## _cr03185

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### EXECUTIVE SUMMARY

- Purpose and methodology
  - Assessment of fiscal transparency practices in Bangladesh against the IMF Code of Good Practices on Fiscal Transparency.
  - Based on: discussions with the authorities and other organizations; the authorities’ response to the IMF fiscal transparency questionnaire; and other sources of information.
  - Reference recommended: IMF Manual on Fiscal Transparency (web address provided in source).

- Recent progress in fiscal reporting
  - Measures in hand to present audited accounts from 2002/3 onward within 12 months of year-end.
  - Monthly reports are being produced around 5–8 weeks after month-end.
  - Processes are in place to establish sustainable improvements in accounts reconciliation.
  - Separation of the accounting function from the Comptroller and Auditor-General’s Office achieved.

- Major weaknesses and concerns
  - Rundown of state resources through quasi-fiscal subsidies to state-owned enterprises and nationalized commercial banks is a major concern; these activities are not transparently reported and should be explicitly considered in fiscal policy.
  - Budget documents do not reveal the key assumptions underlying fiscal policy in a systematic way.
  - Parliamentary mechanisms for oversight of the public finances need strengthening.
  - Reporting reliability remains weak, particularly for foreign-financed projects.
  - Lack of clarity in managerial roles between commercial activity and subsidized service provision contributes to management failures, corruption, and poor industrial relations in sectors where government is heavily involved.

- Structure and scope of public sector activity (select facts)
  - General government defined to include central government and local and municipal governments.
  - Around 200 NFPEs under the purview of 41 sector corporations, plus 3 quasi-commercial government departments included in the budget.
  - Overall contribution of NFPEs to the economy is estimated at less than 3 percent of GDP for FY 2001/02.
  - As of the 2002/03 budget there were 53 ministry/divisional budget heads; as of June 2002 there were [178] departments (bracketed figure as in source).

- Quantified fiscal pressures and quasi-fiscal activities (preserve source figures exactly)
  - Direct subsidies in FY 2000/01:
    - Fertilizers, seeds and agricultural loans: Tk 1.0 billion (0.04 percent of GDP).
    - Food subsidies to police and defense personnel and open market sales of food: Tk 3.1 billion (0.14 percent of GDP).
    - Subsidies to export industries (mostly jute products) in FY 2001/01: Tk 0.9 billion (0.04 percent of GDP).
  - World Bank estimates cited in source:
    - Subsidies from the major power companies around Tk 21 billion (0.8 percent of GDP) on a cash break-even basis in FY 2001/02.
    - Bangladesh Petroleum Company losses in FY 2001/02 around Tk 10 billion (0.4 percent of GDP).
  - Deficits and contingent liabilities:
    - Deficit of the ten main NFPEs amounted to Tk 71 billion (2.8 percent of GDP) in FY 2000/01; about half was covered by the budget, and the remainder by commercial borrowing and accumulation of arrears.
    - Government bank recapitalization amounted to Tk 1.25 billion in FY 2001/02.
  - Privatization receipts 1993–August 2002 totaled Tk 4.5 billion (0.2 percent of average GDP) for 41 entities partially or wholly divested.

- IMF staff priorities and recommendations (immediate and medium-term)
  - Highest immediate priority: consolidate recent gains in improving fiscal reporting (audited accounts timetables, monthly reporting, reconciliation processes).
  - Immediate start to improve reporting on SOEs/NFPEs and to take contingent liabilities and quasi-fiscal activities into account in setting fiscal policy.
  - Strengthen watchdog institutions (e.g., Comptroller and Auditor-General) to assure data integrity and long-term sustainability of reforms.
  - Improve transparency of subsidies and quasi-fiscal operations, including systematic disclosure and monitoring of subsidy purposes and outcomes.
  - Clarify and coordinate privatization and closure policies, ensuring transparency and disclosure of contingent liabilities.
  - Strengthen parliamentary mechanisms for oversight of public finances.
  - Continue reforms to reduce quasi-fiscal losses in gas, power, water and petroleum (including periodic price adjustments based on economic pricing formulas as part of World Bank support).

### 6. The central bank is not yet fully independent, and it supports quasi-fiscal activities of PFIs

- Central bank governance and recent legal changes
  - The Bank of Bangladesh (BB) is administratively under the Ministry of Finance and its nine member Board, including the Chairman, consists of government nominees, including three government officials.
  - The Bangladesh Bank Order of 1972 (as amended) limited BB autonomy; the Order was amended in March 2003 to provide greater operational autonomy to BB.
  - The Banks (Nationalization) Act and the Banking Companies Act were amended at the same time to bring the Nationalized Commercial Banks (NCBs) and the Development Finance Institutions (DFIs) under closer BB supervision.
  - A new Money Loans Court law has been enacted to establish specialist courts to deal with loan defaults and streamline the recovery process.
  - About 100 loss-making branches of NCBs have been either closed or merged in the current financial year.
  - The new banking law is still not clear on procedures for the winding-up of problem banks, and BB still requires the approval of the Finance Ministry to enforce corrective measures over the NCBs and DFIs.

- Quasi-fiscal activities and implications for banking soundness
  - PFIs continue to carry out a range of quasi-fiscal activities despite reforms.
  - The four NCBs accounted for almost 60 percent of overall banking sector deposits at the end of 2001, and an even higher share of risk-weighted assets.
  - Legal provisions (Articles 60–62) explicitly permit BB to provide credit to specialized credit institutions, partly financed by direct appropriation from bank profits.
  - Directed lending to NFPEs and channeling subsidized credits through NCBs and DFIs have undermined profitability and soundness of banks and led to significant accumulation of non-performing loans.
  - Potential fiscal costs from implicit government guarantees on poor-quality loans are not discussed in the budget documents.

- Banking sector structure and governance weaknesses
  - Commercial banks comprise four NCBs, 30 private domestic banks (PDBs), and 12 foreign banks.
  - Insider lending is legally sanctioned under the Banking Companies Act 1991 and has become common, undermining bank soundness.
  - Measures by BB include reducing scope for insider lending, enhancing asset quality, improving loan classification, and better monitoring/enforcement of net open foreign positions.
  - A Money Laundering Prevention Act has been passed.

- Government holdings, NFPEs, and reporting
  - Government decided to privatize or close down, over the next three fiscal years, all manufacturing units in the SOE sector except sugar and fertilizer industries.
  - A consolidated account of the NFPEs is prepared each year, approved by the MOF, but is not presented to parliament.
  - NFPEs follow budgeting, reporting, and audit cycles somewhat similar to government departments but are not subject to parliamentary appropriation control.
  - NFPEs including BTTB, the Post Office, and the Railways use commercial accounting, though reconciliation and asset valuation practices are extremely weak.

- Local government fiscal relations and capacity
  - Local government data are excluded from the fiscal management system and administrative capacity at local levels is weak.
  - From 2002/03:
    - grants to union parishads are distributed on the basis of 15 percent allocation according to performance, the remainder according to area and population;
    - for district grants, 25 percent of the allocation depends on performance.
  - The Cabinet Committee on Local Government has recommended establishing elected upazila parishads.

- Constitutional and institutional fiscal framework
  - 1972 constitution defines fiscal roles; Articles 127–132 established the role of the Comptroller and Auditor-General (C&AG).
  - The accounting function was allocated to the C&AG by the Additional Functions Act of 1974 but has since been transferred to the Finance Division of the MOF.

