## 1mozea2023013 ## Source details **Canonical URL:** [1mozea2023013](https://www.imf.org/-/media/files/publications/cr/2023/english/1mozea2023013.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1mozea2023013.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1mozea2023013.pdf.json) --- ### Preface — mission background, scope, and deliverables - TA mission from the Fiscal Affairs Department (FAD) visited Maputo, Mozambique during the period December 1-14, 2016 to carry out a review of the implementation of the government’s public financial management (PFM) reform strategy. - Mission leadership and team: - Led by Mr. Xavier Rame; team comprised Messrs. Richard Allen, Gregoire Tirot and Soren Langhoff, and Ms. Vania Tembe. - Review of budget execution procedures coordinated with Mr. Jean-Michel Champomier, Afritac South (AFS) expert. - Support from Ms. Esther Palacio, TA coordinator at the IMF office in Mozambique. - Funding and program context: - Part of the “Strengthening Fiscal Institutions in Mozambique Project” funded by the Government of Denmark and implemented by the IMF. - Core focus: - (i) supporting the planning and governance of the PFM reform strategy; - (ii) strengthening the budget execution process; - (iii) assessing the management of the civil service wage bill; and - (iv) enhancing fiscal risk management and transparency. - Deliverable expectations: - Supported finalization of the country’s first fiscal risk statement (FRS) and provided recommendations on operationalizing the Strategic Plan for Public Finance expected to be finalized before the end of 2016 and submitted to the Council of Ministers for approval. ### Executive summary — progress, shock, and diagnostic findings - Progress and challenges: - Over the last 15 years, good progress on PFM reforms but remaining challenges on fiscal transparency and risk management. - Treasury and budget management modernized; initial steps introduced include the medium-term fiscal framework (CFMP) and program budgeting. - Published FTE report shows improved availability of fiscal information but scope to improve budget documentation and fiscal reports, including information on fiscal risks. - Fiscal shock: - Revelation in April 2016 of previously undisclosed debt of $1.4 billion or 10.7 percent of the 2015 GDP increased fiscal risks and pressure to improve fiscal transparency. - Key diagnostics: - 2015 PFM assessment recommended reprioritizing the PFM reform strategy and translating policy into concrete improvements; progress mixed. - Merger of finance and planning functions within the MEF had yet to be implemented. - Limited progress introducing a medium-term budget framework. - Coverage of the Treasury Single Account (TSA) increased; cash flow forecasting improvements limited. - Control over budget execution stages (commitment, verification, payment) not operating as designed. - Real-time monitoring of budget execution limited; no comprehensive consolidated information on expenditure arrears. ### Strategic Plan for Public Finance (2016-2019) — status and mission recommendations - Current situation and scope: - Draft Strategic Plan prepared, aligned with the government’s Vision of Public Finances, 2011-2025 and Programa Quinquenal do Governo (PQG) 2015-2019. - Covers seven objectives with sub-objectives/activities; focus primarily on public finance functions and promotion of business/private investment. - CEDSIF noted: (i) Plan consistent with CEDSIF’s Strategy for 2015-2019 (IT focus); (ii) Plan does not include provisions for training or capacity building (prepared separately); (iii) Plan does not include specific provisions for rolling out to line ministries, provinces or local governments. - CEDSIF prepared an assessment of the cost of implementing the Plan but those data were not supplied to the mission. - Mission assessment and operationalization recommendations: - The Strategic Plan needs to be operationalized: update the Plan regularly to reflect changes in fiscal parameters and ensure consistency with government economic and financial policies. - Prepare an operational plan by directorates and units focused on delivering strategic objectives, with emphasis on actions in the next 12-18 months. - Legal sequencing: revision of the PFM legal framework would support reforms but should not take precedence over more urgent reforms and could be delayed until 2018. - Governance/co-ordination: establish a Special Committee, chaired by the Minister, Vice Minister, or Permanent Secretary, to supervise finalization and implementation and hold regular meetings with development partners to ensure shared ownership and secure funding. - Formal recommendations (text preserved): - Recommendation I.A.1. Ensure that the Strategic Plan for Public Finance, 2016-2020 is finalized and approved by the Council of Ministers, and gives particular emphasis to a public sector-wide approach to PFM reform. (December 2016) - Recommendation I.A.2. Include an updated action plan on fiscal transparency (FTAP) as an annex to the Strategic Plan. (December 2016) - Recommendation I.A.3. Update the Strategic Plan to accommodate the provisions and structural benchmarks included in any new program that is agreed with the IMF, and otherwise on an annual basis. (December 2017 and annually) - Recommendation I.A.4. Prepare detailed operational plans for implementing the objectives, targets and actions outlined in the Strategic Plan, and assign responsibilities to the respective directorates and units of the ministry for delivering these objectives. (June 2017) - Recommendation I.A.5. Prepare a detailed plan for building capacity in PFM at all levels of government, and assign responsibilities to the directorates and units of MEF for implementing the required measures. (June 2017) - Recommendation I.A.6. Prepare an action plan of short-term (12-18 month) PFM reform measures that could be annexed to the Strategic Plan, updated periodically, and reflected in the operational plans of individual directorates. (June 2017) - Recommendation I.B.1. Establish a Special Committee, chaired by the Minister, Vice Minister, or Permanent Secretary to supervise the finalization and implementation of the Strategic Plan, and provide leadership on PFM reform to the operational directorates and units in the MEF, and other stakeholders. The Committee should hold regular meetings with the development partners to ensure the partners’ shared ownership of the Plan, and secure necessary funding. (April 2017) ### e-SISTAFE and strengthening the budget execution process — findings and recommendations - Coverage and rollout status: - In June 2016, 87.6 percent of the 1525 Beneficiary Management Units (UGBs) were covered by e-SISTAFE, against 84 percent in October 2015. - Extension of functionalities increased payments through the TSA to 74.7 percent in December 2015. - Wage payments made through the Salary Payment System (e-Folha) increased to 90.8 percent. - Transformation into UGBs and use of e-SISTAFE: 1,599 UGBs in place, out of which 1,299 were using e-SISTAFE. - Operational gaps and risks: - Remaining coverage gap due to non-compliance with minimum requirements; site inoperation issues: electricity supply, equipment malfunctions, poor network connectivity, lack of maintenance. - During Q1 2014, 14 percent of sites were inoperative nationally, peaking at 38 percent inoperative sites in the North Region. - Recording of transactions in e-SISTAFE still usually takes place at the time of payments, impairing ability to manage budget execution and control commitments. - Real-time recording of commitments is not ensured though technically possible; roll-out of e-asset module (MPE) and extension of budget execution module (MEX) planned for 2016 were not achieved; development of MPE at risk due to financial resource shortage. - Timely recording of commitment, verification, and payment not systematically monitored; sometimes three stages registered the same day. - Number of accounts held outside the TSA decreased to 4,000, against 11,000 in 2013; off-TSA accounts often created without prior approval. - Expenditure processed through advances to budget managers and subsequent reporting (via indireta) indicated as decreasing (from 65 % in 2014 to 85% of spending in December 2016) — objective of using this procedure only in exceptional cases is not yet achieved. - Weaknesses create unreliable and incomplete real-time information on government expenditure and liabilities, creating risk of accumulation of arrears and budget slippage. - Change management, training, and short-term actions: - Users’ forum retrained 1,803 users in 6 provinces; up to February 2017 CEDSIF expected to retrain 7,000 users in four main topics. - Primary limitations identified by users: internet downtime, electricity problems, system slowdown; limited training and access to law/regulations; travel by single users using others’ access rights, breaching segregation of duties. - CEDSIF implementing a change management plan with three levels of intervention: multisector reform management; reform management led by CEDSIF; training of trainers. - Short-term improvement options: - Maximize use of existing data: consolidate sectoral contract registries (outside e-SISTAFE) centrally to monitor budget allocation use and remaining room. - Implement a short-term action plan on arrears as proposed by the April 2016 mission. - Perform a cost-benefit analysis of recentralization of some financial functions to guide improvements (Recommendation II.A.2). - Embed rules in the system to enforce mandatory time lags between phases of the expenditure process. - Specific recommendations (text preserved): - Recommendation II.A.1. Further focus on e-SISTAFE users training and retraining and ensure the implementation of the change management plan (Annually). - Recommendation II.A.2. Perform a cost-benefit analysis of the recentralization of some financial functions. The results should provide guidance on how to proceed to improve the overall effectiveness of system (April 2017). - Recommendation III.B.1. Realize a comprehensive mapping of all accounts held outside the TSA for budget execution so as to obtain a vision their balances and operation and a good vision of the risks they may create, before the end of 2017. - Recommendation III.B.2. Implement a regular reporting system using data available in e-SISTAFE in order to monitor cases of incorrect processing and take immediate action. - Recommendation III.B.3. Consolidate data on contracts recorded by sectors in order to monitor the first stage of budget execution and to establish a control on “pre-commitments”. ### Budget execution statistics (Table 3 — Budget Execution Rate 2012-2015) - Total revenue: 2012 103% ; 2013 111% ; 2014 102% ; 2015 93% - Total expenditure (1): 2012 92% ; 2013 101% ; 2014 91% ; 2015 104% - Goods and services: 2012 102% ; 2013 102% ; 2014 98% ; 2015 110% - Current transfers: 2012 99% ; 2013 97% ; 2014 101% ; 2015 103% - (1): total expenditure minus net loans - Source: State Budget