: 573,645 - 31 Dec. 2018: 1,369,846 - BCG arrears to public sector: - 31 Dec. 2020: 213,064 - 31 Dec. 2019: 224,576 - 31 Dec. 2018: 335,412 - Arrears considered for the assessment (i): - 31 Dec. 2020: 392,857 - 31 Dec. 2019: 349,070 - 31 Dec. 2018: 1,034,434 - Total actual expenditure for the FY* (ii): - 31 Dec. 2020: 174,936,364 - 31 Dec. 2019: 151,517,166 - 31 Dec. 2018: 141,694,691 - Ratio (i)/(ii): - 31 Dec. 2020: 0.22% - 31 Dec. 2019: 0.23% - 31 Dec. 2018: 0.73% - Additional detail: - Arrears of BCG entities by specific expenditure categories include the largest categories: other construction objects (MKD 88.5 million) and contracted services (MKD ...). (Table continues in source.) *Source: PRO and CA data generated for the needs of the PEFA assessment (June 2021).* ### 76.8 million), and material and small inventory (MKD 55.5 million) which accounted for just over half ### 1mkdea2022004 - 76.8 million), and material and small inventory (MKD 55.5 million) which accounted for just over half ### Expenditure arrears: stock (Table 22.2) and aggregate - Total reported arrears: 392,857 (thousand MKD) at 31 Dec. 2020; 349,070 (thousand MKD) at 31 Dec. 2019; 1,034,434 (thousand MKD) at 31 Dec. 2018. - Selected economic-classification arrears (thousand MKD): - 401 Salaries: 11,761 (31 Dec. 2020); 8,054 (31 Dec. 2019); 19,263 (31 Dec. 2018). - 402 Social security contributions: 2,432; 0; 4,409. - 404 Allowances: 249; 71; 112. - 420 Travel and subsistence allowances: 1,216; 6,025; 3,257. - 421 Utilities, heating, communications and transportation: 39,731; 39,582; 73,505. - 423 Material and small inventory: 44,522; 17,974; 374,956. - 424 Repairs and current maintenance: 25,305; 16,528; 144,553. - 425 Contracted services: 76,782; 38,579; 42,053. - 426 Other current expenditure: 17,813; 9,767; 15,409. - 427 Temporary work: 2,764; 1,407; 1,830. - 463 Transfers to NGOs: 36,140; 45,007; 44,470. - 464 Transfers, not classified elsewhere: 31,698; 14,307; 14,909. - 465 Payments being enforced: 0; 0; 89,265. - 480 Purchase of equipment and machinery: 5,309; 11,601; 54,425. - 481 Construction objects: 1,315; 277; 10,673. - 482 Other construction objects: 88,486; 119,828; 124,489. - 485 Investment and non-financial assets: 5,211; 6,095; 1,511. - 489 Capital subsidies to companies and NGOs: 2,045; 9,388; 9,067. - Source of data: ESPEO, MoF Budget and Funds Department customized data set for the PEFA Assessment. - Scoring note: "Based on the ratio of reported arrears at the end of the last three fiscal years against the total annual expenditure of under 1 percent, the score for the dimension is A." ### Expenditure arrears: monitoring (Section 22.2) - Reporting requirements: - Arrears information reported on 4 standardized templates by all types of accounts and sources of funds, by type of creditor, by due date status (unpaid, unpaid past due), and by 3-digit economic classification. - Due/past due status recorded, but data are not broken down by age structure (e.g., 30, 60, 90 or 120 days past due). - Reporting frequency and timeline: - Public sector entities report monthly to ESPEO by the 10th day of the next month for the previous month. - MoF legal provisions require MoF to generate and publish summary reports quarterly; reporting completed by the 10th and published corresponds to 2 weeks from the end of the quarter. Reporting is technically possible monthly. - Reports generated (overview): - Stock: Y; Age: N; Composition: Y; By individual entity: Quarterly; Timeline: within 2 weeks from the end of the quarter. (Source: MoF Summary reports on liabilities (Templates 1-4), Q1 2021.) - Capacity and enforcement: - Requirement in place for MoF FID to take action and sanction entities breaching payment deadlines, but resource constraints have created a backlog: around 600 reports pending inspection and sanctioning at time of assessment. - Assessment conclusion: - Information on stock and composition prepared and published quarterly within 2 weeks from the end of the quarter but no records of arrears age profile; score for the dimension is B. ### PI-23. Payroll controls — overview and scores - Indicator aggregate: PI-23. Payroll controls (M1) B+ - Dimension scores: - 23.1 Integration of payroll and personnel records: B - 23.2 Management of payroll changes: A - 23.3 Internal control of payroll: B - 23.4 Payroll audit: B - Coverage and context: - Indicator coverage is central government (CG). Assessment undertaken at time of assessment, except 23.4 assessed for the last three completed years (2018-2020). - Sample for the indicator: MoF’s centralized payroll calculation, covering close to 70 percent of total CG expenditure. ### 23.1 Integration of payroll and personnel records — findings - Individual budget users (BUs) send monthly payroll calculation on template F1 capturing around 25 items. - MoF Budget and Funds Department maintains F1 records in a Microsoft Access database. - Payroll processing flow: MoF sends summary calculation back to submitting institution; institution instructs Treasury to process payments; salaries disbursed by electronic transfer monthly. - MoF consent required for each new employment; consent referenced on M1 form mandatory for social insurance registration. - Score rationale: Indirect link between personnel and payroll databases and staff hiring controlled by approved staff positions and available funding; score is B. ### 23.2 Management of payroll changes — findings - Monthly submission process: changes made based on documents submitted monthly by BUs (electronically or hard copy); MoF conducts completeness checks and compliance analysis; Head of Budget and Funds Department approves salary template. - Retroactive adjustments: no statistics maintained; reported as rare in interviews; 2020 arrears for basic salaries divided by total spending on this line item shows these were under 0.10 percent of total salaries paid. - PEFA threshold: threshold for retroactive adjustments is 3 percent. - Score rationale: Changes updated monthly in time for next month’s payment with low presumed retroactive adjustments; score is A. ### 23.3 Internal control of payroll — findings - MoF internal controls: procedures in place; data in Microsoft Access database with password protection; privileges assigned to Budget and Funds Department staff; database not programmed to create an audit trail of interventions on data. - SAO findings: no SAO findings raise issues of integrity of data submitted by BUs and held at MoF; however SAO highlights systemic weaknesses in payroll processing across BCG and other sub-sectors (e.g., lack of common legal provisions for calculation of salary of technical support staff). - Score rationale: integrity of data considered high despite systemic issues; score is B. ### 23.4 Payroll audit — findings - Audit coverage: - Personnel and payroll records in BUs and MoF can be audited by internal and external auditors. - SAO audits payroll annually; SAO audit programs include standardized checklists and testing of individual transactions. - MoF Central Harmonization Department does not maintain statistics on internal audits specifically addressing personnel and payroll operations. - SAO findings and coverage: - SAO reported adverse audit findings: lack of standardized coefficients for technical-support staff in BCG (repeated since 2018); salary calculation issues in health care institutions (2019), judiciary, culture and higher education (2019 and 2020); irregularities in processing of allowances in judicial sector (2020). - Number of non-statutory SAO audits increased and progressively encompassed virtually all central government entities over past three years. - Score rationale: SAO progressively audits more CG institutions but without complete annual coverage of all CG salary expenditures; score is B. ### PI-24. Procurement — overview and scores - Indicator aggregate: PI-24. Procurement (M2) A - Dimension scores: - 24.1 Procurement monitoring: A - 24.2 Procurement methods: A - 24.3 Public access to procurement information: A - 24.4 Procurement complaints management: A - Legal and institutional context: - Public Procurement Law (PPL) adopted January 29, 2019, effective April 1, 2019; harmonized with EU Directive. - Public Procurement Bureau (PPB) within MoF coordinates and monitors public procurement system and manages national electronic system for public procurement (ESPP). ### 24.1 Procurement monitoring — findings - ESPP functionality: - Covers entire tendering process from publication to contract award; contracting authorities obliged to use ESPP. - Procurement plans must be published no later than 31 January each year on ESPP. - E-Archive/electronic record of procedures active; separate record book kept; ensures data security, integrity, and audit trail. - Enhancements: pre-view tender documents without subscription; e-payments for annual subscription; e-appeals; e-market for small value procurements; e-catalogues. - COVID-19 adaptations: PPB notification allowing negotiated procedure without publication for urgent procurement per Article 55 (b) of Law on Public Procurement; e-procurement tool with COVID-19 contract data established. - New PPB role: - Administrative ex-ante control mandatory for contracts estimated above EUR 500,000 (goods and services) and above EUR 2 million (works); other procedures may be selected by risk indicators (red flags). - ESPP includes public performance indicators and anti-corruption red flags to select contracts for ex-ante control. - Dimension conclusion: Complete and accurate records maintained in ESPP; score A. ### 24.2 Procurement methods — findings and statistics - 2020 totals: - Number of public procurement contracts concluded in 2020: 32,253. - Total value of contracts in 2020: MKD 56.072.187.702. - Share of GDP: total value represents 8 percent of GDP. - Share of budget: total value represents 23 percent of the budget of the Republic of North Macedonia. - Change vs 2019: value increased by 0.46 percent; number of contracts increased by 0.5 percent (2019 number was 32,065). - Competitive procurement value: - Total value of contracts awarded through competitive methods: MKD 53,627,981,315 (95.64 percent of total). - Most used procedures by value: - Open procedure: 5,400 contracts; MKD 36,315,737,005; 65 percent of total public procurement. - Simplified open procedure: 10,706 contracts; MKD 13,018,215,416; 23 percent of total value. - Small value procurement: 10,701 contracts; MKD 2,461,376,611; 4.39 percent. - Qualifications system: 35 contracts; MKD 1,035,564,617; 1.85 percent. - Negotiated procedure with prior publication: 1 contract; MKD 574,754,400; 1.03 percent. - Negotiated procedure without prior publication: 792 contracts; MKD 2,444,206,387; 4.36 percent. - Special services up to 10,000/20,000 EUR: 4,538 contracts; MKD 71,974,617; 0.13 percent. - Special services: 80 contracts; MKD 150,358,649; 0.27 percent. - SUB-TOTAL (Competitive procedures): 26,842 contracts; MKD 52,830,893,650; 94.22 percent. - TOTAL: 32,253 contracts; MKD 56,072,187,702; 100.00 percent. - Dimension conclusion: Dominant share of open procurement methods; score A. ### 24.3 Public access to procurement information — findings - Legal and informational access: - PPL, by-laws, manuals, guides and brochures posted on PPB website and ESPP; mandatory publication requirements defined in PPL. - Procurement plans, notices, tender documents, contract awards, contract amendments and completion published on ESPP; small value contracts published in dedicated location. - ESPP allows preview of tender documents without registration; enables public commenting on technical specifications; e-payments for ESPP subscription reduce transaction costs for foreign economic operators. - All tenderers can access complete tender documentation in standstill period except documents marked as business secret. - e-Appeal module implemented for electronic filing to State Appeals Commission (SAC); SAC decisions published electronically. - PPB publishes annual reports using ESPP data; Business Intelligence Semantic Model (BISM) used to analyze and extract data. - Key procurement information availability (all Met = Y): - (1) legal and regulatory framework for procurement: Y. - (2) government procurement plans: Y. - (3) bidding opportunities: Y. - (4) contract awards (purpose, contractor and value): Y. - (5) data on resolution of procurement complaints: Y. - (6) annual procurement statistics: Y. - Dimension conclusion: Every key procurement information element complete, reliable and timely; score A. ### 24.4 Procurement complaints management — findings - State Appeals Commission (SAC): - Established 2008; independent legal body reporting to Parliament; decisions made by 5 members appointed by Parliament. - Appeals must be submitted electronically; option to submit on paper for concessions/PPP and certain negotiated procedures. - Time for lodging complaint per PPL: 5 or 10 days depending on procedure; contracting authority must make documents available within 5 working days. - Fee for lodging complaint: between EUR 50 and 200 depending on contract value. - SAC decisions are final and binding and are automatically published on SAC’s website. - Dimension conclusion: Independent administrative complaint resolution mechanism in place; score A. *Source: ESPEO, MoF Budget and Funds Department customized data set for the PEFA Assessment; MoF Summary reports on liabilities (Templates 1-4), Q1 2021; SAO reports and PPB/ESPP data as presented in the assessment.* ### introduction of e-Appeals. A comparative analysis conducted by the Commission of data from the last ### 1mkdea2022004 - introduction of e-Appeals. A comparative analysis conducted by the Commission of data from the last ### e-Appeals: complaints trends and drivers - Findings: - Number of complaints submitted: - 2018 – 561 complaints - 2019 – 737 - 2020 – 1076 - first quarter of 2021 – 550 complaints were submitted - Drivers noted: - Low fees and the simplification of the process by introducing e-Appeals eased the process of submission of complaints. ### Procurement complaints management (Table 24.3: Requirements met on availability of key procurement information) - Requirements Met (Y/N): - (1) is not involved in any capacity in procurement transactions or in the process leading to contract award decisions: Y - (2) does not charge fees that prohibit access by concerned parties: Y - (3) follows processes for submission and resolution of complaints that are clearly defined and publicly available: Y - (4) exercises the authority to suspend the procurement process: (no entry) - (5) issues decisions within the timeframe specified in the rules/ regulations: (no entry) - (6) issues decisions that are binding on every party (without precluding subsequent access to an external higher authority): Y - Overall score: - All the PEFA Framework criteria with respect to procurement complaints management are met, and the score on this dimension is A. ### PI-25. Internal controls on non-salary expenditure — overview and scores - Indicator/Dimension Score: - PI-25. Internal controls on non-salary expenditure (M2) B+ - 25.1. Segregation of duties B - 25.2. Effectiveness of expenditure commitment controls B - 25.3. Compliance with payment rules and procedures A - Institutional framework and scope: - Indicator coverage is CG and the scope is at the time of assessment. - Internal controls in budget execution are developed and implemented within the Law on Public Internal Financial Control (PIFC). - PIFC approach organized along the COSO Framework is applicable for the entire public sector; requirements apply to all public entities. - PIFC progress is a benchmark in the country’s EU accession process. - Key roles in expenditure management: - Each BU: decentralized ex-ante commitment controls, verification and filing of payment orders. - MoF Treasury Department: centralized controls over compliance of payment orders against appropriations, financial plans, and registered commitments. - Internal control monitoring: - Annual self-assessment questionnaires and issuance of Statement of Quality and Status of Internal Control signed by head of each institution. - Institutions manage risk registers; internal audit provides independent assurance. ### 25.1. Segregation of duties — findings - Legal and operational rules: - PIFC Law Article 16: segregation of duties "in a manner not allowing to an official to be at the same time responsible for authorization, execution, accounting and control." - Division of authorizations and responsibilities secured by internal allocation decisions and delegation to head of financial affairs unit. - Implementation status and statistics: - Latest self-reported information suggests 80 percent of central level institutions (BCG and SSFs) have secured the implementation of segregation of duties requirements. (2020 Annual PIFC Report) - The Treasury Operations Manual enforces segregation of duties via differing access rights in Treasury Department, Budget Execution Unit and regional treasury