## Technical Assistance Mission Report — Mozambique: Strengthening Budget Execution and Expenditure Control (Mission: November 15–29, 2017)

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---

### Mission purpose, composition, and context
- Purpose: Improve budget execution and foster expenditure control; contribution to the government public financial management strategy (PEFP 2016-2019).
- Composition: Led by Mr. Benoit Taiclet; team included Ms. Laura Doherty, Messrs. Gregory Horman and Armando Manuel, and Ms. Esther Palacio; supported by the IMF office in Mozambique.
- Funding/Project: Part of the “Strengthening Fiscal Institutions in Mozambique Project” funded by the Government of Denmark and implemented by the IMF.
- Macroeconomic/fiscal context:
  - Since 2015: lower commodity prices, declining foreign-exchange inflows, rising inflation, substantial exchange rate depreciation.
  - Stock of arrears in 2017 reached 3.7 percent of GDP; total stock of debt 78.2 percent of GDP. These arrears are not recorded in public financial accounts.
  - Tentative estimate of domestic arrears: Meticais 30 billion (roughly one fifth of 2017 projected tax revenue).

### Economic and fiscal risks from arrears
- Potential impacts:
  - Shake confidence of economic operators.
  - Disrupt public service delivery.
  - Crowd out cash supply to the economy.
  - Induce second-round fiscal costs (suppliers request advance payments or withhold taxes).
- Broader consequences:
  - Reduced economic growth and increased unemployment.
  - Increased cost of service provision as suppliers raise prices.
  - Interrupted public service delivery and halted investment projects.
  - Increased rent-seeking and collusion to accelerate payments.
  - Increased interest rates as illiquid suppliers borrow; suppliers withholding taxes generate second-round fiscal costs.

### Immediate and priority actions (overview)
- Urgently assess and then gradually clear the stock of arrears:
  - Rapidly take stock and validate legitimate suppliers’ claims.
  - Clear arrears with creditor agreements on clearance modalities (including discounts and possible securitization); clearance may take several years.
- Identify and eliminate underlying causes:
  - Poor credibility of budget allocations.
  - Short-sighted cash projections.
  - Lack of control over expenditure across a large network of spending units (UGBs).
  - Poor visibility of commitments and obligations in fiscal reports.
- Key reform priorities (descending order of emergency):
  - Restore legally compliant expenditure process: reinstate separate phases for commitment, verification, and payment.
  - Streamline network of spending units (over 1,600 UGBs); group and strengthen capacities.
  - Improve credibility of budget ceilings and composition through better budget preparation techniques.
  - Optimize government liquidity: continue pooling cash in the Treasury Single Account (CUT) and introduce dynamic cash management.

### Five Recommendations to Regain Control over Budget Execution (summaries with actions and timing)
- Recommendation 1: Identify and Clear the Stock of Arrears
  - Action 1: Seek donor's funding and select consulting firm for stock taking of arrears — By March 2018
  - Action 2: Design and publish a strategy, set data base framework and institutional — By June 2018
  - Action 3: Open time widow for claimants to submit claims — June-July 2018
  - Action 4: Verify claims, report related expenditure / debt to suppliers in e-SISTAFE, prioritize clearance, schedule payments and lending operations — September 2018
  - Action 5: Proceed with, and report on, arrear clearance — Continued
  - Action 6: Open second widow time for claimants — January 2019

- Recommendation 2: Restore the Expenditure Chain
  - Action 1: Set quarterly ceilings for commitments — By January 2018
  - Action 2: UGBs record their commitments and verification in e-SISTAFE, in due time — January 2018
  - Action 3: Train budget managers (central and provinces levels) — From January 2018, continuous
  - Action 4: Make mandatory the commitment note issued by e-SISTAFE and inform suppliers
  - Action 5: Improve Treasury forecasting technics for Financial Programing
  - Action 6: Strengthen internal audit to control that expenditure chain is effectively restored — From March 2018
  - Action 7: Implement commitment control pilots in a selected set of UGBs (all central level)...March 2018 ... (in some provinces)June 2018 ... (in all provinces)September 2018
  - Action 8: Approve a manual for expenditure and commitment control — By December 2018

- Recommendation 3: Manage the Aggregate Cash Balance more Pro-Actively
  - Action 1: Finalize and circulate the diploma ministerial — End-2017
  - Action 2: Introduce automatic end-of-day sweeping of balances in transit accounts and further minimize the use of advances — 1st quarter 2018
  - Action 3: Continue to close accounts in commercial banks and transfer the balances to the CUT — Ongoing
  - Action 4: Begin cash flow forecasting over six to 12-month horizon — Early 2018

- Recommendation 4: Enhance Budget Credibility
  - Action 1: Analyze and publish the deviations from Budget Law to CGE — 2018 (for inclusion in the 2017 CGE and in the 2019 MTFF)
  - Action 2: Determine expenditure aggregates and include identification of the stock of, and plan to clear arrears — 2018 (for preparation of the 2019 MTFF)
  - Action 3: Continue to insist on a medium-term support framework with donors — Ongoing

- Recommendation 5: Streamline Spending Units Network
  - Phasing in: Define targets, timelines and action plan — By March 2018
  - Action 1: On a voluntary basis regroup small budget UGBs — By June 2018
  - Action 2: Prepare large mergers simultaneous with budget preparation meetings — By September 2018
  - Action 3: Start FY 2019 under the new budget management framework — By January 2019
  - Action 4: Complete remaining planned mergers — By September 2019
  - Action 5: Start FY 2020 under the new framework — By January 2020
  - Action 6: General Inspectorate of Finance reports on experience — By June 2020
  - Indicative regrouping targets:
    - 31 at central level;
    - 240 at provincial level;
    - 150 at district level.

### Managing domestic arrears — definitions, census, verification, database
- Definition: Expenditure arrears are obligations incurred by any public-sector level for which payments have not been made by the due date; Mozambique’s procurement law fixes payment lapse at 30 days (many countries use 90 days).
- Approaches to census:
  - Purchasers’ side: stock from spending units’ ledgers; Treasury demand records if no arrears tracking mechanism exists.
  - Suppliers’ side: limited-time window for creditors to submit claims with required documentation and a cut-off date.
- Verification checks (minimum tests):
  - Legal validity, evidence of delivery, payable value, payable vintage, tax compliance.
- Central arrears database — essential fields to capture for each claim:
  - Vintage classification: one to three months; three to six months; six to 12 months; more than 12 months; by financial year of incurrence.
  - Debtor: government entity incurring liability.
  - Creditor: type (employees; private individuals or businesses; financial institutions; extra-budgetary funds; state-owned enterprise).
  - Economic category: compensation of employees; acquisition of goods and services; transfers; acquisition of nonfinancial assets; acquisition of financial assets.
  - Currency: original denomination.
  - Contractual terms: interest and/or penalties.
  - Payment status: amount already paid; amount outstanding; rescheduling/discounting/factoring status.
- Classification/Reporting:
  - Classify accounts payable as liabilities and include in gross debt measurement.
  - Show payments in arrears as a memorandum item to fiscal tables (e.g., mapa fiscal).
- Practical approach: focus initially on large claims and gradually expand coverage.
- Angolan empirical validation cited: total claims US$13.2 billion; 51.5 percent equivalent to US$6.7 billion certified and validated; remaining 48.6 percent not recognized.

### Repayment modalities — options and cautions
- Pay cash and discount: preferred if fiscal space allows; avoids penalties and supports suppliers’ working capital; creditor discounts may incentivize future price inflation.
- Reschedule payments: negotiate schedules and possible interest when liquidity constrained.
- Earmark loans: borrow and earmark proceeds to reduce arrears; increases explicit government debt but recognizes implicit liability.
- Securitize arrears: convert arrears into promissory notes or marketable debt; disadvantages include moral hazard and secondary-market discounts.
- Settle with state-owned enterprises: book entries and net-off reciprocal payments where applicable.

