## _tnm1403 ## Source details **Canonical URL:** [_tnm1403](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/tnm/2014/_tnm1403.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/tnm/2014/_tnm1403.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/tnm/2014/_tnm1403.pdf.json) --- ### Key definitions related to government expenditures - Commitments - Explicit or implicit agreements to make payments to another party in exchange for supplying goods and services or fulfilling other conditions. - May arise when a formal action is taken by a government entity (for example, issuing a purchase order or signing a contract). - Can be continuing in nature (salaries, public utilities, entitlement payments) and may or may not involve a contract. - Liabilities - A subset of commitments established when one entity is obliged under specific circumstances to provide funds or resources to another party. - Include outstanding debt, leases, provisions, and payables for goods delivered or services rendered. - Liability arises when a third party satisfies the terms of the contract or similar arrangement. - Not all commitments become liabilities (for example, when supplier performance is not satisfied). - Payables (or creditors) - Subset of liabilities for which goods or services have been provided by a third party but not yet paid. - Created when an invoice is approved for payment and recorded in the general ledger or accounts payable subledger. - Expenditure arrears - Subset of payables unpaid beyond a specified due date. - If no due date, arrears are defined as payables unpaid after a specified number of days after invoice or contract date according to law, regulation, government payment policy, or local practice. ### Government expenditure chain (sequence of events) - Order for goods/services placed. - Commitment created, amount reserved against budget. - Goods and services delivered, invoice received. - Invoice approved for payment. - Expense and Payables created. - Payment made by due date: - Payable reversed, cash reduced. - Payment not made by due date: - Payable remains as a Liability; payment is in Arrears. - Commitment is replaced by an actual expense. ### Payment process, operational failures, and monitoring - Payment process and operational sequence - Request for payment made by accounting/financial officer; payment recorded in accounting system removing the liability. - Finance department/treasury issues checks or electronic transfers. - Payment due date known; available funds must be in government bank accounts on due date. - Chronological sequence for payment; checks cashed/electronic transfers made expeditiously. - Common operational failures leading to arrears - Payment orders not processed timely. - Cash rationing due to poor cash flow forecasting. - Infrequent bank reconciliation, causing unknown bank balances. - Officials not respecting chronological sequence and selectively retaining payment orders. - Central or commercial banks holding checks/transfers due to insufficient cash, creating float of unpaid checks. - Data availability (PEFA Indicator 4(ii), 2006-12, 121 countries) - Not scored: 7% - C- Data based on ad hoc exercise: 17% - D- No reliable data: 38% - B- Data generated annually, but incomplete: 26% - A- Reliable and complete data: 12% ### Structural causes of arrears and institutional weaknesses - External budget support volatility and commodity revenue volatility complicate projections. - Deliberate under-budgeting by ministries/agencies to obtain authorization for broader expenditures than affordable. - Lack of commitment controls leading to unaffordable liabilities; commitment controls should reconcile cash availability with commitments. - Poor cash management: commitment limits not linked to projected cash inflows; absence of mechanisms for rolling forecasts. - Delays in payment processing due to excessive documentation, cumbersome ex ante audits, lack of manpower, or lack of automation. - Deliberate deferral of payments in cash-accounting countries to report higher short-term cash balances (particular risk in election years). - Inadequate sanctions against officials/institutions that breach ceilings, fail to register commitments, commit fraud, or fail to publish reports. ### Prevention and control of expenditure arrears — findings and recommended remedies - Strengthening legal and regulatory framework: - Define payment terms (and when a payment is in arrears); reporting requirements; controls at budget authorization, commitment, and payment stages; and sanctions for breaches. - Enhancing credibility and realism of the budget: - Check that costs are estimated adequately using historic behavior, focusing on items prone to arrears (utilities, maintenance, supplies for schools and prisons, infrastructure projects). - Ensure risks are estimated and provided for using contingency reserves. - Include outstanding commitments of multi-year investment projects in the budget and outer-year forecasts. - Provide medium-term certainty through a credible medium-term budget framework (MTBF) with a horizon of three to five years. - Improving accounting and reporting: - Government accounting systems should recognize expenditure commitments, liabilities, and payments. - Supplement cash accounting with separate reporting for commitments, invoices received and verified, accounts payable, invoices paid, and arrears. - Arrears monitoring systems should capture size, maturity, and composition of stock of arrears; reporting of accounts payable and arrears should be part of monthly fiscal reports and annual financial statements. - Strengthening commitment controls: - Prevent initiation of expenditure without available budget and cash. - In integrated FMIS, enforce commitment control through centralized generation of a commitment authorization number. - Where no FMIS exists, maintain manual ledgers capturing approved budget, commitments, and expenditure with regular reporting. - Improving cash and debt management: - Develop accurate and timely short-term estimates of cash inflows and outflows; require spending agencies to prepare financial plans (schedule of commitments and likely cash outflows). - Operate a treasury single account (TSA) with an adequate