- Budgeting, accounting, and coordination weaknesses
  - Separation of the consolidated fund into recurrent and development spending has impeded matching development project expenditures with adequate recurrent operating and maintenance provisions.
  - Government plans to develop a medium-term expenditure framework (MTEF) incorporating a rolling three-year public investment program.
  - Accounting coverage, timeliness, and reliability are inadequate but have improved significantly; CGA-controlled accounts accounting performance has improved substantially.

- Coordination of externally financed projects
  - ERD monitors resource flows for externally financed development projects and external debt management.
  - CGA receives financial data on project expenditures through CAOs for locally funded components but relies on project directors’ reports for externally financed components.
  - All external financing flows through special accounts managed by project directors rather than CAOs; reconciled statements cannot be produced because of incomplete reporting.
  - Foreign aid disbursements are entered in CGA accounts as an offsetting counterpart to recorded expenditure; actual receipts data cannot be reliably obtained from ERD because donor reports lack appropriate breakdowns.

- Tax policy, administration, and transparency
  - NBR reforms include: Large Taxpayers Unit, mandatory pre-shipment inspection, a unique taxpayer identification number, and establishment of a Revenue Reform Commission in June 2002.
  - Executive branch regularly grants exemptions and non-transparent tax incentives, including open-ended tax holidays; no systematic public reporting on the extent and cost of tax concessions.

- Anti-corruption and ethics
  - Principal laws include:
    - Prevention of Corruption Act, 1947;
    - Anti-Corruption Act, 1957;
    - Criminal Law Amendments Act, 1958;
    - Anti-Corruption Tribunal Ordinance, 1960.
  - Authorities advise a Cabinet decision has been taken to establish an Independent Commission for Anti-Corruption.

- Public availability of fiscal information and budget presentation
  - Comprehensive data on actual budget outturns for the central government have not been produced and disseminated on a timely basis.
  - Revised budget estimates are disseminated only annually at presentation of the next year’s budget.
  - No projections for future years are given in the current budget documents; authorities propose that the MTEF include fiscal projections for two years beyond the budget year.

### 21. No estimates of tax expenditures, contingent liabilities or the extent of quasi-

- Fiscal transparency and contingent liabilities
  - No estimates of tax expenditures, contingent liabilities, or the extent of quasi-fiscal activity are included in the budget documents or annual accounts.
  - The NBR authorities indicated data are available to compile estimates of revenue foregone through concessions.
  - No estimates are made of contingent liabilities, such as government guarantees on debt contracted by state-owned enterprises.

- Public debt, domestic borrowing, and financial assets reporting
  - Information on gross external public debt is published, but domestic debt is not reported to parliament and financial assets are not reported.
  - ERD compiles annual data on external government debt; data for domestic debt are produced by the MOF for internal government use only.
  - Public debt information is not included in the audited final accounts of the government.

- Publication practices, timeliness, and GDDS comparability
  - Reporting of fiscal data falls short of GDDS recommendations regarding timeliness, comprehensiveness and reliability.
  - The Finance Division has begun producing quarterly reports on the central government fiscal position; subsequent to the mission’s visit, monthly (and quarterly) reports on the government’s fiscal position have been established and published on the MOF website.

- Budget preparation, priority setting, and development spending
  - Annual budget process is geared to incremental additions and lacks an open and disciplined priority setting mechanism, particularly for development projects.
  - The Annual Development Plan (ADP) process is undermined by incorporation of a large number of projects mid-year, often with questionable priority and rationale.
  - Provision for operations and maintenance spending after project completion is made by block allocation in the year of completion; allocations are generally inadequate.

- Assumptions, fiscal risk disclosure, and deficit focus
  - Economic assumptions underlying the budget estimates are not shown systematically; no sensitivity analysis or statement of overall macroeconomic risk is undertaken.
  - The overall deficit of central government is the main focus of fiscal policy; fiscal data are classified compatible with the 1986 GFS conventions.
  - The prevalence of quasi-fiscal activities suggests developing some form of augmented general government balance once data sources improve.

- New policy proposals, budgeting basis, and performance tracking
  - New policy proposals are estimated separately; ministries submit “new item statements” by end-November of the pre-budget year.
  - Budgeting and accounting are input-based, with no systematic definition of objectives or outputs for performance tracking.

- Internal control, internal audit, and procurement
  - Internal audit arrangements are absent in almost all ministries except a few; few internal audit staff have adequate professional training.
  - Procurement lacks a comprehensive legal framework and systematic procedures; ERD has issued guidelines for externally financed procurement.
  - A World Bank-supported project is planned to prepare a procurement law, standard bidding documents, and training.

- Civil service structure and pay
  - Ministry of Establishment indicates currently there are a total of 936,000 sanctioned posts (90,000 class I officers, 48,000 class II officers, 598,000 class III and about 200,000 class IV staff); in addition around 300,000 staff are employed for fixed periods on development projects.
  - PARC indicates that in 1996 the Ministry of Establishment estimates were 730,117 total sanctioned posts.

- Accounting, reporting timeliness, and the RIBEC reforms
  - Approximately £16 million has been spent on the RIBEC family of projects.
  - Main RIBEC achievements include:
    - establishing a working reconciliation process for CGA accounts;
    - attaining more timely within-year reporting of fiscal data to 5–8 weeks after month-end;
    - improving timeliness of submission of audited accounts to parliament;
    - separating the accounting and audit function in July 2002;
    - improving the quality and timeliness of audit reporting;
    - establishing FMUs in ministries with heavy ADP spending.
  - Accounts are maintained on a cash basis and the system does not provide data on expenditure arrears.
  - FY 2000/01 indicators: shortfall in total revenue of Tk 13 billion, or 5.4 percent (Tk 228 billion in actual collections, compared with Tk 242 billion in the original budget); total budgetary expenditures lower by Tk 13 billion (Tk 371 billion estimated outturn versus Tk 384 in the original budget) or 3.5 percent.

- Mid-year review, audit timeliness, and assurance of integrity
  - Audited final accounts are not yet available within twelve months of the end of the fiscal year; latest presented to parliament are for FY 1999/2000.
  - FY 2000/01 accounts are nearly finalized; it is anticipated that FY 2001/02 accounts can be submitted to the C&AG by end-January 2003 and thereafter regular submission within 12 months of year-end as required by executive order.

### 37. The processes of accounts reconciliation and fiscal reporting are not yet fully

- Reconciliation and fiscal reporting: recent improvements and gaps
  - RIBEC technical improvements have improved reconciliation in areas under CGA control.
  - Institutionalization through regular CGA follow-up and an interdepartmental Task Force on Monitoring Macroeconomic Data is underway.
  - Remaining issues: adequate coverage, complete and timely reconciliation, and presentation of macroeconomic and technical assumptions underlying the budget for external scrutiny.

- External audit and institutional independence
  - Constitutionally the Auditor-General is appointed by the President and specified to be free from direction or control (Article 128 (4)).
  - Under the Rules of Business the C&AG is a division of the MOF; in practice Finance Division does not influence operational work of the C&AG but close administrative supervision limits perceived independence.

- Audit capacity, practice, and parliamentary follow-up
  - Of 3500 established posts in the audit service, only 2500 are filled.
  - Cadre officers are only around 2 percent of staff; in the 9 Audit Directorates there are only 54 cadre officers.
  - PACs take an excessively long time to consider audit recommendations; no PAC has been formed under the present government.