### Restoring the expenditure chain and improving reporting
- Core problem: commitment, verification, and payment phases are currently recorded simultaneously; legal provisions require separate phases and reporting by commitments.
- SISTAFE/e-SISTAFE:
  - System is robust enough to record commitments, verifications, and payments; commitments not yet recorded but a patch could enable this.
  - 1,654 UGBs exist; 1,508 (or 91 percent) are fully connected to e-SISTAFE.
  - Some UGBs lack access due to interconnection and power constraints; advances and ad hoc ledgers outside e-SISTAFE cause payments before certification.
- Three fiscal aggregates for reporting and programming:
  - Commitments made, yet to be settled.
  - Verifications recorded yet to be paid (expenditure float).
  - Payments made (cash basis execution).
- Short-term ceilings and UGB liquidity:
  - Treasury provides weekly ceilings based on short-term cash availability; projections typically shorter than one month.
- Recommendations to restore chain:
  - Set quarterly ceilings for commitments.
  - Immediately restore commitment and verification phases in e-SISTAFE.
  - Train staff and strengthen internal audit.
  - Implement commitment control pilots (central level March 2018; some provinces June 2018; all provinces September 2018).
  - Issue manual for expenditure and commitment control by December 2018.
- Transitional measures:
  - While systems restored, UGBs should manually submit commitments and verifications to DNCP for inclusion in REOs and CGE from end-2017.

### 2015 fiscal execution (selected figures — Ministry of Economy and Finance Expenditure Execution Report of 2015; values in millions of meticais)
- 1 Personnel Expenditure: Adjusted Budget 64.484,8; Committed Expenditure 64.105,5; Verified Expenditure 64.092,1; Paid Expenses 64.092,1
- 2 Goods and Services: Adjusted Budget 23.403,3; Committed Expenditure 22.537,2; Verified Expenditure 22.452,7; Paid Expenses 22.452,7
- 3 Interest on Debt: Adjusted Budget 7.577,4; Committed Expenditure 7.577,4; Verified Expenditure 7.577,4; Paid Expenses 7.577,4
- 4 Current transfers: Adjusted Budget 20.016,9; Committed Expenditure 19.864,7; Verified Expenditure 19.858,0; Paid Expenses 19.858,0
- 5 Subsidies: Adjusted Budget 2.277,3; Committed Expenditure 2.213,4; Verified Expenditure 2.213,4; Paid Expenses 2.213,4
- 6 Pending payments of previous Year: Adjusted Budget 218,1; Committed Expenditure 162,4; Verified Expenditure 162,3; Paid Expenses 162,3
- 7 Other current expenditure: Adjusted Budget 781,8; Committed Expenditure 745,8; Verified Expenditure 745,8; Paid Expenses 745,8
- 8 Capital Expenditure: Adjusted Budget 5.113,2; Committed Expenditure 400,3; Verified Expenditure 400,3; Paid Expenses 400,3
- 9 Total: Adjusted Budget 123.872,8; Committed Expenditure 117.606,7; Verified Expenditure 117.502,0; Paid Expenses 117.502,0
- Note: Table shows liquidated expenditure equals paid expenditure across classifications, implicitly assuming no arrears.

### Pro-active cash and CUT management (Recommendation 3 details)
- Current practice: monthly cash plans used for expenditure control (releases) rather than cash management; Treasury does not actively manage aggregate cash balance with dynamic market operations.
- Key measures:
  - Reduce government cash in commercial banks and improve CUT functioning.
  - Introduce cash flow forecasting (minimum three months, ideally 12 months; daily/weekly steps for short horizons) and dynamic treasury bill issuance linked to forecasts.
  - Introduce automatic end-of-day sweeping of balances in transit accounts.
- Implementation timeline:
  - Finalize and circulate diploma ministerial to regulate accounts — End-2017
  - Introduce automatic end-of-day sweeping — 1st quarter 2018
  - Continue closing commercial bank accounts and transfer balances to CUT — Ongoing
  - Begin forecasting aggregate cash flows over six to 12-month horizon — Starting in 1st quarter 2018
- Risks:
  - UGB resistance to moving cash from commercial bank accounts to CUT.
  - Donor resistance to holding financing in CUT.
  - Practical limits to dynamic treasury bill issuance.

### Enhancing budget credibility (Recommendation 4)
- Problems observed:
  - Since 2014 total revenue has fallen as percent of GDP; in-year reallocations and monthly cash controls used to contain deficits.
  - Annual budget not always adequately costed or used as primary allocation tool.
  - Repeated sizable deviations between Budget Law and outturn: example taxation revenue deviations and expenditure forecast accuracy:
    - 2013: Budget Law taxation revenue 95.5 billion Meticais vs collected 107.5 billion — 12.6 percent deviation.
    - 2016: taxation revenue deviation 1.7 percent.
    - 2014: total expenditure overestimated by 5.0 percent.
    - 2016: total expenditure overestimated by 13 percent.
- Key measures:
  - Improve realism of revenue and expenditure estimates at aggregate and composition levels.
  - Publish reconciliation of deviations from Budget Law to CGE and analyze causes.
  - Integrate arrears identification and clearance plan into MTFF baseline estimates.
- Institutional arrangements:
  - Strengthen linkages between MEF directorates (macro-fiscal forecasting, budget planning, treasury); no new institutions required.

### Professionalizing and streamlining UGBs (Recommendation 5 details)
- UGB landscape:
  - Total UGBs: 1,654 (200 central; 650 provincial; 770 district).
  - Central concentration: 17% of UGBs operate 90% of central expenditure; 83% operate 10%.
  - Provincial concentration: 28.5% of UGBs operate 80% of provincial expenditure; 71.5% operate 20%.
- Table 4 (selected indicators for 2016 — percent shares and remarks reproduced as in source):
  - Central: 2016 Budget 82.84% ; 2016 Outturn 85.17% ; # of UGBs 13.17% ; Overall Budget Credibility 3%
  - Niassa: 2016 Budget 3.77% ; 2016 Outturn 4.81% ; # of UGBs 8.56% ; Overall Budget Credibility 27%
  - Nampula: 2016 Budget 2.40% ; 2016 Outturn 1.62% ; # of UGBs 12.03% ; Overall Budget Credibility 32%
  - Zambezia: 2016 Budget 2.11% ; 2016 Outturn 1.42% ; # of UGBs 9.99% ; Overall Budget Credibility 33%
  - Gaza: 2016 Budget 1.55% ; 2016 Outturn 1.13% ; # of UGBs 8.32% ; Overall Budget Credibility 27%
  - Tete: 2016 Budget 1.34% ; 2016 Outturn 0.91% ; # of UGBs 8.26% ; Overall Budget Credibility 32%
  - Sofala: 2016 Budget 1.27% ; 2016 Outturn 1.00% ; # of UGBs 8.02% ; Overall Budget Credibility 21%
  - Cabo Delgado: 2016 Budget 1.19% ; 2016 Outturn 0.77% ; # of UGBs 7.66% ; Overall Budget Credibility 35%
  - Inhambane: 2016 Budget 1.08% ; 2016 Outturn 0.80% ; # of UGBs 7.96% ; Overall Budget Credibility 26%
  - Maputo Provincia: 2016 Budget 1.01% ; 2016 Outturn 1.03% ; # of UGBs 6.40% ; Overall Budget Credibility 2%
  - Manica: 2016 Budget 0.87% ; 2016 Outturn 0.73% ; # of UGBs 7.24% ; Overall Budget Credibility 16%
  - Maputo Cidade: 2016 Budget 0.57% ; 2016 Outturn 0.61% ; # of UGBs 2.39% ; Overall Budget Credibility 7%
  - Central remark: 17% of UGBs operate 90% of central expenditure; 83% of UGBs operate 10% of central expenditure.
  - Provincial remark: 28.5% of UGBs operate 80% of provincial expenditure; 71.5% of UGBs operate 20% of central expenditure.
- Expected benefits of streamlining:
  - Larger, more accountable UGBs with capacity to produce timely fiscal reports.
  - Reduced manual reporting and improved budget allotments.
  - Easier financial programming and cash planning.
- Pragmatic steps:
  - Shut down inactive UGBs.
  - Group dependent UGBs under same department or province.
  - Assign small UGBs to technical platforms while retaining signing authority locally.
  - Redeploy Treasury officials to meet local needs.
- Risks/mitigation:
  - Anticipate resistance; communicate benefits and ensure no undue budget constraints.
- Implementation schedule: define targets by March 2018; voluntary grouping by June 2018; large mergers by September 2018; start FY 2019 under new framework by January 2019; complete mergers by September 2019; start FY 2020 under new framework by January 2020; report by June 2020.