cash buffer. - Centralize payments and prepare a cash plan where agencies cannot prepare cash plans. - Issue short-term treasury bills in liquid domestic money markets to address temporary liquidity shortages. - Enhancing oversight of subnational governments and SOEs: - Require timely payment of bills and regular monitoring and reporting of liabilities. - Aim for consolidated fiscal reporting for the entire general government or public sector where capacity permits. - Implementing technological solutions: - Use prepaid mobile phones/telephone cards, meters for utilities, prepaid cards for fuel and supplies; centralize acquisition of common goods and services to reduce arrears. - Upgrading FMIS: - Modern FMIS should control main stages of budget execution and include original budget, supplementary budget, commitments (including multi-year), liquidations, payments, payment due dates, and payments in arrears. ### Illustrative country example — Brazil (comprehensive strategy) - Legal and institutional reforms after the fiscal crisis of the 1990s: - Fiscal Responsibility Law (FRL): budget carry over (restos a pagar) authorized only if equivalent available cash in the TSA at end of the fiscal year; in election years forbidden to commit expenditure that will not be paid in the current mandate; no new commitment allowed six months before the election or when no financial resources are available in the TSA at the end of the mandate. - Fiscal rules: any expense not paid is considered a liability and part of the general government gross debt; net recurrent revenues related to the gross debt cannot exceed 200 percent for states and 120 percent for municipalities. - IFMIS implemented in central and state governments to control all stages of expenditure (budget appropriation, commitment, liquidation, and payment). - TSA: all tax and non-tax revenues electronically collected and deposited in the central bank. - Commitment control: obligatory to register commitment, liquidation, and payment stages in IFMIS to process payment. - Procurement: IFMIS commitment number must be identified during bidding to guarantee reserved budget. - Payment of interest: each contract requires the government to pay a penalty if expenses are paid more than 30 days after the due date. - Control: Tribunal de Contas da União can stop contracts/payments considered potentially harmful and can fine officials. - Arrears reporting: comprehensive fiscal reports published monthly provide information on commitment, liquidation, and payments by each budget entity and by budget line item; overall liabilities published separately, but value of payments in arrears is not. ### Illustrative country example — Senegal (clearance and prevention) - Background and crisis: - Unpaid bills rose to 7 percent of GDP in October 2008. - Causes: increases in food and energy subsidies, poor budget management, and reduced liquidity in the WAEMU. - Initial verification and prioritization: - External auditors verified outstanding payments; valid claims scheduled for repayment through the budget; invalid claims rejected. - Reforms implemented: - Fiscal reporting: improved format and transparency; annual budget law annex with budget execution and forecast data for agencies receiving funds in excess of CFAF 5 million. - Financial management systems: reconfigured SIGFIP; expanded SIGFIP coverage; developed interfaces with accounting software rolled out to all accounting units. - Sanctions: administrators who illegally created liabilities brought before financial disciplinary chamber and subject to penalties. - Clearance strategy and outcomes: - Stock of arrears reduced from 7 percent of GDP in October 2008 to 1 percent of GDP by end-March 2009 through reprioritization of investment spending, mobilization of WAEMU financial markets, donor support, and strengthened PFM systems. - Case implications: - Verify claims before payment; enhance fiscal reporting and FMIS; apply sanctions; combine domestic measures with external financing. ### Illustrative country example — Liberia (clearance and prevention) - Background and scale: - Domestic arrears estimated in 2006 at US$914 million (150 percent of GDP). - Deputy minister of finance led clearance process with liaison among debt management unit, legal counsel, and ministry of justice. - Appropriations made in subsequent budgets to cover claims. - Verification and results: - Verification produced categories: valid, contestable, rejected. - Holders of contestable claims invited to provide further documentation. - Results: US$304 million (50 percent of GDP) in claims found valid. - A 2012 PEFA study indicates arrears fell to US$49 million (4.2 percent of GDP) by end of 2011. - Commitment controls and clearance strategy: - Stringent centralized manual commitment controls to prevent new arrears. - Valid claims discounted at an agreed rate; agreements with financial institutions to repay over a 30-year period beginning in 2007/08 with a four-year grace period on principal. - Classification and database elements recommended: - Maintain central database capturing: vintage, debtor, creditor, economic category (GFSM 2001), currency, contractual terms, payment status, and risk of non-payment. - Administrative accounting: classify accounts payable as liabilities (domestic or foreign) and include in gross debt; payments in arrears as a memorandum item on the balance sheet. - Prioritization criteria examples: - Socioeconomic impact, vintage, cost (interest/penalties), risk of disruption or litigation, currency exposure, and creditor type (intra-government debts prioritized administratively). - Liquidation options and operational arrangements: - Oversight by technical group or arrears committee with typical membership: budget department, treasury, inspectorate/internal audit, possibly supreme audit institution as observer. - Budgetary provisions: explicit provision in annual budget and MTBF; centralized management of arrears repayment line; verified creditor lists for payments. - Transparency: reports of payments against arrears budget line in addition to regular fiscal reports. - Netting and offsetting: - Netting arrangements generally not advisable; account on a gross basis; coordinate