Execution Report, 2015 ### Wage bill management — systems, risks, and recommendations - Legislative and institutional framework: - Execution and control regulated by the SISTAFE Law, SISTAFE Decree, and Financial Administration Manual (MAF). - Government employment regulated by the General Statute of State Employees (Law 2009) and the 2009 Regulation on State Employees. - Finance Inspectorate (IGF) and Court of Accounts (TA) play crucial control roles. - MAEFP mandated for HR strategy and policy. - Systems, coverage, and recent operations: - e-CAF implemented in 2007 and e-Folha in 2009. - Following the Letter of Intent from December 2015: 270,612 government employees received their salary through e-Folha corresponding to 89,3 percent of the employees registered in e-CAF. - In 2015, 81,1 percent of the 302,800 civil servants registered in e-CAF had carried out the Proof of Life. - A temporary database e-CPAE created to handle transition of roughly 7.000 employees to normal terms in e-CAF and e-Folha. - e-Folha will successively replace three legacy systems which still manage 2.000 employees due to outstanding issues. - Strengths and controls: - Design of wage bill legal framework, procedures, and controls appears adequate. - “Proof of Life” operation updated the register of public employees in 2015, including biometric information; ongoing from 2017. - High coverage of databases and applications provides embedded controls; salary payment process includes controls at sector and MEF levels. - Emerging concerns and diagnostic gaps: - Wage bill forecasting rudimentary but effective recently; need to systematize multiyear planning and budgeting methodology. - Budget documentation provides only aggregated information on assumptions; disclosing distribution of staff headcount and factors explaining wage bill dynamics would improve transparency. - Declaraçao de Cabimento process could benefit from strengthened analysis of impact of additional admissions on the wage bill. - e-CAF maintains no historic data about individual public employees; personnel files remain paper-based within sectors, increasing fraud risk. - Interim control recommendation: IGF should, prior to inspections, collaborate with TA to produce updated printed lists from the TA’s “Sistema de Gestao de Vistos” to control individual Vistos against personnel files. - Risks and outlook: - Budget execution forecasts for 2016 and 2017 show systematic budget overruns in both years. - Possible causes (not resolved) include: - (i) deliberate under budgeting, - (ii) deactivation or overriding of system controls and legal procedures, - (iii) buildup of arrears from previous years recorded outside the system but paid in 2016, - (iv) changes in payroll composition (larger than foreseen increases in pay and allowances), - (v) decrease in expected number of staff transiting to retirement, - (vi) significant increase of hiring of new staff. - The Letter of Intent objectives likely to be only partially achieved: while Proof of Life and expanded e-Folha use successful, target of reducing the wage bill by 0.2 % of GDP in 2016 compared to 2015 appears difficult to achieve. - Recommendations (text preserved): - Recommendation III.B.1. DNCP should develop and implement improved tools during 2017 to forecast the impact on the payroll following new hires, promotions etc. to allow the Declaraçao de Cabimento to be issued by e-Sistafe and e-Folha. - Recommendation III.B.2. In 2017 IGF in collaboration with the TA should prepare printed lists of employees containing information from the TA system “Gestao do Visto” to allow for immediate control during inspection missions of the proper classification of employees in the e-CAF. - Recommendation III.B.3. During 2017, the MEF should push for closing the existing legacy systems in the area of payroll management and ensure that the transition process to e-Folha is concluded. - Recommendation III.B.4. During 2017, all remaining employees under irregular terms should have their terms regularized and staff employed under Investimento should be included in future payroll forecasts. - Recommendation III.B.5. During 2017, the MEF should investigate if there are viable alternatives to bank accounts for those employees (and pensioners) that have no access to the traditional banking system for geographical reasons. This could include looking at the utilization of mobile banking accounts. ### Gabinete de Gestão de Risco (GGR) — establishment, role, and sequencing - Establishment and staffing: - GGR established with an Acting Director and six professional employees. - Medium-term projected staffing complement: "about 20-25 professional staff, together with 4-5 support staff." - Supported by a resident advisor from the IMF’s Fiscal Affairs Department, financed by Belgium; "The advisor is expected to start work early in 2017." - Classified as a unit reporting to the Minister (not a full directorate) by MEF legal directorate. - Current functions and assessment: - Legal mandate covers internal audit, compliance, and risk management across fiscal and operational risks. - To date, limited work devoted to internal audit/compliance; most resources to preparing the 2016 FRS. - GGR has worked closely with DEFF which currently has greater analytical and technical capacity. - Immediate priority recommended: focus on effective assessment and management of fiscal risks. - Proposed organization and functions (two divisions): - Division 1: Fiscal Risk Analysis — prepare fiscal risk management policy and mitigation strategy; maintain comprehensive fiscal database; prepare biannual fiscal risk statements; advise Minister/Permanent Secretary on exposure and mitigation; coordinate forecasts with DEEF; develop tools and methodology; organize workshops. - Division 2: Monitoring and Compliance — monitor compliance with agreements/laws/regulations; monitor implementation of the 2014 FTAP; prepare biannual reports to the Minister on compliance and fiscal risks. - Internal audit sequencing: - Development of internal audit within MEF "should not be given priority in the short term." - Internal audit located in GGR is a potential distraction; consider establishing internal audit as a separate unit reporting directly to the Minister or Permanent Secretary. - IGF could provide some internal audit services in short- to medium-term though IGF independence complicates direct reporting. - Recommendations for GGR (text preserved): - Recommendation IV.A.1. Establish the GGR in a strategically prominent position in the MEF’s organizational structure, so that the unit can provide effective advice to the Minister and Permanent Secretary on the management and mitigation of fiscal risks, and related compliance issues. (April 2017) - Recommendation IV.A.2. Reorganize the GGR into two divisions, one responsible for fiscal risk analysis, the other for monitoring and compliance with public finance regulations, and agreements with the IMF and other international development partners. Relocate the GGR’s internal audit function in a separate unit which reports directly to the Minister or the Permanent Secretary. (April 2017) ### Fiscal Risk Statement (FRS), Fiscal Transparency Action Plan (FTAP), and transparency measures - FRS status and integration: - Mozambique’s first FRS published November 2015; supported by IMF TA. - FAD mission recommended improving information disclosed and expanding FRS scope. - Government unable to prepare an updated FRS for the 2017 budget due to complexity of the 2017 budget, limited capacities, and lack of integration with budget process. - Proposed approach: produce FRS biannually — as annex to the Cenário Fiscal de Médio Prazo and to the Proposta de Orçamento do Estado. - Assessment and methodological guidance: - FRS should identify sources of fiscal risk, assess potential magnitude and estimate probability. - Short-term: dual categorization per risk — potential impact: low, medium, high; probable occurrence: likely, probable, remote. - Medium-term: develop probabilistic estimates using historical data and financial analysis. - Based on assessment, identify and select mitigation instruments depending on risk nature, cost-tradeoff, and institutional capacity. - Recommendations for FRS (text preserved): - Recommendation IV.B.1. Synchronize the preparation of the FRS with the budget calendar and publish the next versions of the FRS in 2017 as an annex to both the Cenário Fiscal de Médio Prazo and the Proposta de Orçamento do Estado. (2017) - Recommendation IV.B.2. Develop a mapping of fiscal risks and assess the probability and the potential impact of these risks. (2017) - Recommendation IV.B.3. Develop a mitigation strategy for the major risks. (2017) - FTAP status and role: - November 2013 FTE highlighted areas for improving fiscal transparency; proposed FTAP. - Limited absorption of FTAP measures into MEF reform plans; key risks identified in FTE (e.g., government guarantees) have materialized. - An updated and approved FTAP annexed to the Strategic Plan would support implementation and signal commitment. - Recommendation IV.C.1. Update and approve the FTAP and annex it to the Strategic Plan for Public Finance. (2017) ### Selected objectives, indicators, and annex material (examples preserved) - Strategic Objective A. Stimulate Savings and Private Investment — sample numeric targets: - A1. Promote and attract Investment to Mozambique - Volume of new investment (USD millions): 1.8 1 2 3 5 - Responsible Directorate: DEEF - A2. Contribute to development of the private sector - Number of new business enterprises created: 315 500 650 800 1000 - Responsible Directorate: DEEF - Annex II — Draft FRS Outline (key elements): - Section 1: Introduction and Background (1/2 page) - Section 2: Magnitude of Fiscal Risks (1-2 page) - Section 3: Main Sources of Fiscal Risk (6-7 pages) — macroeconomic risks and special risks (natural disasters, SOEs, PPPs, VAT arrears, law suits) - Section 4: Government Policies for Mitigating Risks (1-2 pages) - Annexes to include lists and detailed data on PPPs, SOEs, resource-revenue uncertainties, government guarantees, significant law suits. - Annex III — Fiscal Risk Management Toolkit (selected instruments preserved): - Natural disasters and environmental risks: Early warning systems; reinsurance; catastrophe bonds; natural disaster funds. - Macro shock (Commodity Prices): Sensitivity analysis; hedging instruments; stabilization funds; prudent price assumptions. - Guarantees: central registry; central authorizing entity; ceilings on liabilities; charge risk-related fees; guarantee funds. - PPPs: central registry; Ministry of Finance gatekeeper; ceilings; CBA and value for money checks; guarantee fees. - SOEs: quantify explicit exposures; monitor performance; scenario analysis/stress testing; reporting requirements; explicit no-bail-out clauses; provision for restructuring costs. *Source: PREFACE, EXECUTIVE SUMMARY and selected chapters, 1mozea2023013 (IMF FAD mission report, December 1-14, 2016).