offices. - Assessment: - There is appropriate segregation of duties with clear responsibilities in payment processing, but several institutions have yet to operationalize segregation of duties throughout other steps in the expenditure process. - Score for this dimension: B. ### 25.2. Effectiveness of expenditure commitment controls — findings - System and processes: - Annual commitments: reported ex-post in the Treasury Department’s E-Commitment module of the TrIS; BUs attach contract and documentation. - Commitments registered by administrative, program and economic classification and for all sources of funds. - Registration controls: - Amounts controlled against annual appropriation; those exceeding appropriation automatically rejected. - E-commitment module issues a registration number referenced when checking the payment order. - Payment orders for unregistered commitments automatically rejected. - Timeliness and exemptions: - BUs required to register contracts within 15 days; exceptions must be approved by MoF Treasury Department. - Treasury Department reported not more than 5-6 such requests for exception on a monthly basis at time of assessment. - BUs exempt from obligation to report commitments under MKD 300,000 in value. - Recurrent cost (e.g., salaries and social benefits) exempt from this procedure. - Multi-annual commitments: - BUs required to report multi-annual commitments in E-commitment module; data available for commitments over the coming three years. - Execution controlled against the annual budget; no means to control commitments over the medium-term horizon. - Healthcare institutions (HIF controlled TSA): - HIF confirms budgets with public healthcare institutions at the beginning of the year, subdivided in 12 equal installments. - Healthcare institutions can file supplementary monthly requests for additional money to be subtracted from next month’s allocation. - No requirement for healthcare institutions to register commitments; payment orders controlled against annual budget and remaining account balance. - Assessment: - Considering comprehensiveness of annual commitment controls against projections of available cash and the annual appropriation, but gaps in alignment control of multi-annual commitments with medium-term indicative ceilings, the score for this dimension is B. ### 25.3. Compliance with payment rules and procedures — findings - Evidence and practices: - Decentralized process: roughly 80 percent of respondents in 2020 FM&C self-assessment reported authority and responsibility for managing budget funds clarified through internal rules and procedures. - Requirement to register date of payment in E-Commitment module mitigates concentration of responsibilities at head of institution. - MoF Treasury Department checks payment orders via TrIS against annual appropriation, financial plan, executions to date (reduced for registered annual commitments), and available account balance (Treasury Operations Manual, item 78). - MoF Treasury Department may reject payment orders not satisfying criteria or in case of inconsistencies on purpose and basis of payment. - Exceptions are defined in Treasury Operations Manual (Chapter IX); exceptions not singled out as pervasive in audit reports reviewed. - Current submission modality and compliance monitoring: - All payment orders submitted on paper with supporting documentation to regional treasury offices which input data into TrIS. - Once approved and executed, transaction details posted in Treasury Main Ledger. - No statistics maintained on number of transactions compliant/non-compliant with regular procedures and use of exceptions; reportedly low use of exceptions and absence of major audit and inspection findings on this topic. - SSFs sub-sector (HIF): - HIF controls and approves all invoices submitted by 108 healthcare institutions. - Heads of 30 HIF branch offices sign off on substantive controls at branch offices and liquidate invoices; HIF central office executes payments. - Assessment: - Budget inspection and external audit findings did not document non-compliance with regular payment procedures or unauthorized use of exceptions. - Dimension score: A. ### PI-26. Internal audit — overview and scores - Indicator and dimension scores: - PI-26. Internal audit (M1) C+ - 26.1. Coverage of internal audit A - 26.2. Nature of audits and standards applied B - 26.3. Implementation of internal audits and reporting C - 26.4. Response to internal audits C - Coverage and institutional arrangements: - Internal audit (IA) is functionally independent and required under the Law on PIFC. - IA developed within COSO framework with remit to audit internal controls, risk management and governance. - IA is decentralized; MoF Central Harmonization Department (CHD) proposes legislative/methodological framework, monitors and prepares consolidated reports. - Heads of individual spending units required to establish internal audit unit (IAU) or department (IAD) based on size and MoF criteria. - Establishment requirement under Article 30 of the PIFC Law. - Certification and staffing: - Available information suggests 86 internal auditors across the public sector hold certificates of certified public sector internal auditor. - MoF CHD reported 91 established internal audit units, staffed with over 130 internal auditors as of May 2021, for all public sector institutions at the central government level. - Excluding central level PCs and EBUs, there are 13 internal audit units in BCG entities and SFFs covering 91.75 percent and 91.61 percent of revenue and expenditure of the Budget of the Republic of North Macedonia, respectively. - Table excerpt (selected entries from Table 26.1: Overview of CG institutions with established internal audit function, by materiality (MKD)): - Budgetary central government 2020 Expenditure* 174,936,364 2020 Revenue** 186,585,409 — IAU established: Y — Internal audit staff: 2.6 (on average) - MoF - State Functions and MoF proper 2020 Expenditure* 16,790,074 — IAU established: Y — Internal audit staff: 6 - PRO (actual expenditure), total taxes and contributions administered by the PRO 2020 Expenditure* 1,120,133 2020 Revenue** 170,942,000 — IAU established: Y — Internal audit staff: 3 - CA (actual expenditure), total taxes and contributions administered by the PRO 2020 Expenditure* 1,267,914 — IAU established: Y — Internal audit staff: 3 - Ministry of Labor and Social Policy 2020 Expenditure* 50,423,644 — IAU established: Y — Internal audit staff: 4 - Ministry of Defense 2020 Expenditure* 7,209,513 — IAU established: Y — Internal audit staff: 4 - Ministry of Internal Affairs 2020 Expenditure* 10,458,090 — IAU established: Y — Internal audit staff: 2 - Ministry of Health 2020 Expenditure* 8,796,213 — IAU established: Y — Internal audit staff: 1 - Ministry of Education and Science 2020 Expenditure* 24,841,812 — IAU established: Y — Internal audit staff: 2 - Budgetary central government coverage: 83.51% - Social insurance funds 2020 Expenditure*: 115,714,000 - Pension and Disability Insurance Fund 2020 Expenditure*: 77,682,638 — IAU established: Y — Internal audit staff: 3 - Health Insurance Fund 2020 Expenditure*: 35,842,102 — IAU established: Y — Internal audit staff: 4 *Italic line indicating the source of this content.* ### 3. Employment Agency 3,834,421 Y 2 ### 3. Employment Agency ### Coverage and key statistics - Social security funds coverage: 100.00% - Average (BCG and SSF) coverage: 91.75% 91.62% - Reported internal audit coverage of CG revenue and expenditure: just above 90 percent - Expenditure reported in the consolidated BCG and SSF final accounts (notation in source) - Source: assessment team, based on MoF and SSF publicly available data ### 26. Nature of audits and standards applied - Legal requirements prescribe the application of the Institute of Internal Auditor’s International Professional Practices Framework. - Applicable IA manual reflects the requirements of the audit standards integral to this framework. - Internal Audit Charters, signed at the level of each institution, define IA function objectives, independence, competencies and responsibilities in line with applicable international standards. - Internal auditors are required to uphold the prescribed Code of Ethics. - Internal auditors have the legal mandate to interview any manager and staff and access all required documentation (in line with regulations on classified information and personal data). - All signed IA Charters are filed with the MoF CHD. - Internal auditors may carry out: - financial audit - compliance audit (regularity) - audit of the internal control systems - performance audit - IT audit - Internal auditors engage in both assurance and consulting arrangements. - Breakdown of types of audit carried out in 2020: - system-based audits: 39 audits, or 27.5 percent - regularity audits: 56 audits, or 39.43 percent - financial audits: one audit, or 0.7 percent - performance audits: two audits, or 1.4 percent - IT audits: one audit, or 0.7 percent - combined audits: 29 audits, or 20.4 percent - audits for monitoring the recommendations: 14 audits, or 9.9 percent - Observations: - Majority of audits focused on adequacy and effectiveness of internal controls with emphasis on controls intended to ensure regularity (compliance). - Only two performance audits in the period indicate a notable lack of focus on value for money considerations (see also PI-8.4). - Capacity of internal auditors remains a substantial constraint. - Quality assurance procedures need further development. - Low staffing levels imply many IAUs cannot meet quality assurance requirements, especially ongoing supervision and ex-post review of audit files. - Internal audit function is unevenly developed across institutions (per interview with the SAO). - Dimension score: B (focus on adequacy and effectiveness of internal control with limited gains in implementing full scale quality assurance improvement programs) ### 26.3. Implementation of internal audits and reporting - Internal auditors are organizationally and functionally independent and report directly to the head of the entity. - Legislation requires IAUs to develop risk-based strategic and annual plans, approved by the head of the audited entity. - Plans are developed for each engagement, accompanied by audit programs outlining audit procedures. - Number of IA reports issued: - 2020: 142 - 2019: 180 - 2018: 214 - Central harmonization data on planned audits completed: - 2020: 64.3 percent of planned audits completed (221/142 reported) - Comparative data: 2019: 221/180, 2018: 225/214 - IA reports are submitted to the head of the audited entity. - MoF CHD collects data on rates of management responses annually via Reports on Performed Audits and Internal Audit Activities submitted by individual IAUs by 10 May each year. - Individual audit reports are available to the SAO but are not automatically distributed to the external auditor. - Considering that less than 75 percent of planned internal audits in 2020 were executed, the dimension score is C. ### 26.4. Response to internal audits - For each IA report, the head and staff of the audited entity must prepare an action plan including deadlines and responsible parties. - Registers of recommendations are maintained at the individual IAU level. - Status of recommendations is reported to and monitored by the head of the institution and the head of the IAU. - Self-reported management action on internal audit recommendations is partial and under the 75 percent threshold that would qualify as “most” under the PEFA framework. - Management response to internal audit recommendations (central-level entities): - 2017: 34.2 percent - 2018: 52 percent - 2019: 66.1 percent - 2020: 60.1 percent - Considering that management response came within 12 months for under 75 percent of issued recommendations, the dimension score is C. ### PILLAR SIX: ACCOUNTING AND REPORTING — Overall observations - Timely bank account reconciliation is facilitated by comprehensive coverage of the STA in both MKD and foreign currency. - Suspense and advance accounts are cleared on time. - TrIS is used to produce periodic fiscal reports providing a consolidated picture of revenues and expenditures and progress against the approved budget; reports are cash-based (cover payments but not commitments or payables). - Information on all revenue and expenditure transactions executed through the TrIS is posted in the Treasury Main Ledger in line with the prevailing chart of accounts; the accuracy of this information is considered sound. - In-year budget execution reporting is largely aggregated on economic and administrative classifications; narrative analysis lacks updates of projected revenues and expenditures for the remainder of the budget year. - Since 2018, MoF publishes quarterly reports on registered liabilities (see PI-22) and transparency of in-year budget execution has been enhanced through the Open Finance Portal. - Year-end reporting requirements: - Each BU must present a set of core financial statements including the statement of revenue and expenditure and the balance sheet. - Separate statements of revenue and expenditure are produced for the four sources of funding. - Final Account is produced by the MoF as a consolidated report on budget execution of BCG revenues and expenditures for the fiscal year with a narrative section. - Final Account is presented for external audit within 3 months from year end and normally reaches the Parliament with the auditor’s opinion within 7 months. - Legislation does not require a consolidated annual balance sheet, limiting scrutiny of the full picture of government assets and liabilities. - National legal framework for accounting and financial reporting has remained stable since the last PEFA assessment, ensuring consistency and comparability over time. - Stability has precluded improvements to financial disclosures: accounting standards used are not disclosed in the Final Account and there are no notes on accounting policies used. ### PI-27. Financial data integrity (M2) — summary and scores - PI-27 overall score: B+ - Dimension scores: - 27.1. Bank account reconciliation: A - 27.2. Suspense accounts: A - 27.3. Advance accounts: B - 27.4. Financial data integrity processes: B - All government accounts (domestic and foreign currency) are held with the NBRNM and form part of a comprehensive STA at the MoF and the HIF encompassing over 90 percent of CG revenue and expenditure. - Other EBUs manage accounts separately but are not considered material for scoring (shares: 9.5 percent and 6 percent respectively). ### 27.1. Bank account reconciliation — details - MoF Treasury Department reconciles records on inflows and outflows in domestic currency from the Treasury Main Ledger in the TrIS against the NBRNM statements. - NBRNM provides statements for foreign currency accounts, government foreign debt operations and for specific projects as shown in Table 27.1. - Reconciliation practices for HIF STA accounts follow the same timelines (daily basis) and are carried out at detailed level. - Table 27.1. BCG bank account reconciliation (as presented in source) - Category of bank accounts / Covers / Frequency of reconciliation / Aggregate or detailed level / Timeline for reconciliation - All domestic currency STA accounts (by all sources of funds): 6935 active STA accounts / Daily / Detailed level / Daily (real time) - Foreign currency account for government foreign debt operations (inflows and outflows) on STA: 1 / Monthly / Detailed level / Within ten working days after end of the month - Foreign currency accounts (opened in NBRNM) managed by separate budget users for projects in their jurisdiction.: (coverage unspecified) / Daily / Detailed level / Reconciled on a daily basis** - Notes: budget users can hold bank accounts only within the STA - "** through a so called mirror accounts which correspond to its specific counterparts - domestic currency accounts - opened within the STA" (as stated in source) - Since all central government bank accounts (90 percent by materiality) are part of the STA and are reconciled with the NBRNM daily, the score for the dimension is A. *Source: assessment team, based on MoF and SSF publicly available data.