payments and tax obligations if necessary for liquidity. - Financing options: - If fiscal space small: pay in cash from current receipts or government borrowing. - Borrowing to pay arrears increases government debt stock but recognizes implicit liability; may be infeasible due to debt ceilings, small domestic markets, or high issuance costs. - Negotiated schedules with creditors, possible discounts (treat with caution). - Securitization: - Considered only as last resort (promissory notes, marketable treasury bills, or bonds); advantages: maturity selection and tradability; disadvantages: moral hazard, trading at considerable discount, prevents prioritization of urgent arrears. ### Appendix: Sample measures adopted by countries (selected cases and common themes) - Country corrective measures (selected highlights) - Albania (2002): record inter-enterprise and tax arrears; reconcile and sign bilateral MOUs; consider multilateral nettings. - Angola (2009, 2013): census of arrears and audit; define payment calendar; suspend new contracts; create commitment control; legislate arrears definition. - Central African Republic (2012): audit and certify arrears; strengthen budget execution; set commitment ceilings; create Liquidity Committee. - Republic of Congo (2004): define payment arrears; validate stock via inspectorates; implement payment methods and schedules; audit cross debts. - Côte d’Ivoire (2002, 2011): settlement plans for payments arrears; settle government-energy sector claims; apply recommendations on tariffs. - Gabon (2004): restructure public enterprises; audit unpaid payment orders; improve budgetary transparency. - The Gambia (2002): comprehensive program for public enterprise financial problems and settlement of inter-entity arrears. - Georgia (2004): audit stock of arrears and pensioner register; implement TSA and full commitment control; monthly commitment, arrears, and payment reports. - Ghana (2003, 2009): implement commitment and cash management systems; monthly early warning reports; audit cross-debt; strengthen expenditure monitoring. - Haiti (2006): census on government employees and wage arrears; plan for clearance of wage arrears. - Lesotho (2010): improve IFMIS effectiveness and audit arrears. - Malawi (2005, 2012): define arrears policy; securitize stock through special treasury bills; publish monthly reports; implement commitment control module; inform suppliers expenditures outside system will not be paid. - Niger (2005): define arrears clearance strategy; prioritize wage arrears. - Common themes in measures proposed - Audit, census, and validation: undertake census and audit of arrears; validate via oversight bodies. - Cash, commitment, and payment controls: implement commitment controls, FMIS, TSA, monthly cash plans, and Liquidity Committees. - Legal, institutional, and reporting reforms: legislate arrears definitions; create monitoring committees; implement new public audit and PFM acts. - Enterprise/sector actions: restructure public enterprises; negotiate reschedules; implement tariff reforms for cost recovery. - Prevention: limit extra-budgetary payments; set commitment ceilings; early warning systems; monthly reporting; inform suppliers that expenditures outside approved systems will not be paid. *Technical Notes and Manuals 14/01 | 2014* ### Box 1. Definition of Key Terminology Related to Government Expenditures ### Box 1. Definition of Key Terminology Related to Government Expenditures ### Key definitions - Commitments - Explicit or implicit agreements to make payments to another party in exchange for supplying goods and services or fulfilling other conditions. - Can be for specific goods and services and may arise when a formal action is taken by a government entity, for example, issuing a purchase order or signing a contract. - Can be of a continuing nature that requires a series of payments; such continuing commitments may or may not involve a contract but are often based on a legal obligation (for example, salaries, public utilities, and entitlement payments). - Liabilities - A subset of commitments established when one entity is obliged under specific circumstances to provide funds or resources to another party. - Include outstanding debt, leases, and provisions, as well as payables for provision of goods delivered or services rendered. - The liability arises when a third party satisfies the terms of the contract or similar arrangement. - Not all commitments become liabilities (for example, when the obligation to deliver goods or services is not satisfied by the supplier as specified in the agreement). - Payables (or creditors) - A subset of liabilities for which the related goods or services have been provided by a third party but not yet paid for by the recipient. - A payable is created when an invoice is approved for payment and has been recorded in the general ledger or accounts payable subledger as an outstanding liability awaiting payment. - Expenditure arrears - A subset of payables that have remained unpaid beyond a specified due date for payment. - Where no due date is specified, arrears are defined as payables that have remained unpaid after a specified number of days after the date on the invoice or contract, in accordance with a law, regulation, government payment policy, or local practice. ### Government expenditure chain (sequence of events) - Order for goods/services placed. - Commitment created, amount reserved against budget. - Goods and services delivered, invoice received. - Invoice approved for payment. - Expense and Payables created. - Payment made by due date. - Payable is reversed, and cash is reduced by the corresponding amount. - Payment not made by due date. - Payable remains as a Liability in the books. - Payment is in Arrears. - Commitment is replaced by an actual expense. ### Operational points from definitions - A payable is recorded when an invoice is approved and entered in the accounting records (general ledger or accounts payable subledger). - Liability recognition depends on satisfaction of contractual or similar terms by the supplier; absent supplier performance, a commitment may not convert into a liability. - Arrears require either a specified due date or an established