### Seminar outcomes and operational recommendations
- Two half-day seminars held discussing arrears, lessons from Angola, budget credibility, and CUT/cash management.
- Working group recommendations (selected):
  - Expenditure chain: restore three phases in e-SISTAFE; enforce compliance; use commitment certificate to inform suppliers; provide quarterly commitment ceilings; improve e-SISTAFE access.
  - Cash management: reduce Treasury accounts in commercial banks; sweep surplus balances to CUT; develop financial programming with improved forecasts; complement monthly/weekly rationing with annual/quarterly cash plans.

*Source: Preface, Executive Summary, and mission chapter excerpts — IMF Fiscal Affairs Department technical assistance mission to Mozambique, November 15–29, 2017.*

### Preface ___________________________________________________________________________________________ 6

### Preface

### Mission purpose and composition
- A Fiscal Affairs Department (FAD) technical assistance (TA) mission visited Maputo, Mozambique during the period November 15-29, 2017, at the request of the Minister of Economy and Finance, Mr. Adriano Maleiane, to improve budget execution and foster expenditure control.
- The mission was led by Mr. Benoit Taiclet and comprised Ms. Laura Doherty (FAD staff), Messrs. Gregory Horman and Armando Manuel (FAD experts), and Ms. Esther Palacio (IMF TA coordinator and PFM expert in Mozambique).
- The mission benefitted from the support of the IMF office in Mozambique.
- The mission is part of the “Strengthening Fiscal Institutions in Mozambique Project” funded by the Government of Denmark and implemented by the IMF.

### Acknowledgements
- The mission expressed gratitude for close cooperation and fruitful collaboration provided by the authorities, especially Mr. Domingos Lambo, Permanent Secretary, and thanked participants to meetings and workshops for active and constructive participation.

### Context and link to broader strategy
- The mission contributed to the government public financial management strategy (PEFP 2016-2019) and focused specifically on expenditure control at a pivotal time for Mozambique’s government.

---

### Executive Summary

### Macroeconomic and fiscal context
- Since 2015, Mozambique has been affected by lower commodity prices, declining foreign-exchange inflows, rising inflation, and substantial exchange rate depreciation.
- Following three years of large deficits, and absent further fiscal consolidation, the fiscal deficit is expected to expand, while domestic arrears stemming from overspending and limited access to domestic financing continue to build up.
- In 2017, the stock of arrears has reached 3.7 percent of GDP, further adding to the total stock of debt (78.2 percent of the GDP). These arrears are not recorded in public financial accounts.
- The stock disclosed by the authorities lacked many details (only an aggregate decomposition by (i) past three years and previous years, (ii) current versus capital expenditure, and (iii) central versus provincial and district levels of expenditure). The mission was unable to assess this amount.

### Economic and fiscal risks from arrears
- Potential impacts of the accumulated stock of arrears include:
  - shaking economic operators’ confidence in the government;
  - potentially disrupting public service delivery;
  - crowding out cash supply to the economy;
  - inducing second-round fiscal costs since suppliers may request payments in advance or withhold payment of taxes until they receive payments due from the government.
- Broader economic consequences listed include:
  - Reduced economic growth through ceased or delayed economic activity and increased unemployment.
  - Increased cost of service provision as suppliers adjust prices upward to mitigate delayed payments.
  - Reduced or interrupted public service delivery and potential hold on investment projects.
  - Increased rent-seeking and collusion to accelerate payment or circumvent expenditure control procedures.
  - Increased interest rates as illiquid suppliers borrow from banks.
  - Second-round fiscal costs via suppliers withholding taxes.

### Immediate and priority actions
- Urgently assess and then gradually clear the stock of arrears. The government should:
  - rapidly take stock of and validate legitimate suppliers’ claims;
  - clear arrears thereafter with creditors’ agreements on clearance modalities (including discounts and possible securitization); clearance may take several years.
- Identify and eliminate the underlying causes of arrears accumulation. Major weaknesses to be addressed:
  - poor credibility of budget allocations;
  - short-sighted cash projections;
  - lack of control over expenditure, operated by a large network of spending units (UGBs);
  - poor visibility of government commitments and obligations through existing fiscal reports.

### Key reform priorities (presented in descending order of emergency)
- Restore a legally compliant expenditure process: reinstate separate phases for commitment, verification, and payment; currently these three phases occur simultaneously, with little information and control over commitments, expenditure float, and arrears.
- Streamline the network of spending units (UGBs): over 1,600 UGBs hamper allocation of funds and budget monitoring; group UGBs and strengthen capacities.
- Improve the credibility of budget ceilings and composition through more efficient processes and techniques for budget preparation.
- Optimize government liquidity: continue pooling cash in the Treasury Single Account (CUT) and introduce a more dynamic approach to cash management to minimize disruptions in expenditure.

### Five Recommendations to Regain Control over Budget Execution (summary table entries preserved)
- Recommendation 1: Identify and Clear the Stock of Arrears
  - Action 1: Seek donor's funding and select consulting firm for stock taking of arrears — By March 2018
  - Action 2: Design and publish a strategy, set data base framework and institutional — By June 2018
  - Action 3: Open time widow for claimants to submit claims — June-July 2018
  - Action 4: Verify claims, report related expenditure / debt to suppliers in e-SISTAFE, prioritize clearance, schedule payments and lending operations — September 2018
  - Action 5: Proceed with, and report on, arrear clearance — Continued
  - Action 6: Open second widow time for claimants — January 2019

- Recommendation 2: Restore the Expenditure Chain
  - Action 1: Set quarterly ceilings for commitments
  - Action 2, 3: UGBs record their commitments and verification in e-SISTAFE, in due time
  - Action 4: Train budget managers (central and provinces levels)
  - Action 5: Make mandatory the commitment note issued by e-SISTAFE and inform suppliers
  - Action 6: Improve Treasury forecasting technics for Financial Programing
  - Action 7: Strengthen internal audit to control that expenditure chain is effectively restored — From March 2018
  - Action 8: Implement commitment control pilots in a selected set of UGBs (all central level)...March 2018 ... (in some provinces)June 2018 ... (in all provinces)September 2018
  - Action 9: Approve a manual for expenditure and commitment control — By December 2018

- Recommendation 3: Manage the Aggregate Cash Balance more Pro-Actively
  - Action 1: Finalize and circulate the diploma ministerial — End-2017
  - Action 2: Introduce automatic end-of-day sweeping of balances in transit accounts and further minimize the use of advances — 1st quarter 2018
  - Action 3: Continue to close accounts in commercial banks and transfer the balances to the CUT — Ongoing
  - Action 4: Begin cash flow forecasting over six to 12-month horizon — Early 2018

- Recommendation 4: Enhance Budget Credibility
  - Action 1: Analyze and publish the deviations from Budget Law to CGE — 2018
  - Action 2: Determine expenditure aggregates and include identification of the stock of, and plan to clear arrears — 2018
  - Action 3: Continue to insist on a medium-term support framework with donors to ensure timely commitments and disbursements of project finance — Ongoing

- Recommendation 5: Streamline Spending Units Network
  - Phasing in: Define targets, timelines and action plan — By March 2018
  - Action 1: On a voluntary basis regroup small budget UGBs — By June 2018
  - Action 2: Prepare large mergers simultaneous with budget preparation meetings — By September 2018
  - Action 3: Start FY 2019 under the new budget management framework — By January 2019
  - Action 4: Complete remaining planned mergers — By September 2019
  - Action 5: Start FY 2020 under the new framework — By January 2020
  - Action 6: General Inspectorate of Finance reports on experience — By June 2020
  - Implementation timing note: From January 2018, continuous
  - Possible support listed: IMF, Sweden; AFS, European Union; IMF, European Union, USAID, Switzeland, Austria, GIZ; IMF/Denamrk, AFS, DFID; IMF/Belgium, Ireland, World Bank/DFID, AFS, European Union

---

### Managing Domestic Arrears

### Definition and international practice
- Expenditure arrears are financial obligations, incurred by any level of the public sector, for which payments have not been made by the due date. They include overdue payments based on legal obligation, contractual commitment, or continuing service arrangement.
- The value of expenditure arrears constitutes the amount of the original overdue payment, as well as any interest or financial penalties that the government might accrue.
- Many countries consider arrears as obligations that are due and not paid within 90 days following delivery or an agreed date for payment. Mozambique’s procurement law fixes a shorter time lapse of 30 days.