* ### PREFACE __________________________________________________________________________________________ 6 ### PREFACE ### Mission background and logistics - A technical assistance (TA) mission from the Fiscal Affairs Department (FAD) visited Maputo, Mozambique during the period December 1-14, 2016 to carry out a review of the implementation of the government’s public financial management (PFM) reform strategy. - The mission was led by Mr. Xavier Rame and comprised Messrs. Richard Allen, Gregoire Tirot and Soren Langhoff, and Ms. Vania Tembe, FAD experts. - The review was coordinated with an analysis of budget execution procedures undertaken by Mr. Jean-Michel Champomier, Afritac South (AFS) expert. - The mission benefited from the support of Ms. Esther Palacio, TA coordinator at the IMF office in Mozambique. ### Acknowledgements - The mission expressed gratitude for the cooperation of the authorities, especially Mr. Domingos Lambo, Permanent Secretary, and for active participation in meetings and workshops. ### Funding and program context - The mission is part of the “Strengthening Fiscal Institutions in Mozambique Project” funded by the Government of Denmark and implemented by the IMF. ### Core focus of the mission - The mission concentrated on four key topics: - (i) supporting the planning and governance of the PFM reform strategy; - (ii) strengthening the budget execution process; - (iii) assessing the management of the civil service wage bill; and - (iv) enhancing fiscal risk management and transparency. ### Timeline and deliverable expectations - The mission supported finalization of the country’s first fiscal risk statement (FRS) and provided recommendations on operationalizing the Strategic Plan for Public Finance expected to be finalized before the end of 2016 and submitted to the Council of Ministers for approval. --- ### EXECUTIVE SUMMARY ### Progress and outstanding challenges - Over the last 15 years, Mozambique has made good progress with its PFM reform agenda but faces challenges related to fiscal transparency and risk management. - Treasury and budget management processes have been substantially modernized; initial steps introduced include the medium-term fiscal framework (CFMP) and program budgeting. - The published FTE report shows improved availability of fiscal information, but scope remains to improve budget documentation and fiscal reports, including information on fiscal risks. ### Fiscal shock and transparency imperatives - Following the revelation in April 2016 of previously undisclosed debt of $1.4 billion or 10.7 percent of the 2015 GDP, the country faces significant fiscal risks and pressure to improve fiscal transparency. ### Key diagnostic findings - The 2015 PFM assessment recommended reprioritizing the PFM reform strategy and translating policy into concrete improvements; progress in modernizing PFM systems has been mixed. - The merging of finance and planning functions within the MEF had yet to be implemented. - Limited progress in introducing a medium-term framework for the budget. - Coverage of the Treasury Single Account (TSA) increased, but cash flow forecasting improvements were more limited. - Control over stages of budget execution (commitment, verification, and payment) did not appear to operate as designed. - Real-time monitoring of budget execution is limited and there is no comprehensive and consolidated information on expenditure arrears. ### Strategic emphasis of the mission - The mission focused on operationalizing and governing the Strategic Plan for Public Finance, strengthening budget execution, assessing wage bill management, and enhancing fiscal risk management and transparency. --- ### IMPROVED PLANNING AND IMPLEMENTATION OF PFM REFORMS ### Strategic Plan for Public Finance (2016-2019) - Current situation: - The MEF prepared a draft Strategic Plan for Public Finance covering the period 2016-2019, aligned with the government’s Vision of Public Finances, 2011-2025 and Programa Quinquenal do Governo (PQG) 2015-2019. - Preparation was coordinated by CEDSIF with support from MEF directorates and units; drafts were discussed with development partners who submitted comments. - The MEF expected to finalize the Plan before the end of 2016 and submit it to the Council of Ministers for approval. - Scope and content: - The Strategic Plan covers seven objectives with sub-objectives/activities; its focus is primarily on public finance functions but also includes promotion of the business sector and private investment. - CEDSIF noted that the Plan: (i) is consistent with CEDSIF’s Strategy for 2015-2019 (IT focus); (ii) does not include provisions for training or capacity building (prepared separately); and (iii) does not include specific provisions for rolling out to line ministries, provinces or local governments. - CEDSIF prepared an assessment of the cost of implementing the Plan but those data were not supplied to the mission. ### Mission assessment and recommendations (strategic planning) - The Strategic Plan needs to be operationalized: - Update the Plan regularly to reflect changes in fiscal parameters and ensure consistency with the government’s economic and financial policies. - Prepare an operational plan by directorates and units focused on delivering strategic objectives, with emphasis on actions in the next 12-18 months. - Legal framework sequencing: - While a revision of the PFM legal framework would support reforms in the Strategic Plan, it should not take precedence over more urgent reforms and could be delayed until 2018. - Governance and coordination enhancements: - The mission recommends establishing a Special Committee, chaired by the Minister, Vice Minister, or Permanent Secretary, to supervise finalization and implementation of the Strategic Plan and provide leadership on PFM reform. - The Committee should hold regular meetings with development partners to ensure shared ownership and secure adequate funding. --- ### STRENGTHENING THE BUDGET EXECUTION PROCESS ### Current constraints and risks - Systemic constraints preclude timely recording of all stages of budget execution. - The budget execution system emphasizes tight financial control, de facto subordinating commitments recording to cash release by Treasury. - Real-time monitoring of budget execution is limited and there is no comprehensive and consolidated information on expenditure arrears. ### Short-term improvement options - Maximize use of existing data: - Sectoral contract registries (outside e-SISTAFE) should be consolidated centrally to monitor budget allocation use and assess remaining financial room. - Implement short-term action plan on arrears: - The action plan on arrears proposed by the April 2016 mission could be implemented in the short term to improve evaluation of the stock of payment arrears. --- ### MANAGING THE CIVIL SERVICE WAGE BILL ### Current practices and strengths - Wage bill forecasting is rudimentary but has been effective in the recent period. - Multiyear planning and budgeting methodology should be systematized and strengthened to improve predictability and planning of budget outlays. - Budget documentation provides only aggregated information on assumptions underlying the wage bill forecast; disclosing distribution of staff headcount and factors explaining wage bill dynamics would improve fiscal transparency and forecast quality. - The design of the wage bill legal framework, procedures, and controls appears adequate. - “Proof of Life” operation updated the register of public employees in 2015, including biometric information, and will be carried out on an ongoing basis from 2017. - High coverage of databases and applications provides embedded controls; the salary payment process includes controls at sector and MEF levels. ### Emerging concerns and diagnostic gaps - Recent slippages in the wage bill are concerning: - Budget execution forecasts for 2016 and 2017 show systematic budget overruns in both years. - Without detailed data, it is unclear whether overruns are due to deliberate under-budgeting, deactivation or overriding of controls, buildup of arrears from previous years recorded outside the system but being paid in 2016, changes in payroll composition, decreases in retiring staff, significant increases in new hires, or combinations thereof. - FAD offered to assist authorities in a detailed analysis of wage bill data to identify causes and mitigation measures. --- ### ENHANCING FISCAL RISK MANAGEMENT AND FISCAL TRANSPARENCY ### Institutional arrangements and the GGR - Sound institutional arrangements are needed for an effective and integrated approach to fiscal risk management. - Creation of the Cabinet for Fiscal Risks Management (GGR) is a first step to establish and staff a central risk management oversight unit. - The GGR could support the government’s fiscal risk management policy and related accountability framework. ### Priority functions and sequencing for the GGR - Strengthening central controls over fiscal risk management should be a priority; possible measure: submit to the prior approval of the Minister of Finance and Economy any act with a financial impact. - Given staffing and capacity constraints, the GGR should initially focus on fiscal risk management functions: - fiscal risk strategy; - Fiscal Risk Statement (FRS); - overall exposure to risk; - mitigation strategies; - compliance with key legal requirements and international commitments. - Development of internal audit within MEF should not be prioritized in the short term and could be allocated to the General Inspectorate of Finance. ### Fiscal Risk Statement and transparency instruments - The publication of the FRS in 2015 was a major step to improve fiscal transparency; objective now is to fully integrate the statement with management and mitigation of fiscal risks. - Based on fiscal risk assessment, the government should identify relevant mitigation instruments. - The timeline for preparing the FRS should be fully aligned with the budget calendar: - An FRS annexed to the Cenário Fiscal de Médio Prazo (CFMP) could provide a medium-term perspective. - An FRS annexed to the budget proposal could focus on assessing risks during the upcoming budget year. ### Fiscal Transparency Action Plan (FTAP) - Most FTE findings remain valid; updating and approving the FTAP would send a clear signal of commitment to improve fiscal transparency. - The FTAP update could be developed with development partners, who could support implementation. - FAD could provide operational support to finalize the update. --- *Source: PREFACE and EXECUTIVE SUMMARY, 1mozea2023013 - PREFACE (IMF FAD mission report, December 1-14, 2016).