practice/law/regulation that defines a cutoff (specified number of days after invoice/contract date) to determine when a payable becomes an arrear. *Technical Notes and Manuals 14/01 | 2014* ### 4. Payment ### 4. Payment ### Payment process and operational sequence - Request for payment is made by the accounting or financial officer, and a payment is recorded in the accounting system, removing the liability. - Finance department/treasury processes orders and issues checks or electronic transfers. - Payment due date is known, and available funds are in government bank accounts on the due date. - There is a chronological sequence for payment. - Checks are cashed/electronic transfers made expeditiously in favor of the creditor. ### Common operational failures leading to arrears - Payment orders are not processed in a timely manner. - Cash is rationed because cash flow forecasting is poor and available cash is insufficient to meet the payment obligations. - Bank reconciliation is infrequent, and available bank balances are unknown. - Officials do not respect a chronologic sequence of payment and selectively retain payment orders. - Central bank or commercial banks may hold on to checks or transfers due to lack of cash available in bank accounts, resulting in a float of unpaid checks. ### Data availability and monitoring (PEFA indicators) - Availability of data on expenditure arrears in 121 countries, Indicator 4(ii) (2006-12, PEFA scores): - Not scored: 7% - C- Data based on ad hoc exercise: 17% - D- No reliable data: 38% - B- Data generated annually, but incomplete: 26% - A- Reliable and complete data: 12% ### Structural causes of arrears and weaknesses - External budget support volatility and commodity revenue volatility complicate budgetary projections. - Deliberate under-budgeting by ministries and agencies for infrastructure, entitlements, subsidies, or essential items to obtain initial authorization for broader expenditure than can be afforded. - Lack of commitment controls: failure to manage incurrence of obligations leads to unaffordable liabilities; commitment controls should reconcile availability of cash with commitments. - Poor cash management: commitment limits not linked to projected cash inflows; lack of mechanisms to collect forecast data from budget agencies and produce rolling forecasts. - Delays in processing of payments due to excessive documentation requirements, cumbersome ex ante audits, lack of manpower, or lack of automation. - Deliberate deferral of payments in cash-accounting countries to report higher short-term cash balances (particular risk in election years). - Inadequate sanctions: ineffective or unenforced sanctions against officials or institutions who enter commitments above ceilings, fail to register commitments, commit fraud, or fail to publish reports. ### Prevention and control of expenditure arrears — findings and recommended remedies - Strengthening the legal and regulatory framework: - Define payment terms (and when a payment is in arrears); reporting requirements; controls at budget authorization, commitment, and payment stages; and sanctions for breaches. - Enhancing the credibility and realism of the budget: - Check that costs are estimated adequately through analysis of historic behavior of each category of expenditure, with focus on items prone to arrears (utilities, maintenance, supplies for schools and prisons, infrastructure projects). - Ensure that risks to the budget are adequately estimated and provided for, using contingency reserves. - Ensure that outstanding commitments of multi-year investment projects are included in the budget and outer-year forecasts. - Provide ministries and agencies with greater medium-term certainty; a credible medium-term budget framework (MTBF) sets expenditure ceilings with a horizon of three to five years. - Improving accounting and reporting: - Government accounting systems should recognize expenditure commitments, liabilities, and payments. - In the near term, supplement cash accounting with separate reporting mechanisms for commitments, invoices received and verified, accounts payable, invoices paid, and arrears. - Arrears monitoring systems should capture size, maturity, and composition of the stock of arrears; reporting of accounts payable and arrears should be part of monthly fiscal reports and annual financial statements. - Strengthening commitment controls: - Prevent initiation of expenditure without available budget and cash. - In integrated FMIS, enforce commitment control through centralized generation of a commitment authorization number. - Where no FMIS exists, maintain manual ledgers to capture approved budget, commitments, and expenditure with regular reporting. - Improving cash and debt management: - Develop accurate and timely short-term estimates of cash inflows and outflows; require spending agencies to prepare financial plans (schedule of commitments and likely cash outflows). - Operate a treasury single account (TSA) with an adequate cash buffer to make payments as they arise. - Centralize payments and prepare a cash plan where agencies cannot prepare cash plans. - Issue short-term treasury bills in liquid domestic money markets to address temporary liquidity shortages. - Enhancing oversight of subnational governments and state-owned enterprises: - Legal and governance frameworks should require timely payment of bills and regular monitoring and reporting of liabilities. - Aim for consolidated fiscal reporting for the entire general government or public sector where reporting capacity permits. - Implementing technological solutions: - Use prepaid mobile phones/telephone cards, meters for utilities, prepaid cards for fuel and supplies, and centralize acquisition of common goods and services to reduce arrears. - Upgrading FMIS: - Modern FMIS should control main stages of budget execution and include original budget, supplementary budget, commitments (including multi-year), liquidations, payments, payment due dates, and payments in arrears. ### Illustrative country example — Brazil: comprehensive strategy to prevent accumulation of expenditure arrears - Legal and institutional reforms implemented after the fiscal crisis of the 1990s: - Fiscal Responsibility