### Scale and reporting gaps
- The mission notes that Mozambique’s accumulated stock of arrears adds to the debt burden and that these arrears are not recorded in public financial accounts.
- A 2015 PEFA survey of 121 assessments found the stock of central government arrears was less than 2 percent in only 31 percent of surveyed countries; some IMF program countries accumulated arrears in excess of 20 percent of GDP.
- Arrears-related structural benchmarks or performance criteria were included in 95 percent of 140 IMF-supported programs between 1999 and 2012.

### Box: Angola country case (2002-2003) — Stages of arrears clearance
- Following the civil war, Angola acknowledged claims of arrears of US$13 billion for 1992–2003 and implemented a 6-year strategy to clear the arrears. The strategy involved six stages:
  - Acknowledgement of claims: established a calendar for creditors to submit claims, defined required information and documents, and set three stages to handle the process: unpaid invoices for 1992-97, for 1998-2003, and all transactions after 2003.
  - Verification: verified legal condition of creditors, company establishment, tax compliance, whether claims were recorded in balance sheets, and verification of sufficient budget provisions in the related budgetary unit.
  - Validation: contracted an independent auditing company to validate each claim based on specific criteria to ensure legitimacy.
  - Negotiation: Ministry of Finance negotiated agreements with legitimate creditors, set a calendar of payments, partly in cash and partly in treasury bonds with maturities up to 5 years, a 5 percent coupon, and payments per semester.
  - Payment: small claims were paid in cash, while others received bonds (initially indexed to the exchange rate, later to the consumer price index) to ensure liquidity over time; subsequently, bonds were traded in secondary market.

---

*Preface and Executive Summary, Technical Assistance mission report (FAD), November 15-29, 2017.*

### 6.      A thorough stock take of the outstanding stock of arrears is    necessary, in order to

### 6.      A thorough stock take of the outstanding stock of arrears is    necessary, in order to

### Approaches to census of arrears
- Purchasers’ side:
  - Take stock from spending units’ ledgers and records of due obligations not paid.
  - Treasury must demand spending units’ records, pending invoices, and all other due obligations if no mechanism tracks arrears from expenditure processing systems.
- Suppliers’ side:
  - A dedicated unit (most often an audit institution) opens a limited-time window for creditors to bring claims forward.
  - Claims must be documented to government specifications, including a timetable for stocktaking and clear information requirements.
  - A cut-off date for inclusion of new arrears should be established to encourage timely reporting and avoid fraudulent claims.

### Verification of arrears (process and checks)
- Verification can be undertaken by the supreme audit institution, an inspectorate or internal audit in the ministry of finance, or private audit firms.
- Verification tests should confirm existence, value, and vintage using the following checks (Table 2):
  - Legal validity: Check that the transaction was duly authorized and consistent with budgetary authorizations; apply sanctions where appropriate and legally assess claim validity.
  - Evidence of delivery: For doubtful or material transactions, reconfirm delivery by requesting supplier information (e.g., financial records); require progress or completion certificates for complex or investment-project-related transactions.
  - Payable value: Invoices should contain the amount and reference to the purchase order; cross-check with suppliers’ financial statements if doubtful.
  - Payable vintage: Check by reference to the invoice and other supporting documentation.
  - Tax compliance: Revenue authority checks to ensure suppliers are registered taxpayers and not delinquent in tax payments.

### Building and maintaining a central arrears database (classification fields)
- Establish and maintain a centrally held database of valid outstanding payments in the ministry of finance.
- Practical approach: focus initially on large claims and gradually expand coverage.
- Data to capture for each outstanding claim:
  - Vintage: classify by overdue duration: one to three months, three to six months, six to 12 months, and more than 12 months; older arrears classified by financial year of incurrence.
  - Debtor: record government entity incurring the liability (central or subnational government, extra-budgetary fund, or state-owned enterprise).
  - Creditor: classify by type (employees, private individuals or businesses, financial institutions, extra-budgetary funds, or state-owned enterprise); distinguish extra- and intra-government obligations.
  - Economic category: compensation of employees, acquisition of goods and services, transfers, acquisition of nonfinancial assets, acquisition of financial assets.
  - Currency: capture the original denomination to ensure sufficient foreign exchange for external arrears.
  - Contractual terms: identify interest and/or penalties for non-payment.
  - Payment status: distinguish amount already paid, amount outstanding, and any rescheduling, discounting, or factoring of the unpaid obligation.
- Keep the database up-to-date showing discharge of arrears and subsequent additions.
- Classify entire stock of accounts payable as liabilities, further as domestic or foreign, and include in government’s measurement of gross debt.
- Payments in arrears should be included as a memorandum item to the government’s fiscal table (e.g., the mapa fiscal).

### Empirical validation: Angolan experience
- Total claims in the period amounted US$13.2 billion; only 51.5 percent equivalent to US$6.7 billion were certified and validated.
- Remaining 48.6 percent represented claims not recognized.

### Prioritization criteria for arrears clearance
- Socioeconomic impact: prioritize arrears to sensitive/vulnerable sectors (salaries of low-income workers, pensions, social benefits).
- Vintage: older obligations have priority.
- Cost: prioritize arrears that accrue interest and penalty charges.
- Risk: prioritize arrears that may result in legal action, disruption of essential services, or cost escalation of future supplies.
- Currency: prioritize foreign currency denominated debt if domestic currency devaluation outpaces domestic inflation.
- Creditor: prioritize intra-government debts (can be resolved administratively with minimal net cost).

### Repayment modalities (options and cautions)
- Pay cash and discount:
  - Preferred when fiscal space allows; avoids penalties and helps suppliers’ working capital.
  - Creditor discounts may be negotiated but can incentivize future price inflation by suppliers.
- Reschedule payments:
  - Negotiate payment schedule with creditors, no-discount option, and an interest rate if liquidity constrained.
  - Viable when market conditions are not ripe for sizeable new debt placements.
- Earmark loans:
  - Borrow in financial markets and earmark proceeds to reduce stock of arrears.
  - Increases explicit government debt but recognizes an implicit existing liability.
- Securitize arrears:
  - Transform arrears into government debt via promissory notes, marketable treasury bills, or bonds to creditors.
  - Disadvantages include moral hazard for budget managers, secondary-market discounts reducing suppliers’ working capital, and reduced ability to prioritize urgent arrears.
- Settle with state-owned enterprises:
  - Make book entries reflecting outstanding bills, leaving a single remaining debt resolvable through budget transfers to SOEs.
  - Net off reciprocal payments (e.g., dividends) where applicable.

### Preventing further accumulation of arrears (Angolan lessons and Mozambique diagnosis)
- Angola measures:
  - Issuance of a “commitment note” required for all public acquisitions of goods and services.
  - Legislation defined arrears as invoices unpaid 90 days after issuance to facilitate quarterly monitoring.
  - Procurement controls: contracts above US$ 0,5 million required Minister of Finance approval; contracts above US$ 10 million required President signature with pre-approval of the Minister of Finance prior to submission to the Audit Office.
  - In response to oil price drop and arrears from public investment projects (PIP), authorities aligned the PIP portfolio to the medium term fiscal framework and monitor projects before start. New projects require transparent and sufficient budget allocations and tenders under public procurement office oversight.
- Mozambique diagnosis of underlying causes for arrear accumulation:
  - Limited control on budget execution by the ministry of economy and finance due to an overly simplified process lacking clear distinction of expenditure phases and commitment control.
  - Budget decomposition in administrative items is not credible; allocations not properly calibrated and subject to frequent in-year changes, leading to over-commitments by spending units.
  - Cash supply shortages and imperfect cash management within and outside the treasury single account (CUT).
  - Sheer number of spending units (UGBs) hampers budget execution, preparation, and cash management; many UGBs have low financial activity and lack skills and economies of scale.

### Strengthening budget execution and recording key expenditure stages
- Expenditure control should record at least three key stages: commitment, goods/services receipt and verification, and payments.
- Three aggregates for fiscal reporting and financial programming:
  - Commitments made, yet to be settled.
  - Verifications recorded yet to be paid (the expenditure float).
  - Payments made (cash basis budget execution).
- Mozambique fiscal law (Law 9/2002 of 12 of February, Law of Financial Management System) identifies three stages and demands fiscal reporting be based on commitments, but these provisions are practically not implemented.
- SISTAFE system:
  - Robust enough to record transactions and different phases (commitments, verifications, payments); commitments are not yet recorded but a simple patch could enable this.
  - Not all UGBs have access to e-SISTAFE due to interconnection and power constraints; some UGBs operate with technical support from other units or receive advanced payments, causing payments before certification and commitment.
  - Current Treasury practice: transactions entered as they mature for payment, not when stages happen. Spending units keep invoices and contracts in ad hoc ledgers outside e-SISTAFE. All steps of expenditure are recorded within one week: commitments and verifications recorded in SISTAFE simultaneously; payments made within four days (time needed for disbursements).