- IMF staff assessment and priorities (IMF STAFF COMMENTARY)
  - Progress: standards of accounting and fiscal reporting are improving toward meeting basic requirements of the fiscal transparency code.
  - Immediate priority: consolidate and fully institutionalize improvements achieved; publish and actively disseminate information already in the system.
  - Broader reforms: strengthen state-owned enterprise sector transparency, introduce an MTEF, and strengthen watchdog institutions including the C&AG.

- Specific measures to consolidate reconciled, timely, and comprehensive reporting (paragraphs 47–51)
  - Institutional and data-assurance measures:
    - Establish the Task Force as a high-level Economic Monitoring Committee to review monthly government fiscal position and data quality.
    - Ensure incorporation of clear assurances of data quality in monthly, quarterly, and annual fiscal and financial reports, including reconciliations between CGA accounts and BB/commercial bank balances and reconciliation of ADP foreign financing flows.
    - Establish clear standards for timeliness of reports—treat GDDS as a minimum—and publish monthly reports on the MOF website.
    - Include both external and domestic debt data in monthly and quarterly reports; annual financial statements should include debt data as a memorandum record.
    - C&AG, in certifying annual accounts, should comment on government compliance with standards of data quality and timeliness and on adequacy and consistency of debt records.

  - Foreign-financed projects:
    - Require project directors to provide prompt monthly reports to the CAO covering receipts, bank statements for project accounts, and spending data.
    - Set up a small External Financing Unit within CGA to monitor reporting and investigate major discrepancies between ERD, CGA, and IMED data on ADP spending.
    - Record all receipts of foreign aid or loans in a memorandum account by BB before transfer to project accounts, and provide balances to CGA, ERD, and IMED.
    - Longer-run: bring special accounts for foreign aid and loans within the government accounting system once CGA accounts and expenditure control are demonstrably reliable.

  - Coordination between ministries and CAOs:
    - Clarify FMU roles; conduct seminars/workshops with PAOs and senior ministry officials; upgrade selected CAO positions and promote appropriately qualified candidates.

  - Internal audit strengthening:
    - Create an Internal Audit Cell in the Ministry of Finance on a pilot basis as a ‘center of excellence’ to develop standards, guidelines, manuals and training materials.

  - Improved public dissemination and analytical budget information:
    - Present basic macroeconomic, technical, and policy assumptions underlying budget estimates systematically (possibly as an annex to Budget in Brief or Budget Speech).
    - Disclose contingent liabilities arising from government guarantees or contractual arrangements in an annex to the budget.
    - Prepare a statement of tax expenditures as an annex to the budget documents.
    - Compile a statement of fiscal risks indicating possible impacts of changes in key assumptions or contingent events.

### 52. Assurances of fiscal discipline and policy accountability should be given priority

- Medium-Term Expenditure Framework (MTEF): implementation priorities
  - Staff recommendation: proceed in a carefully phased manner and establish key components of fiscal policy discipline and accountability as prerequisites for full MTEF implementation.
  - Key measures:
    - Use macroeconomic framework developed for PRSP as the overall resource envelope for the MTEF.
    - Carefully cost existing policy expenditures and separate them from new policies in budget preparation and forecasting forward estimates.
    - Establish a high-level committee to coordinate annual review of all new policies and control admission of new policies within the overall resource envelope.
    - Make ministries responsible for detailed rolling forward estimates; FMUs should be responsible for maintaining these estimates.
    - Once conditions are satisfied, publish forward estimates of expenditures and receipts under existing policy in the annual budget document.

- Fiscal transparency and reform of state-owned enterprises (SOEs/NFPEs/PFIs)
  - Rundown of state resources through direct subsidies and quasi-fiscal activities of NFPEs and PFIs is identified as the single greatest source of long-term loss and fiscal risk.
  - Measures to strengthen MOF capacity and reporting:
    - Strengthen the MOF monitoring cell by adding skilled staff for within-year reports on SOE activity and effective monitoring of income and losses.
    - Set a longer-term objective for the unit to develop analytical focus to quantify costs of NFPE noncommercial activity along World Bank lines.
    - As reporting improves, produce a regular report on the consolidated public sector balance to inform fiscal policy (not as a key policy target until database is stronger).
    - Develop an annual analytical report on subsidies and quasi-fiscal activities as an annex to the budget documents.
    - Strengthen analysis of costs of quasi-fiscal activities by PFIs and strengthen BB banking supervision in light of FSAP advice.

- Strengthening watchdog institutions and governance
  - Reinforcing the C&AG:
    - Support FMRP proposals to strengthen capacity and quality of external audit and give C&AG clearer administrative independence.
    - Consider making the C&AG an officer of the parliament; separate accounts and audit cadre; subject C&AG accounts to audit; establish peer review processes; draft and enact an Audit Act.
  - Parliamentary oversight and PAC:
    - Reinstate the PAC mechanism as soon as possible and provide it with a permanent secretariat and financial management experts.
    - Make PAC hearings open to the public and establish Audit Committees in all ministries including civil society members.

- Anti-corruption and local government accountability
  - Set up an Anti-Corruption Commission with highly qualified members drawn from civil society, directly under parliament or an ombudsman office.
  - Clarify decentralization policy and consider establishing a local government commission with a mandate to strengthen financial accountability of LGIs.
  - Initial actions for LGIs:
    - Strengthen financial management and internal audit of LGIs.
    - Provide extensive training to finance and audit staff of LGIs.
    - Prepare accounts of all city corporations and municipalities on accrual basis and audit them by private independent auditors.
    - Make city and municipality annual reports and audited financial statements available to the media and the public.

*Source: EXECUTIVE SUMMARY and selected sections, IMF staff assessment of fiscal transparency practices in Bangladesh (IMF staff report text as provided in the content unit).*

### EXECUTIVE SUMMARY

### _cr03185 - EXECUTIVE SUMMARY

### Purpose and methodology
- Assessment of fiscal transparency practices in Bangladesh against the IMF Code of Good Practices on Fiscal Transparency.
- Based on: discussions with the authorities and other organizations; the authorities’ response to the IMF fiscal transparency questionnaire; and other sources of information.
- Reference recommended: IMF Manual on Fiscal Transparency (web address provided in source).

### Recent progress in fiscal reporting
- Measures in hand to present audited accounts from 2002/3 onward within 12 months of year-end.
- Monthly reports are being produced around 5-8 weeks after month-end.
- Processes are in place to establish sustainable improvements in accounts reconciliation.
- Separation of the accounting function from the Comptroller and Auditor-General’s Office achieved.

### Major weaknesses and concerns
- Significant weaknesses remain in other areas of the fiscal transparency code.
- Rundown of state resources through quasi-fiscal subsidies to state-owned enterprises and nationalized commercial banks is a major concern; these activities are not transparently reported and should be explicitly considered in fiscal policy.
- Budget documents do not reveal the key assumptions underlying fiscal policy in a systematic way.
- Parliamentary mechanisms for oversight of the public finances need strengthening.
- Reporting reliability remains weak, particularly for foreign-financed projects.
- Lack of clarity in managerial roles between commercial activity and subsidized service provision contributes to management failures, corruption, and poor industrial relations in sectors where government is heavily involved.

### Structure and scope of public sector activity (select factual points)
- General government defined to include central government and local and municipal governments (see Box 1 in source).
- Around 200 NFPEs under the purview of 41 sector corporations, plus 3 quasi-commercial government departments included in the budget.
- Operations of NFPEs cover all economic sectors and are dominant in key sectors such as railways, electricity, gas, and water.
- Overall contribution of NFPEs to the economy is estimated at less than 3 percent of GDP for FY 2001/02.
- As of the 2002/03 budget there were 53 ministry/divisional budget heads; as of June 2002 there were [178] departments (bracketed figure as in source).