Law (FRL): budget carry over (restos a pagar) authorized only if equivalent available cash in the Treasury Single Account (TSA) at end of the fiscal year; in election years forbidden to commit expenditure that will not be paid in the current mandate; no new commitment allowed six months before the election or when no financial resources are available in the TSA at the end of the mandate. - Fiscal rules: any expense not paid is considered a liability and part of the general government gross debt; net recurrent revenues related to the gross debt cannot exceed 200 percent for states and 120 percent for municipalities. - Integrated financial management information system (IFMIS): implemented in central and state governments to control all stages of expenditure (budget appropriation, commitment, liquidation, and payment). - TSA: all tax and non-tax revenues electronically collected through the banking system and receipts deposited in the central bank. - Commitment control: obligatory to register commitment, liquidation, and payment stages in the IFMIS to process payment. - Procurement: commitment number generated by IFMIS must be identified during bidding to guarantee reserved budget. - Payment of interest: each contract requires the government to pay a penalty if expenses are paid more than 30 days after the due date. - Control: the Supreme Audit Institution (Tribunal de Contas da União) can stop any contract or payment considered potentially harmful and can fine officials. - Arrears reporting: comprehensive fiscal reports published monthly provide information on commitment, liquidation, and payments by each budget entity and by budget line item; overall liabilities published separately, but value of payments in arrears is not. - Sources cited: Government of Brazil 1986, 2000. *Source: 4. Payment — Technical Notes and Manuals 14/01 | 2014* ### Box 4. The Senegal Approach to Clear and Prevent Expenditure Arrears ### Box 4. The Senegal Approach to Clear and Prevent Expenditure Arrears ### Background and crisis - Unpaid bills had been a problem for the Senegalese government for a number of years, reaching a crisis point in October 2008, when they rose to 7 percent of GDP. - The arrears were partly a result of cash flow difficulties stemming from increases in food and energy subsidies, poor budget management, and reduced liquidity in the West African Monetary Union (WAEMU). - The government recognized the need to implement measures to address the problem. ### Initial verification and prioritization actions - External auditors were appointed to verify outstanding payments. - Valid claims were scheduled for repayment through the budget process; invalid claims were rejected. ### Reforms implemented - Fiscal Reporting - Improved the format and transparency of budget reports. - Included presentation of past year and current year actual expenditure data. - Included in the annual budget law an annex with budget execution and forecast data of all agencies receiving funds from the budget in excess of CFAF 5 million. - Financial Management Systems - Reconfigured the budget execution monitoring system (SIGFIP) to improve efficiency and enhance the reliability of real-time data. - Expanded SIGFIP coverage to enable monitoring at each stage of budget execution. - Developed interfaces with accounting software, which was rolled out to all accounting units. - Sanctions - Administrators who illegally created a liability for the government by knowingly committing expenditure in excess of authorized appropriations were brought before the financial disciplinary chamber of the court of audit and subject to penalties. - Clearance Strategy - The stock of arrears was reduced by end-March 2009 to 1 percent of GDP through: - Reprioritization of investment spending. - Mobilization of resources from WAEMU financial markets. - Support from donors. - Coupling these with prudent and rigorous public financial management systems. ### Outcomes and implications - Rapid, multi-pronged action (verification, reporting reforms, FMIS strengthening, sanctions, fiscal reprioritization, and external financing) reduced arrears from 7 percent of GDP in October 2008 to 1 percent of GDP by end-March 2009. - The case illustrates the importance of: - Verifying claims before payment. - Enhancing fiscal reporting and FMIS coverage and reliability. - Applying sanctions to deter illicit creation of liabilities. - Combining domestic fiscal measures with external market and donor financing to clear arrears. *Source: IMF, Senegal: Second and Third Review under the Policy Support Instrument January 2009 and July 2009 available at: http://www.imf.org/external/country/SEN/index.htm.* ### Box 6. Liberia: Strategy to Clear and Prevent Fresh Expenditure Arrears ### Box 6. Liberia: Strategy to Clear and Prevent Fresh Expenditure Arrears ### Background and scale of the problem - Liberia emerged from the civil war with domestic arrears estimated in 2006 at US$914 million (150 percent of GDP). - Responsibility for the arrears clearance process was vested in a deputy minister of finance, who created mechanisms for liaison between: - the debt management unit (maintaining records of verified claims), - the legal counsel of the ministry of finance, and - the ministry of justice (to provide legal advice on validity of claims). - Appropriations were made in subsequent budgets to cover the claims. ### Verification and categorization of claims - Verification exercise conducted with assistance of the auditor general produced three categories of claims: valid, contestable, and rejected. - Holders of contestable claims were invited to provide further documentation. - Results of verification: - US$304 million (50 percent of GDP) in claims were found to be valid. - Procedural steps highlighted: - Step 3. Categorization of claims: categorize each claim as valid, contestable, or rejected based on documentation and recognition of government liability. - Step 4. Appeals from claimants: holders of contestable claims may be invited to provide further documentation or have claims referred for adjudication; burden of proof rests with claimants; claim holders have the right to appeal external auditor or adjudicator decisions through the