* ### 27.2 Suspense accounts ### 27.2 Suspense accounts ### Suspense (transitional) accounts: reconciliation and clearance - Purpose: Transitional accounts are used by the MoF Treasury Department to temporarily hold revenue and some expenditure payments before their allocation to the final account. - Practice: - Transitional accounts are reconciled on a daily basis, aiming for the zero balance at the end of the day. - Any remaining balances are described as immaterial and usually closed the next business day. - If any issues are registered with identification, the funds are nominally held in the transitional accounts until they are matched, classified and transferred to the core budget account. - PEFA fieldguide definition note: - Footnote 88: "Which is the definition that the 2018 PEFA Fieldguide uses to describe “suspense accounts.”" - Table 27.2. Suspense accounts reconciliation and clearance (as reported): - Revenue transitional accounts (associated with each type of revenue) - Frequency of reconciliation: Daily - Timeline for reconciliation: Daily - Timeline for clearance: Daily. If not, on the next business day - Expenditure transitional account - (No additional timeline fields shown in the extracted table) - Assessment outcome: Transitional accounts, operated by the MoF Treasury Department, are reconciled and cleared the day after which merits score A on this dimension. *Source: 1mkdea2022004 - 27.2 Suspense accounts* ### 30.4 is assessed at the time of the assessment. ### 30.4 is assessed at the time of the assessment. ### Overview of public external audit (SAO) - Indicator/Dimension Score - PI-30. External audit (M1) C+ - 30.1. Audit coverage and standards B - 30.2. Submission of audit reports to the legislature C - 30.3. External audit follow-up A - 30.4. Supreme Audit Institution independence A - Mandate and legal framework - Public external audit is the responsibility of the State Audit Office (SAO) operating under the 2010 State Audit Law (amended in 2014, 2015, 2016, 2018, 2020 and 2021). - SAO remit covers all central government bodies, including the SSFs and Regulatory Agencies, all local government units (LGUs) and institutions dependent on them, all enterprises owned by government, and political parties. - The Auditor General is appointed for a term of 9 years by the Parliament. - Organisational capacity and staffing - SAO has 183 approved staff positions but only 105 have been filled. - Almost all staff have a master’s degree in law, economics, IT or other fields. - SAO provides in‑house training and certification on international auditing standards (INTOSAI/ISSAIs); multiple trainings were organized in 2019 with donor assistance. - Systems and tools - SAO has an upgraded Audit Management System; auditors can access the system remotely. - Auditors deploy computer assisted audit techniques (CAATs) and IDEA software. - SAO uses a dedicated application (SAPRI) to monitor status of audit recommendations; the database is only accessible by SAO staff. - Strategic guidance - Development guided by Strategic Development Plan 2018-2022, including implementation of ISSAIs and continuous monitoring of audit effects and recommendation fulfillment. ### 30.1. Audit coverage and standards - Scope and frequency - SAO cannot carry out a full financial and compliance audit of all auditees every year; it aims to cover most in detail over several years using risk-based annual plans. - A consolidated annual report of all SAO activities is sent to Parliament in June each year. - Annual audit of the execution of the core Budget is required; SSFs are audited annually. - A sample of EBUs is audited in line with SAO’s risk-based annual plans. - Limitations in scope - Financial statements of the execution of the Core Budget do not include assets and liabilities; SAO can audit assets and liabilities reported in balance sheets of individual institutions only. - Core Budget excludes financing from borrowing, donations etc.; the level of revenue and expenditure from these other sources not covered by SAO’s audit of the Core Budget stayed below 10 percent of total BCG revenue and expenditure in all three years during the assessed period. - Disclosed standards - Auditing standards disclosed are the ISSAIs. - Audit coverage of main CG entities (table summary) - Table 30.1. Audit coverage of the Budget of the RNM financial reports - Year: 2018 FY 2017 — Coverage of the Final Account of the BCG Revenue and Expenditure: >90 percent — Coverage of the Final Accounts of the SSFs Revenue and Expenditure: 100 percent - Year: 2019 FY 2018 — Coverage of the Final Account of the BCG Revenue and Expenditure: >90 percent — Coverage of the Final Accounts of the SSFs Revenue and Expenditure: 100 percent - Year: 2020 FY 2019 — Coverage of the Final Account of the BCG Revenue and Expenditure: >90 percent — Coverage of the Final Accounts of the SSFs Revenue and Expenditure: 100 percent - Dimension score - Considering reported coverage excludes consolidated information on assets and liabilities, the score for the dimension is B. ### 30.2. Submission of audit reports to the legislature - Legal timing requirement - Article 33 (1) and (2) of the State Audit Law: SAO shall prepare an annual report and submit it to the Parliament for consideration by 30 June in the current year for the previous year at the latest. - Annual audit of the Core Budget is sent to Parliament in June each year, within four months of receipt of out-turn statements from MoF. - Practice - Individual financial audit reports are sent to Parliament and published on SAO website as soon as approved. - In line with the PEFA Handbook, delays are considered only for the annual budget execution report. - Timing data (Final Account submission) - Table 30.2: Timing of audit reports submission to the legislature for Final Account - 2017: Dates of receipt of the Final Account by the SAO: 23 February 2018 — Dates of submission of the Final Account: 28 May 2018 — Months from receipt to submission: 3 months - 2018: Dates of receipt of the Final Account by the SAO: 26 February 2019 — Dates of submission of the Final Account: 31 May 2019 — Months from receipt to submission: 3 months - 2019: Dates of receipt of the Final Account by the SAO: 27 February 2020 — Dates of submission of the Final Account: 18 September 2020 — Months from receipt to submission: 7 months - The FY 2019 submission delay reflects extensions under the Decree with a force of law on application of the Law on Budgets during a state of emergency and scheduling effects from early parliamentary elections; the Final Report of the SAO was submitted to the competent Committee on September 18, 2020. - Dimension score - The dimension is scored C as the submission for FY 2019 is over six months after the end of the fiscal year, notwithstanding that submission was in line with the state of emergency decision. ### 30.3. External audit follow-up - Legal requirement for auditees - Article 32 of Law on State Audit: legal representative of the entity subject to audit shall notify SAO and the body competent for supervision and control of measures taken in relation to findings and recommendations within a period of 90 days as of receipt of the final report. - Implementation status (2017–2019) - 2019 Annual Report: 70 per cent of recommendations where the 90-day deadline had passed were in process of implementation; 16 per cent were not implemented because of changes in circumstances or disagreements by auditees; no response had been received from auditees in respect of 14 per cent of the recommendations. - Table 30.2: Status of implementation of recommendations - Recommendation status — 2017 — 2018 — 2019 - Implemented — 479 — 596 — 352 - Not implemented — 161 — 136 — 73 - Cannot be implemented — 4 — 23 — 4 - Status not determined — 145 — 42 — 69 - Total recommendations — 789 — 799 — 498 - Follow-up mechanisms - Status of audit recommendations is reviewed during regular audits, follow up reviews or dedicated audits. - In 2019 SAO conducted 38 follow up reviews to determine status and degree of implementation of recommendations given in final audit reports of 2018 and 2019 and issued 71 reports. - Monitoring tools - SAO uses SAPRI to monitor status of audit recommendations and ongoing audits; database accessible only by SAO staff. - Dimension score - Based on clear evidence of timely and effective follow-up by the executive, the score for the dimension is A. ### 30.4. Supreme Audit Institution independence - Independence features assessed (summary table) - Table 30.3: Overview of independence requirements met (Element/ Requirements Met (Y/N); Evidence used/Comments) - The SAO operates independently from the executive with respect to procedures for appointment and removal of the head of the SAO — Y — As per the Law on State Audit Article 4(3) and Article 4(4); term nine years without re-election. SAO was headed by the deputy AG in 2017 and 2018. On December 12, 2019, the Parliamentary Committee elected the new AG. - The SAO operates independently with respect to the planning of audit engagements — Y — Annual Audit Program independently prepared and approved by SAO and published on SAO website. - The SAO operates independently with respect to arrangements for publicizing reports — Y — All audit reports are published immediately upon completion and available on SAO website. - The SAO operates independently with respect to the approval and execution of the SAO’s budget — Y — The budget is proposed by SAO and approved by the NA. In 2019, MKD 99,757,000 were proposed, MKD 86,633,000 (86%) were approved and the expenditure was MKD 85,960,000 (99%). - This independence is assured by law — Y — Constitution, Law on State Audit. - The SAO has unrestricted and timely access to all records, documentation and information for all audited entities — Y — As per Article 25(1) of the Law on State Audit, auditors have free access to premises, books, electronic data and can request explanations from representatives. - Dimension score - Based on the requirements met to ensure that the SAO operates independently from the executive, the score for the dimension is A. ### PI-31. Legislative scrutiny of audit reports (summary) - Indicator/Dimension Score - PI-31. Legislative scrutiny of audit reports (M2) C+ - 31.1. Timing of audit report scrutiny A - 31.2. Hearings on audit findings D - 31.3. Recommendations on audit by legislature D - 30.4. Transparency of legislative scrutiny of audit reports A - Cooperation initiatives - 2019 twinning project activities aimed at strengthening cooperation between SAO and Parliament included recommendations for developing quality parliamentary discussions on audit reports, raising MPs’ awareness, internships and study visits. - Memorandum of Understanding signed in May 2021 between SAO and the Parliament to review the audit report and prepare joint action plans. - Parliament Strategic Plan 2021-2023 includes “strengthening of oversight role of parliament and capacity building of the Budget and Finance Committee staff” as an objective. - 31.1. Timing of audit report scrutiny - Legal requirement: Article 52 of the Budget Law requires Government to submit annual budget execution report with audit report for discussion and adoption by June 30. - No legal obligation for Assembly to examine reports other than consolidated Annual Report on SAO operations; 90 audit reports were submitted to Parliament but not further examined according to 2019 SAO Annual Report. - Timing data (scrutiny of Final Account) - Table 31.1: Timing of audit report scrutiny - 2017: Dates of receipt of the Audit Report of the Final Account: 19 June 2018 — Dates audit reports tabled (deliberated) in the plenary: Reviewed in July 2018 — Deliberated from receipt: Under 3 months — Deliberated from end of period: 8 months - 2018: Dates of receipt of the Audit Report of the Final Account: 25 June 2019 — Dates audit reports tabled (deliberated) in the plenary: Reviewed in July 2019 — Deliberated from receipt: Under 3 months — Deliberated from end of period: 7 months - 2019: Dates of receipt of the Audit Report of the Final Account: 13 October 2020* — Dates audit reports tabled (deliberated) in the plenary: Reviewed on 26 January 2021 — Deliberated from receipt: Under 3 months — Deliberated from end of period: 13 months - *see explanation under PI-30 - Dimension score - Considering Parliamentary reviews of the audit reports of the Final Account were completed in under 3 months from receipt, the score for the dimension 31.1 is A. *Source: 1mkdea2022004 - 30.4 is assessed at the time of the assessment.* ### 31.2 Hearings on audit findings ### 31.2 Hearings on audit findings ### Hearings on audit findings (dimension 31.2) - This dimension assesses the extent to which hearings on key findings of the SAI take place. - There is no legal obligation for the Parliament to examine the audit reports on individual BUs. - No in-depth hearings with auditees subject to criticism were conducted by the Parliament in the 2017-2019 period. - Number of audit reports submitted to the Parliament: - 89 in 2017 - 117 in 2018 - 90 in 2019 - Hearings held on SAO’s Annual Report have taken place, but the Annual Report presents SAO’s activities for the year and does not subject any individual audited entities to hearings. - As only the SAO’s Annual Report is subject to hearing, while there are no hearings by the Parliament related to individual audit reports of budget users, the score for the dimension is D. ### Recommendations on audit by legislature (dimension 31.3) - This dimension assesses the extent to which the legislature issues recommendations and follows up on their implementation. - The annual report findings are discussed during its review. - Wherever weaknesses have been reported, the Parliament provides comments and further guidance to the SAO for follow up; however: - The Parliament does not issue a separate set of recommendations. - The Parliament does not follow up on the SAO recommendations. - Considering that the requirements have not been met in terms of providing recommendations and appropriate follow-up for all three years in the sample, the score for the dimension is D. ### Transparency of legislative scrutiny of audit reports (dimension 31.4) - This dimension assesses the transparency of the scrutiny function in terms of public access. - All Committee hearings on the SAO’s Annual Report have been broadcast live on TV. - The proceedings are documented, and minutes of the meetings are available from the web page of the Parliament. - Given that all hearings are publicly available, the score for the dimension is A. --- ### Overall analysis of PFM systems ### Aggregate fiscal discipline - Objective: align levels of revenue and expenditures without creating significant fiscal deficits and manage spending within the available fiscal space. - Fiscal Strategy: - Prepared based upon macroeconomic and fiscal projections. - Forecasts of interest rates are not explicitly revealed. - There is no independent review of the forecasts (the independent review of the forecasts is addressed in the new draft organic budget law). - Provides forecasts and targets for the budget and two outer years as a basis for the medium term and annual budget, however deviations from original forecasts provided in the previous year’s fiscal strategy are not explained and published, nor are explanations provided of deviations from the forecasts. - Proposed introduction of a fiscal rule, fiscal council and supporting changes to fiscal reporting in the draft Organic Budget Law should contribute to enhanced fiscal discipline. - Expenditure management and budget execution: - Budget execution is performing well and contributes to overall fiscal discipline. - Deviations between executed budget and approved budget on the expenditure side are low to moderate reaching up to eight percent in the assessed period. - Hard controls at the payments stage allow spending by budget users only within approved budget allocations. - No established mechanism prevents budget users from entering into contractual commitments which may exceed annual and medium-term allocations and estimates. - Commitment control is decentralized to individual budget users and relies on their systems of financial management and control, which are underdeveloped and susceptible to indiscipline and incurring commitments which exceed budget allocations. - Fiscal information and budget documentation: - Fiscal information is transparent and publicly accessible and all relevant budget classifications are in place, although not all classifications are used for in-year and year end reporting. - The budget documentation is not comprehensive enough and does not include items such as current year’s budget, aggregated budget data for revenue and expenditures, macroeconomic assumptions, comprehensive information on financial assets, budget impact of new policy proposals and assessments of fiscal risks and tax expenditures. - A material amount of government operations remain outside of the financial reports. - Revenue management: - Comprehensive and up-to-date information on revenue rights and obligations exists. - Revenue risk management, audits and investigations and level of tax arrears lag behind and register weak performance. - Timeliness of information and transfer related to revenue collections is adequate, while reconciliation of tax assessments could be improved. - Deviation of executed versus budgeted revenue: - 7 percent in 2018 - 7 percent in 2019 - 16 percent in 2020 (as a consequence of the pandemic) - Medium-term perspective and fiscal risk monitoring: - Budget documentation includes expenditure estimates and ceilings for two years following the budget year, but analysis of deviations from such estimates and ceilings in the next budget cycle, and related explanations are not