### Quantified fiscal pressures and quasi-fiscal activities (preserve source figures exactly)
- Direct subsidies in FY 2000/01:
  - Fertilizers, seeds and agricultural loans: Tk 1.0 billion (0.04 percent of GDP).
  - Food subsidies to police and defense personnel and open market sales of food: Tk 3.1 billion (0.14 percent of GDP).
  - Subsidies to export industries (mostly jute products) in FY 2001/01: Tk 0.9 billion (0.04 percent of GDP).
- World Bank estimates cited in source:
  - Subsidies from the major power companies around Tk 21 billion (0.8 percent of GDP) on a cash break-even basis in FY 2001/02.
  - Bangladesh Petroleum Company losses in FY 2001/02 around Tk 10 billion (0.4 percent of GDP).
- Deficits and contingent liabilities:
  - Deficit of the ten main NFPEs amounted to Tk 71 billion (2.8 percent of GDP) in FY 2000/01; about half was covered by the budget, and the remainder by commercial borrowing and accumulation of arrears.
  - Government bank recapitalization amounted to Tk 1.25 billion in FY 2001/02.
- Privatization receipts 1993–August 2002 totaled Tk 4.5 billion (0.2 percent of average GDP) for 41 entities partially or wholly divested (source data cited in the report).

### Institutional and regulatory issues
- Privatization Commission established under the Privatization Act 2000; administratively part of the Prime Minister’s Office; autonomous in divestment of listed enterprises with sales price under Tk 250 million (government final approval required above that limit).
- Need to re-examine and clarify policies across options for dealing with loss-making enterprises, including disclosure of contingent liabilities arising from closure and asset sale operations.
- Steps taken to simplify regulatory framework (energy and telecommunications) and to establish a “one-stop shop” for new investment regulation through the Board of Investment (BOI), but BOI procedures remain complex and judicial and law enforcement weaknesses persist.
- Legislative developments noted: in April 2003 Parliament passed the Energy Regulatory Commission Act; the Independent Regulatory Commission for Telecommunications is operational.

### IMF staff priorities and recommendations (immediate and medium-term)
- Highest immediate priority: consolidate recent gains in improving fiscal reporting (audited accounts timetables, monthly reporting, reconciliation processes).
- Immediate start to improve reporting on state-owned enterprises (SOEs)/NFPEs and to take contingent liabilities and quasi-fiscal activities into account in setting fiscal policy.
- Strengthen watchdog institutions (e.g., Comptroller and Auditor-General) to assure data integrity and long-term sustainability of reforms.
- Improve transparency of subsidies and quasi-fiscal operations, including:
  - Explicitly considering quasi-fiscal activities in fiscal policy.
  - Systematic disclosure and monitoring of subsidy purposes and outcomes.
- Clarify and coordinate privatization and closure policies, ensuring transparency and disclosure of contingent liabilities.
- Strengthen parliamentary mechanisms for oversight of public finances.
- Continue reforms to reduce quasi-fiscal losses in gas, power, water and petroleum (the source notes agreement on periodic price adjustments based on economic pricing formulas as part of World Bank support).

*Source: EXECUTIVE SUMMARY, IMF staff assessment of fiscal transparency practices in Bangladesh.*

### 6. The central bank is not yet fully independent, and it supports quasi-fiscal

### 6. The central bank is not yet fully independent, and it supports quasi-fiscal activities of PFIs

### Central bank governance and recent legal changes
- The Bank of Bangladesh (BB) is administratively under the Ministry of Finance and its nine member Board, including the Chairman, consists of government nominees, including three government officials.
- Under the Bangladesh Bank Order of 1972, as amended, BB had limited autonomy with respect to the design and implementation of monetary and exchange rate policies.
- The Order was amended in March 2003 to provide greater operational autonomy to BB.
- The Banks (Nationalization) Act and the Banking Companies Act were amended at the same time to bring the Nationalized Commercial Banks (NCBs) and the Development Finance Institutions (DFIs) under closer BB supervision.
- A new Money Loans Court law has been enacted to establish specialist courts to deal with loan defaults and streamline the recovery process.
- About 100 loss-making branches of NCBs have been either closed or merged in the current financial year.
- The new banking law is still not clear on procedures for the winding-up of problem banks, and BB still requires the approval of the Finance Ministry to enforce corrective measures over the NCBs and DFIs.

### Quasi-fiscal activities and implications for banking soundness
- Despite recent reforms, Public Financial Institutions (PFIs) continue to carry out a range of quasi-fiscal activities.
- Government involvement in the financial sector remains extensive, despite greater ownership diversification in the last decade.
- The four NCBs accounted for almost 60 percent of overall banking sector deposits at the end of 2001, and an even higher share of risk-weighted assets.
- Legal provisions (Articles 60–62) explicitly permit BB to provide credit to specialized credit institutions (rural credit, export credit, and industrial credit), partly financed by direct appropriation from bank profits.
- BB has ordered banks not to exceed a maximum rate on credit for exporters.
- Directed lending to NFPEs, and channeling subsidized credits through the NCBs and DFIs to favored sectors (agriculture and jute cited), have:
  - undermined profitability and soundness of banks;
  - led to significant accumulation of non-performing loans.
- The potential fiscal costs stemming from implicit government guarantees on loans of questionable quality are not discussed in the budget documents.

### Banking sector structure and governance weaknesses
- Commercial banks in Bangladesh comprise four nationalized commercial banks (NCBs), 30 private domestic banks (PDBs), and 12 foreign banks.
- Political interference and lack of managerial accountability are noted: politicians and government officials regularly interfere in operations of NCBs and DFIs, while management is not generally held accountable for performance.
- Insider lending is legally sanctioned: the Banking Companies Act 1991 allows banks to make secured loans to their directors and their affiliates; insider lending has become common and has severely undermined soundness of most banks.
- Some efforts by BB include reducing scope for insider lending, enhancing asset quality, improving loan classification, and better monitoring/enforcement of net open foreign positions.
- A Money Laundering Prevention Act has been passed to stem illegal financial transactions.
- Concerns remain that a number of systemic weaknesses and recommendations from the Financial Sector Assessment Program mission (October 2002) should be pursued further.

### Government holdings, NFPEs, and reporting
- Government holdings of equity and financial assets are very extensive and are partially reported.
- Government retains ownership of NFPEs, holdings in joint-venture companies, and residual holdings of privatized companies.
- Subsequent to the mission’s visit, the government decided to privatize or close down, over the course of the next three fiscal years, all manufacturing units in the SOE sector except those in the sugar and fertilizer industries.
- All NFPEs are monitored by the MOF Monitoring Cell, but minority equity holdings are not systematically reported.
- A consolidated account of the NFPEs is prepared each year, approved by the MOF, but is not presented to parliament.
- NFPEs follow budgeting, reporting, and audit cycles somewhat similar to government departments but are not subject to parliamentary appropriation control.
- NFPEs including BTTB, the Post Office, and the Railways use commercial accounting, though reconciliation and asset valuation practices are extremely weak.