judicial system. - Step 5. Rejection of invalid claims: government should formally notify rejected claimants and state the basis of the rejection; government must retain full records to defend future legal actions. ### Commitment controls and clearance strategy - Commitment controls: stringent centralized manual commitment controls were introduced to prevent accumulation of new arrears. - Clearance strategy developed as comprehensive domestic arrears resolution strategy: - Valid claims were discounted at an agreed rate. - Agreements with financial institutions to repay claims over a 30-year period, beginning in 2007/08. - Debt service charges increasing in the outer years, following a four-year grace period on principal repayments. - Outcome reported: - A 2012 PEFA study indicates that arrears balance had fallen to US$49 million (4.2 percent of GDP) by the end of 2011. ### Classification of arrears for clearance (database design elements) - Establish and maintain centrally a database of valid outstanding payments in the ministry of finance. - Recommended initial practical approach: focus first on large claims, then gradually expand coverage. - Data elements to capture for each outstanding claim: - Vintage: capture original due date; classify arrears by overdue durations: one to three months, three to six months, six to 12 months, and more than 12 months. Older arrears classified by financial year in which incurred. If due date not recorded, use invoice date as proxy. - Debtor: government entity incurring liability, classified by institutional group (central government, subnational government, agency, extra-budgetary fund, or state-owned enterprise). - Creditor: creditor name classified by type: employees, private individuals, private businesses, financial institutions, central government, subnational government, extra-budgetary funds, or state-owned enterprise. - Economic category: classify by GFSM 2001 economic category (compensation of employees, acquisition of goods and services, transfers, acquisition of nonfinancial assets, acquisition of financial assets). - Currency: capture original denomination currency. - Contractual terms: capture relevant contractual information including whether outstanding balance results in interest and/or penalties. - Payment status: capture total amount due on invoice, amounts already paid, amount outstanding, and any rescheduling, discounting, or factoring. - Risk of non-payment: include risk assessment of further payment delays (industrial action risk if civil servants unpaid; project non-completion risk if contractors unpaid; litigation and socioeconomic impacts). - Administrative accounting treatment: - All stocks of accounts payable should be classified as liabilities, further classified as domestic or foreign, and included in government’s measurement of gross debt (in accordance with GFSM 2001 and other macroeconomic statistical systems). - Payments in arrears should be included as a memorandum item to the government’s balance sheet. ### Prioritization criteria for clearance - Prioritization should be based on transparent criteria, examples include: - Socioeconomic impact: prioritize arrears to economically sensitive or vulnerable sectors (salaries of low-income workers, pensions, social benefits). - Vintage: older obligations should have priority over newer obligations. - Cost: arrears that accrue interest and penalty charges should have priority. - Risk: arrears that may result in legal action, disruption of essential services, or cost escalation should be prioritized. - Currency: prioritize payment of foreign currency denominated debt if domestic currency devaluation is outpacing domestic inflation. - Creditor: prioritize clearance of intra-government debts (can be done administratively through the annual budget at minimal net cost). ### Liquidation options and operational arrangements - Oversight: a technical group or arrears committee in the ministry of finance should oversee liquidation to ensure consistent application of the strategy. Committee functions: - Ensure payments made according to prioritization criteria. - Receive reports from spending units and prepare periodic reports (for example, quarterly) to the ministry of finance and Cabinet on performance and recommended remedial actions. - Typical membership: budget department, treasury, inspectorate/internal audit, possibly supreme audit institution as observer. - Budgetary provisions and controls: - Annual budget and medium-term budget framework (MTBF), if available, should make explicit provision for clearance of arrears. - Centralized management and control of the budget line for arrears repayment is recommended to avoid recycling arrears. - Payments from centralized budget should be backed by a list of verified eligible creditors, in line with repayment priorities. - Entities should provide verified creditor information to ministry of finance for budget preparation, MTBF, performance monitoring, and budget release, and verification at time of payment. - For countries without an MTBF, keep separate controls to track remaining stock of arrears and ensure adequate annual budget provision until arrears are paid. - Transparency and reporting: - Reports of payments made against arrears budget line in addition to regular fiscal reports help demonstrate commitment and build supplier confidence. - Netting and offsetting: - Generally, netting arrangements (offsetting settlement of arrears against tax obligations) are not advisable: they undermine transparency and accountability and engender moral hazard. - All payments and revenues must be accounted for on a gross basis. - Coordination of payments and tax obligations may be considered to avoid liquidity problems, especially for large amounts outstanding. - Financing options: - If fiscal space is available and stock is small: pay arrears in cash from current receipts or government borrowing to avoid penalties and enable suppliers to rebuild working capital. - Borrowing to pay stock of arrears: proceed by borrowing in domestic or foreign markets and earmarking proceeds for reduction of arrears. This increases stock of government debt but does not decrease net worth because it recognizes an existing implicit