provided. - Fiscal risk monitoring is basic and needs further development. - Absence of a fully functioning system for monitoring and management of fiscal risks may result in additional unplanned demands for budget expenditures. - Public investment management: - No effective system for management of public investments, risking implementation delays, underspending of the capital budget, or poorly budgeted projects with cost overruns. ### Strategic allocation of resources - Sectoral strategies and medium-term plans: - Adopted for most ministries and appropriately costed. - Visible link between those documents and budget allocations enabling implementation of strategic and medium-term priorities. - Budget users are required to prepare three-year strategic plans and reflect strategic priorities in the budget through programs and sub-programs with objectives and expected results. - Budget circular requires strategic plan with quantified programs, activities, goals, and priorities as integral part of the budget request. - Performance management: - Performance management and measurement of results are basic and hinder budgeting based on performance. - Program budgeting has not been formally introduced, although some elements are in place. - No established system for measuring achieved results against the plan; quality of information provided is uncertain. - Semi-annual and annual reports are prepared on implementation of programs, but not presented to allow comparison of results achieved against performance indicators set in plans. - Budget credibility and risks: - A fairly credible annual budget enables reliable planning of strategic allocations. - Accumulation of tax arrears can pose a risk and should be monitored. - Relatively high deviation in composition of expenditures can pose a risk of reallocating funds from strategic to ad-hoc priorities. - Reporting and oversight: - Accurate reporting of revenue and expenditures through in-year and annual reports provides reliable information on execution of strategically important activities, although not on programs or performance. - No consolidated balance sheet of the government. - Procurement management is scored at the higher end and payroll controls are adequate. - Weaknesses affecting strategic allocation: - Weak public investment management system. - Underdeveloped medium-term budgetary framework. - Lack of effective system for management of fiscal risks. ### Efficient service delivery - Budget credibility and execution: - A fairly credible budget ensures implementation of service delivery expenditures. - Variances in composition of expenditures can pose risks of reallocation of service delivery allocations to other expenditure categories. - Timely and accurate information on revenue collections is available, but accumulation of tax arrears carries the risk of insufficient revenue to execute service delivery programs. - Transparency and controls: - Transparent fiscal information and reliable budget execution reports facilitate monitoring of financial aspects of service delivery programs. - Predictability of available in-year resources and cash and liquidity management enable timely execution by service delivery units. - Sound budget execution system and controls ensure orderly execution of allocations intended for service delivery. - Reliable reporting on arrears and relatively low levels of stock of arrears ensure allocated funds for service delivery will not be subject to reallocations on an ad-hoc basis to settle overdue payments from previous years. - Performance measurement: - Weak program budgeting and performance management prevent meaningful analysis of efficiency of service delivery. - No established system for measuring achieved results against the plan. - Performance information and analysis would enable corrective actions for future budget cycles. - Asset and investment management: - Lack of effective systems for managing public investments and public assets can be detrimental to ensuring adequate infrastructure for service delivery sectors (health, education, transport, electricity, water supply). - Oversight contributions: - A well performing external audit by the SAO and parliamentary oversight provide additional scrutiny over expenditures related to service delivery, but not all entities are audited each year. - Gradually developing internal audit function can contribute to improving systems and governance in service delivery units. - Transparent, equitable and rule-based transfers from central government to lower levels contribute to efficient service delivery at the sub-national level. ### Effectiveness of the internal control framework - Overall picture: - Mixed picture with some improvements in centralized core PFM processes; less success translating decentralized managerial accountability into practice across public sector institutions. - The 2021 EC Progress Report places North Macedonia as “moderately prepared” in the area of financial control with limited progress year-on-year in improving internal controls. - Control environment: - Civil Servants’ Code of Ethics codes civil service integrity. - MoF’s Central Harmonization Department (CHD) is main point of reference for training in financial management and control. - Human resource policies and practices are being reformed within public administration reforms. - Risk management: - Best practice methodology for risk management is in place; many CG organizations have risk registers. - Audit findings suggest a number of risks have materialized into weaknesses (examples: HRMIS, asset recording and management). - Areas assessed with high scores: Debt Management Strategy (A in 13.3), Macrofiscal sensitivity analysis (A in 14.3), Cash Flow Forecasting and Monitoring (A in 21.2). - Areas needing improvement: Economic Analysis of Investment Proposals (C in 11.1), Revenue Risk Management (C in 19.2), central oversight of PCs and LSGs (both C). - Control activities: - Executed as regulated for authorization and approval procedures; PI-25 scored in higher range. - Segregation of duties operationalized in budget execution system for BCG entities and SFFs (B in 25.1). - Key controls executed according to regulations: access to resources and records (Financial data integrity processes, B in PI-27.4), verifications (Effectiveness of controls over data used to verify payroll payments, B in PI-23.3), and reconciliations (bank account reconciliation practices, A in PI-27.1). - Information and communication: - Access to fiscal information rated A in PI-9 for MoF managed processes. - Substance of budget documentation rated D in PI-5. - Accuracy of in-year budget reports rated B in PI-28.3. - Timing of in-year budget reports B in PI-28.2. - Timeliness of submission of the Final Account for external audit A in PI-29.2. - Non-financial reporting (outputs and outcomes) rated C in 8.2. - Monitoring and follow-up: - Monitoring results mixed: public corporations monitoring D in PI-10.1, resources received by service delivery units C in PI-8.3, monitoring of SNGs C in PI-10.2, asset monitoring C in PI-12, investment monitoring C in PI-11.4. - Monitoring of expenditure arrears B in PI-22.2 and procurement monitoring A in 24.1. - Response to internal audit recommendations C in PI-26.4. ### Performance changes since the 2015 assessment (section 3.3) - Assessment approach: - 2015 assessment conducted in line with 2011 PEFA Framework while the current assessment uses the 2016 PEFA Framework. - Analysis of performance changes done by assessing evidence collected for the 2020 assessments against the requirements of the 2011 PEFA Framework. - Aggregate indicator movements (out of 28 performance indicators reassessed under the 2011 Framework): - 11 indicators maintained the same rating - 11 indicators registered improved scores (most due to improved performance) - 6 indicators showed deteriorated scores (two on account of reinterpretation of the evidence against the scoring criteria) - Of the 11 indicators that retained the same rating as in 2015: - three scored A - two scored B/B+ - four scored C/C+ - two indicators scored D/D+ - Main improvements between PEFA assessments in 2015 and 2020: - Monitoring of expenditure arrears: ESPEO system allows monthly reporting of the stock and structure of arrears; stock of reported BCG arrears, excluding arrears to other public sector institutions, is low but some institutions are still not reporting through the system. - Tax administration: transparency and access of tax liabilities improved; effectiveness of penalties improved through legislative changes; management of tax arrears remained an issue. - Public procurement: 2019 PPL is harmonized with respective EU directives and the current system meets all six listed requirements under 2011 PEFA methodology; the new public procurement platform (ESPP) includes procurement plans of contracting authorities. - Compliance with rules on processing and recording transactions: Low reported level of BCG arrears reinforces fairly high compliance; within BUs limited progress in strengthening internal controls and managerial accountability. - In-year budget reporting: Transparency progressively increasing; Open Finance Portal provides real time insight into treasury executed transactions. - External audit: CG entities representing at least 75 percent of total expenditures are audited annually, covering at least revenue and expenditure; audits generally adhere to auditing standards. - Legislative scrutiny of the budget proposal: Parliament’s review now covers fiscal policies, medium term fiscal framework and medium-term priorities, as well as details of expenditure and revenue. - Areas with nominal or actual deterioration: - Payroll control scores improved nominally only as underlying practices remained largely unchanged though SAO progressively audits more entities. - Deterioration in variance in expenditure composition and comprehensiveness of information included in budget documentation (on account of higher portion of directly managed EU funds). - Nominal deterioration on budget classifications and guidance for preparing budget submissions. - Nominal deterioration on debt management indicator due to reassessment of evidence (underlying performance stable or improved in some aspects). - Timeliness on annual financial statements affected by COVID-related disruptions; accounting standards dimension scored lower due to reinterpretation of evidence. - Overall assessment: - PFM performance registered overall improvement compared to 2015. - Reforms resulted in a mix of modest improvements to upstream and downstream PFM practices. - Despite positive trends, room for further improvement exists to ensure integrity of fiscal aggregates. - Without a consolidated overview on fiscal risks it is less likely their impact on aggregate discipline can be anticipated and managed. - Budget documents do not explain changes between vintages of fiscal forecasts, leaving a large information gap on the effectiveness of fiscal policies. - Expanding the scope of parliamentary scrutiny over medium-term priorities and more effective oversight of audit reports (hearings and additional recommendations, as needed) would strengthen parliamentary ability to hold the executive to account. - The basis for strategic allocation of resources remains largely unchanged: planning focuses on 3-year ministry work plans, not sector strategies. - Performance changes are conducive to improved efficiency in service delivery but evidence of improvements is scarce; advances include orderly cash releases and improved procurement transparency and competitiveness, and an increased number and coverage of performance audits by the SAO. *Source: 1mkdea2022004 - 31.2 Hearings on audit findings* ### Annex 1: 2021 Performance indicator summary ### Annex 1: 2021 Performance indicator summary ### Budget Reliability - PI-1 Aggregate expenditure outturn — B - Since the variations in two of the three years covered by the assessment are between 90 and 110 percent. - PI-2 Expenditure composition outturn — D+ (Scoring method M1 (WL)) - (i) Expenditure composition outturn by function — B - Since the variations in expenditure composition were less than 10 percent in two of the past three years. 2020 outturns deviated strongly in response to the pandemic. - (ii) Expenditure composition outturn by economic type — D - As the variations in expenditure composition by economic classification in two of the past three years exceeded 15 percent. - (iii) Expenditure from contingency reserves — A - Since the level of actual expenditure charged to a contingency was less than 5 percent in the past three years. - PI-3 Revenue outturn — C (Scoring method M2 (AV)) - (i) Aggregate revenue outturn — C - Since the actual revenue deviation in two out of the three past financial years was under 8 percent of total revenue. - (ii) Revenue composition outturn — C - Since the variance in revenue composition in two of the past three years was lower than 15 percent. ### Transparency of Public Finances - PI-4 Budget Classification — B - The budget is classified by administrative, economic, program, and the functional classification is derived from the program and organizational classifications by bridge table. Budget formulation is based only on the “Group” level of the GFS standard. - PI-5 Budget Documentation — D - Budget documentation fulfils two of four basic elements and three of the eight additional elements. - PI-6 Central government operations outside financial reports — D+ (Scoring method M2 (AV)) - (i) Expenditure outside financial reports — C - Extra-budgetary expenditure not included in ex-ante and ex post financial reports amounted to less than 10 percent of budgetary central government expenditure in 2020. - (ii) Revenue outside financial reports — D - Extra-budgetary revenue not included in ex-ante and ex-post financial reports amounted to more than 10 percent of budgetary central government revenue in 2020. - (iii) Financial reports of extra-budgetary units — C - The majority of extrabudgetary units submit financial reports within 9 months of the end of the fiscal year. - PI-7 Transfers to SNGs — A (Scoring method M2 (AV)) - (i) System for allocating Transfers — A - The allocation of over 90 percent on average of central government grants to LGUs is based on transparent and rules based systems. - (ii) Timeliness of information on transfers — A - Local governments receive guidance on prospective allocations and other factors to be taken into account in preparing their budgets by 30 September each year. - PI-8 Performance information for service delivery — D+ (Scoring method M2 (AV)) - (i) Performance plans for service delivery — C - Information is produced annually on activities to be performed and is published for the majority of ministries. - (ii) Performance achieved for service delivery — C - Information is not presented in a format that would allow for comparing results achieved against the performance indicators of planned programs and allocated funding. - (iii) Resources received by service delivery units — C - A survey carried out in one of the last three years provides estimates of the resources received by service delivery units for at least one large ministry. - (iv) Performance evaluation for service delivery — D - The number, institutional coverage and amount of expenditure covered by performance audits is less than required for a B score, the rating for this dimension is therefore C. - PI-9 Public access to information — A - All elements assessed are published within the required timeframe. ### Management of assets and liabilities - PI-10 Fiscal risk reporting — C (Scoring method M2 (AV)) - (i) Monitoring of public corporations — D - Most public corporations submit audited financial reports within 9 months of the end of the fiscal year which qualifies for score C. Excluding the institutional units assessed under dimension 6.3, the majority of the remaining PCs report within 9 months. - (ii) Monitoring of sub-national government (SNG) — C - All subnational governments submit unaudited financial reports annually within 9 months of the close of the fiscal year, published on the individual municipality webpages. - (iii) Contingent liabilities and other fiscal risks — B - Two of three significant contingent liabilities are reported, but there is no consolidated report including all significant contingent liabilities. - PI-11 Public investment management — D+ (Scoring method M2 (AV)) - (i) Economic analysis of investment proposals — C - There are no national guidelines, and appraisals based on economic analysis are conducted for some major projects (funded from external sources). - (ii) Investment project selection — D - Major projects are prioritized by a central entity but not on the basis of measurable criteria for selection that are rigorous and focus on economic efficiency and productivity. - (iii) Investment project costing — C - Capital costs of major investment projects are included in each year of the medium-term budget, but recurrent