### Local government fiscal relations and capacity
- Control over general government finances is complicated by exclusion of local government data from the fiscal management system and weak administrative capacity at local levels.
- The structure of intergovernmental fiscal relations discourages local governments from raising their own revenues; central grants and transfers are the principal source of local finance.
- Data on local government budgets and accounts are provided by local authorities to the Ministry of Local Government, Rural Development and Cooperatives, but are not systematically compiled or analyzed.
- The authorities advise steps are being taken to establish a consolidated report from 2003/04.
- Stable principles of decentralized management are not fully formulated: the 1983 Local Government Ordinance and subsequent modification in 1990 devolved expenditure responsibilities but fiscal authority has not been developed to match responsibilities.
- From 2002/03:
  - grants to union parishads are distributed on the basis of 15 percent allocation according to performance, the remainder according to area and population;
  - for district grants, 25 percent of the allocation depends on performance.
- There is no clear consensus on the direction of further decentralization; capacity constraints and corruption at local level are widely recognized.
- The Cabinet Committee on Local Government has recommended establishing elected upazila parishads.

### Constitutional and institutional fiscal framework
- The 1972 constitution defines fiscal roles of the executive, legislative, and judicial branches, and Articles 81–92 give basic principles for fiscal management.
- Articles 127–132 established the role of the Comptroller and Auditor-General (C&AG) to carry out auditing functions of government.
- The Additional Functions Act of 1974 (as amended in 1975 and 1983) allocated the accounting function to the C&AG; the accounting function has since been transferred to the Finance Division of the MOF.
- In practice, relationships between branches—particularly executive and legislature—are widely seen as confrontational and parliamentary consideration of economic reforms and development of effective watchdog institutions remains weak.
- The fiscal management legal framework is clear and grounded in constitutional principles, notably:
  - Article 84 (universality): all receipts of government to consolidated fund or public account;
  - Article 85: all payments by parliamentary act or presidential rule.
- Budget preparation follows detailed regulations under presidential authority defining roles of the Finance Division, principal accounting officers (PAOs), Controller General of Accounts (CGA), and chief accounts officers.
- The system does not provide sufficient assurance of regular monitoring and reporting; separation of audit and accounting and improved reconciliation practices are expected to help.

### Budgeting, accounting, and coordination weaknesses
- Separation of the consolidated fund into recurrent and development spending has impeded matching development project expenditures with adequate recurrent operating and maintenance provisions.
- The Finance Division primarily administers the recurrent budget while the Ministry of Planning is responsible for planning and monitoring development spending.
- The government plans to develop a medium-term expenditure framework (MTEF) incorporating a rolling three-year public investment program.
- Accounting coverage, timeliness, and reliability are inadequate but have improved significantly in recent years; CGA-controlled accounts accounting performance has improved substantially.

### Coordination of externally financed projects
- External Relations Division (ERD) of the Ministry of Finance monitors resource flows for externally financed development projects and external debt management.
- Implementation, Monitoring, and Evaluation Division (IMED) of the Ministry of Planning monitors project implementation using financial and physical data from project directors.
- CGA receives financial data on project expenditures through CAOs for locally funded components, but relies on project directors’ reports for externally financed components.
- All external financing flows through various forms of special accounts managed by project directors rather than CAOs.
- Reconciled statements of expenditure and receipts cannot be produced because of incomplete reporting; CGA records only expenditures based on project directors’ reports.
- Foreign aid disbursements are entered in CGA accounts as an offsetting counterpart to recorded expenditure; actual receipts data cannot be reliably obtained from ERD because donor reports lack appropriate breakdowns.
- Bank statements are not provided by project directors to the CGA; only some receipts flow through consolidated fund accounts.

### Tax policy, administration, and transparency
- Tax laws and regulations are published, but discretion by tax officials remains a concern; reducing scope for discretion was emphasized in the FY 2002/03 budget speech.
- NBR reforms include establishment of a Large Taxpayers Unit, mandatory pre-shipment inspection, a unique taxpayer identification number, and in June 2002 establishment of a Revenue Reform Commission.
- The executive branch regularly grants exemptions and non-transparent tax incentives, including open-ended tax holidays, particularly in the export sector.
- Extensive specific and ad hoc exemptions have reduced tax collection, impaired equity and transparency, provided discretionary power to tax officials, and encouraged rent seeking.
- There is no systematic public reporting on the extent and cost of tax concessions.
- Tax regulations and procedures are clearly documented but ineffectively applied due to inadequate monitoring; penalties for late filing and payment are not regularly enforced and tax evasion is common.
- Supervision of tax officials is weak; tax appellate tribunals exist but are regarded as highly politicized and ineffective.

### Anti-corruption and ethics
- A public sector ethics code and disclosure of assets rules exist, and principal laws for anti-corruption include:
  - Prevention of Corruption Act, 1947;
  - Anti-Corruption Act, 1957;
  - Criminal Law Amendments Act, 1958;
  - Anti-Corruption Tribunal Ordinance, 1960.
- Effectiveness of laws and institutions is limited in practice due to widespread non-transparent practices; allegations against politicians are seldom independently investigated.
- Steps introduced include enforcing TIN submission as part of salary payment procedures and establishment of an Anti-Corruption Bureau in the Prime Minister’s Department.
- There is wide support for making anti-corruption institutions clearly independent of the executive.
- Subsequent to the mission’s visit, the authorities advise that a Cabinet decision has been taken to establish an Independent Commission for Anti-Corruption.

### Public availability of fiscal information and budget presentation
- The budget provides comprehensive coverage of central government fiscal activity; line ministries/divisions prepare detailed budgets further broken down by individual agencies.
- Data for local government budgetary operations are not easily available and are not presented with the budget.
- Detailed data on estimated expenditures of the Ministry of Defense are provided in the budget documents; defense accounts are departmentalized and consolidated by the CGA though not directly brought to account through the CGA.
- Comprehensive data on actual budget outturns for the central government have not been produced and disseminated on a timely basis due to delays in identifying government transactions and reconciliation problems with bank accounts.
- Revised budget estimates are disseminated only annually at presentation of the next year’s budget; revised budget numbers for the preceding fiscal year rather than final year-end data are published in the summary budget document.
- In the Demands for Grants and Appropriations of 2002/03, preliminary accounts data for two years preceding the budget (2000/01) were presented.
- No projections for future years are given in the current budget documents; authorities propose that the MTEF include fiscal projections for two years beyond the budget year, with emphasis needed on accountability of forward estimate projections.

*Source: _cr03185 - 6. The central bank is not yet fully independent, and it supports quasi-fiscal*

### 21. No estimates of tax expenditures, contingent liabilities or the extent of quasi-

### 21. No estimates of tax expenditures, contingent liabilities or the extent of quasi-

### Fiscal transparency and contingent liabilities
- No estimates of tax expenditures, contingent liabilities, or the extent of quasi-fiscal activity are included in the budget documents or annual accounts.
- Changes to revenue measures are listed in full in the annual budget speech, but no estimate of the cost of nonstandard concessions is given.
- The NBR authorities indicated that data are available to compile estimates of revenue foregone through concessions.
- No estimates are made of contingent liabilities, such as government guarantees on debt contracted by state-owned enterprises.
- The impact of quasi-fiscal operations of the government is not systematically reviewed in the context of the budget, nor is any official estimate of potential costs provided.

### Public debt, domestic borrowing, and financial assets reporting
- Information on gross external public debt is published, but domestic debt is not reported to parliament and financial assets are not reported.
- The ERD compiles and disseminates comprehensive annual data on external government debt; data for domestic debt are produced by the MOF for internal government use only.
- Data on government domestic borrowing and debt are published in the BB’s Annual Report and made available on its website about nine months after the end of the fiscal year.
- Public debt information is not included in the audited final accounts of the government.
- Data are compiled for NFPEs but these data are not used for reporting on government financial assets.