liability. May be infeasible due to gross public debt ceilings, small domestic markets, or high sovereign issuance costs. - Negotiated schedule: if liquidity insufficient, negotiate payment schedule with creditors according to pre-defined calendar and agreed interest rate; governments may agree to discounts (haircuts) but treat with caution as discounts can induce suppliers to inflate future prices. - Securitization: - Securitization of arrears (transforming them into government debt) should be considered only as a last resort. Options include issuing promissory notes (discountable by commercial banks that cannot be repurchased by the central bank), marketable treasury bills, or bonds directly to creditors. - Advantages: allows selection of debt maturity structure and repayment profile; creditors can trade titles in secondary market for liquidity. - Disadvantages: - Creates strong moral hazard incentives for government financial managers to continue commitments in excess of appropriations expecting future securitization. - Securitized instruments almost always trade at a considerable discount, reducing working capital available to original supplier compared with cash payment. - Prevents government from prioritizing the most urgent arrears as securities are issued to all creditors on equal terms. - Footnotes and further discussion: securitization is further discussed in Ramos (1998). The discount on a treasury bill used for this purpose should only be the interest element; discount on a promissory note may include a large risk premium related to likelihood of government extending or refuting eventual payment. ### Special considerations for state-owned enterprises (SOEs) - Identify and settle stock of arrears between government and state-owned enterprises to avoid solvency and profitability problems in enterprises. - For government, a book entry can reflect all outstanding bills, leaving a single remaining debt resolvable through a budget injection to the SOE and inclusion in the MTBF. - Reciprocal payments owed to government (for example dividends) can be netted off against required cash injections. *Source: Government of Liberia Domestic Debt Resolution Strategy 2008 and 2012 Liberia PEFA assessment.* ### Appendix 2. Sample Measures Adopted by Countries to ### Appendix 2. Sample Measures Adopted by Countries to Address the Accumulation of Arrears ### Country cases and corrective measures - Albania (2002) - Main Problems: - Inter-enterprise arrears and arrears to the tax and social security systems. - Corrective Measures Proposed: - Record inter-enterprise arrears and tax arrears. - Complete reconciliation process. - Sign bilateral memoranda of understanding indicating the amount of net overdue payables/receivables. - Determine the amount that can be canceled through multilateral nettings. - Angola (2009, 2013) - Main Problems: - Arrears accumulated during civil war and financial crisis. - Sharp reduction of revenues from oil. - Low demand for treasury papers. - Extra-budgetary expenditures and weak commitment controls. - Corrective Measures Proposed: - Undertake census of arrears and audit of claims. - Define a payment calendar. - Reach agreement with creditors. - Implement temporary suspension of new contracts. - Create commitment control system. - Include definition of arrears in legislation. - Central African Republic (2012) - Main Problems: - Excess expenditures outside of the budget system. - Corrective Measures Proposed: - Conduct audit to identify and certify the expenditure arrears, and develop plan to clear arrears. - Strengthen budget execution and public. financial management through spending controls and transparent recording of expenditure and domestic revenues, with a view to generating surplus on the domestic primary balance. - Set expenditure commitment ceilings consistent with available liquidity. - Create a Liquidity Committee and a Budget Management Monitoring Committee. - Limit extra-budgetary payments. - Republic of Congo (2004) - Main Problems: - Lower-than-expected non-oil revenue receipts, (higher-than-expected transfer and subsidy expenditures). - Non-programmed payments of domestic arrears due to reconstruction investments, the sale of government oil through the national oil company at prices below reference prices. - Inefficient cash flow management. - Corrective Measures Proposed: - Develop clear definition of payment arrears. - Obtain validation by the Office of the Inspector-General of Finance and the Court of Accounts of the stock of arrears on social debts (wages, pensions, and the rights of workers in liquidated enterprises). - Close retirement fund accounts and Treasury deposit accounts. - Establish payment methods and schedules. - Implement a system to ensure the integrity of ex post settlement of arrears. - Prepare a preliminary table of cross debts at end-2003 (government, social security, public enterprises, and private sector). These cross debts will be audited by an independent firm. - Côte d’Ivoire (2002) - Main Problems: - Accumulation of arrears between the government and the energy sector. - Control of energy tariffs affecting the financial sustainability of the energy companies. - Corrective Measures Proposed: - Adoption of a settlement plan for domestic payments arrears. - Settlement of claims and debts between the government and energy sector. - Implementation of recommendations of the study on electricity tariffs. - Côte d’Ivoire (2011) - Main Problems: - Accumulation of external debt with bilateral and multilateral creditors. - Accumulation of arrears between public enterprises and the social security system. - Corrective Measures Proposed: - Application of a plan for clearing arrears, validated jointly by the public enterprises and social security institutions. - Gabon (2004) - Main Problems: - Restructuring of public enterprises and arrears on social security contributions by public enterprises. - Arrears accumulated to domestic and external creditors. - Wage arrears related to unpaid financial impact of advancement promotion of civil servants. - Corrective Measures Proposed: - Restructure public enterprises. - Negotiate a reschedule on payments of debt obligations to external creditors. - Audit