* ### 3. The draft Strategic Plan is a comprehensive document and has been well prepared, ### 3. The draft Strategic Plan is a comprehensive document and has been well prepared, ### Major issues and design observations - The draft Strategic Plan is comprehensive but some outstanding issues need to be addressed, notably greater prominence for macro-fiscal issues in light of ongoing discussions between the authorities and the IMF on a possible program. - Structure: - The Plan’s broad structure, broken down into objectives and activities, is appropriate. - Need for clearer distinction between strategic objectives (e.g., achieving value for money in the ownership and management of public assets) and operational objectives (e.g., improving the performance of the procurement system in conducting competitive international tenders, and in recording public assets). - Coverage gaps: - Greater emphasis needed on assessing and reporting the fiscal operations of public sector entities outside the central government, in particular public corporations, the social security fund (INSS), and the banking sector. - Annex tables: - Two annexed tables mix actions/activities over the five-year Plan period with related performance targets/indicators; the second table is a results matrix but its purpose is not clearly distinguished from the first table. - Recommendation to merge into a single strategic action plan: under each strategic objective, list main actions (high level) and a few Key Performance Indicators (KPIs) to be monitored during implementation. - Annex 1 proposes a template for the revised presentation. - Suggestion to include a table showing the trend in selected KPIs over the past five years to provide historical context. ### PEFA and indicator framework - Proposal by some development partners to include selected PEFA indicators as monitoring tools was discussed. - Mission view: - Indicators in the Plan should be clearly distinguished from the PEFA framework. - The Plan is strategic with high-level targets on public finance for the next five years. - The PEFA framework provides a technical assessment of PFM processes and systems and should be complementary. - Recommendation: - Encourage the government to update the PEFA assessments carried out in 2010 and 2015 every few years to identify PFM areas requiring strengthening and on which authorities may request support. - PEFA indicators could be included in the detailed operational plans that the MEF should prepare to deliver the MEF’s strategic objectives. ### Implementation, operationalization, and updates - Updates: - The Plan covers the period to 2019 but public finances are likely to change substantially during this period; there is a strong case for updating the Plan and its strategic targets regularly, perhaps annually. - First occasion to update would arise should the authorities agree a program with the IMF; such a program would include targets and structural benchmarks that could be included in an updated Strategic Plan. - Operationalization: - The Plan focuses on strategic objectives but gives limited attention to how it will be put into effect and which entities will be operationally responsible. - CEDSIF indicated the Plan, once adopted, would feed into the government’s annual Economic and Social Plan (PES); this routine activity alone is unlikely to be sufficient. - Recommendation that the Strategic Plan include a section describing next steps, allocation of responsibilities to MEF directorates/units (DNPO, DNT, DEEF, GGR, etc.), and specific tasks. - Suggested timeline: each directorate prepare by, say, April 2017, an operational plan focusing on actions for the next 12-18 months and the resources required. - Table 2 (Illustrative Operational Plan for a Directorate (2016-2017)) lists key elements to include (Responsible official; Project manager; Coordination required; Relevant Objective; Action to be delivered; Activities; Estimated time period; Key performance indicator{s}; Estimated cost of activity—Capital, Recurrent, Total; Consultancy support; Financing; Measures to cover financing gap; Capacity building; Reporting on progress). Example entries include: - Estimated time period to complete activity: January 2017 to June 2018 - Key performance indicator{s}: Percentage of SOEs covered by database - Reporting on progress: Monthly reports to Permanent Secretary and CEDSIF - Directorates should discuss plan development with other directorates and with CEDSIF, which should advise on coordination. - CEDSIF should ensure its Strategy for 2015-2019 is consistent with the new Strategic Plan on IT systems and updated in parallel. ### Capacity building and human resources - Current Plan includes only very limited information on training and capacity building required for MEF staff and executing agencies in central government and regions. - CEDSIF informed the mission some preliminary work on capacity building requirements had been done, but this was to be disclosed in a separate document; the mission was not provided further information. - Capacity building activities need to be costed and integrated into directorates’ operational plans to avoid the Plan becoming a purely paper exercise. - Wide consultations at all government levels will be required and capacity building should be aligned with operations of the soon-to-be-established Higher Institute of Public Finance and Taxation and existing training facilities. ### Mozambique’s New Higher Institute of Public Finance and Taxation (Box 1) - Expected opening: mid-2017. - Programs and capacities: - Bachelor’s program: initial intake of 200 students (five years). - Master’s program: initial intake of 90 students (three years). - Total capacity: 800 students. - Institute will have two arms: one focusing on public finance issues, the other on taxation. - Permanent, full-time faculty plus guest lecturers from civil service and academia. - Arrangements with the Mozambique Association of Accountants and the Association of Internal Auditors in Mozambique. - Courses will not replace specialized training for operational staff (e.g., delivered by CEDSIF on the e-SISTAFE modules). ### Prioritization, legislative basis, and sequencing of PFM reforms - The Strategic Plan provides high-level guidelines for strengthening public finances over the medium term but is less useful for planning and sequencing PFM reforms that should be prioritized over the next 12 to 18 months. - Important PFM reforms identified in previous FAD reports or in the 2014 Fiscal Transparency Evaluation are not included in the Plan, nor are specific recommendations on fiscal risks discussed elsewhere in the mission report. - The mission makes recommendations on budget execution and payroll management for inclusion in a prioritized action plan. - Suggestion to update and publish the prioritized action plan annually as an annex to the Strategic Plan. - Development partners should be consulted on specific measures and may provide technical and/or financial support; the plan could incorporate any structural benchmarks on PFM agreed under a future IMF program. - Legislative basis: - FAD’s TA report of November 2015 recommended that the SISTAFE Law be updated. - Preparing a revised law will be important to facilitate reforms but should not take precedence over more urgent reforms and could be delayed until 2018. ### Formal recommendations (text preserved) - Recommendation I.A.1. Ensure that the Strategic Plan for Public Finance, 2016-2020 is finalized and approved by the Council of Ministers, and gives particular emphasis to a public sector-wide approach to PFM reform. (December 2016) - Recommendation I.A.2. Include an updated action plan on fiscal transparency (FTAP) as an annex to the Strategic Plan. (December 2016) - Recommendation I.A.3. Update the Strategic Plan to accommodate the provisions and structural benchmarks included in any new program that is agreed with the IMF, and otherwise on an annual basis. (December 2017 and annually) - Recommendation I.A.4. Prepare detailed operational plans for implementing the objectives, targets and actions outlined in the Strategic Plan, and assign responsibilities to the respective directorates and units of the ministry for delivering these objectives. (June 2017) - Recommendation I.A.5. Prepare a detailed plan for building capacity in PFM at all levels of government, and assign responsibilities to the directorates and units of MEF for implementing the required measures. (June 2017) - Recommendation I.A.6. Prepare an action plan of short-term (12-18 month) PFM reform measures that could be annexed to the Strategic Plan, updated periodically, and reflected in the operational plans of individual directorates. (June 2017) ### Governance and coordination mechanisms — current situation and assessment - Current situation: - Governance arrangements for managing and coordinating PFM reforms have improved but could be strengthened further. - FAD’s November 2015 mission recommended that the MEF establish a formal mechanism for discussion of PFM reform issues with donors and other stakeholders. - MEF consulted development partners on preparation of the Strategic Plan for Public Finance, 2016-19, but arrangements could be formalized and responsibilities clarified. - Assessment — issues to consider: - Leadership: - Senior management of the MEF has taken a back seat on Plan preparation; technical work led by CEDSIF with policy directorates. - Senior Technical Committee chaired by the Permanent Secretary supervised preparation but Minister, Vice Minister or Permanent Secretary involvement has been limited. - Development partner meetings have been with CEDSIF, not senior MEF management. - Mission view: senior management should take a stronger role in finalization and implementation. - Options: organize leadership through the Technical Committee or a Special Committee for Implementation, chaired by Minister, Vice Minister or Permanent Secretary, with MEF directorates, CEDSIF, and development partner representatives. - Funding: - Broad cost estimates prepared by CEDSIF but detailed estimates at activity level are needed before implementation. - Development partners are willing in principle to finance some activities bilaterally or through a common fund. - Amounts required and funding mechanisms/modalities need senior-level discussion; no broad envelope disclosed by CEDSIF or MEF at this stage. - Monitoring implementation: - CEDSIF informed mission that two existing groups—the Forum of e-SISTAFE Users (FUE) and the National SISTAFE Committee (RUE), which meets annually—would be formally responsible for monitoring implementation, but arrangements need reinforcement by the Special Committee. - Reporting cadence proposed: - Minister should be updated every three months on progress. - Council of Ministers should be updated annually. - Technical monitoring responsibility: MEF’s National Directorate for Monitoring and Evaluation (DNMA) would be responsible, supported by CEDSIF in establishing a monitoring framework and assessments. - Detailed operational plans and capacity building programs require more granular monitoring; roles of CEDSIF and DNMA need clear definition. - MEF decisions required on feedback mechanisms to directorates/agencies and remedial actions if progress falls short. - Mandate of the Special Committee (with technical support from CEDSIF and DNMA) could include: - (i) finalizing the Strategic Plan