### Publication practices, timeliness, and GDDS comparability
- Formal commitments for more regular publication of fiscal data have not been made and advance release date calendars are not announced.
- Reporting of fiscal data currently falls short of GDDS recommendations with regards to timeliness, comprehensiveness and reliability.
- The Finance Division has begun producing quarterly reports on the central government fiscal position drawing from CGA monthly reports and ERD data on external financing.
- Subsequent to the mission’s visit, the practice of preparing monthly (and quarterly) reports on the government’s fiscal position has been established; the reports are published on the MOF website.

### Budget preparation, priority setting, and development spending
- The annual budget process is clearly defined but geared to incremental additions to existing commitments and lacks an open and clearly disciplined priority setting mechanism, particularly for development projects.
- The annual budget call circular provides clear directions to ministries for preparing budget estimates.
- There is not a good linkage between recurrent and capital budget preparation, nor of their implementation.
- The Finance Division is responsible for overall budget preparation and detailed administration of the revenue budget; the Ministry of Planning is responsible for planning and implementation of the development budget.
- The Annual Development Plan (ADP) budget process is not clearly disciplined and has been undermined by incorporation of a large number of projects mid-year, often with questionable priority and rationale.
- Provision for operations and maintenance spending in the revenue budget following project completion is made by block allocation in the year of completion; these allocations are generally inadequate according to authorities.
- The extensive use of block allocations reduces transparency and provides considerable discretionary power for reallocation during the year.

### Assumptions, fiscal risk disclosure, and deficit focus
- Economic assumptions underlying the budget estimates are not shown systematically or comprehensively and there is no statement of fiscal risks.
- The annual Budget Speech provides a broad economic background and indicates some key assumptions but not in tabular or systematic form; no sensitivity analysis of budget assumptions is undertaken and there is no statement of overall macroeconomic risk.
- Revenue projections are based predominantly on past trends and examination of specific factors that influence various taxes.
- The overall deficit of central government is the main focus of fiscal policy; fiscal data are classified in a way compatible with the 1986 GFS conventions on analytical reporting.
- Improvements in accounting and reporting are designed to permit tracking of the overall deficit of the central government; further improvement in above-the-line data is needed.
- The prevalence of quasi-fiscal activities suggests developing some form of augmented general government balance once data sources are significantly improved.

### New policy proposals, budgeting basis, and performance tracking
- New policy proposals are estimated separately from existing policy expenditures during budget preparation; ministries submit “new item statements” by end-November of the pre-budget year.
- New projects are distinguished from ongoing projects in the ADP.
- Budgeting and accounting are input-based, with no systematic definition of objectives or outputs for performance tracking.

### Internal control, internal audit, and procurement
- Internal audit arrangements are absent in almost all ministries, divisions and departments except the Ministry of Works, Ministry of Land, Ministry of Roads and Highways, and Department of Education.
- Some CAO offices have pre-audit arrangements carried out by the staff of the C&AG; most NFPEs have internal audit departments.
- Few internal audit staff have adequate professional training.
- Steps are being taken to improve coordination of monitoring of development and revenue budgets via high-level meetings of Finance Division, Planning Ministry, and ERD, and through the newly established Public Expenditure Review Committee.
- The authorities plan to integrate the internal audit function into all activities of the Finance Division and to set up a pilot internal audit unit in the MOF.
- Procurement lacks a comprehensive legal framework and systematic procedures; tender committees exist for major procurement but oversight is inadequate.
- ADP projects in transport, shipping and telecommunications have been increasingly financed through suppliers’ credit on non-transparent terms that circumvent competitive bidding.
- There is no legal framework for procurement and no established standard bidding documents; ERD has issued a set of guidelines for externally financed procurement.
- A World Bank-supported project is planned to prepare a procurement law, standard bidding documents, and training of government officials.

### Civil service structure and pay
- The civil service is overmanned and is not open to competitive employment practices.
- Promotion is largely based on district quotas and seniority; more merit-based promotion has been introduced but limited to a particular base/year of recruitment.
- Pay structures are rigid with little differentiation between grades; PARC reports salaries are far below the private sector at higher grades and overgenerous at lower grades.
- Ministry of Establishment indicates currently there are a total of 936,000 sanctioned posts (90,000 class I officers, 48,000 class II officers, 598,000 class III and about 200,000 class IV staff); in addition around 300,000 staff are employed for fixed periods on development projects.
- PARC indicates that in 1996 the Ministry of Establishment estimates were 730,117 total sanctioned posts.

### Accounting, reporting timeliness, and the RIBEC reforms
- The accounting system has improved significantly but does not yet produce complete and accurate in-year reports on central government budget outturn.
- RIBEC family of projects (including RIBEC 2000, FIMA, and RIGA) supported by DFID helped improve public sector financial management.
- Approximately £16 million has been spent on the RIBEC family of projects.
- Main RIBEC achievements include:
  - establishing a working reconciliation process for CGA accounts;
  - attaining more timely within-year reporting of fiscal data to 5–8 weeks after month-end;
  - improving timeliness of submission of audited accounts to parliament;
  - separating the accounting and audit function in July 2002;
  - improving the quality and timeliness of audit reporting;
  - establishing FMUs in ministries with heavy ADP spending.
- Prior to RIBEC, final accounts were not presented until 2–3 years after year-end and within-year accounts were not prepared for 10–14 weeks after month end.
- No information is available through CGA on outcomes for most non-ADP capital spending and the entire food account during the budget implementation period; such data become available after the end of the fiscal year with a lag of a few months.
- Accounts are maintained on a cash basis and the system does not provide data on expenditure arrears.
- Foreign-financed project spending complicates timely and reliable fiscal reporting; RIBEC helped address this through FMUs introduced in seven line ministries.
- RIBEC has attained critical momentum in establishing an effective reporting system; authorities are committed to addressing remaining problems systematically.

### Mid-year review, audit timeliness, and assurance of integrity
- The government is introducing a mid-year fiscal review process; MOF conducts an internal mid-year review scheduled for completion by end-February and prepares revised budget estimates toward the end of the fiscal year.
- In 2002/03 the government plans to present the legislature with a mid-year fiscal review to assess economic and fiscal trends and indicate any revisions to its fiscal policies.
- The national tax administration (NBR) is not given independent status; its authority derives from tax legislation and Rules of Business and it does not directly provide reports to the legislature beyond departmental reports compiled by the Cabinet Secretariat.
- Audited final accounts are not yet available within twelve months of the end of the fiscal year. The latest such documents presented to parliament are for FY 1999/2000.
- FY 2000/01 accounts are nearly finalized; it is anticipated that FY 2001/02 accounts can be submitted to the C&AG by end-January 2003 and thereafter regular submission within 12 months of year-end as required by executive order.
- Indicators of the reliability of budget data are not made publicly available; data for FY 2000/01 indicate a shortfall in total revenue of Tk 13 billion, or 5.4 percent (Tk 228 billion in actual collections, compared with Tk 242 billion in the original budget), entirely due to shortfalls in nontax revenues.
- Total budgetary expenditures for FY 2000/01 were lower by Tk 13 billion (Tk 371 billion estimated outturn versus Tk 384 in the original budget) or 3.5 percent, with higher current expenditures (+ Tk 7 billion) offset by lower spending on the ADP (- Tk 10 billion) and on non-ADP capital expenditure and net lending (- Tk 8 billion).
- Within current expenditures the data show higher spending on interest payments (+ Tk 4 billion) and on subsidies and transfers (+ Tk 10 billion) and lower spending on block allocations (- Tk 8 billion) relative to the original budget.
- Statements of accounting policy are not included in the budget and final accounts documents; government accounts are prepared on a cash basis and no statement of the basis of accounts or key elements of accounting policy are provided.