unpaid payment orders. - Improve budgetary transparency and reporting on budget execution including arrears. - The Gambia (2002) - Main Problems: - Reemergence of cross arrears between the government and public enterprises, including tax arrears. - Corrective Measures Proposed: - Develop and implement a comprehensive program to address the financial problems of the public enterprises and a settlement of inter-entity arrears. - Define quarterly targets to eliminate cross arrears by addressing longer-term financial imbalances of public enterprises, including restructuring or privatization. - Georgia (2004) - Main Problems: - Significant increase in fiscal deficits, leading to a buildup in domestic arrears on pensions and wages. - Unrealistic budget and weak expenditure management. - Poor governance in tax collection. - Corrective Measures Proposed: - Define a plan to clear and reschedule payment obligations. - Audit the stock of arrears and the register of pensioners. - Implement a treasury single account and a full commitment control. - Prepare realistic monthly cash plans and a more predictable schedule for treasury bill auctions. - Implement civil service reforms to improve quality and reduce corruption. - Introduce and enforce disciplinary and ethic codes. - Prepare monthly commitment, arrears, and payment reports. - Ghana (2003) - Main Problems: - Accumulation of arrears regarding road contracts, education allowances, and other expenditures. - Unrealistic public services tariffs, leading to financial constraints of the public enterprises in water and electricity. - Accumulation of cross-company debts. - Corrective Measures Proposed: - Implement a new commitment and cash management system and a budget accounting system on a pilot basis. - Prepare monthly early warning report to identify eventual accumulation of arrears. - Implement automatic pricing formula on the price of oil. - Audit to determine amount of cross-debt among public service utility companies. - Implement monthly report on commitments and arrears. - Ghana (2009) - Main Problems: - Larger fiscal deficit and insufficient financing. - Institutional capacity to identify and control the accumulation of new arrears, and difficulties in rolling out the accounting system to all entities. - Corrective Measures Proposed: - Take stock of the accumulated arrears. - Implement financial recovery plan in public enterprises and a cost-recovery price strategy. - Strengthen the public expenditure monitoring function. - Establish a cash management framework and an early warning system. - Haiti (2006) - Main Problems: - Accumulation of wage and non-wage arrears. - Corrective Measures Proposed: - Improve fiscal transparency, and prepare a census on government employees and a survey on wage arrears. - Implement plan for clearance of wage arrears. - Lesotho (2010) - Main Problems: - Lack of adequate implementation of a financial management information system to control expenditure execution and to implement adequate internal controls and reporting functions. - Corrective Measures Proposed: - Improve effectiveness of the integrated financial management information system. - Audit to identify arrears. - Malawi (2005) - Main Problems: - Cost overruns in construction of roads beyond contract estimates and budget ceilings. - Accounts payable module of the information system not operational. - Insufficient internal mechanisms to control arrears. - Inclusion of teachers in payroll without budget provision. - Corrective Measures Proposed: - Define an arrears policy. - Implement new public audit act and public finance management act. - Implement administrative measures to prevent arrears on utility expenses. - Securitize stock of arrears through issuance of special treasury bills. - Publish monthly report on arrears. - Introduce pre-payment system for telephones. - Implement direct payment by accountant general of utility bills and offsetting of departmental budget transfers. - Malawi (2012) - Main Problems: - Sharp reduction in external grants, leading to increasing fiscal deficits. - Tariffs charged by public enterprises below recovery cost. - Corrective Measures Proposed: - Audit arrears claims. - Implement the commitment control module of the financial management information system. - Inform suppliers that expenditures outside of the system will not be paid. - Niger (2005) - Main Problems: - Shortfall in external financing and higher fiscal deficit. - Corrective Measures Proposed: - Define an arrears clearance strategy. - Prioritize payment of wage arrears. ### Common themes in measures proposed - Audit, census, and validation: - Undertake census of arrears and audit of claims. - Audit the stock of arrears and registers (pensioners, payment orders). - Obtain validation by oversight bodies (Office of the Inspector-General of Finance, Court of Accounts). - Cash, commitment, and payment controls: - Implement commitment control systems and financial management information systems. - Implement treasury single account, monthly cash plans, and predictable treasury bill auction schedules. - Define payment calendars, payment methods, and schedules. - Establish cash management frameworks and Liquidity Committees. - Legal, institutional, and reporting reforms: - Include definition of arrears in legislation. - Create monitoring committees and strengthen budget execution. - Improve budgetary transparency and reporting on budget execution including arrears. - Implement new public audit and public finance management acts. - Enterprise-specific and sectoral actions: - Restructure public enterprises and implement financial recovery plans. - Negotiate debt reschedules with external creditors. - Implement tariff reforms or automatic pricing formulas to ensure cost recovery in public utilities. - Measures to prevent recurrence: - Limit extra-budgetary payments; set expenditure commitment ceilings. - Implement early warning systems and monthly reporting on commitments and arrears. - Inform suppliers that expenditures outside approved systems will not be paid. *Source: IMF Policy Notes (as presented in Appendix 2 of the Technical Notes and Manuals 14/01).* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/tnm/2014/_tnm1403.pdf_