### Recommendation 1: Identify and Clear the Stock of Arrears — key measures, institutions, risks, and schedule
- Background:
  - Domestic arrears accumulated to the tentative estimate of Meticais 30 billion (roughly one fifth of 2017 projected tax revenue).
  - Overall debt remains in high risk of distress; restructuring of public debt owed to private creditors is unavoidable.
- Key measures:
  - Kick-start a census of unpaid public-sector obligations and maintain a comprehensive database on creditors, claims, and repayments.
  - Check and reject illegitimate claims; seek creditors’ agreement on arrear clearance modalities (discounts, cash repayments, possible securitization).
  - Implement arrear clearance per a prioritized schedule consistent with government fiscal stance.
- Institutional arrangements:
  - Strategy for arrear clearance should include five steps: stocktaking, verification, classification, prioritization, and verification of arrears.
  - Strategic guidance and oversight: MEF and the court of account (TA).
  - Implementation: Treasury department (repayments and lending operations) and the General Inspectorate of Finance (census of creditors and verification of claims), with support from a consulting firm financed by a donor.
- Risks and mitigation:
  - Publish plans, timetable, and verification criteria to minimize perceptions of favoritism and corruption.
  - Choose financial instruments transparently to avoid downside risks to debt sustainability and erosion of budget manager accountability.
  - Include clearance schedule in multiyear spending and debt projections.
- Schedule for implementation (Action timeline):
  - Action 1: Define main outlines of the strategy, seek donor funding and select a consulting firm to stock take the arrears — By March 2018
  - Action 2: Design and publish a strategy, set database framework and institutional arrangements — By June 2018
  - Action 3: Open time window for claimants to submit claims — June-July 2018
  - Action 4: Verify claims, report related expenditure / debt to suppliers in e-SISTAFE, prioritize clearance, schedule repayments and lending operations in line with multiyear fiscal policy — By September 2018
  - Action 5: Proceed with, and report on, arrear clearance — Continued
  - Action 6: Open second window for claimants and collect remaining unsolved legitimate claims — January 2019

*Source: IMF mission text (chapter excerpt).*

### 18.      Squeezing expenditure phases into such a short time lapse, denies capturing

### 18.      Squeezing expenditure phases into such a short time lapse, denies capturing

### Expenditure phases and execution gaps
- Squeezing expenditure phases into a short time lapse prevents capturing commitments and invoices when they occur, encouraging neglect of contracts, receipts and invoices until the last moment.
- Fiscal reporting in Mozambique is incomplete and does not provide a fair reflection on government obligations; decisions on fiscal policies are poorly informed due to lack of accurate data on real execution processes.
- Reported fiscal statements often show zero arrears while disclosed stocks indicate significant arrears: the authorities disclosed a stock related to 2015 amounting to 3 billion meticais, and 9 billion meticais in 2016, despite fiscal statements constantly reporting zero arrears.

### Commitment control (findings)
- Commitment control is loose or inexistent.
- Legal framework: investment contracts shall be submitted by spending units to the supreme audit (TA) for control on procedural regularity, not budget compliance; prior to TA’s control, the Treasury should conduct preliminary control on commitments (pre-cabimento).
- In practice, the ceiling issued by the Treasury is not binding the purchasing UGB and does not prevent over-purchasing in excess of budget.
- Most commitments are not controlled upstream, and the financial sustainability of spending units’ procurement is not ensured.

### 2015 fiscal execution (key statistics — Table 3: Summary of the 2015 Fiscal Statement, in millions of meticais)
- 1 Personnel Expenditure: Adjusted Budget 64.484,8; Committed Expenditure 64.105,5; Verified Expenditure 64.092,1; Paid Expenses 64.092,1
- 2 Goods and Services: Adjusted Budget 23.403,3; Committed Expenditure 22.537,2; Verified Expenditure 22.452,7; Paid Expenses 22.452,7
- 3 Interest on Debt: Adjusted Budget 7.577,4; Committed Expenditure 7.577,4; Verified Expenditure 7.577,4; Paid Expenses 7.577,4
- 4 Current transfers: Adjusted Budget 20.016,9; Committed Expenditure 19.864,7; Verified Expenditure 19.858,0; Paid Expenses 19.858,0
- 5 Subsidies: Adjusted Budget 2.277,3; Committed Expenditure 2.213,4; Verified Expenditure 2.213,4; Paid Expenses 2.213,4
- 6 Pending payments of previous Year: Adjusted Budget 218,1; Committed Expenditure 162,4; Verified Expenditure 162,3; Paid Expenses 162,3
- 7 Other current expenditure: Adjusted Budget 781,8; Committed Expenditure 745,8; Verified Expenditure 745,8; Paid Expenses 745,8
- 8 Capital Expenditure: Adjusted Budget 5.113,2; Committed Expenditure 400,3; Verified Expenditure 400,3; Paid Expenses 400,3
- 9 Total: Adjusted Budget 123.872,8; Committed Expenditure 117.606,7; Verified Expenditure 117.502,0; Paid Expenses 117.502,0
- Source: Ministry of Economy and Finance (MEF) Expenditure Execution Report of 2015.
- Note: Table is symptomatic that the level of liquidated expenditure equals level of paid expenditure across economic classification lines, implicitly assuming no arrears.

### Short-term ceilings and UGB liquidity information
- There is little financial information on UGBs’ financial needs during the fiscal year; absent information on upcoming payments, Treasury projections for expenditure are shorter than one month.
- The Treasury provides UGBs their ceilings for expenditure on a weekly basis based on short-term availability of cash; UGBs proceed with payments within less than one week.

### Improving expenditure control (recommendations and actions)
- Controlling and recording commitments is key to preventing expenditure arrears; commitment control aims to manage incurrence of obligations to enforce expenditure ceilings and avoid arrears.
- Quarterly apportionment by the Treasury is recommended so UGBs have sufficient room to record verifications, enable interactive programming, and allow consolidation of a quarterly cash plan.
- No further IT system development is strictly required to restore the expenditure chain; a new e-SISTAFE procurement functionality is being developed to record procurement and could add a pre-commitment stage, but the commitment and verification stages must be restored irrespective of completing the pilot.
- The Treasury should move from cash rationing to financial programming, forecasting quarterly expenditure based on previsions from spending agencies, revenue authority and debt management department to restore three expenditure phases and record commitments and verifications in e-SISTAFE.

### Recommendation 2. Restore the Expenditure Chain (background, key measures, institutional arrangements, risks, schedule)
Background
- The phases of the expenditure currently are recorded simultaneously, which is not compliant with the fiscal law. There is little information and control over commitments, expenditure, and arrears.

Key measures
- Set quarterly ceilings for commitments, based on revenue forecasts;
- Immediately restore the commitment and verification phases in e-SISTAFE;
- Raise awareness through seminars on the need to restore the normal expenditure process;
- Improve financial programing by the National Treasury Directorate;
- Revise the calendar of data collection from UGBs so that the Treasury can prepare the quarterly financial programing;
- Gradually implement the commitment control, starting from the UGBs at central level.

Institutional arrangements
- The National Directorate of Treasury will need to coordinate with CEDSIF to ensure availability of support and ensure the implementation process goes smoothly.

Risks and mitigation measures
- Restoration will require extensive capacity development. While reestablishing the chain in the system, information on commitments and verifications should be manually submitted by UGBs to the accounting directorate (DNCP) and reported in fiscal reports. Communicating to the private sector is important to raise awareness of effective control of public expenditure.