*Source: IMF staff report text as provided in the content unit.*

### 37. The processes of accounts reconciliation and fiscal reporting are not yet fully

### _cr03185 - 37. The processes of accounts reconciliation and fiscal reporting are not yet fully

### Reconciliation and fiscal reporting: recent improvements and gaps
- Technical improvements achieved through the RIBEC project have improved reconciliation in all areas directly under the control of the CGA.
- Improvements are being institutionalized through:
  - regular follow-up procedures by the CGA; and
  - an interdepartmental Task Force on Monitoring Macroeconomic Data (addressing foreign-financed projects as well as CGA data; see paragraph 15).
- Remaining issues:
  - Adequate coverage of the system and complete and timely reconciliation are yet to be achieved.
  - Macroeconomic and technical assumptions underlying the budget are not presented sufficiently to allow detailed external scrutiny (paragraph 41).
  - Fiscal reports are compiled by the Finance Division drawing from CGA and ERD, with increasing emphasis on reconciliation with departments and revenue agencies (particularly NBR and the National Directorate of Savings) and BB (paragraph 42).

### External audit and institutional independence
- Constitutional provisions:
  - The Auditor General’s position is established under the constitution, which specifies he shall not be subject to direction or control of any other person or authority in the exercise of his functions (Article 128 (4)).
  - Constitutionally, the Auditor-General is appointed by the President.
- Administrative arrangements:
  - Under the Rules of Business, the C&AG is a division of the MOF and is treated like any other government division for budget and establishment review.
  - Rules of Business requires that the Finance Division present the case for appointment, resignation, removal, conditions of service, making provision for additional functions (under Article 28(3) of the constitution), and the form and manner of keeping public accounts.
  - In practice, the Finance Division does not influence the operational work of the C&AG, but the perception of close administrative supervision appears to limit perceived independence relative to general international practice (footnote 29).

### Audit capacity, practice, and parliamentary follow-up
- Capacity constraints:
  - Of 3500 established posts, only 2500 are filled.
  - A high proportion of staff are relatively low level; cadre officers are only around 2 percent of staff.
  - In the 9 Audit Directorates, there are only 54 cadre officers.
  - Audit teams are headed by an officer but most other members are junior level staff lacking expertise in modern system-based audit.
- Practice weaknesses:
  - Manuals and updated codes exist, but capacity to implement them remains weak.
  - Lack of systematic working files and absence of systematic peer review processes.
  - Audits emphasize detailed financial and regulatory compliance rather than materiality and systemic deficiencies.
- Parliamentary and executive follow-up:
  - Public Accounts Committees (PACs) take an excessively long time to consider audit recommendations; the cycle of accountability remains incomplete.
  - No PAC has been formed under the present government (apparently due to non-participation of the opposition).
  - The last PAC had started reviewing audit reports of 1993/94 and some special audit reports.
  - No permanent secretariat or mechanism exists to review implementation of PAC recommendations.

### IMF staff assessment and priorities (IMF STAFF COMMENTARY)
- Progress noted:
  - Bangladesh has made good progress in basic areas of fiscal transparency; standards of accounting and fiscal reporting are improving toward meeting basic requirements of the fiscal transparency code (paragraph 43).
  - The CGA’s reconciliation and reporting have been transformed toward producing reports capable of meeting international standards of timeliness, reliability, comprehensiveness, and analytical capacity.
- Immediate priority:
  - Consolidate and fully institutionalize improvements achieved; sustain momentum (paragraph 44).
  - Publish and actively disseminate information already in the system to gain transparency gains at relatively low cost.
- Broader reforms:
  - Fundamental improvements in transparency are central to financial management reform, including reforms of the state-owned enterprise sector and introduction of an MTEF (paragraph 45).
  - Strengthening watchdog institutions and sustained governance and anti-corruption efforts are critical; action should be taken to strengthen the role of the C&AG (paragraph 46).

### Specific measures to consolidate reconciled, timely, and comprehensive reporting (paragraphs 47–51)
- Institutional and data-assurance measures:
  - Establish the Task Force as a high-level Economic Monitoring Committee with regular functions to review monthly government fiscal position and data quality, including reconciliation of CGA and other source data.
  - Economic Monitoring Committee should ensure incorporation of clear assurances of data quality in monthly, quarterly, and annual fiscal and financial reports, including:
    - A statement of reconciliation between CGA accounts and BB/commercial bank balances—including, as soon as possible, reconciliation of ADP foreign financing flows (see paragraph 48);
    - A statement of reconciliation between CGA and departmental reports of transactions during the period;
    - A statement of uncleared suspense and remittance account balances and, for year-end accounts, an assurance that all balances have been cleared;
    - An assurance for year-end accounts by the CGA that no transfers of authority from the consolidated fund to the public account have occurred;
    - For monthly reports and all fiscal reports in GFS format, a brief reconciliation showing the relationship between the GFS deficit and budget or CGA accounting statement aggregates;
    - A statement of reconciliation at the macroeconomic level between fiscal, monetary, and external data sets.
  - Establish clear standards for timeliness of monthly, quarterly, and annual fiscal/financial reports—GDDS should be treated as a minimum—and publish monthly reports on the MOF website as soon as practical.
  - Include both external and domestic debt data in monthly and quarterly reports by the Finance Division; annual financial statements should include debt data as a memorandum record. The CGA should provide a statement of assurance that debt records are complete and consistent with transaction records.
  - The C&AG, in certifying annual accounts, should comment on government compliance with standards of data quality and timeliness and on adequacy and consistency of debt records maintained by the CGA (footnote 32).

- Foreign-financed projects (paragraph 48):
  - Require project directors to provide prompt monthly reports to the CAO covering receipts, bank statements for project accounts, and spending data.
  - Set up a small External Financing Unit within CGA to monitor reporting, investigate major discrepancies between ERD, CGA, and IMED data on ADP spending, and amend CGA accounts accordingly.
  - Record all receipts of foreign aid or loans in a memorandum account by BB before transfer to project accounts, and provide balances of the memorandum account to CGA, ERD, and IMED.
  - Longer-run: support Bank CFAA suggestion to bring special accounts for foreign aid and loans within the government accounting system once CGA accounts and expenditure control are demonstrably reliable and effective.

- Coordination between ministries and CAOs (paragraph 49):
  - Diagnosed shortcomings in FMUs: limited financial management advice to PAOs due to (i) continuation of existing planning/budget-control mechanisms and nonfunctioning budget committees; (ii) CAOs located outside ministries; (iii) relatively junior status of CAOs.
  - Suggested actions:
    - Prepare a discussion paper clarifying the role envisaged for FMUs and steps required within ministries;
    - Conduct seminar/workshops with PAOs and senior ministry officials setting up FMUs;
    - Upgrade selected CAO positions and promote appropriately qualified candidates.
  - Ministries with established FMUs could be initial focal points.