costs of the project are not included in the budget documents. - (iv) Investment project monitoring — C - The total costs and physical progress of major investment projects are monitored by the implementing government unit, but there are no standard procedures for project implementation and published annual reports address financial implementation only. - PI-12 Public asset management — D+ (Scoring method M2 (AV)) - (i) Financial asset monitoring — C - While records of the major categories of financial assets are maintained, information on their performance is too fragmented to be considered useful for the analysis. - (ii) Nonfinancial asset monitoring — D - There are issues reported with timeliness of information in cadaster, the only comprehensive centralized registry of immovable property, while other comprehensive asset registries are yet to be established. - (iii) Transparency of asset disposal — D - Required information on asset disposal is highly decentralized and the information in the budget execution report limited to aggregate values. - PI-13 Debt management — A (Scoring method M2 (AV)) - (i) Recording and reporting of debt and guarantees — B - Even though the central records are updated regularly and comprehensive statistical and management reports are publicly available, there is only formal annual reconciliation with creditors. - (ii) Approval of debt and guarantees — A - The MoF is, de facto, the single responsible debt management entity which undertakes borrowing operations (provides consent for those operations) in line with documented rules and procedures and within the Government- and Parliament-approved limits. - (iii) Debt management strategy — A - A current, comprehensive three-year DMS is in place and its execution against the debt management objectives publicly reported, including on target ranges for various indicators. ### Policy-based fiscal strategy and budgeting - PI-14 Macroeconomic and fiscal forecasting — C+ (Scoring method M2 (AV)) - (i) Macroeconomic forecasts — D - The forecast of macroeconomic indicators is included in the fiscal strategy covering the budget year and two following years, but is not reviewed by any other independent entity. - (ii) Fiscal forecasts — C - The MoF prepares the macroeconomic forecasts, but the differences from the projects provided in the previous year’s budget are not explained and published as part of the annual budget process. - (iii) Macro-fiscal sensitivity analysis — B - Fiscal forecast scenarios based on unexpected changes in macroeconomic conditions or other external risks are being published starting from the Fiscal Strategy 2019-2021. - PI-15 Fiscal strategy — C (Scoring method M2 (AV)) - (i) Fiscal impact of policy proposals — D - Brief explanations of the proposed changes in revenues and expenditures exist, but they are not covering the next two fiscal years, and are not quantified. - (ii) Fiscal strategy adoption — A - The fiscal strategy that includes quantitative fiscal goals and targets for the budget year and the following two years is duly adopted. - (iii) Reporting on fiscal outcomes — D - There is no published or internal report that describes the progress made against the fiscal strategy or an explanation of the deviations from the objectives and targets set. - PI-16 Medium term perspective in expenditure budgeting — C (Scoring method M2 (AV)) - (i) Medium-term expenditure estimates — B - The annual budget presents estimates of expenditure for the budget year and the two following fiscal years allocated by administrative and economic classification. - (ii) Medium-term expenditure ceilings — D - The aggregate expenditure ceilings for the budget year and the two following fiscal years were not approved by Government before the first budget circular was issued for the 2021-23 budget. - (iii) Alignment of strategic plans and medium-term budgets — B - Medium-term strategic plans are prepared for the majority of ministries, and include cost information. The majority of expenditure policy proposals in the approved medium-term budget estimates align with the strategic plans. - (iv) Consistency of budgets with previous year estimates — D - The budget documents do not provide any explanation of changes to expenditure estimates between the second year of the last medium-term budget and the first year of the current medium-term budget at the aggregate level. - PI-17 Budget preparation process — C+ (Scoring method M2 (AV)) - (i) Budget calendar — A - A clear annual budget calendar exists, is generally adhered to, and allows all budgetary units at least six weeks from receipt of the budget circular to meaningfully complete their detailed estimates on time. - (ii) Guidance on budget preparation — D - The budget circular does not provide expenditure ceilings for total funds. - (iii) Budget submission to the legislature — C - The executive has submitted the annual budget proposal to the legislature at least one month before the start of the fiscal year in two of the last three years. - PI-18 Legislative scrutiny of budgets — B+ (Scoring method M1 (WL)) - (i) Scope of budget scrutiny — A - The legislature’s review covers fiscal policies, medium-term fiscal forecasts, and medium-term priorities as well as details of expenditure and revenue. - (ii) Legislative procedures for budget scrutiny — B - The legislature’s procedures to review budget proposals are approved by the legislature in advance of budget hearings and are adhered to. Procedures include internal organizational arrangements such as legislature committees, technical support, and negotiation procedures. - (iii) Timing of budget approval — A - The legislature has approved the annual budget before the start of the year in each of the last three fiscal years. - (iv) Rules for budget adjustments by the executive — A - Clear rules exist for in-year budget adjustments by the executive. The rules set strict limits on the extent and nature of amendments and are adhered to in all instances. ### Predictability and control in budget execution - PI-19 Revenue administration — C (Scoring method M2 (AV)) - (i) Rights and obligations for revenue measures — A - Revenue collecting agencies provide comprehensive and up-to-date information of revenue rights and obligations, including redress process. - (ii) Revenue risk management — C - Partly structured and systematic approaches are used for assessing revenue compliance risks. - (iii) Revenue audit and investigation — D - Neither of the revenue agencies has a compliance improvement plan (PRO has plans only for some sectors). the score for the present dimension is D. - (iv) Revenue arrears monitoring — D* - Based on the analysis and supporting evidence and given that the PRO is not able to determine the age of tax arrears and accrued interest (except for VAT), the score for the present dimension is D* due to lack of reliable data. - PI-20 Accounting for revenue — C+ (Scoring method M1 (WL)) - (i) Information on revenue collections — A - MoF Treasury Department has daily access to revenue data broken down by type which is reported on a monthly basis. - (ii) Transfer of revenue collections — A - All revenue payments are collected in the STA controlled by the MoF Treasury Department. - (iii) Revenue accounts reconciliation — C - Revenue agencies are not reconciling data related to assessments. - PI-21 Predictability of in-year resource allocation — A (Scoring method M2 (AV)) - (i) Consolidation of cash balances — A - All BCG bank and cash balances are calculated and consolidated daily. - (ii) Cash forecasting and monitoring — A - On basis of the frequency of updates to the annual cash forecast and the scope of information used to update it. - (iii) Information on commitment ceilings — B - Reliable information on commitment ceilings issued to spending units that are updated monthly on a rolling basis for the following quarter. - (iv) Significance of in-year budget adjustments — A - Despite of the significant volume of in-year adjustments caused by the pandemic, these took place twice in 2020 and have remained transparent and systematic. - PI-22 Expenditure arrears — B+ (Scoring method M1 (WL)) - (i) Stock of expenditure arrears — A - Ratio of reported arrears at the end of the last three fiscal years against the total expenditure of under 1 percent. - (ii) Expenditure arrears monitoring — B - Information on stock and composition of public sector arrears (including BCG entities) is prepared and published quarterly within 2 weeks from the end of the quarter but does not include age. SAO information suggests data may not be complete. - PI-23 Payroll controls — B+ (Scoring method M1 (WL)) - (i) Integration of payroll and personnel records — B - There is an indirect link between personnel and payroll databases and staff hiring is controlled by approved staff positions and available funding. - (ii) Management of payroll changes — A - Changes between personnel records and payroll calculations are updated monthly and in time for the next month’s payment with low presumed retroactive adjustments. - (iii) Internal control of payroll — B - Systemic issues highlighted in SAO findings indicate a number of internal control weaknesses none are related to integrity of data which is considered high. - (iv) Payroll audit — B - SAO progressively audits more central government institutions but without the complete annual coverage of all CG salary expenditures. - PI-24 Procurement — A (Scoring method M2 (AV)) - (i) Procurement monitoring — A - The ESPP maintains data for contracts including data on what has been procured, value of procurement and who has been awarded contracts. The data are accurate and complete for all procurement methods for goods, services and works. - (ii) Procurement methods — A - Based on the dominant share of open procurement methods in use, the score on this dimension is A. - (iii) Public access to procurement information — A - Every key procurement information element is complete and reliable for government units representing all procurement operations and is made available to the public in a timely manner. - (iv) Procurement complaints management — A - The procurement complaint system meets every criterion. - PI-25 Internal controls on non-salary expenditure — B+ (Scoring method M2 (AV)) - (i) Segregation of duties — B - Appropriate segregation of duties with clear responsibilities in payment processing, but a number of institutions have yet to operationalize segregation of duties throughout the other steps in the expenditure process. - (ii) Effectiveness of expenditure commitment controls — B - Comprehensiveness of annual commitment controls against projections of available cash and the annual appropriation, but gaps exist in controlling alignment of multi-annual commitments with medium-term ceilings. - (iii) Compliance with payment rules and procedures — A - Budget inspection and external audit findings did not document non-compliance with regular payment procedures or unauthorized use of exceptions. - PI-26 Internal audit — C+ (Scoring method M1 (WL)) - (i) Coverage of IA — A - Reported internal audit coverage of CG revenue and expenditure of just above 90 percent of revenues and expenditures. - (ii) Nature of audits and standards applied — B - Focus on adequacy and effectiveness of internal control with limited gains in implementing full scale quality assurance improvement programs in line with the applicable standards. - (iii) Implementation of IAs and reporting — C - Less than 75 percent of planned internal audits in 2020 were executed. - (iv) Response to IAs — C - Management response came within 12 months of the report being produced for under 75 percent of issued recommendations. ### Accounting and Reporting - PI-27 Financial data integrity — B+ (Scoring method M2 (AV)) - (i) Bank account reconciliation — A - All budgetary central government bank accounts (90 percent by materiality) are part of the STA and are reconciled with the NBRNM daily. - (ii) Suspense accounts — A - Transitional accounts - operated by the MoF Treasury Department - are reconciled and cleared the day after. - (iii) Advance accounts — B - Available information suggests quarterly reconciliation on advance accounts. - (iv) Financial data integrity processes — B - Integrity of financial data is assured through restricted and recorded access to the TrIS which results in audit trail but there is no dedicated unit or team in charge of verifying financial data integrity. - PI-28 In-year budget reports — C+ (Scoring method M1 (WL)) - (i) Coverage and comparability of reports — C - Coverage and classification of data in the reports allows for direct comparison on administrative and highly aggregated level of economic classification with the budget, without details on expenditures from transfers to second-line budget users. - (ii) Timing of in-year budget reports — B - In-year budget execution reports are prepared and published monthly, within four weeks from the end of period. - (iii) Accuracy of in-year budget reports — B - No concerns with data accuracy and monthly narrative update on budget execution, but reported expenditure is captured at payment stage only. - PI-29 Annual financial reports — D+ (Scoring method M1 (WL)) - (i) Completeness of annual financial reports — C - Information in the government’s Final Account is limited to revenue, expenditure and cash balance for the year. - (ii) Submission of reports for external audit — A - Based on the date of the last submitted annual financial report for audit (FY 2019). - (iii) Accounting standards — D - National framework ensures consistent reporting over time, the accounting standards are not formally disclosed. ### External scrutiny and audit - PI-30 External audit — C+ (Scoring method M1 (WL)) - (i) Audit coverage and standards — B - Reported coverage excludes consolidated information on assets and liabilities. - (ii) Submission of audit reports to the legislature — C - Submission of the report for FY 2019 was more than seven months, notwithstanding that the submission was in line with the state of emergency decision. - (iii) External audit follow-up — A - Clear evidence of timely and effective follow-up by the executive. - (iv) Supreme Audit Institution (SAI) independence — A - Requirements met to ensure that the SAI operates independently from the executive. - PI-31 Legislative scrutiny of audit reports — C+ (Scoring method M2 (AV)) - (i) Timing of audit report scrutiny — A - Parliamentary review of the audit report of the Final Account was completed in under 3 months from its receipt. - (ii) Hearings on audit findings — D - Individual audit reports are not reviewed by the Parliament. - (iii) Recommendations on audit by the legislature — D - Requirements have not been met for all three years in the sample. - (iv) Transparency of legislative scrutiny of audit reports — A - All hearings are publicly available. *Annex 1: 2021 Performance indicator summary — North Macedonia* ### Annex 2: Summary of observations on the internal control ### Annex 2: Summary of observations on the internal control framework ### 1. Control environment - 1.1 The personal and professional integrity and ethical values of management and staff - Based on self-reported information for 2020, over 90 percent of public sector organizations reported their staff is familiar with the Civil Servants’ Code of Ethics. - A small number of organizations have developed their institution-specific codes of ethics. - Institutional structures to facilitate prevention and processing of conflict-of-interest situations (ethics committees and/or ethics commissioners) are only starting to be established. (CHD PIFC Report 2020) - 1.2 Commitment to competence - For 2020, MoF CHD concluded that additional efforts are needed on preparation of professional development plans and development of specific skills. - 1.3 The “tone at the top” - Self-reported information for 2020 suggests majority of public sector organizations hold regular senior management meetings used to discuss realization of objectives and results, budget execution, and key risks. (CHD PIFC Report 2020) - 1.4 Organizational structure - Internal organizational structures are prescribed in the regulations, statutes or rulebooks on internal organization. - Central ministries are required to coordinate work with subordinate entities, second-line budget users and public enterprises within their line of competence. - A handful of central level entities (4 percent) reported they are familiar with the status of internal controls in subordinated entities. (CHD PIFC Report 2020) - 1.5 Human resource policies and practices - HRM and PFM are concurrent reform streams under the umbrella of Public Administration Reform. ### 2. Risk assessment - 2.1 Risk identification - Requirements are in place for public sector organizations to identify and document risks in risk management strategies, risk registers or planning documents; focus is on compliance risks. - For 2020, self-reported information identified around 70 percent of central level respondents