and its annual updates; - (ii) preparing detailed operational and capacity building plans by directorates; - (iii) preparing an action plan of short-term priority PFM reform measures to annex to the Plan; - (iv) monitoring implementation and providing feedback to project managers where performance lags; - (v) preparing regular reports to the Council of Ministers on progress in implementing the Plan’s KPIs; - (vi) liaising with development partners on financing of activities that support Plan implementation. - Development partners should be invited to participate in Committee meetings, especially on funding issues. - Recommendation: - Recommendation I.B.1. Establish a Special Committee, chaired by the Minister, Vice Minister, or Permanent Secretary to supervise the finalization and implementation of the Strategic Plan, and provide leadership on PFM reform to the operational directorates and units in the MEF, and other stakeholders. The Committee should hold regular meetings with the development partners to ensure the partners’ shared ownership of the Plan, and secure necessary funding. (April 2017) ### Strengthening the budget execution process — e-SISTAFE development and implementation (selected findings) - Prior FAD missions highlighted substantial progress on rolling out and coverage of e-SISTAFE and recommended further focus on user training and operational performance. - Coverage statistics (June 2016 vs October 2015): - In June 2016, 87.6 percent of the 1525 Beneficiary Management Units (UGBs) were covered by e-SISTAFE, against 84 percent in October 2015. - Gaps and operational issues: - Remaining coverage gap results from non-compliance with minimum requirements for operating e-SISTAFE. - Some installed sites faced challenges from lack of regular electricity supply, equipment malfunctions, poor network connectivity, and lack of maintenance. - During the first quarter of 2014, 14 percent of sites were inoperative at the national level, peaking at 38 percent inoperative sites in the North Region. - Impact on payments and payroll: - Extension of functionalities increased the number of payments made through the Single Treasury Account (TSA) to 74.7 percent in December 2015. - Wage payments made through the Salary Payment System (e-Folha) increased to 90.8 percent, significantly improving internal control of the payroll. - Capacity building: - CEDSIF have stepped up training of finance staff. *Source: IMF Staff* ### 8. The change management plan (see Box 2) could leverage the feedbacks of the e- ### 8. The change management plan (see Box 2) could leverage the feedbacks of the e- ### Change management plan and users’ forum - A users’ forum conducted in 6 provinces (including district level) increased the number of users who have benefited from retraining to 1,803. - Up to February 2017, CEDSIF expected to retrain 7,000 users in four main topics: stages of budget execution, wages process and payment, bank account registration and maintenance, and e-SISTAFE safety procedures. - Users’ forum (established by CEDSIF in 2015) feedback identified primary limitations to expenditure execution in e-SISTAFE: - Technical problems: internet downtime, electricity problems, and system slowdown. - Capacity constraints: limited training and access to law and regulations and lack of update on system updates or changes. - Organizational arrangements: users sometimes travel to distant sites to input transactions; a frequent practice is a single user travelling and using access rights from others, breaching segregation of duties and basic internal control. ### Box 2 — e-SISTAFE Change Management Plan (operational design) - Focus levels: 1. Process level: monitor developments of e-SISTAFE modules and enable a coordinated action strategy. 2. Institutional level: cover all main e-SISTAFE actors and align them across change events. - Three levels of intervention: - Multisector reform management to (i) coordinate e-SISTAFE, (ii) create institutional alliances, (iii) involve other sectors in decision-making, and (iv) sponsor, negotiate and monitor the degree of acceptance and integration of e-SISTAFE. - Reform management (lead by CEDSIF) to improve internal communication, provide support to e-SISTAFE users, establish change management teams at the base level, provide training, including tools and methodologies to conduct change with success and monitor the SISTAFE implementation. - Training of trainers, based on trainers from the central level o, CEDSIF provincial delegations. - Source: Change Management Plan, November 2015 ### Assessment of e-SISTAFE usage and implementation - e-SISTAFE is part of ongoing PFM reform; its effectiveness depends on comprehensiveness across phases of the expenditure process. - Recording of transactions in e-SISTAFE still usually takes place at the time of payments, impairing ability to manage budget execution and control commitments. - Most users have been trained; changing users’ work habits and behavior remains a key enabler of effective overhaul of budget execution procedures. - CEDSIF is implementing a change management plan to strengthen e-SISTAFE use as a management tool. ### Short-term measures and system rollout status - Further consolidation requires training and dissemination of legal framework (laws, regulations, procedures). - A cost-benefit analysis of possible recentralization of financial functions could assist in improving system effectiveness (particularly in resource-limited areas). - Embedding rules in the system to enforce mandatory time lags between phases of the expenditure process could improve system use. - Progress on November 2015 mission recommendations limited, notably on asset management, e-tax implementation, planning and budget subsystem modules; delays attributed by authorities to limited availability of funding. - CEDSIF is exploring e-SISTAFE access via internet and mobile phone. ### Box 3 — e-SISTAFE implementation status (as of CEDSIF activities report June 2016) - State Asset Management: Until June 2016, human resources allocated to initiate development of new features of State asset management subsystem, asset management component and public procurement. CEDSIF expect to finalize it in 27 months. - e-tax: a contract was signed with a consortium (NBMSIT, Novabase e Intrasoft Internacional) to implement remaining features of e-tax. - Budget and planning subsystem (SPO): Schedule of activities finalized and terms of reference for specialized consulting services prepared; this activity is facing resources constraints. ### Recommendations (from the chapter) - Recommendation II.A.1. Further focus on e-SISTAFE users training and retraining and ensure the implementation of the change management plan (Annually). - Recommendation II.A.2. Perform a cost-benefit analysis of the recentralization of some financial functions. The results should provide guidance on how to proceed to improve the overall effectiveness of system (April 2017). ### Budget execution procedures — key findings - Real time recording of commitments is not ensured though technically possible through e-SISTAFE. Roll-out of the e-asset module (MPE) and extension of budget execution module (MEX) planned for 2016 were not achieved; development of MPE is at risk due to financial resource shortage. - Timely recording of commitment, verification, and payment is not systematically monitored; the mission found that the three stages were sometimes carried out in e-SISTAFE over a short period, with some users registering the three stages the same day. - Number of accounts held outside the TSA decreased to 4,000, against 11,000 in 2013. DTN reported off-TSA accounts are often created without prior approval; a detailed mapping is required to identify amounts, balances, purpose of operations, and effectiveness of transfer to TSA. - Expenditure processed through advances to budget managers and subsequent reporting and accounting (via indireta) is stated as decreasing (from 65 % in 2014 to 85% of spending in December 2016). The objective of using this procedure only in exceptional cases is not yet achieved. - Weaknesses lead to unreliable and incomplete real-time information on government expenditure and liabilities, creating risk of accumulation of arrears and budget slippage. - Decree 5/2016 art. 119 provides a clear legal definition of arrears — noted as progress. ### Table 3 — Budget Execution Rate (2012-2015) - Total revenue: 2012 103% ; 2013 111% ; 2014 102% ; 2015 93% - Total expenditure (1): 2012 92% ; 2013 101% ; 2014 91% ; 2015 104% - Goods and services: 2012 102% ; 2013 102% ; 2014 98% ; 2015 110% - Current transfers: 2012 99% ; 2013 97% ; 2014 101% ; 2015 103% - (1): total expenditure minus net loans - Source: State Budget Execution Report, 2015 ### Cash management, decentralization, and arrears monitoring - Cash flow management constrains real time recording of commitment: Treasury issues a “Limite de Cabimentacao” corresponding to available cash for a one-week time slot in the following month; UGEs often wait at least one month to register commitment. - Centralized cash management overloads Treasury and limits focus on cash flow forecasting. Decentralization to MEF delegations (DPEF) at provincial level is under discussion for medium-term examination. - Transformation into UGBs and use of e-SISTAFE: 1,599 UGBs in place, out of which 1,299 were using e-SISTAFE. - Use of indirect payment procedures based on advances and ex-post commitment decreased to around 15 percent; ratio should decrease further to exceptional use only. - Increasing use of TSA and closing accounts outside TSA should improve monitoring, but consolidated vision of all bank accounts is still missing; recent donor use of accounts outside Government system created adverse trend. - No quantitative information on stock or flow of arrears and no monitoring system; entities responsible for arrears action plan (April 2016) had not been defined at mission date. Recommended first-stage approach to gather arrears data (Box 4). ### Box 4 — Gathering data on payment arrears from contracts (recommended approach) - Use questionnaires to request detailed information from budget unit managers because more than 1,500 budget execution units exist and no standardized invoice registration system is in place; on-site inspection if managers do not respond. - Ask confirmation to suppliers and contractors based on sampling to corroborate amounts and dates of unpaid invoices. - Source: IMF Staff ### Additional operational weaknesses and short-term improvements - New e-SISTAFE feature (2016) allows issuance of a “commitment note” (nota de compromisso) printable from e-SISTAFE to confirm to suppliers that Government has resources to pay; because purchase orders are issued outside e-SISTAFE and the note can be generated only when a commitment is registered, it currently does not add value for budget execution control. - Parallel systems and records at budget unit level mean relevant information is recorded outside e-SISTAFE and unavailable for central