Schedule for implementation (selected actions and timing)
- Action 1 Set quarterly ceilings for commitments — By January 2018
- Action 2 UGBs record their commitments in e-SISTAFE upon contracting — January 2018
- Action 3 UGBs record their verifications in e-SISTAFE upon receiving suppliers' invoices, per legal provisions set in SISTAFE Law — January 2018
- Action 4 Train budget managers (central and provinces levels) — From January 2018, continuous
- Action 5 Make mandatory the commitment note issued by e-SISTAFE and inform suppliers
- Action 6 Improve the Treasury’s forecasting techniques for financial programing
- Action 7 Strengthen internal audit to control that expenditure chain is effectively restored — From March 2018, continuous
- Action 8 Implement commitment control pilots in a selected set of UGBs all central level/in some provinces/in all provinces — March 2018 / June 2018 / September 2018
- Action 9 Based on the experience from the pilot, issue a manual for expenditure and commitment control — By December 2018

### Improving fiscal reporting (findings and transitional measures)
- Fiscal reporting fosters accountability and improves fiscal policy decision making; it is a legal requirement (Constitution; SISTAFE law and regulations).
- Quarterly REOs are published 45 days after the end of each quarter; the year-end execution report and financial statement (CGE) is submitted end-May of the following year. Reports are public and include cumulative data in great detail.
- Important data on real commitments and verifications are missing in REOs and CGE. Transactions outside the treasury single account (CUT) require manual processing before reporting; large unexplained transactions have been observed.
- Concerns: misalignment with GFSM 2014, absence of balance sheet reporting on main financial liabilities and assets, and late discussion of the CGE in Parliament with two-year lag.
- Recommendations: automate production of REOs and CGE, adopt GFSM 2014 framework, include Mapa Fiscal overall presentation, and add a simplified balance sheet in the CGE reporting debt balances, payables, cash and bank balances, financial investments, other financial assets, and contingent liabilities.
- Transitional measure: while reestablishing the expenditure chain, UGBs should manually submit information on real commitments and verifications to DNCP and report them in REOs and CGE from end-2017 until the system captures information timely.
- The stock of arrears resulting from the validation process must be immediately reported. Practical approach: record expenditure and liability to suppliers in the year they are validated; the verified stock of arrears must be shown in fiscal reports and statistics even before a solution to clear them is agreed.

### Optimizing government cash and CUT arrangements (findings)
- Objective of cash management: ensure government has sufficient liquidity to pay obligations as they fall due without cash rationing or accumulating arrears; banking arrangements centralize liquidity within a CUT operated by the Treasury.
- The Treasury prepares a cash budget at fiscal year start (decomposes approved budget by month; largely static) and a monthly cash plan (cash flow projection for coming month, broken down by week) that is discussed at a weekly meeting chaired by the Minister to decide weekly financial quotas for UGBs.
- The Treasury does not actively manage the government’s aggregate cash balance: it does not borrow or lend in the money market to maintain a steady CUT balance; short-term borrowing is occasional via accepting liability for some Bank of Mozambique treasury bills.

CUT and banking arrangements (findings and figures)
- Number of UGBs: 1,654; of them 1,508 (or 91 percent) are fully connected to e-SISTAFE.
- Significant liquidity lies outside the CUT, especially in commercial banks: cash advances continue to be made from the CUT into bank accounts outside the CUT for UGBs without e-SISTAFE access; donor-financed transactions where donors do not use the CUT; payments to suppliers in rural areas without bank accounts; and petty cash payments.
- Advances are not swept back overnight into the CUT. Sectors also hold accounts for self-generated revenue; substantial donor assistance continues to flow through commercial bank accounts, not through the CUT. Moving donor funds into sub-accounts within the CUT should be investigated as a medium-term endeavor.

Operational issues and priorities
- The Treasury has closed thousands of inactive, infrequently used, or inappropriately opened commercial bank accounts; new accounts continue to be identified and the opening of new accounts outside the CUT is still permitted with authorization.
- Priority rule: revenue and expenditure accounts must be opened at the Bank of Mozambique, except for accounts to pay wages and those used to receive student fees.
- The Treasury has drafted a circular (diploma ministerial) to clarify regulations regarding accounts in commercial banks and is awaiting approval to distribute it to UGBs; this should be pursued as a priority.
- Delays in sweeping revenue into the CUT reduce cash management efficiency: delays include up to two days by commercial banks before sweeping to the DAF account, and in many cases sweeping does not occur until the end of the month; revenue awaiting classification may cause longer delays though cash movement into the CUT need not be delayed by classification.

*Source: Mission (excerpts from IMF chapter).*

### 38.      The cash budget is a useful tool to provide a monitoring benchmark. It can also

### 1mozea2023016 - 38. The cash budget is a useful tool to provide a monitoring benchmark. It can also

### Role and purpose of the cash budget
- The cash budget is a useful tool to provide a monitoring benchmark.
- It can also inform the annual borrowing plan prepared by the Debt Management Department of the Treasury, particularly the timing of the local issuance of domestic bonds through the stock exchange.

### Current practice in Mozambique: monthly cash plans as expenditure control
- Monthly cash plans are used in practice as an expenditure control tool, not as a cash management tool.
- Revenue component: based on an updated projection from the revenue administration.
- Expenditure component: treated as requests from UGBs for release of authority, not as forecasts; Treasury decides release amounts depending on expected adequacy of cash reserves.
- This arrangement:
  - Manages the risk of a cash shortfall by allowing the Treasury to hold back or delay expenditure (cash rationing).
  - Reduces incentive for UGBs to plan their financial operations.
  - Risks creating unnecessary arrears or supply disruption.

### Need for pro-active aggregate liquidity management (Recommendation 3)
- Treasury should adopt a more pro-active approach to managing the government’s aggregate liquidity to reduce need to hold back or delay expenditure.
- Cash rationing should be the last course of action, after exhausting other measures to accommodate short-term mismatches.
- Dynamic adjustment of short-term financing through treasury bill issuance:
  - Augment issuance (beyond programmed levels) when cash balance would otherwise fall into deficit.
  - Reduce issuance when cash balance would otherwise be unduly excessive.

### Importance and characteristics of cash flow forecasts
- Cash flow forecasts are essential for devising strategies to smooth the cash flow profile and make cash rationing less disruptive.
- Forecasts enable informed decisions on which spending—sector versus sector, and within each sector—to constrain or allow, better protecting fiscal priorities.
- Required characteristics (quality strengthened over time):
  - Horizon: at a minimum three months, ideally 12 months (or longer).
  - Time step: daily (if necessary, weekly) out three months, and weekly beyond three months.
  - Update frequency: preferably every week, and at least every month, rolled forward across fiscal years.
  - Investigation of variances between forecasts and actual outturns to distinguish temporary vs permanent shocks.
  - Permanent shocks require more substantial policy response, e.g., reducing expenditure, raising revenue, or tolerating a higher fiscal deficit for the year.

### Box 5 — Building Cash Flow Forecasts: elements and actions
- Forecast period: ideally at least 12 months, rolling into the next fiscal year when necessary.
- Design elements:
  (i) A database of actual daily cash flows to identify patterns for monitoring; actual flows tracked against profiles submitted by budget entities and major divergences investigated.
  (ii) Information flow from revenue and spending entities; budget entities supply information when actual flows diverge from the budget.
  (iii) A network of contacts, voice and electronic, with main revenue and spending entities for developing forecasts and monitoring flows; central cash manager should know timing of major cash flows (e.g., debt service).
- Forecast construction:
  - Built from knowledge about specific flows, historical patterns, and judgments about policy or administrative changes.
  - Econometric techniques are not useful for daily or monthly projections; their role is to help forecast annual or quarterly aggregates used as constraints.
  - Examine patterns by plotting time series year-over-year to reveal seasonality.
- Important procedural actions:
  (i) Identify key working-level contacts in selected revenue and spending entities.
  (ii) Set up formal requirements to ensure profiles are supplied and updated.
  (iii) Back formal requirements with informal arrangements for early notice of major changes, possibly on the day itself.
- Practical focus: concentrate on sums that are large, most variable, and most unpredictable.
- Source: Mission.