who fulfilled this requirement. - 2.2 Risk assessment (significance and likelihood) - Risks are assessed on the basis of impact and likelihood in line with the 2015 MoF CHD Guidelines. - 2.3 Risk evaluation - Requirements in place to monitor the in-year status and evolution of risks; risk (re)evaluation should be documented in individual risk registries. - 2.4 Risk appetite assessment - Risk appetite assessment is decided upon in individual risk management strategies. - 2.5 Responses to risk (transfer, tolerance, treatment or termination) - In principle, all categories of risk responses are available. - Where risk treatment is selected, controls foreseen to mitigate them are to be documented in risk registers. ### 3. Control activities - 3.1 Authorization and approval procedure - Outside of the core MoF processes, about 55 percent of central level institutions reported that they have instituted rules and procedures for undertaking commitments and general payment authorizations to the financial affairs departments (CHD PIFC Report 2020), implying authorization and approval on institutional level remain fairly centralized. - 3.2 Segregation of duties (authorizing, processing, recording, reviewing) - In PI-25.1, segregation of duties is rated B. - Latest self-reported information suggests 80 percent of central level institutions (BCG and SSFs) have secured the implementation of the segregation of duties requirements. - The regulatory framework together with TrIS procedures ensure segregation of duties in key stages of the payments process. - 3.3 Controls over access to resources and records - Financial data integrity processes in PI-27.4 scored B. - 3.4 Verifications - Effectiveness of controls over data used to verify payroll payments in PI-23.3 scored B. - 3.5 Reconciliations - Among MoF-operated processes, reconciliation of revenue accounts scored C in PI-20.3. - Bank account reconciliation practices in PI-27.1 are rated A. - 3.6 Reviews of operating performance - Public sector organizations are expected to review operating performance, operations, processes and activities as part of ongoing monitoring. - Annual plans for financial management and controls and plans for addressing weaknesses and irregularities based on self-assessment of internal control are being developed. - Government does not carry out centralized, independent performance reviews (such as e.g., spending reviews). - 3.7 Reviews of operations, processes and activities - (No additional specific observations beyond 3.6 in the source text.) - 3.8 Supervision (assigning, reviewing and approving, guidance and training) - No information on the specific topic was collected in the course of the PEFA assessment. ### 4. Information and communication - Management information systems for financial and non-financial information across central government organizations remain underdeveloped (MoF CHD Annual Report for 2020). - Only 71 percent of central government level organizations maintain centralized records of all signed contracts and contractual commitments supported by an information system. ### 5. Monitoring - 5.1 Ongoing monitoring - Line management is charged with delivering results and ensuring compliance in line with the managerial accountability concept. - Internal audit is an integral part of the monitoring component and is operational for virtually all central level revenue and expenditure (score A on PI-26.1). - Implementation of internal audits and reporting is rated C in PI-26.3. - 5.2 Evaluations - Capacity for independent evaluation of government performance is nascent. - SAO's performance audits (C on PI-8.4) cover an increasing number of government entities. - Internal auditors’ work on government efficiency and effectiveness is limited. - 5.3 Management responses - Management generally responds to internal and external audit findings, but timeliness and extent of response can improve. - Internal audit with 60 percent response rate within 12 months (scored C on PI-26.4). - External audit with around 70 percent of recommendations being implemented (scored A on PI-30.3). - The process of monitoring progress in implementation of external audit recommendations is supported with a dedicated information system. *Annex draws mainly on the Annual Report on PIFC for 2020 produced on the basis of self-reported information from public sector organizations. Observations are further cross referenced to Section 3 scores on core PFM functions.* ### Annex 3C: Sources of information used to extract evidence for scoring each ### Annex 3C: Sources of information used to extract evidence for scoring each indicator ### Budget reliability - PI-1. Aggregate expenditure outturn - Annual Budget Laws 2018, 2019, 2020 - Annual Final Account 2018, 2019, 2020 - 1.1. Aggregate expenditure outturn - PI-2. Expenditure composition outturn - Annual Budget Laws 2018, 2019, 2020 - Annual Final Account 2018, 2019, 2020 - Law on Budgets - consolidated text (Official Gazette 64/05, 4/08, 103/08, 156/09, 95/10, 180/11, 171/12, 192/15, 167/16), Article 11 - 2.1. Expenditure composition outturn by function - 2.2. Expenditure composition outturn by economic type - 2.3. Expenditure from contingency reserves - PI-3. Revenue outturn - Annual Budget Laws 2018, 2019, 2020 - Annual Final Account 2018, 2019, 2020 - 3.1. Aggregate revenue outturn - 3.2. Revenue composition outturn ### Transparency of public finances - PI-4. Budget classification - Law on Budgets - consolidated text (Official Gazette 64/05, 4/08, 103/08, 156/09, 95/10, 180/11, 171/12, 192/15, 167/16), Article 13 - 2020 Budget of the Republic of North Macedonia - Annual Financial Statement for 2019 - Draft (organic) Budget Law (OBL 21) - Rulebook on income classification; Rulebook on amending the Rulebook on income classification; Rulebook on classification of expenditures; Rulebook on supplementing the Rulebook on expenditure classification - Bridge table to GFS; COFOG-Functional Classification (Budget); Bridge table to COFOG - Rulebook on the Chart of Accounts and Rulebook on the Content of Individual Accounts in the Chart of Accounts - 4.1 Budget classification - PI-5. Budget documentation - Law on Budgets - consolidated text (Official Gazette 64/05, 4/08, 103/08, 156/09, 95/10, 180/11, 171/12, 192/15, 167/16) - Public Debt Law (Official Gazette 62/2005, 88/2008, 35/2011, 139/2014, 98/2019) - Fiscal Strategy 2021-2023 (July 2020) - Revised Fiscal Strategy 2021-2023 (December 2020) - Public Debt Management Strategy 2021-2023 (December 2020) - 2021 Budget of the Republic of North Macedonia - Annual Financial Statement for 2019 - 5.1 Budget documentation - PI-6. Central government operations outside financial reports - Law on Public Enterprises (Official Gazette 38/96, 6/2002, 40/2003, 49/2006, 22/2007, 83/2009, 97/10, 6/12, 119/13, 41/14, 138/14, 25/15, 61/15 and 39/16) - Executed revenues and expenditures 2020 - 6.1 Expenditure outside financial reports - 6.2 Revenue outside financial reports - 6.3 Financial reports of extra-budgetary units - PI-7. Transfers to subnational governments - Law on Local Self Government (Official Gazette 5/2002) - Law on Financing of Local Self-Government Units (Official Gazette 61/2004, 96/2004, 67/2007, 156/2009, 47/2011, 192/2015, 209/2018, 244/2019, 53/2021 and 77/2021) - Law on Budgets - Article 19 - 7.1 System for allocating transfers - 7.2 Timeliness of information on transfers - PI-8. Performance information for service delivery - Budget circular 2019, 2020, and 2021 - Strategic priorities and plans of the Government and ministries; Manual for Strategic Planning, Jan 2014 - Budget Execution Law for 2021 (Dec 2020) - State Audit Law (Official Gazette 66/10, 145/10, 12/14, 43/14, 154/15, 192/15, 27/16, 83/18 and 122/21) - 2020 Annual Report on performed audits and operation of the State Audit Office - 2019 Annual Report on the Functioning of the Public Internal Financial Control System - Annual plans and reports of PESR, HIF and PIDF - 8.1 Performance plans for service delivery - 8.2 Performance achieved for service delivery - 8.3 Resources received by service delivery units - 8.4 Performance evaluation for service delivery - PI-9. Public access to fiscal information - Budget Law for 2021 (Official Gazette 307/2020) - Budget execution reports - Budget circular - 9.1 Public access to fiscal information ### Management of assets and liabilities - PI-10. Fiscal risk reporting - Law on Budgets (Official Gazette 64/05, 4/08, 103/08, 156/09, 95/10, 180/11, 171/12, 192/15, 167/16) - Law on Public Enterprises (Official Gazette 38/96, 6/2002, 40/2003, 49/2006, 22/2007, 83/2009, 97/10, 6/12, 119/13, 41/14, 138/14, 25/15, 61/15 and 39/16) - Law on Accounting of the Budget and Budget Users (Official Gazette 61/02, 98/02, 81/05, 24/11, 145/15 and 170/17) - Law on Local Self Government (Official Gazette 5/2002) - Law on Concessions and PPPs (Official Gazette 6/02, 144/14, 33/15, 104/15, and 215/15) - Fiscal Strategy 2021-23 initial and revised - Law on Public Debt (Official Gazette 62/05, 88/08, 35/11, 139/14 and 98/19) - Public Debt Strategy 2021-23 - Public Debt Management annual report 2019 - Law on Reporting Liabilities (Official Gazette 64/18) - Deposit Insurance Fund annual report 2019 - Draft (organic) Budget Law (OBL 21) - Град Скопје - Официјален портал (skopje.gov.mk) - 10.1 Monitoring of public corporations - 10.2 Monitoring of sub-national government - 10.3 Contingent liabilities and other fiscal risks - PI-11. Public investment management - Project ranking procedure, MoES; Project ranking procedure, MoTC; Single Project Pipeline procedures, SEA - Budget circular 2019-21, 2020-22, and 2021-23 - Manual for Strategic Planning, General Secretariat, January 2014 - Annual plans and reports of PESR - 11.1 Economic analysis of investment proposals - 11.2 Investment project selection - 11.3 Investment project costing - 11.4 Investment project monitoring - PI-12. Public asset management - The Law on Managing State Property - The Law on Use and Disposal of State-owned and Municipal-owned Assets (2019) - Law on Sale and Disposal of Commercial Property held by the State - Law on Concession - Law on Agriculture - Law on Construction - Law on Privatization and Lease of State/owned Construction Land - PPP registry - Audit reports - CEF Discussion Paper: Public Sector Asset Management in the Republic of North Macedonia - Rulebook on the Chart of Accounts - Rulebook on Accounting for the Budget and Budget Users - Sample of BCG financial statements (incl. SFFs and major line ministries) - 12.1 Financial asset monitoring - 12.2 Nonfinancial asset monitoring - 12.3 Transparency of asset disposal - PI-13. Debt management - Law on Public Debt (“Official Gazette of the Republic of Macedonia”, nos. 62/05, 88/08, 35/11 and 139/14 and “Official Gazette of the Republic of North Macedonia”, no. 98/19) - Law on Financing of Local Government - Annual Report on Public Debt Management 2019, 2018, 2017 - Quarterly statistical debt reports - 2021-2023 Public Debt Management Strategy - Main secondary legislation (Form M1 for monthly reporting, Manual on the Type and the Contents of the Monthly Information on the Change of the Stock of Each Borrowing by the Public Debt Holders, Manual on the Form and the Contents of the Periodical Financial Reports of the Local Government Units) - 13.1 Recording and reporting of debt and guarantees - 13.2 Approval of debt and guarantees - 13.3 Debt management strategy ### Policy-based fiscal strategy and budgeting - PI-14. Macroeconomic and fiscal forecasting - Fiscal Strategy 2018-2020 through 2021-23 (with outlooks until 2025) - Budget 2018 though 2021 - Law on Budgets - consolidated text (Official Gazette 64/05, 4/08, 103/08, 156/09, 95/10, 180/11, 171/12, 192/15, 167/16) - Draft (organic) Budget Law (OBL 21) - Economic Reform Programme 2021 – 2023 - Public Debt Management Strategy - 14.1 Macroeconomic forecasts - 14.2 Fiscal forecasts - 14.3 Macro-fiscal sensitivity analysis - PI-15. Fiscal strategy - Fiscal Strategy 2018-2020 through 2021-23 (with outlooks until 2025) - Budget 2018 though 2021 - Law on Budgets - consolidated text (Official Gazette 64/05, 4/08, 103/08, 156/09, 95/10, 180/11, 171/12, 192/15, 167/16) - Draft (organic) Budget Law (OBL 21) - Economic Reform Programme 2021 – 2023 - Public Debt Management Strategy - 15.1 Fiscal impact of policy proposals - 15.2 Fiscal strategy adoption - 15.3 Reporting on fiscal outcomes - PI-16. Medium-term perspective in expenditure budgeting - Fiscal Strategy 2017-19, 2018-20, 2019-21, 2020-22 and 2021-23 - Budget Circular 2018-20, 2019-21, 2020-22, and 2021-23 - Law on Budgets (Official Gazette 64/05, 4/08, 103/08, 156/09, 95/10, 180/11, 171/12, 192/15, 167/16) - Draft (organic) Budget Law (OBL 21) - Methodology of Strategic Planning, General Secretariat (Official Gazette 124/08) - Strategic plan of MoTC 2021-23 - PFM Reform Program 2018-21 - Manual for Strategic Planning, General Secretariat, January 2014 - 16.1 Medium-term expenditure estimates - 16.2 Medium-term expenditure ceilings - 16.3 Alignment of strategic plans and medium-term budgets - 16.4 Consistency of budgets with previous year’s estimates - PI-17. Budget preparation process - Law on Budget and Fiscal Responsibility (Official Gazette 4/18) - Fiscal Strategy 2017-19, 2018-20, 2019-21, and 2020-22 - Guidelines for macroeconomic and fiscal policy for 2018 - Budget Circular 2019-21 - 17.1 Budget calendar - 17.2 Guidance on budget preparation - 17.3 Budget submission to the legislature - PI-18. Legislative scrutiny of budgets - The Constitution of North Macedonia 1991 with 36 revisions through 2019 - Law on the National Assembly (Official Gazette 84/05,17/06, 107/06, 77/08, 80/08, and 161/08) - Rules of Procedure of the National Assembly (Official Gazette 60/02, 91/08, 119/10, 23/13) - Law on Budgets (Official Gazette 64/05, 4/08, 103/08, 156/09, 95/10, 180/11, 171/12, 192/15, 167/16) - 18.1 Scope of budget scrutiny - 18.2 Legislative procedures for budget scrutiny - 18.3 Timing of budget approval - 18.4 Rules for budget adjustments by the executive ### Predictability and control in budget execution - PI-19. Revenue administration - PFM Reform Program 2018-21 - Tax System Reform Strategy 2021-2025 - Public Revenue Office Strategic Plan 2021-23 - Customs Law (Official Gazette 39/2005, 4/2008, 48/2010, 158/2010, 44/2011, 53/2011, 11/2012, 71/12, 187/2013, 15/2015, 129/2015, 154/2015, 192/2015, 23/2016, 144/2018 и 110/2021) - Risk Management Strategy 2018-2022 - 19.1 Rights and obligations for revenue measures - 19.2 Revenue risk management - 19.3 Revenue audit and investigation - 19.4 Revenue arrears monitoring - PI-20. Accounting for revenues - Budget Law - Instruction for the manner of registration, allocation, refund and transfer of public revenues - Instruction on the form and content of payment instruments for domestic transactions - 20.1 Information on revenue collections - 20.2 Transfer of revenue collections - 20.3 Revenue accounts reconciliation - PI-21. Predictability of in-year resource allocation - Treasury Operations Manual - Rulebook on the Manner of Opening the Foreign Exchange Accounts of Budget Users and Spending Units of the Republic of Macedonia and the Budget of Local Government Units (2005) - 2019 Decision on reallocation - 2020 Decision on reallocation - 2020 Decree on amendments - 2020 Law on supplementary budget - 21.1 Consolidation of cash balances - 21.2 Cash forecasting and monitoring - 21.3 Information on commitment ceilings - 21.4 Significance of in-year budget adjustments - PI-22. Expenditure arrears - Law on Reporting and Recording of Liabilities (2018) - Law on Financial Discipline (2013) - Rulebook on the Manner of Reporting of Liabilities and the Form and Contents of Summary Reports - 22.1 Stock of expenditure arrears - 22.2 Expenditure arrears monitoring - PI-23. Payroll controls - Law on Administrative Servants (Official Gazette 27/14, 199/14, 48/15, 154/15, 5/16, 142/16, 11/18, 275/19 and 14/20) - Law on Public Sector Employees (Official Gazette 27/14, 199/14, 27/16, 35/18, 198/18, 143/19 and 14/20) - SAO IT audit: Effectiveness and Efficiency of Measures and Actions Taken by Ministry of Information Society and Administration for Full Implementation of the HRMIS in Public Sector Institutions (2019) - SAO 2020 Annual Report - 23.1 Integration of payroll and personnel records - 23.2 Management of payroll changes - 23.3 Internal control of payroll - 23.4 Payroll audit - PI-24. Procurement - Public Procurement Law (PPL)(2019) - 2020 Annual Report of the PPB - 24.1 Procurement monitoring - 24.2 Procurement methods - 24.3 Public access to procurement information - 24.4 Procurement complaints management - PI-25. Internal controls on non-salary expenditure - Treasury Operations Manual (Official Gazette 219/2018) - Annual Report on the Functioning of the 2019 PIFC System - 25.1 Segregation of duties - 25.2 Effectiveness of expenditure commitment controls - 25.3 Compliance with payment rules and procedures - PI-26. Internal audit - Law on PIFC (last amended 2015) - Draft