monitoring; transmitting parallel information (e.g., data on potential financial impact of contracts) to central Treasury may be a temporary solution. - Table 4 summary of recording stages highlights many steps with “No action” or parallel recording practices; several stages are not consistently registered in e-SISTAFE and sector procurement management units (UGA) lack access. - Short-term improvement: consolidate existing data on contracts (Excel-sheets at sectoral level) to provide more accurate information on use of budget allocation and remaining allocation. - Segregation of duties is clearly defined but not effective in practice; simultaneous registration of Commitment, Verification and Payment often enabled by single agent using colleagues’ passwords due to staffing shortages. - CEDSIF had defined in 2011 a control report on the extension of incorrect use of e-SISTAFE that the system could generate at zero cost; a similar report should be implemented in 2017 regularly with targeted assistance and training to less performing units. *Source: 1mozea2023013* ### Box 5. Using Purchase Orders and e-Invoicing Portal: International Experience ### Box 5. Using Purchase Orders and e-Invoicing Portal: International Experience ### International experience and measures adopted - In some countries (Zambia, Kenya, Namibia, Botswana) suppliers have been informed in the Press and on TV that no Invoice will be accepted for payment if the delivery of goods and services is not based on an IFMIS issued Purchase Order with an associated Purchase Order number. - Suppliers must be notified that only IFMIS issued Purchase Orders will guarantee payment. - In some advanced economies the Ministry of Finance has introduced e-Invoicing where the Invoice from the supplier must be submitted through a Government operated e-Invoicing portal linked to the IFMIS. - In that e-Invoicing setup, the purchase order number must be provided to submit the invoice. ### Operational effects on budget execution and IFMIS - Requiring IFMIS-issued Purchase Orders incentivizes suppliers to request Purchase Orders from government officials, which in turn encourages government officers in charge of procurement and purchases to launch commitments in the system to be able to issue Purchase Orders. - This initiative has helped the countries reduce commitment outside of the IFMIS. - Combining mandatory IFMIS Purchase Orders with an e-Invoicing portal that requires the Purchase Order number makes it difficult to bypass the budget execution phases. - These measures would strengthen the ability to secure effective commitment in the e-Sistafe. ### Recommendations (as presented) - Recommendation III.B.1. Realize a comprehensive mapping of all accounts held outside the TSA for budget execution so as to obtain a vision their balances and operation and a good vision of the risks they may create, before the end of 2017. - Recommendation III.B.2. Implement a regular reporting system using data available in e-SISTAFE in order to monitor cases of incorrect processing and take immediate action. - Recommendation III.B.3. Consolidate data on contracts recorded by sectors in order to monitor the first stage of budget execution and to establish a control on “pre-commitments”. *Source: Mission* ### 40. The legislative framework for wage bill execution and control is comprehensive and ### 1mozea2023013 - 40. The legislative framework for wage bill execution and control is comprehensive and ### Legislative framework and institutional responsibilities - Execution and control of the wage bill is regulated by the SISTAFE Law and the SISTAFE Decree as well as by the various legal instruments related to the budget execution, including the Financial Administration Manual (Manual de Administracao Financeira - MAF). - Government employment is regulated by the General Statute of State Employees (turned into Law in 2009) and by the 2009 Regulation on State Employees. - The Finance Inspectorate (Inspeccao Geral das Financas – IGF) and the Court of Accounts (Tribunal Administrativo – TA) have legal mandates that play a crucial role in the control process. - The Ministry of State Administration and the Public Function (Ministerio da Administracao Estatal e Funcao Publica - MAEFP) is mandated to develop, oversee and implement overall strategies and policies on human resource management. - Each sector in government is responsible, under sector-specific legislative frameworks, for management and supervision of government-funded employment in the sectors. ### Admission and administration of public employees (Box 8) - The Admission Plan for each sector presented in the budget documentation (Fundamentacao do Orcamento) provides the ceilings for the number of new employees that can be hired in each sector. - The annual admission plan guarantees that there is fiscal space to include new employees on the payroll. - Each sector must prepare detailed plans for admissions and identify suitable candidates. - Before hiring, the sector must secure a “Declaracao de Cabimento” from the DNCP in the MEF; this declaration ensures MEF approval and budgetary space for new employees. - The sector must present the administrative process to the TA to secure the “Visto” from the TA. The TA will ensure required documents (birth certificate, identity card, professional certificates, including the Declaration of Cabimento) are included in the case file and, if properly prepared, will issue the Visto within 40 days. - Similar procedures apply for promotions, transfers, dismissals, and retirement. ### Monthly payroll calculation, controls, and execution - Sectors are responsible for updating monthly registers regarding employees and maintaining registers of presence, illness, holidays, etc.; this information is processed into e-Folha and presented to the DNCP. - DNCP calculates a first draft of the monthly payroll and returns it to the sector in e-Folha for approval. - DNCP has defined a band of variation (5 percent) around the expected/budget payroll value for the sector: - If payroll > the 5 percent band, the payroll must be approved by the Minister of the sector. - If ministerial approval is not given, payroll will be recalculated based on expected values derived from e-CAF and then scheduled for payment through the budget execution module of e-Sistafe and a request for payment to DNT. - DNCP monitors the overall monthly process and ensures the defined monthly schedule for payment of wages and personnel expenditure is carried out in accordance with the Financial Procedures Manual. ### Cash payments and banking access - Part of the payroll is still executed via cash payments because some public employees do not have a bank account, particularly in regions without access to the banking system; pensioners are also involved. - The volume of cash transactions is decreasing. ### Compliance with wage bill ceilings (2010-2015) - An ex post review shows the global wage bill ceiling has generally been complied with during 2010-2015, with fiscal slippage occurring twice: - 2013: overrun of 1.6 percent. - 2014: overrun of 5 percent. - For other years, wage bill execution remained under the annual ceiling approved by Parliament. - Additional funds are often added or transferred between ceilings by reallocation of appropriations (appropriations to a sector on other expenditure can be reallocated to salary – but not the other way around) or by liberating reserved the cativos. ### Reporting, oversight, and audit findings - Reporting on wage bill execution is included in the e-Sistafe reporting modules and forms part of the quarterly budget execution reports (Relatorio de Execucao Orcamental – REO) published on the MEF website. - IGF (internal audit) and TA (external audit) have not identified systemic deficiencies in the payroll control system. - IGF inspections, supported by data from e-CAF and e-Folha, identify payroll as a high risk area in particular related to: - (i) over and extra time payments, - (ii) payment of allowances, - (iii) proper registration of public employees in the e-CAF. - Specific issues noted: - Requests for overtime and allowances without proper authorization. - Possible fraud involving falsification of the TA Visto, allowing employees to be registered at a higher pay scale. - Personnel case files are kept in paper at sectors while copies of the Visto are kept with TA, making instant reconciliation difficult. - Both IGF and TA have the mandate to recommend cases to the Public Prosecutor and have executed this mandate over the years. - TA audits the payroll following an annual work plan and has not identified system issues regarding payroll control. ### IT systems, coverage, and shortcomings - e-CAF implemented in 2007 and e-Folha in 2009; IT underpinning has seen steady improvements. - e-Folha will successively replace three legacy systems which still manage 2.000 employees due to outstanding issues regarding some salary tables and career definitions being regularized by DNCP. - Following the Letter of Intent from December 2015: - 270,612 government employees received their salary through e-Folha corresponding to 89,3 percent of the employees registered in e-CAF. - In 2015, 81,1 percent of the 302,800 civil servants registered in e-CAF had carried out the Proof of Life. - A temporary database e-CPAE was created to handle the transfer of payment data from various systems to e-Folha and e-Sistafe and to handle the transition of roughly 7.000 employees to normal terms in e-CAF and e-Folha. - e-CAF serves as the authoritative repository to validate a public employee prior to releasing a salary payment but has shortcomings: - e-CAF maintains no historic data about individual public employees; new status updates are superimposed on old status without tracking history. - Personnel files remain paper-based within sectors, increasing fraud risk (tampering, falsified TA Visto). ### Assessment and identified weaknesses - Declaraçao de Cabimento process could benefit from strengthened analysis of the impact of additional admissions on the wage bill. - DNPO and DNCP introduced specific budget lines covering new hires, promotions and salary increases; these lines cannot be executed directly and are reallocated when hires occur. - Issuance of the Declaraçao de Cabimento is based on availability on these lines and salary impact forecasts calculated in spreadsheets by DNCP. - DNCP should be equipped with tools to more precisely calculate payroll impact based on e-Folha and e-CAF data when hiring or promoting staff before issuing the Declaraçao de Cabimento. - The Declaraçao de Cabimento should be issued through the IT system: - The hiring process should be supported by a forecasting tool in the e-Sistafe/e-Folha system producing a system-issued report that simulates impact on payroll ceilings for sector/province/district and includes assumptions on existing employees, expected pensioner exits, salary progression, and estimates of annual salary negotiation in the Comissao Consultivo de Salario. - Similar system