- Internal audit strengthening (paragraph 50):
  - Create Internal Audit Cell in the Ministry of Finance on a pilot basis as a ‘center of excellence’ with a relatively small number of highly qualified professional staff.
  - Cell to develop internal audit standards, guidelines, manuals and training materials for rollout to other ministries.
  - Strengthening internal audit will provide assurance of systems control and reduce pressure on external audit.

- Improved public dissemination and analytical budget information (paragraph 51):
  - Present basic macroeconomic, technical, and policy assumptions underlying budget estimates systematically (possibly as an annex to Budget in Brief or Budget Speech), ideally in tabular form showing linkages to revenue/expenditure impacts.
  - Disclose contingent liabilities arising from government guarantees or contractual arrangements (including liabilities from enterprise closure) in an annex to the budget documents.
  - Prepare a statement of tax expenditures as an annex to the budget documents.
  - Compile a statement of fiscal risks indicating possible impacts of changes in key assumptions or contingent events on the overall fiscal position.
  - Some elements could be introduced for the 2003/04 budget and progressively improved; longer run incorporation could be achieved through a revised legal framework for public finances.

*IMF staff commentary and recommendations as presented in the source document.*

### 52. Assurances of fiscal discipline and policy accountability should be given priority

### 52. Assurances of fiscal discipline and policy accountability should be given priority

### Medium-Term Expenditure Framework (MTEF): implementation priorities
- Authorities are committed to introduction of output-oriented budgeting in a medium-term time horizon based on a sound macroeconomic framework.
- An effective MTEF depends crucially on an open and disciplined budget planning and implementation process; it involves much more than rolling macroeconomic projections over a three-year period and requires significant changes to annual budget procedures and an integrated approach to development and recurrent spending.
- Staff recommendation: proceed in a carefully phased manner and establish key components of fiscal policy discipline and accountability as prerequisites for full MTEF implementation across all government ministries (see note on possible referral to the Public Expenditure Review Commission (terms of reference issued on June 13, 2002) and the Revenue Reform Commission (terms of reference issued on July 2, 2002)).

Key measures to introduce:
- The macroeconomic framework being developed for the poverty reduction strategy paper (PRSP) be developed as the overall resource envelope for the MTEF;
- Existing policy expenditures should be carefully costed and clearly separated from new policies in budget preparation and forecasting future commitments (forward estimates);
- New policy submissions should encompass both proposals for the rolling public investment program and additions to the revenue budget above existing policy commitments, and these proposals should be reviewed in an integrated process;
- Establish a high-level committee to coordinate annual review of all new policies (encompassing both ADP and additional revenue budget proposals)—and establish strict procedures to control admission of new policies and contain total spending within the overall resource envelope;
- Make ministries responsible for their detailed rolling forward estimates of expenditures and receipts as a basis for annual budget submissions and negotiations—and FMUs or an appropriately modified unit within the ministry should be primarily responsible for maintaining these estimates;
- Once the preceding conditions are satisfied, publish forward estimates of expenditures and receipts under existing policy (both revenue budget and ADP) in the annual budget document to reveal the continuing costs of government policy and provide a basis for policy accountability.

### Fiscal transparency and reform of state-owned enterprises (SOEs/NFPEs/PFIs)
- Systematic measures to strengthen transparency and reforms of the state-owned enterprises sector are urgently required.
- Rundown of state resources through direct subsidies and quasi-fiscal activities of NFPEs and PFIs is identified as the single greatest source of long-term loss and fiscal risk.
- Current data collection is inadequate and does not clearly represent government policies and their costs.
- A strong unit within the MOF capable of systematic analysis of the government balance sheet (including NFPE/PFI quasi-fiscal activities) should be established now.

Measures to strengthen MOF capacity and reporting:
- Strengthen the MOF monitoring cell by adding skilled staff to enable within-year reports on state-owned enterprise activity and more effective monitoring of income and losses of major enterprises in this sector;
- Set a longer-term objective for the unit to develop a stronger analytical focus to quantify the costs of NFPE noncommercial activity along lines developed by the World Bank; explicitly include skills development in the unit’s terms of reference at the outset;
- As reporting on NFPEs improves, produce a regular report on the consolidated public sector balance—such a balance should inform fiscal policy management but not be treated as a key policy target without a much stronger database and detailed analysis of quasi-fiscal activity of the NFPE and PFI sectors;
- Develop an annual analytical report on subsidies and quasi-fiscal activities as an annex to the budget documents; initiate this analysis in preliminary form quickly and strengthen analytical quality over time so it is considered actively in budget decision-making;
- In light of further advice from the FSAP mission, strengthen analysis of the costs of quasi-fiscal activities by PFIs and strengthen the banking supervision role of the BB.

### Strengthening watchdog institutions and governance
- Strong, independent watchdog institutions are essential for sustainable reforms and data integrity; the public sector management environment must be more open to scrutiny by organizations credibly independent of the executive branch.

Reinforcing the Comptroller and Auditor General (C&AG):
- Support proposals in the FMRP to strengthen capacity and quality of external audit by C&AG and give the C&AG clearer administrative independence.
- Suggestions to consider:
  - Make the C&AG an officer of the parliament; while still subject to review by the Finance Division (as with the Parliament Secretariat), have the C&AG budget and manpower sanctioned by the Public Accounts Committee on behalf of the parliament;
  - Implement separation of the accounts and audit cadre as soon as possible to ensure independence on staff matters and strengthen management by the C&AG;
  - Subject the C&AG accounts to audit, possibly by an independent private sector auditor; establish a peer review process (in line with INTOSAI practices) possibly involving another Auditor General’s Office from a developed country in periodic review of audit practices;
  - Draft and enact an Audit Act as soon as possible to establish a better enabling environment for independent and high quality audit.

Parliamentary oversight and Public Accounts Committee (PAC):
- Reinstate the PAC mechanism as soon as possible.
- Strengthen PAC capacity to examine audit findings and review executive follow-up.
- Measures to consider:
  - Provide the PAC with a permanent secretariat to follow-up on all audit recommendations;
  - Include experts on financial management in the public accounts committee;
  - Make PAC hearings open to the public;
  - Establish Audit Committees in all government ministries including members from civil society;
  - Give Standing Committees on Ministries additional responsibility to review settlement status of audit recommendations based on initial C&AG reports.

### Anti-corruption and local government accountability
- Long-run improvements in transparency require a substantial, well-directed, and nonpartisan effort to fight corruption; prevalence of corruption in public and private sectors impedes progress in fiscal transparency and public sector management.
- A widely supported recommendation: set up an Anti-Corruption Commission, including highly qualified members drawn from civil society, directly under parliament or an ombudsman office; staff support implementation as soon as possible (this falls beyond the detailed remit of a fiscal ROSC).

Clarifying role and strengthening accountability of local government:
- Decentralization and strengthening of local government are necessary for greater citizen participation, more effective delivery of poverty-reducing programs, and deeper accountability structures.
- Government policy on relationships among tiers of local government and the center is under clarification; mechanisms for transparency and accountability at local levels need establishment and firm political direction early.
- Consider establishing a local government commission with a clear mandate to strengthen local government institutions, especially their financial accountability framework.

Initial actions for local government institutions (LGIs):
- Strengthen financial management and internal audit of LGIs;
- Provide extensive training to finance and audit staff of LGIs for capacity development;
- Prepare accounts of all city corporations and municipalities on accrual basis and audit them by private independent auditors;
- Make city and municipality annual reports and audited financial statements available to the media and the public.

*Source: _cr03185 - 52. Assurances of fiscal discipline and policy accountability should be given priority*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2003/_cr03185.pdf_