Law on PIFC (2020) - Annual Consolidated PIFC Report 2019 and 2020 - Sample internal audit reports - 26.1 Coverage of internal audit - 26.2 Nature of audits and standards applied - 26.3 Implementation of internal audits and reporting - 26.4 Response to internal audits ### Accounting and reporting - PI-27. Financial data integrity - SAO 2020 Annual Report - 27.1 Bank account reconciliation - 27.2 Suspense accounts - 27.3 Advance accounts - 27.4 Financial data integrity processes - PI-28. In-year budget reports - Open Government Portal https://open.finance.gov.mk/en/home - Budget Law, Article 53 - IMF Fiscal Transparency Evaluation (2018) - Open Budget Survey (2019) - Monthly execution reports, economic classification - Monthly reports, administrative classification - 28.1 Coverage and comparability of reports - 28.2 Timing of in-year budget reports - 28.3 Accuracy of in-year budget reports - Rulebook on the Manner of Reporting of Liabilities and the Form and Contents of Summary Reports - SAO 2020 Annual Report - PI-29. Annual financial reports - Law on Accountancy of the Budget and Budget Beneficiaries - Rulebook on the Form and Content of the Balance Sheet and Revenue and Expenditure Statement - Rulebook on the CoA and Rulebook on the Content of Individual Accounts in the CoA - Rulebook on Accountancy of the Budget and Budget Beneficiaries - IMF Fiscal Transparency Evaluation (2018) - Budget Law - 29.1 Completeness of annual financial reports - 29.2 Submission of the reports for external audit - 29.3 Accounting standards ### External scrutiny and audit - PI-30. External audit - State Audit Law (Official Gazette 66/10, 145/10, 12/14, 43/14, 154/15, 192/15, 27/16, 83/18 and 122/21) - SAO Strategic Development Plan 2018-2022 - SAO 2019 Annual Report - 30.1 Audit coverage and standards - 30.2 Submission of audit reports to the legislature - 30.3 External audit follow up - 30.4 Supreme Audit Institution independence - PI-31. Legislative scrutiny of audit reports - Budget Law, Article 52 - Decree for State of Emergency, March 18, 2020 - 31.1 Timing of audit report scrutiny - 31.2 Hearings on audit findings - 31.3 Recommendations on audit by the legislature - 31.4 Transparency of legislative scrutiny of audit reports ### Annex 4: 2021 Performance change summary (excerpt) - Indicator/Dimension: A. PFM-OUT-TURNS: Credibility of the Budget - PI-1 Aggregate expenditure out-turn compared to original approved budget - 2015 score: B - 2020 score: A - Trend: ↑ - Description of requirements met in current assessment: Expenditure Outturn deviated from planned budget by more than 5% for one of the past three fiscal years (2020). *Annex 3C: Sources of information used to extract evidence for scoring each indicator (as provided in the source).* ### Annex 5b. ### Annex 5b. ### PI-2 to PI-4: Expenditure composition, revenue out-turn, arrears - PI-2 Composition of expenditure out-turn compared to original approved budget: A B+ ↓ (M1 method) - (i) Variance in expenditure composition (administrative classification): A B - 2018: 7% - 2019: 6.3% - 2020: 17.5% - In 2015 assessment variance exceeded 5% in only one year; in this assessment variance exceeds 5% in all three years and exceeded 10% in one year (2020). - (ii) Average amount charged to contingency vote over last three years: A A - Amounts charged to contingency were much less than 3% of total expenditure; performance remained unchanged. - PI-3 Aggregate revenue out-turn compared to original approved budget: D C ↑ - Actual revenue deviation in two out of the three past financial years was between 92 and 116 percent of revenue. - In 2015 assessment revenue out-turn was below 92% in all three observed years. - PI-4 Stock and monitoring of expenditure payment arrears: D+ B ↑ (M1 method) - (iii) Stock of expenditure payment arrears and recent change: C B - Stock of reported BCG arrears, excluding arrears to other public sector institutions, is low. - It has not been reduced significantly (over 25 percent) in the last two years. - Improvement in score due to underlying performance improvements; some institutions still not reporting through the ESPEO. - (iv) Availability of data for monitoring the stock of expenditure payment arrears: D B - ESPEO system allows monthly reporting over the stock and structure of arrears, but not their age profile. - Improvement in score due to improvement of underlying performance; some institutions still not reporting through the ESPEO. ### B. Key cross-cutting issues: Comprehensiveness and Transparency (PI-5 to PI-10) - PI-5 Classification of the budget: A B ↓ - Consistent administrative, economic, functional and sub-functional classifications used in Budget and outturn presentation. - Reduction in score since GFS level is now included in the 2016 PEFA Framework. - PI-6 Comprehensiveness of information included in budget documentation: B B = - Five of nine benchmarks are satisfied. No change in performance. - PI-7 Extent of unreported government operations: C+ C ↓ (M1 method) - (i) Level of unreported government operations: C C - Extra-budgetary expenditure not included in ex ante and ex post fiscal reports amounted to about 7 per cent of consolidated central government expenditure in 2020. - (ii) Income/expenditure information on donor-funded projects: A C - All loan financed projects fully included in fiscal reports but less than 50% of grant-financed projects. - Deterioration due to higher portion of directly managed EU funds. - PI-8 Transparency of inter-governmental fiscal relations: A A = (M2 method) - (i) Horizontal allocation to Sub-national Governments: A A - Over 90 per cent on average of central government grants to LGUs based on transparent, rule-based systems. - (ii) Timeliness and reliable information to SN Governments on allocations: A A - LGUs receive guidance on prospective allocations by 30 September each year. - (iii) Extent of consolidation of fiscal data for general government by sectoral categories: B A - Summary reports of general government revenue and expenditure by economic classification now published 1 month after year-end (shortened from 13 to 1 month). - PI-9 Oversight of aggregate fiscal risk from other public sector entities: C C = (M1 method) - (i) Central government monitoring of autonomous entities and public enterprises: C C - Quarterly financial reports made to MoF by PEs and Regulatory Agencies but not consolidated into a fiscal risks report. - (ii) Central government monitoring of SN government’s fiscal position: C C - LGUs make quarterly reports to MoF; all LGU borrowing requires MoF consent but no information on LGUs' current financial liabilities. - Improved reporting on arrears and municipal debt, but no consolidated report prepared. - PI-10 Public access to key fiscal information: A A = - Government makes available all basic 5 and additional 4 elements within specified time frames. - In previous assessment 5 of 6 benchmarks were met; no change in indicator performance. ### C. Budget cycle — Policy-Based Budgeting (PI-11 to PI-12) - PI-11 Orderliness and participation in the annual budget process: B+ B ↓ (M2 method) - (i) Fixed budget calendar: A A — exists, generally followed. - (ii) Guidance on budget submissions: C D — Expenditure ceilings not subject to prior government approval; budget circular does not provide ceilings for total funds. Reassessment of evidence; no performance change. - (iii) Timely budget approval by legislature: A A — Budgets approved before year start. - PI-12 Multi-year perspective in fiscal planning, expenditure policy and budgeting: C+ C+ = (M2 method) - (i) Multiyear fiscal forecasts and functional allocations: D C - Forecasts of fiscal aggregates prepared for at least two years on rolling basis; budget documents do not explain changes between vintages. - Score improved since fiscal strategy provides main categories of economic classification. - (ii) Scope and frequency of debt sustainability analysis: A A - MoF reports DSA carried out annually using IMF/WB debt sustainability modelling tools. - (iii) Existence of costed sector strategies: C C - Planning focuses on 3-year ministry strategies, not sector strategies. - (iv) Linkages between investment budgets and forward expenditure estimates: C C - Some investment decisions have weak links to sector strategies; investment planning focuses on 3-year ministry strategies. ### C(ii). Predictability and Control in Budget Execution (PI-13 to PI-18) - PI-13 Transparency of taxpayer obligations and liabilities: C+ C+ = (M2 method) - (i) Clarity/comprehensiveness of tax liabilities: B B - (ii) Taxpayer access to information: B B - (iii) Tax appeal mechanism: D D — Appeals sent directly to the Administrative Court. - PI-14 Effectiveness of measures for taxpayer registration and tax assessment: C+ B ↑ (M2 method) - (i) Controls in taxpayer registration system: C B — Integrated taxpayer register introduced with linkages to some government systems. - (ii) Effectiveness of penalties for non-compliance: C B — Penalties exist but not always effective; legal/administrative changes introduced since last assessment. - (iii) Planning and monitoring of tax audit and fraud investigation programs: B B — Annual audit/control plans based on risk analysis; not qualifying as compliance improvement plans. - PI-15 Effectiveness in collection of tax payments: D+ D+ = (M1 method) - (i) Collection ratio for gross tax arrears: D D - Tax debt collection ratio in last two years was below 60%; total tax arrears significant (above 2% of total annual collections). - Due to unreliable data, performance assessment not possible. - (ii) Effectiveness of transfer of tax collections to the Treasury: A A — All tax revenue paid directly into the STA. - (iii) Frequency of reconciliation between tax assessments, collections, arrears records, and Treasury receipts: D D - Tax assessments not reconciled between revenue agencies and MoF Treasury; issues with different IS pending a new integrated system. - PI-16 Predictability in the availability of funds for commitment of expenditures: B+ B+ = (M1 method) - (i) Cash flow forecasting and monitoring: A A - Cash flow forecast prepared for fiscal year and updated monthly; coordinated informally between MoF Departments, revenue agencies and NBRNM. - Improvements: revised cash planning procedures and tools (Excel format) developed in 2019 with WB assistance; staff trained. - (ii) Reliability and horizon of in-year information to MDAs on ceilings: B B - Budget users provided reliable commitment ceilings for next three months; reduction of paper-based submissions improved performance. - (iii) Frequency/transparency of adjustments to budget allocations above MDA management: A A - Documented rules for supplementary budgets upheld despite COVID-19 adjustments. - PI-17 Recording and management of cash balances, debt and guarantees: A B+ ↓ (M2 method) - (i) Quality of debt data recording and reporting: A B - Domestic and foreign debt records complete, updated and reconciled with creditors at least quarterly; comprehensive reports produced at least annually. - Deterioration in score due to reinterpretation of evidence; actual performance improved with respect to DMIS functionalities. - (ii) Extent of consolidation of government's cash balances: A A — All BCG cash balances calculated and consolidated daily; no social insurance funds and EBUs off the TSA. - (iii) Systems for contracting loans and issuance of guarantees: B B — Issues controlled by MoF within limits. - PI-18 Effectiveness of payroll controls: C+ B ↑ (M1 method) - (i) Integration/reconciliation between personnel records and payroll: B B — Not directly linked; payroll supported with full documentation and checks against previous month. - (ii) Timeliness of changes to personnel records and payroll: A B — Updates monthly; score revised to B due to reinterpretation of evidence; no change in underlying performance. - (iii) Internal controls of changes to personnel records and payroll: A B — Authority restricted but no audit trail; score revised to B. - (iv) Existence of payroll audits to identify control weaknesses/ghost workers: C B — Payroll audited by SAO and internal auditors; SAO progressively audits more entities. ### C(ii). Procurement, internal controls and audit (PI-19 to PI-23) - PI-19 Competition, value for money and controls in procurement: B+ A ↑ (M2 method) - (i) Legal/regulatory framework transparency/comprehensiveness: C A - 2019 PPL harmonized with EU directives; system meets all six PEFA 2011 requirements. - (ii) Use of competitive procurement methods: A A — Default method at over 80 percent. - (iii) Public access to procurement information: B A - Key procurement information made public for virtually all procurements; improvement with new ESPP platform. - (iv) Independent administrative procurement complaints system: A A — SAC meets seven benchmarks under PEFA 2011. - PI-20 Effectiveness of internal controls for non-salary expenditure: C+ B ↑ (M1 method) - (i) Effectiveness of expenditure commitment controls: B B — Low reported arrears suggest effective commitment controls; multiannual commitments an exception. - (ii) Comprehensiveness/relevance/understanding of other internal control rules: B B — Improving alignment with risks; work in progress. - (iii) Degree of compliance with rules for processing/recording transactions: C B — Absence of audit findings and low arrears support fairly high compliance; score improved due to reinterpretation. - PI-21 Effectiveness of internal audit: C+ C+ = (M1 method) - (i) Coverage and quality of IA function: B B - IAUs increased to 91 in 2020 from 84 in 2015; number of auditors dropped from 145 to 133; stronger quality assurance needed. - (ii) Frequency and distribution of reports: A C - Reports issued regularly for audits conducted, submitted to audited entity management; number of audits planned/carried out decreasing. - Lower score due to reinterpretation that distribution to audited entity, MoF and SAI was not consistently met. - (iii) Extent of management response to IA: C C - 61 percent of internal audit recommendations implemented within 12 months in 2020 (was 65 percent in 2015); management response considered partial. - PI-22 Timeliness and regularity of accounts reconciliation: A A = (M2 method) - (i) Regularity of bank reconciliation: A A — Daily reconciliations within next day for domestic currency STA accounts. - (ii) Regularity and clearance of suspense accounts and advances: A A — Daily reconciliation; advance accounts to contractors reconciled at least quarterly. - PI-23 Availability of information on resources received by service delivery units: D D = - Information available on HIF website for health care institutions, but not education providers; slight improvement as data is publicly available for health institutions. ### C(ii). Reporting, financial statements, external scrutiny and legislative oversight (PI-24 to PI-28) - PI-24 Quality and timeliness of in-year budget reports: D+ C+ ↑ (M1 method) - (i) Scope of reports against budget: D C - Comparison to budget possible for main economic items and by administrative classification; expenditure captured at payment stage. - Improvement in score from reassessment of evidence; transparency increasing. - (ii) Timeliness of issue of reports: A A — Prepared quarterly or more frequently, issued within 4 weeks of period end. - Open Finance portal (not assessed) improves public availability. - (iii) Quality of information: A A — No material concerns regarding data accuracy from TrIS. - PI-25 Quality and timeliness of annual financial statements: D+ D ↓ (M1 method) - (i) Completeness of financial statements: D D — Consolidated government statement prepared annually with revenue and expenditure. - (ii) Timeliness of submissions: A D - COVID state of emergency postponed deadlines for preparing/adopting 2020 Final Account; submission for external audit outside assessment cut-off date. - No underlying change in FY 2017-2019 where Final Account consistently submitted within three months (qualifying for score A). - (iii) Accounting standards used: C D — National framework ensures consistent reporting but accounting standards not formally disclosed; score changed due to reinterpretation. - PI-26 Scope, nature and follow-up of external audit: D+ B ↑ (M1 method) - (i) Scope/nature of audit performed: D B - CG entities representing at least 75% of total expenditures audited annually; audits generally adhere to standards focusing on significant/systemic issues. - Improvement in score from increased coverage and reinterpretation of revenue/expenditure covered in Final Account audit. - (ii) Timeliness of submission of audit reports to Legislature: A B - Submission timely in 2018 and 2019 (under 4 months); took more than 6 months to reach Parliament in 2020 due to COVID. - (iii) Evidence of follow up on audit recommendations: B B - SAO monitoring improved with dedicated information system; 70 percent of recommendations in process of implementation where 90-day deadline had passed (was 65 percent in 2015). - PI-27 Legislative scrutiny of the annual budget law: D+ B+ ↑ (M1 method) - (i) Scope of legislature scrutiny: D A - Legislature review covers fiscal policies, medium term fiscal framework, medium term priorities, and details of expenditure and revenue. - (ii) Procedures well established and respected: A A - (iii) Adequacy of time for legislature review: B B — At least one month to review budget proposals. - (iv) Rules for in-year amendments without ex-ante legislative approval: A A — Clear rules exist and are respected. - PI-28 Legislative scrutiny of external audit reports: D D+ ↑ (M1 method) - (i) Timeliness of examination of audit reports by legislature: D A - Despite COVID delay in submission, Parliament completed its review in under 3 months during the period. - Improvement due to reinterpretation scoring on review of Final Account audit report. - (ii) Extent of hearings on key findings: D D — No in-depth hearings on audit reports by Parliament. - (iii) Issuance of recommended actions by legislature and implementation by executive: D D — No recommendations issued by Parliament. *Annex 5b.