reports should be issued for promotions and other decisions impacting the wage bill. - Interim controls to improve validity of the Visto are recommended pending a new HRM system: - MEF and MAFFP proposed developing and implementing an HR management system for all Wage Bill stakeholders to maintain employment history and improve reliability (e.g., ensuring TA Visto approval). - Interim recommendation: IGF should, prior to inspections, collaborate with TA to produce updated printed lists from the TA’s “Sistema de Gestao de Vistos” of employees and current status to bring on inspection missions to control individual Vistos against personnel files. ### Transition and inclusion priorities - MEF should continue to push for phasing out legacy systems; the mission recommends 2017 be used to conclude transition of all employees in the three legacy systems and in the e-CPAE to e-Folha. - Mobile banking accounts could be an alternative for employees (or pensioners) without traditional bank accounts due to geographical reasons; MEF could consider mobile banking accounts or accounts in the Mozambican Postal system. - Government employees funded by international development partners under Investimento should be included in payroll forecasting and irregularly employed staff should be regularized in 2017; inclusion of irregularly employed staff into e-Folha under regular terms should be concluded in 2017 and any remaining employees funded under Investimento should be included in future salary forecasts with a plan for regularization. ### Main risk and outlook for Letter of Intent objectives - Main identified risk in wage bill execution and control: - Despite well-designed system controls in e-Sistafe and e-Folha and a solid legislative framework, budget execution forecasts for 2016 and 2017 show systematic budget overruns in both years. Possible causes (not resolved) include: - (i) deliberate under budgeting, - (ii) deactivation or overriding of system controls and legal procedures, - (iii) buildup of arrears from previous years recorded outside the system but paid in 2016, - (iv) changes in payroll composition (larger than foreseen increases in pay and allowances), - (v) decrease in expected number of staff transiting to retirement, - (vi) significant increase of hiring of new staff. - The objectives set in the Letter of Intent will only be partially achieved: - While MEF successfully carried out the Proof of Life and expanded e-Folha use, it appears difficult to achieve the target of reducing the wage bill by 0.2 % of GDP in 2016 compared to 2015. ### Recommendations (as listed) - Recommendation III.B.1. DNCP should develop and implement improved tools during 2017 to forecast the impact on the payroll following new hires, promotions etc. to allow the Declaraçao de Cabimento to be issued by e-Sistafe and e-Folha. - Recommendation III.B.2. In 2017 IGF in collaboration with the TA should prepare printed lists of employees containing information from the TA system “Gestao do Visto” to allow for immediate control during inspection missions of the proper classification of employees in the e-CAF. - Recommendation III.B.3. During 2017, the MEF should push for closing the existing legacy systems in the area of payroll management and ensure that the transition process to e-Folha is concluded. - Recommendation III.B.4. During 2017, all remaining employees under irregular terms should have their terms regularized and staff employed under Investimento should be included in future payroll forecasts. - Recommendation III.B.5. During 2017, the MEF should investigate if there are viable alternatives to bank accounts for those employees (and pensioners) that have no access to the traditional banking system for geographical reasons. This could include looking at the utilization of mobile banking accounts. *Source: IMF staff (extracted from the referenced chapter).* ### 56. The MEF has recently established a Risk Management Unit, the Gabinete de Gestão ### 1mozea2023013 - 56. The MEF has recently established a Risk Management Unit, the Gabinete de Gestão ### Establishment, staffing, and status - The MEF has established a Risk Management Unit, the Gabinete de Gestão de Risco (GGR). - Current staffing: an Acting Director and six professional employees. - Medium-term projected staffing complement: "about 20-25 professional staff, together with 4-5 support staff." - The GGR will be supported by a resident advisor from the IMF’s Fiscal Affairs Department, financed by Belgium; "The advisor is expected to start work early in 2017." - Legal status: classified as a unit reporting to the Minister (not a full directorate of the MEF) by decision of the MEF’s legal directorate; in practice this classification is "unlikely to limit the unit’s functions, size, or capability." ### Current functions and activities - Under its legal mandate, the GGR is responsible for three main activities: - internal audit, - compliance, - risk management. - Responsibilities cover risks beyond fiscal risks, including operational risks, and include: - ensuring MEF compliance with legal obligations in planning, budgeting, and public finance, - undertaking internal audits of MEF systems and operations. - Since establishment, "the amount of work it has devoted to its internal audit and compliance functions has been quite limited." - Most current resources deployed to preparing the 2016 version of the MEF’s fiscal risk statement. - The GGR has worked closely with the MEF’s Economic and Financial Studies Directorate (DEFF), which "currently has greater analytical and technical capacity than the GGR." ### Analysis: role, leadership, and capacity building - The Minister has taken a personal interest in establishing the GGR to fill a vacuum in MEF’s organizational structure. - The unit should advise the Minister and Permanent Secretary on assessment and management of risks related to fiscal policy and ensure compliance with legal requirements and agreements with the IMF and other international development partners. - The GGR’s position as the central strategic unit in the MEF "needs to be affirmed" so it can play an effective advisory role (see Figure 8). - Minister emphasized staffing with professionals "highly experienced and skilled in economics and finance"; existing staffing complement "may require" revisiting. - The IMF long-term resident advisor will enhance the unit’s capacity in the next two years. ### Challenges and coordination issues - Functions of macroeconomic and fiscal forecasting, fiscal reporting, and fiscal risk analysis are distributed among several MEF directorates and units (DEEF, DNPO, DNT, and GGR), creating fragmentation that is "sub-optimal" and imposing heavy demands on coordination. - GGR will need to build and manage relationships with these directorates to obtain and exchange information and work collaboratively (e.g., fiscal risk analysis). - Exercising the compliance function will require strong leadership and sensitive relationship handling, since compliance functions are "relatively unfamiliar to the public sector" and more common in the private sector. - Under challenging fiscal circumstances, some aspects of compliance (e.g., satisfying terms and conditions of agreements with international development partners) are appropriate to be exercised by the GGR. ### Proposed organization and functions (Table 7 summary) - Immediate priority: focus on effective assessment and management of fiscal risks. - Proposed organization: two divisions to give primacy to measurement, control, and management of fiscal risks while contributing to compliance work. Division 1: Fiscal Risk Analysis — responsibilities - Preparation of a draft fiscal risk management policy and risk mitigation strategy, and its periodic update, for publication by the government. - Preparation and maintenance of a comprehensive fiscal database, in consultation with relevant MEF directorates. - Preparation of a biannual fiscal risk statement, one statement to coincide with the publication of the budget, the other with the medium-term fiscal scenario. - Provision of advice to the Minister and Permanent Secretary on the government’s overall exposure to fiscal risks, and alternative risk mitigation strategies. - Coordination of the preparation of macro-economic and fiscal forecasts with the DEEF. - Preparation of fiscal sensitivity analysis and fiscal projections using alternative macroeconomic scenarios. - Development of tools and data to monitor the government’s exposure to specific risks, e.g., government guarantees, PPPs, financial sector, social security (INSS), state enterprises, natural disasters, external aid, etc. - Preparation of analysis of specific fiscal risks (e.g., government guarantees, PPPs, financial sector, social security (INSS), state enterprises, local governments, external aid) and dissemination within operational directorates and units. - Development of fiscal risk analysis methodology (e.g., long-term scenario planning, management of risks from natural resources) based on good international practices, and dissemination within MEF directorates. - Organization of workshops for MEF directorates and line ministries to build understanding of the new framework of assessing and managing fiscal risk, and ensure cooperation in providing relevant data and analysis. Division 2: Monitoring and Compliance — responsibilities - Monitoring compliance with the terms and conditions of agreements with international development partners, including the IMF. - Monitoring compliance with laws, regulations, and other decisions by the government relating to fiscal risks and the management of public finances. - Monitoring the implementation of the 2014 Fiscal Transparency Action Plan. - Preparing biannual reports to the Minister and senior management on compliance issues and the monitoring of fiscal risks, with recommendations on any necessary actions required by the MEF. ### Internal audit: sequencing and options - Development of internal audit within the MEF "should not be given priority in the short term." - Location of internal audit in the GGR is a potential distraction from urgent tasks; consideration could be given to establishing internal audit as a separate unit reporting directly to the Minister or Permanent Secretary. - The IGF could be asked to provide some internal audit services to the MEF in the short- to medium-term, though locating audit in the IGF is not seen as appropriate because IGF "is an independent entity that does not report directly to the Minister." ### Recommendations for GGR (exact wording and timing) - Recommendation IV.A.1. Establish the GGR in a strategically prominent position in the MEF’s organizational structure, so that the unit can provide effective advice to the Minister and Permanent Secretary on the management and mitigation of fiscal risks, and related compliance issues. (April 2017) - Recommendation IV.A.2. Reorganize the GGR into two divisions, one responsible for fiscal risk analysis, the other for monitoring and compliance with public finance