### Recommendation 3 — Pro-actively Manage the Cash Balance
- Background findings:
  - Despite pooling efforts in the CUT, substantial liquidity remains outside the CUT.
  - Treasury does not manage aggregate liquidity pro-actively to minimize cash rationing.
  - Current cash plans are used to control budget execution rather than manage cash to avoid rationing.
- Key measures:
  - Reduce the amount of government cash that sits in commercial banks and further improve functioning of the CUT.
  - Introduce cash flow forecasting to facilitate pro-active management of the aggregate cash balance through dynamic issuance of treasury bills, reducing recourse to cash rationing.
- Institutional arrangements:
  - No change to existing institutional arrangements in UGBs.
  - Treasury must strengthen capacity to prepare high-frequency cash flow forecasts.
  - Dynamic treasury bill issuance must be coordinated closely with the Bank of Mozambique.
- Risks and mitigation:
  - UGBs may resist shifting cash from commercial bank accounts to the CUT; e-SISTAFE provides functionality to set up sub-accounts within the CUT to preserve visibility.
  - Donors may resist holding their financing within the CUT; progress depends on government credibility to ensure funds are not diverted.
  - Practical limits may exist to adopting a more dynamic approach to treasury bill issuance.
- Schedule for implementation:
  - Action 1: Finalize and circulate the diploma ministerial to secure information from commercial banks on government bank accounts and to regulate more closely the opening and operation of any new accounts — End-December 2017
  - Action 2: Introduce automatic end-of-day sweeping of balances in transit accounts and further minimize the use of advances — 1st quarter 2018
  - Action 3: Continue to close accounts in commercial banks and transfer the balances to the CUT — Ongoing
  - Action 4: Begin forecasting the government’s aggregate cash flows and cash balance over six to 12-month horizon and use the information to manage treasury bill issuance volumes in a dynamic manner — Starting in 1st quarter 2018

### Enhancing the credibility and accuracy of the budget
- Definition and importance:
  - A credible budget is one that is executed as planned; sound and predictable budget allocations to spending units are key to fiscal discipline.
  - Arrears are usually symptomatic of weaknesses in public finance management and poorly formulated budgets.
- Problems identified:
  - Since 2014, total revenue has been falling as a percent of GDP and each year government has cut total expenditure to contain the budget deficit.
  - Monthly tight controls on cash payments and in-year reallocations were used to manage expenditure changes.
  - The annual budget is prepared and executed mainly according to an economic classification with many detailed budget lines; same classifications used for execution.
  - Principal weakness: annual budget is not always adequately costed and not used as primary tool for resource allocation decisions.
  - Decisions on expenditure prioritization often postponed into the budget year and resolved through in-year reallocations.
  - Spending units have little incentive to change planned activities, contributing to accumulation of arrears despite reported cuts in total expenditure.
- Credibility components:
  - Accuracy of macro-fiscal forecasts.
  - Reliability of allocations to spending units.
- Weaknesses in documentation and process:
  - Budget documentation provides insufficient detail on assumptions underlying macro-fiscal forecasts and lacks information on reasons for deviations of actual to forecast.
  - MEF should present assumptions in budget documentation for independent scrutiny and transparently reconcile reasons behind expenditure and revenue forecast changes.
  - Process to determine fiscal aggregates is weak and not anchored on medium-term debt sustainability analysis; this provides insufficient discipline on budget deficit size at the start of the process.
  - Budget procedure is largely bottom-up, driven by ministries’ spending requests.
  - MEF is taking steps to improve macro-fiscal forecasting capacities and fiscal risk analysis.
- Donor uncertainty:
  - Withdrawal of donors from direct budget support increased reliance on project finance; late or missing project funding forces sizeable state budget adjustments (noted concern in 2016).
  - Government should insist on a medium-term support framework with donors for timely commitments and disbursements.
- Revenue and expenditure forecast accuracy:
  - Taxation revenue forecasting accuracy has improved: example deviations cited
    - 2013: Budget Law taxation revenue 95.5 billion Meticais vs collected 107.5 billion — 12.6 percent deviation.
    - 2016: deviation was 1.7 percent.
  - Total expenditure forecast accuracy worsened:
    - 2014: total expenditure overestimated by 5.0 percent.
    - 2016: deviation increased to 13 percent.
    - Overestimation driven by under-execution of capital expenditure due to cancelled/delayed donor payments and significant in-year expenditure cuts to reduce the deficit.

*Source: Mission.*

### 55.      The reductions and reallocations of expenditure within the budget year are made

### 1mozea2023016 - 55.      The reductions and reallocations of expenditure within the budget year are made

### In-year reductions, reallocations, and budget credibility
- Reductions and reallocations of expenditure within the budget year are made for cash rationing purposes, with little discussion of commensurate changes to policy priorities or the impact on the provision of services.
- Allocations to spending units through Budget Law should provide a basis for planning activities throughout the budget year and an expectation of the level of service delivery.
- Reducing spending allocations in the absence of decisions regarding the re-prioritization of government services provides no guidance to spending units on how spending cuts are to be achieved.
- Expenditure reduction plans are not effective when they are made to spending allocations without accompanying changes in the underlying expenditure policies; the likely consequence is overspending against appropriation and/or the emergence of payment arrears.

### Changes in composition of expenditure and execution weaknesses
- The composition of expenditure by economic classification changed by 8.9% in 2014 and by 27.3% in 2016; in 2016 funds for goods & services were cut to fund the wage bill and interest payments with outturns higher than expected.
- The reallocation between functional classification changed by 8.1% in composition in 2016.
- A significant portion of the change in expenditure is a result of under-execution of capital expenditure; changes in composition of current expenditure reveal weaknesses in the execution process as a result of unrealistic budget estimates.
- In 2016 the Budget Law underestimated expenditure on interest payments and on wages — wages are described as an expense that should be easy to estimate, and the significant change from Budget reflects challenges associated with controlling the size of the civil service wage bill.
- Changes in the composition of functional classification reflect uncertainty of donor funding for investment projects. Each year the Budget Law overestimates expenditure in four key functions: economic matters, environmental protection, housing and development and health — each being large areas for execution of capital expenditure.

### Impact on budget balance and credibility
- There have been significant reallocations of expenditure within the budget year and efforts to reduce the size of the deficit through budget execution control.
- Large deviations from Budget Law to the CGE raise concerns about the credibility of budget estimates presented to Parliament for legislative approval.
- Note: a positive change in figures presented means Budget was greater than actual; in the figure on Overall Balance this means the Budget forecasted a larger deficit than the actual outcome.

### Improving realism at MTFF stage (Box 7)
- The MTFF should present: i) macroeconomic and fiscal projections; ii) updates to baseline expenditure; iii) the targeted amount of fiscal space and its sectoral allocation; iv) other issues for budget preparation.
- Baseline estimates: costs for future budget years based on no policy changes (no savings, no new policies); developed and agreed by staff between MEF and ministries.
- Parameters to update baselines should be explicit and agreed (e.g., macro-economic indicators such as unemployment, inflation; program parameters such as beneficiaries; commitments for contracts and capital projects).
- MEF should identify in baselines the plan for clearing the stock of arrears.
- Targeted fiscal space should be determined through reconciliation of updated baseline estimates and the targeted expenditure ceiling; MTFF should propose allocation across sectors or identify spending cuts if fiscal space is negative.

### Fiscal reporting and arrears
- Current fiscal reporting compounds challenges for budget credibility as it does not capture the accumulation of arrears.
- The process of budget execution does not permit the monitoring or prevention of arrears; the CGE provides incomplete information on the state of government finances and therefore does not provide accurate comparison to budget estimates.
- SISTAFE remains focused on tight cash control and there is no requirement to record all commitments; fiscal information is not capturing the accumulation of arrears.
- This impacts the credibility of budget year forecasts and the ability of future budgets to be credible if arrears and multi-year commitments are not informing spending allocation decisions through budget preparation.

### Recommendation 4 — Enhance Budget Credibility
Background:
- Weaknesses in annual budget preparation reflect that decisions on expenditure prioritization are often pushed out to the budget year and resolved only through in-year reallocations; significant reductions and reallocations occur without accompanying changes in underlying expenditure policies.

Key measures:
- Improve budget credibility by continuing to improve the realism of revenue estimates (including donor funding), and of expenditure estimates both at the aggregate level (i.e., total recurrent and capital expenditure) and at the composition level (i.e., allocations by classification).
- Publish a reconciliation of changes (and their reasons) from the Budget Law to CGE, and analyze the largest deviations in allocations (both economic and functional classification).
- Identify the implications of deviation for the budget to inform the preparation of baseline estimates in the MTFF.

Institutional arrangements:
- Strengthen linkages between MEF directorates responsible for macro-fiscal forecasting, the Directorate for Budget Planning, and the Directorate of Treasury.
- No additional institutional arrangements required; strengthen existing processes:
  - Fiscal reporting should identify and analyze deviations from Budget to outturn.
  - The preparation of expenditure aggregates at the MTFF stage should be determined through a reconciliation of top-down and bottom-up approaches (see Box 7).