* ### Annex 5 - Calculations for PI-1, PI-2 and PI-3 (2016 ### Annex 5 - Calculations for PI-1, PI-2 and PI-3 (2016 Framework) ### Fiscal years for assessment - Year 1 = 2018 - Year 2 = 2019 - Year 3 = 2020 ### PI-1 Aggregate outturn, PI-2 composition variance, contingency share (by year) - 2018 - aggregate outturn (PI-1): 91.8% - composition (PI-2) variance: 9.6% - contingency share of budget: 0.00% - 2019 - aggregate outturn (PI-1): 92.7% - composition (PI-2) variance: 6.3% (Table 3 top of file shows composition variance 6.3% within one table; elsewhere composition variance for 2019 appears as 8.7% in Table 5 — the Results Matrix lists 2019 composition variance as 8.7% for PI-2.1/PI-2.3. The economic-classification composition variance for 2019 is reported as 11.3% in the PI-2.2 section.) - contingency share of budget: 0.0% - 2020 - aggregate outturn (PI-1): 102.8% - composition (PI-2) variance: 17.8% - contingency share of budget: 0.0% ### Detailed expenditure allocation and outturn (selected aggregates and notable deviations) - Allocated expenditure (by year) - 2018 allocated expenditure: 154,315,837 (MKD thousands) — allocated expenditure line shown as 154,315,837 with allocated/executed reconciliation in tables - 2019 allocated expenditure: 163,386,311 (MKD thousands) - 2020 allocated expenditure: 170,232,974 (MKD thousands) - Total expenditure (including interest, contingency) - 2018 total expenditure: 154,324,721 (MKD thousands) - 2019 total expenditure: 163,395,691 (MKD thousands) - 2020 total expenditure: 170,241,447 (MKD thousands) and reported alternative total 174,936,364 (MKD thousands) in adjusted lines - Interest and contingency workload (examples) - 2018 interest: 8,684; contingency: 200 - 2019 interest: 9,180; contingency: 200 - 2020 interest: 8,273; contingency: 200 - Examples of large administrative/functional deviations in 2018 (budget vs. actual vs. adjusted budget; absolute deviation and percent preserved) - Head 1: Budget 43,602,533; actual 43,543,887; adjusted budget 40,034,182; absolute deviation 3,509,705 8.8% - Head 2: Budget 16,408,410; actual 17,378,863; adjusted budget 15,065,576; absolute deviation 2,313,288 15.4% - Head 8: Budget 6,071,729; actual 2,714,344; adjusted budget 5,574,830; absolute deviation 2,860,486 51.3% - Head 11: Budget 2,271,161; actual 1,097,951; adjusted budget 2,085,293; absolute deviation 987,342 47.3% - Examples of large administrative/functional deviations in 2019 - Head 7: Budget 7,273,985; actual 4,481,094; adjusted budget 6,745,203; absolute deviation 2,264,109 33.6% - Head 9: Budget 3,937,665; actual 6,055,317; adjusted budget 3,651,417; absolute deviation 2,403,900 65.8% - Examples of large administrative/functional deviations in 2020 - Head 9: Budget 4,369,979; actual 18,473,371; adjusted budget 4,490,507; absolute deviation 13,982,864 311.4% - Head 8: Budget 5,827,579; actual 2,693,065; adjusted budget 5,988,309; absolute deviation 3,295,244 55.0% - Head 5: Budget 10,133,000; actual 7,892,386; adjusted budget 10,412,478; absolute deviation 2,520,092 24.2% - Head 21: Budget 14,352,442; actual 12,297,656; adjusted budget 14,748,296; absolute deviation 2,450,640 16.6% ### Expenditure composition variance by economic classification (PI-2.2) — key results (MKD millions) - 2018 (Table 2, totals and variances) - Total expenditure (budget): 154,324; actual: 141,694.6; adjusted budget: 141,694.6; total absolute deviation 23,635.8 - Composition variance: 16.7% - Selected economic heads (Budget / actual / adjusted budget / absolute deviation / percent) - Compensation of employees: 26,345 / 25,610.0 / 24,188.7 / 1,421.3 / 5.9% - Use of goods and services: 16,983 / 14,159.4 / 15,592.8 / 1,433.4 / 9.2% - Capital Expenditure: 24,075 / 12,099.5 / 22,104.4 / 10,005.0 / 45.3% - Subsidies and transfers (inc. to local budgets): 35,439 / 38,599.4 / 32,538.9 / 6,060.5 / 18.6% - Current transfers to EBFs: 34,550 / 35,158.6 / 31,722.0 / 3,436.6 / 10.8% - 2019 (Table 3) - Total expenditure (budget): 163,396; actual: 151,517; adjusted budget: 151,517.4; total absolute deviation 17,153.4 - Composition variance: 11.3% - Selected economic heads - Compensation of employees: 27,592 / 26,964 / 25,586.5 / 1,377.5 / 5.4% - Use of goods and services: 19,030 / 15,830 / 17,646.2 / 1,815.8 / 10.3% - Capital Expenditure: 25,821 / 17,769 / 23,943.7 / 6,175.0 / 25.8% - Subsidies and transfers (inc. to local budgets): 37,688 / 39,382 / 34,948.4 / 4,433.3 / 12.7% - 2020 (Table 4) - Total expenditure (budget): 170,241; actual: 174,936; adjusted budget: 174,936.4; total absolute deviation 31,857.2 - Composition variance: 18.2% - Selected economic heads - Compensation of employees: 29,744 / 28,927 / 30,564.0 / 1,636.6 / 5.4% - Use of goods and services: 19,995 / 14,969 / 20,546.6 / 5,577.7 / 27.1% - Capital Expenditure: 23,578 / 16,022 / 24,228.0 / 8,206.2 / 33.9% - Subsidies and transfers (inc. to local budgets): 40,409 / 56,277 / 41,523.7 / 14,753.3 / 35.5% - Debt repayment (noted): 43,214 budget; 41,829 actual (2020) ### Revenue composition outturn (PI-3) — key results (MKD thousands) - Aggregate results by year (total revenue outturn and composition variance) - 2018 - Total revenue (budget): 193,512,000.0 - Total revenue (actual): 179,315,696.0 - Total revenue (adjusted budget): 179,315,696.0 - Overall variance: 92.7% - Composition variance: 12.4% - Total absolute deviation reported: 22,148,180.0 - 2019 - Total revenue (budget): 210,848,000.0 - Total revenue (actual): 195,889,000.0 - Total revenue (adjusted budget): 195,889,000.0 - Overall variance: 92.9% - Composition variance: 13.7% - Total absolute deviation reported: 26,878,186.4 - 2020 - Total revenue (budget): 222,308,000.0 - Total revenue (actual): 186,585,409.1 - Total revenue (adjusted budget): 186,585,409.1 - Overall variance: 83.9% - Composition variance: 17.1% - Total absolute deviation reported: 31,964,904.3 - Selected revenue component deviations (2018) - Taxes on income, profit and capital gains: Budget 30,238,000.0; actual 32,304,458.0; adjusted budget 28,019,699.1; absolute deviation 4,284,758.9 15.3% - Taxes on goods and services: Budget 77,782,037.0; actual 72,999,154.0; adjusted budget 72,075,840.8; absolute deviation 923,313.2 1.3% - Social security contributions: Budget 55,403,000.0; actual 56,538,000.0; adjusted budget 51,338,560.4; absolute deviation 5,199,439.6 10.1% - Grants from foreign governments: Budget 4,011,216.0; actual 0.0; adjusted budget 3,716,947.7; absolute deviation 3,716,947.7 100.0% - Fees and charges: Budget 4,023,056.0; actual 9,187.0; adjusted budget 3,727,919.1; absolute deviation 3,718,732.1 99.8% - Selected revenue component deviations (2019) - Taxes on income, profit and capital gains: Budget 34,539,000.0; actual 30,260,100.5; adjusted budget 32,088,567.0; absolute deviation 1,828,466.5 5.7% - Taxes on goods and services: Budget 80,072,957.0; actual 76,767,565.8; adjusted budget 74,392,033.5; absolute deviation 2,375,532.3 3.2% - Social security contributions: Budget 62,316,000.0; actual 62,166,000.0; adjusted budget 57,894,876.5; absolute deviation 4,271,123.5 7.4% - Grants from foreign governments: Budget 5,571,738.0; actual 0; adjusted budget 5,176,440.8; absolute deviation 5,176,440.8 100.0% - Fees and charges: Budget 3,895,144.0; actual 13,225.4; adjusted budget 3,618,795.8; absolute deviation 3,605,570.4 99.6% - Selected revenue component deviations (2020) - Taxes on income, profit and capital gains: Budget 36,482,000.0; actual 29,121,846.5; adjusted budget 30,619,720.8; absolute deviation 1,497,874.4 4.9% - Taxes on goods and services: Budget 85,349,957.0; actual 69,011,387.2; adjusted budget 71,635,103.7; absolute deviation 2,623,716.5 3.7% - Social security contributions: Budget 67,033,000.0; actual 66,564,000.0; adjusted budget 56,261,491.8; absolute deviation 10,302,508.2 18.3% - Grants from foreign governments: Budget 5,534,478.0; actual 184,157.5; adjusted budget 4,645,144.8; absolute deviation 4,460,987.3 96.0% - Fees and charges: Budget 3,658,991.0; actual 19,745.3; adjusted budget 3,071,029.1; absolute deviation 3,051,283.8 99.4% ### Results matrices (condensed) - PI-1.1 (total expenditure outturn), PI-2.1 (composition), PI-2.3 (contingency share) — Results Matrix (Table 5, expenditure section) - 2018: total exp. Outturn 91.8%; composition variance 9.6%; contingency share 0.0% - 2019: total exp. Outturn 92.7%; composition variance 8.7%; contingency share (blank/0.0%) - 2020: total exp. Outturn 102.8%; composition variance 17.8%; contingency share (blank/0.0%) - PI-2.2 (expenditure variance by economic classification) — Results Matrix (Table 5, economic classification) - 2018: composition variance 16.7% - 2019: composition variance 11.3% - 2020: composition variance 18.2% - PI-3 (revenue composition outturn) — Results Matrix (Table 5, revenue) - 2018: total revenue deviation 92.7%; composition variance 12.4% - 2019: total revenue deviation 92.9%; composition variance 13.7% - 2020: total revenue deviation 83.9%; composition variance 17.1% *Source: Annex 5 - Calculations for PI-1, PI-2 and PI-3 (2016 Framework) (calculation sheets and results as presented in the source content).* ### Annex 5a - Calculations for PI-1, PI-2 and PI-3 (2011 Framework) ### Annex 5a - Calculations for PI-1, PI-2 and PI-3 (2011 Framework) ### Calculation sheets for PFM Performance Indicators PI-1, PI-2.1 and PI-2.3 (Expenditure, MKD thousands) - Fiscal years for assessment: - Year 1 = 2018 - Year 2 = 2019 - Year 3 = 2020 - Year = 2018 (Table 2) — selected aggregates and results: - Allocated expenditure: 141,521,822 - Actual/adjusted allocated expenditure reported: 135,948,013.5 - Absolute deviation (allocated expenditure): 9,518,833.2 - Contingency: 200.0 - Contingency actual: 86.9 - Total expenditure (budget line): 141,522,022 / 135,948,100.3 - Aggregate outturn (PI-1): 3.9% - Composition variance (PI-2): 7.0% - Contingency share of budget: 0.0% - Year = 2019 (Table 3) — selected aggregates and results: - Allocated expenditure: 149,031,910 - Actual/adjusted allocated expenditure reported: 143,880,506.1 - Absolute deviation (allocated expenditure): 9,131,572.1 - Contingency: 200.0 - Contingency actual: 107.8 - Total expenditure (budget line): 149,032,110 / 143,880,613.9 - Aggregate outturn (PI-1): 3.5% - Composition variance (PI-2): 6.3% - Contingency share of budget: 0.0% - Year = 2020 (Table 4) — selected aggregates and results: - Allocated expenditure: 158,193,407 - Actual/adjusted allocated expenditure reported: 166,355,144.4 - Absolute deviation (allocated expenditure): 29,079,400.8 - Contingency: 200.00 - Contingency actual: 168.42 - Total expenditure (budget line): 158,193,607 / 166,355,312.9 - Aggregate outturn (PI-1): 5.2% - Composition variance (PI-2): 17.5% - Contingency share of budget: 0.0% - Results Matrix (Table 5 — expenditure indicators): - 2018 — total exp. outturn (PI-1): 3.9%; composition variance (PI-2): 7.0%; contingency share: 0.0% - 2019 — total exp. outturn (PI-1): 3.5%; composition variance (PI-2): 6.3%; contingency share: 0.0% - 2020 — total exp. outturn (PI-1): 5.2%; composition variance (PI-2): 17.5%; contingency share: 0.0% ### Calculation sheets for revenue composition and outturn (PI-3, MKD thousands) - Fiscal years for assessment: - Year 1 = 2018 - Year 2 = 2019 - Year 3 = 2020 - Year = 2018 (Table 2) — selected revenue lines and variances: - Taxes on income, profit and capital gains: budget 30,238,000.0; actual 32,304,458.0; adjusted budget 28,019,699.1; absolute deviation 4,284,758.9; percent 15.3% - Taxes on goods and services: budget 77,782,037.0; actual 72,999,154.0; adjusted budget 72,075,840.8; absolute deviation 923,313.2; percent 1.3% - Taxes on international trade and transactions: budget 5,328,000.0; actual 5,603,709.0; adjusted budget 4,937,130.7; absolute deviation 666,578.3; percent 13.5% - Other taxes: budget 1,450,700.0; actual 519,801.0; adjusted budget 1,344,274.7; absolute deviation 824,473.7; percent 61.3% - Social security contributions: budget 55,403,000.0; actual 56,538,000.0; adjusted budget 51,338,560.4; absolute deviation 5,199,439.6; percent 10.1% - Grants from foreign governments: budget 4,011,216.0; actual 0.0; adjusted budget 3,716,947.7; absolute deviation 3,716,947.7; percent 100.0% - Fees and charges: budget 4,023,056.0; actual 9,187.0; adjusted budget 3,727,919.1; absolute deviation 3,718,732.1; percent 99.8% - Sum of rest: budget 8,678,117.0; actual 6,869,410.0; adjusted budget 8,041,478.5; absolute deviation 1,172,068.5; percent 14.6% - Total revenue: budget 193,512,000.0; actual 179,315,696.0; adjusted budget 179,315,696.0; Overall variance: 92.7%; Composition variance: 12.4% - Aggregate absolute variance reported: 22,148,180.0 - Year = 2019 (Table 3) — selected revenue lines and variances: - Taxes on income, profit and capital gains: budget 34,539,000.0; actual 30,260,100.5; adjusted budget 32,088,567.0; absolute deviation 1,828,466.5; percent 5.7% - Taxes on goods and services: budget 80,072,957.0; actual 76,767,565.8; adjusted budget 74,392,033.5; absolute deviation 2,375,532.3; percent 3.2% - Taxes on international trade and transactions: budget 5,816,000.0; actual 6,032,618.5; adjusted budget 5,403,373.2; absolute deviation 629,245.3; percent 11.6% - Other taxes: budget 1,457,101.0; actual 674,303.7; adjusted budget 1,353,724.3; absolute deviation 679,420.6; percent 50.2% - Social security contributions: budget 62,316,000.0; actual 62,166,000.0; adjusted budget 57,894,876.5; absolute deviation 4,271,123.5; percent 7.4% - Grants from foreign governments: budget 5,571,738.0; actual 0; adjusted budget 5,176,440.8; absolute deviation 5,176,440.8; percent 100.0% - Fees and charges: budget 3,895,144.0; actual 13,225.4; adjusted budget 3,618,795.8; absolute deviation 3,605,570.4; percent 99.6% - Sum of rest: budget 10,128,379.0; actual 15,572,994.6; adjusted budget 9,409,802.5; absolute deviation 6,163,192.1; percent 65.5% - Total revenue: budget 210,848,000.0; actual 195,889,000.0; adjusted budget 195,889,000.0; Overall variance: 92.9%; Composition variance: 13.7% - Aggregate absolute variance reported: 26,878,186.4 - Year = 2020 (Table 4) — selected revenue lines and variances: - Taxes on income, profit and capital gains: budget 36,482,000.0; actual 29,121,846.5; adjusted budget 30,619,720.8; absolute deviation 1,497,874.4; percent 4.9% - Taxes on goods and services: budget 85,349,957.0; actual 69,011,387.2; adjusted budget 71,635,103.7; absolute deviation 2,623,716.5; percent 3.7% - Taxes on international trade and transactions: budget 6,200,000.0; actual 5,734,334.0; adjusted budget 5,203,724.3; absolute deviation 530,609.7; percent 10.2% - Other taxes: budget 2,097,700.0; actual 510,106.4; adjusted budget 1,760,621.4; absolute deviation 1,250,515.0; percent 71.0% - Social security contributions: budget 67,033,000.0; actual 66,564,000.0; adjusted budget 56,261,491.8; absolute deviation 10,302,508.2; percent 18.3% - Grants from foreign governments: budget 5,534,478.0; actual 184,157.5; adjusted budget 4,645,144.8; absolute deviation 4,460,987.3; percent 96.0% - Fees and charges: budget 3,658,991.0; actual 19,745.3; adjusted budget 3,071,029.1; absolute deviation 3,051,283.8; percent 99.4% - Sum of rest: budget 8,132,016.0; actual 11,974,619.6; adjusted budget 6,825,285.3; absolute deviation 5,149,334.3; percent 75.4% - Total revenue: budget 222,308,000.0; actual 186,585,409.1; adjusted budget 186,585,409.1; Overall variance: 83.9%; Composition variance: 17.1% - Aggregate absolute variance reported: 31,964,904.3 - Results Matrix (Table 5 — revenue indicators): - 2018 — total revenue deviation (PI-3 overall variance): 92.7%; composition variance: 12.4% - 2019 — total revenue deviation (PI-3 overall variance): 92.9%; composition variance: 13.7% - 2020 — total revenue deviation (PI-3 overall variance): 83.9%; composition variance: 17.1% *Annex 5a - Calculations for PI-1, PI-2 and PI-3 (2011 Framework)* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1mkdea2022004.pdf_