regulations, and agreements with the IMF and other international development partners. Relocate the GGR’s internal audit function in a separate unit which reports directly to the Minister or the Permanent Secretary. (April 2017) ### Fiscal Risks Statement (FRS) — current situation and assessment - Mozambique’s first fiscal risk statement was published in November 2015; this was supported by IMF technical assistance. - FAD mission recommended a two-pronged approach to make the FRS more valuable: (i) improve information already disclosed; (ii) expand FRS scope to capture a wider range of potential risks. - FAD prepared a technical note focusing on: (i) coherence between the statement of fiscal risks and the budget documentation, (ii) structure and organization of the statement, (iii) linkages between fiscal forecasts and risks, (iv) presentation of key risks related to state-owned enterprises, and (v) disclosure of risks related to natural resource revenues. - Despite creation of the GGR, the government was unable to prepare an updated FRS at the time of submission of the 2017 budget due to complexity of the 2017 budget preparation, limited capacities to gather and analyze data, and lack of integration of the FRS within the overall budget process. - The mission proposed a draft outline for the new FRS and supported initial steps of preparation. Key assessment points - Publication of the FRS in 2015 was a major step to improve fiscal transparency. - The FRS should be fully integrated into an effective approach to manage and mitigate fiscal risks. - The statement describes many sources of fiscal risk, including uncertainties surrounding GDP, commodity prices, donor financing, exchange rates, public corporations, and public-private partnerships. - The FRS analyzes accuracy of past forecasts of revenue and expenditure and the uncertainty surrounding current forecasts; it provides information on the debts of SOEs as a first step toward disclosing fiscal risks from these corporations. - The FRS should further identify sources of fiscal risks and improve evaluation of potential magnitude and estimate probability of occurrence: - As a first step, assessments of maximum possible risk (e.g., total value of a guarantee) could be used. - In the medium-term, more detailed probabilistic estimates could be developed (e.g., historical data for natural disasters, financial analysis of SOEs). - In the short-term, use a dual categorization: (i) potential impact: low, medium, high; and (ii) probable occurrence: likely, probable, remote. - Based on fiscal risks assessment, the government should identify relevant mitigation instruments; choice depends on nature of risks, cost-tradeoff between mitigating and accommodating risks, and institutional capacities. Timing and integration with budget calendar - Main fiscal forecasts are reported first in the Cenário Fiscal de Médio Prazo (normally produced mid-year) and then updated and published in September in the Proposta de Orçamento do Estado. - FRS could be included as an annex to both documents, implying publication twice a year: - FRS annexed to the Cenário Fiscal de Médio Prazo: medium-term perspective. - FRS annexed to the Proposta de Orçamento do Estado: assessment of risks during the upcoming budget year. ### Recommendations for the FRS (exact wording and timing) - Recommendation IV.B.1. Synchronize the preparation of the FRS with the budget calendar and publish the next versions of the FRS in 2017 as an annex to both the Cenário Fiscal de Médio Prazo and the Proposta de Orçamento do Estado. (2017) - Recommendation IV.B.2. Develop a mapping of fiscal risks and assess the probability and the potential impact of these risks. (2017) - Recommendation IV.B.3. Develop a mitigation strategy for the major risks. (2017) ### Fiscal Transparency Action Plan — current situation - The November 2013 Fiscal Transparency Evaluation (FTE) highlighted areas for improving Mozambique’s fiscal transparency practices. - The FTE found that SISTAFE law and e-SISTAFE helped meet many IMF Fiscal Transparency Code standards, but revealed weaknesses in institutional coverage and reliability of fiscal reporting, including very limited disclosure of SOE financial positions and entities such as the INSS. - The FTE stressed need to develop disclosure and management of fiscal risks. - The FTE proposed a Fiscal Transparency Action Plan (FTAP) to enhance fiscal transparency and risk management over the medium term, including a roadmap to implement recommendations to enhance the information base for fiscal decision-making and meet key international fiscal transparency standards and practices. *Source: IMF Staff* ### 70. Progress in clarifying the coverage of the government's annual financial statements ### Progress in clarifying the coverage of the government's annual financial statements ### Coverage and legal framework findings - Revision of the SISTAFE Law, which would align the definition of the public sector with international standards and extend institutional coverage of budgetary and financial reporting, did not take place as expected in 2016. - A long-awaited law defining the status of public funds, SOEs, and other autonomous entities, together with arrangements for their financial oversight, is not yet available. - A law to address issues related to the State corporate sector (which include SOEs and minority holdings) is planned, but its scope does not include public funds and other autonomous entities. ### Financial reporting and accounting reform findings - Progress in improving disclosure of the financial position of SOEs has been limited. - Following FAD advice, the government has modified its initial timetable for introducing full accrual accounting and is now considering this a long-term target. - No detailed roadmap defining the transition to accrual accounting has been prepared. - Further improvements in the quality of information on public assets are on hold, pending the implementation of e-SISTAFE’s State Asset Module (MPE). ### Assessment of FTAP integration and PFM strategic planning - A limited number of the measures included in the FTAP have been absorbed into the MEF’s reform plans. - Previous FAD reviews (January 2014 and November 2015) recommended incorporation of the FTAP into the government's PFM reform agenda to ensure complementarity and coordination. - The MEF’s draft Strategic Plan for Public Finance includes some aspects of the FTAP but coverage is incomplete; the Strategic Plan could put more emphasis on developing a public sector wide approach to public finances. - Key fiscal risks identified in the FTE, such as risks related to government guarantees, have materialized. ### Role of an updated FTAP - An updated and approved FTAP should support implementation of the Strategic Plan by providing a clear timeline for key underlying reforms required to achieve strategic outcomes. - The FTAP proposes a five-year timeline for implementation of various actions and could be synchronized with the Strategic Plan; an update of the FTAP could be included as an annex to the Plan. - Updating and approving the FTAP would signal the government's commitment to improve fiscal transparency. - The update should be developed through collaboration with development partners; FAD could provide operational support to finalize this update. ### Recommendation - Recommendation IV.C.1. Update and approve the FTAP and annex it to the Strategic Plan for Public Finance. (2017) ### Strategic Plan for Public Finance — Selected objectives, actions, indicators and targets - Strategic Objective A. Stimulate Savings and Private Investment - A1. Promote and attract Investment to Mozambique - Volume of new investment (USD millions): 1.8 1 2 3 5 - Responsible Directorate: DEEF - A2. Contribute to development of the private sector - Number of new business enterprises created: 315 500 650 800 1000 - Responsible Directorate: DEEF - Strategic objectives B through G listed with action headings but without numeric targets presented in the source excerpt (e.g., B1. Improve tax collection mechanism; C2. Improve public investment selection and monitoring; D2. Improve cash management; E.1. Register the main state assets; F2. Improve the management and supervision of the public sector; G2. Improve access to public finance information). ### Annex II — Fiscal Risk Statement (Draft Outline) — key elements - Section 1: Introduction and Background (1/2 page) — concept and definition of fiscal risk; comparison with November 2015 FRS and key risks that materialized in 2016; main sources of data for FRS. - Section 2: Magnitude of Fiscal Risks (1-2 page) — summary of main findings; discussion of magnitude of uncertainty for deficit and debt and aggregate revenues and expenditures; summary table of main fiscal risks. - Section 3: Main Sources of Fiscal Risk (6-7 pages) — two subsections: - Macroeconomic risks: sensitivity analysis, reference to IMF’s debt sustainability analysis, analysis of past forecast errors with standardized tables (suggested period 2008 to 2015). - Special risks: natural disasters, SOEs, PPPs, VAT arrears, law suits; summary tables for each area; uncertainties around revenues from natural gas and other resources. - Section 4: Government Policies for Mitigating Risks (1-2 pages) — discussion of mitigation policies (e.g., limiting borrowing for public corporations, budget buffers, reducing debt or extending average maturity); implementation of mitigation measures identified in the 2016 FRS. - Annexes proposed to include lists and detailed data on PPPs, SOEs, resource-revenue uncertainties, government guarantees, significant law suits. ### Annex III — Fiscal Risk Management Toolkit — selected entries (categories preserved) - Risk identification and quantification; mitigation; provision; accommodate - Instruments and measures across risk types include: - Natural disasters and environmental risks: Early warning systems; planning; tax premia; reinsurance; catastrophe bonds; natural disaster funds. - Macro shock (e.g., Commodity Prices): Sensitivity analysis; privatization; commodity market regulation; hedging instruments; stabilization funds; prudent price assumptions. - Guarantees: Maintain central registry; central authorizing entity; ceilings on liabilities; charge risk-related fees; partial guarantees; provision for expected calls; guarantee funds. - Public-Private Partnership: Central registry of PPP commitments; central authorizing entity / Ministry of Finance gatekeeper role; ceilings on PPP commitments; CBA and value for money checks; charge guarantee fees; provision for expected calls. - State Owned Enterprises: Quantify explicit exposures; monitor financial performance; scenario analysis or stress testing; reduce size of the SOE sector; reporting requirements; explicit no-bail-out clauses; provision for restructuring costs. *Fiscal Affairs Department, International Monetary Fund — content as provided in the source document.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1mozea2023013.pdf_