Risks and mitigation measures:
- Improve existing processes and integrate efforts to improve budget credibility into the budget cycle to avoid creating additional systems or processes.

Schedule for implementation (actions and timing):
- Action 1: Analyze and publish the deviations from Budget Law to CGE for macroeconomic indicators, fiscal aggregates, and composition of expenditure. Further identify the major causes for deviations and their expected impacts for future budgets. For inclusion in the 2017 CGE and in the 2019 MTFF.
- Action 2: Determine expenditure aggregates, through updating the baseline estimates and determining the allocation of fiscal space. Include identification of the stock of, and plan to clear arrears. For preparation of the 2019 MTFF.
- Action 3: Continue to insist on a medium-term support framework with donors to ensure timely commitments and disbursements of project finance. Ongoing.

### Professionalizing and streamlining spending units (UGBs)
- There are more than 1,600 UGBs across the country: 200 UGBs at the central government level, 650 at the provincial level, and 770 at the district level.
- At the central level, the bulk of budget execution is concentrated in a few spending units that collectively execute 90% of the central agencies’ budgets.
- Central distribution: 17% of UGBs operate 90% of central expenditure; 83% of UGBs operate 10% of central expenditure.
- Provinces distribution: 28.5% of UGBs operate 80% of provincial expenditure; 71.5% of UGBs operate 20% of central expenditure.

Table 4 (selected indicators for 2016)
- Central: 2016 Budget 82.84% ; 2016 Outturn 85.17% ; # of UGBs 13.17% ; Overall Budget Credibility 3%
- Niassa: 2016 Budget 3.77% ; 2016 Outturn 4.81% ; # of UGBs 8.56% ; Overall Budget Credibility 27%
- Nampula: 2016 Budget 2.40% ; 2016 Outturn 1.62% ; # of UGBs 12.03% ; Overall Budget Credibility 32%
- Zambezia: 2016 Budget 2.11% ; 2016 Outturn 1.42% ; # of UGBs 9.99% ; Overall Budget Credibility 33%
- Gaza: 2016 Budget 1.55% ; 2016 Outturn 1.13% ; # of UGBs 8.32% ; Overall Budget Credibility 27%
- Tete: 2016 Budget 1.34% ; 2016 Outturn 0.91% ; # of UGBs 8.26% ; Overall Budget Credibility 32%
- Sofala: 2016 Budget 1.27% ; 2016 Outturn 1.00% ; # of UGBs 8.02% ; Overall Budget Credibility 21%
- Cabo Delgado: 2016 Budget 1.19% ; 2016 Outturn 0.77% ; # of UGBs 7.66% ; Overall Budget Credibility 35%
- Inhambane: 2016 Budget 1.08% ; 2016 Outturn 0.80% ; # of UGBs 7.96% ; Overall Budget Credibility 26%
- Maputo Provincia: 2016 Budget 1.01% ; 2016 Outturn 1.03% ; # of UGBs 6.40% ; Overall Budget Credibility 2%
- Manica: 2016 Budget 0.87% ; 2016 Outturn 0.73% ; # of UGBs 7.24% ; Overall Budget Credibility 16%
- Maputo Cidade: 2016 Budget 0.57% ; 2016 Outturn 0.61% ; # of UGBs 2.39% ; Overall Budget Credibility 7%
- Central remark: 17% of UGBs operate 90% of central expenditure; 83% of UGBs operate 10% of central expenditure.
- Provincial remark: 28.5% of UGBs operate 80% of provincial expenditure; 71.5% of UGBs operate 20% of central expenditure.

### Benefits and approach to streamlining UGBs
- Expected outcomes of streamlining:
  - More accountable and proficient staff in UGBs (capacity development and accountability frameworks easier with a critical mass of staff, e.g., 30 or more).
  - More timely and accurate fiscal reports by consolidating quarterly reports and reducing manual reporting.
  - More accurate budget allotments and reduced need for in-year reallocations.
  - Improved financial programming: fewer UGBs operating significant budgets ease a bottom-up approach for Treasury cash plans.
- Recommended pragmatic approach (case by case):
  - Shut down inexistent UGBs without financial activities.
  - Group dependent UGBs under same department, province, or district.
  - Assign small UGBs to technical platforms implementing technical steps while leaving signing authority to UGB managers.
  - Redeploy Treasury officials to fit UGBs’ needs locally and centrally.

### Recommendation 5 — Streamline Spending Units Network
Background:
- The number of UGBs hampers allocation of funds and budget consolidation; MEF reallocates funds during the year depending on cash availability; UGBs with low financial activity struggle to reach standards, skills, and economies of scale.

Key measures:
- Gradually regroup UGBs at center, province and district levels to divide their number by four with indicative targets:
  - 31 at central level (i.e., ministries and constitutional institutions);
  - 240 at provincial level (i.e., governors, assemblies, regional directions, hospitals, and townships);
  - 150 at district level (by grouping district UGBs in district secretariats).

Institutional arrangements:
- Measures do not affect Mozambique’s decentralization framework; all grouped UGBs report to central government agencies.
- Ministries: (i) first group small-budget UGBs and operate expenses on their behalf; (ii) constitute central spending centers for larger budget UGBs; (iii) eventually operate all central expenditure related to the ministry’s budget.
- Provinces: (i) group small-budget UGBs not related to central government ministries under governors; (ii) merge UGBs related to regional directions; (iii) keep hospitals and large budget units as UGBs.
- Districts: group all UGBs in district secretariats.

Risks and mitigation:
- Expect resistance from small UGBs fearing budget haircuts or administrative delays; MEF should communicate that funds will be more easily funneled from the CUT and that larger UGBs will be more efficient.
- Central ministries should assure deconcentrated units will not suffer budget constraints beyond normal business.
- A communication campaign is needed.

Schedule for implementation (phasing and actions):
- Phasing in: Define targets, timelines and action plan by March 2018 at latest.
- Action 1: On a voluntary basis group small budget UGBs by June 2018.
- Action 2: Prepare large mergers simultaneous with budget preparation meetings by September 2018.
- Action 3: Start FY 2019 under the new budget management framework by January 2019.
- Action 4: Complete remaining planned mergers by September 2019.
- Action 5: Start FY 2020 under the new framework by January 2020.
- Action 6: General Inspectorate of Finance reports on experience by June 2020.

### Seminar on Budget Control — main outcomes and operational recommendations
- Two half-day seminars organized to discuss best practices in budget management and ways to resolve and prevent arrears; participants included senior and technical government officials from MEF, sector ministries, and external audit body.
- Day 1: five short presentations on mapping the problem of arrears, lessons from Angola, budget credibility, expenditure process, and the CUT and cash management.
- Day 2: two working groups discussed strengthening the expenditure chain and cash management, focusing on commitment, verification, and payment; cash and debt planning; and banking arrangements to optimize the treasury single account.

Working group recommendations (selected)
- Group 1 (Expenditure chain):
  - Change user practices to restore the three phases of the expenditure chain in e-SISTAFE when they are done; requires extensive training and clear manual of procedures.
  - Enforce compliance over the execution process in e-SISTAFE with support from internal control (IGF).
  - Use the ‘commitment certificate’ issued by e-SISTAFE to provide suppliers with proof of future payment; train suppliers to deliver only after commitments are made in the system.
  - Put cash management tools in place so commitment ceilings can be provided on a quarterly basis to strengthen communication between spending units and MEF.
  - Improve infrastructure supporting e-SISTAFE to ensure regular access from local offices; current access losses lead agents to travel and may cause all three expenditure phases to be recorded simultaneously.

- Group 2 (Cash management):
  - Strengthen CUT by reducing Treasury accounts in commercial banks (e.g., accounts created by spending units or externally financed projects) and reinforce procedures to ensure surplus balances are immediately transferred to the CUT (e.g., revenue accounts).
  - Develop cash management function (programação financeira) with improved and regularly updated forecasts of cash flows to execute the budget predictably without rationing cash or accumulating arrears.
  - Complement monthly and weekly cash rationing mechanisms (requesição de necessidades financeiras) with annual, quarterly, and monthly cash management plans (improving the existing orçamento de tesoureria and planos de tesoureria).

*Source: IMF mission based on data from the Budget Law and the CGE; Fiscal Affairs Department, International Monetary Fund.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1mozea2023016.pdf_