## _wp14164

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---

### I. Introduction and Purpose
- Framework purpose:
  - Support countries’ fiscal efforts at three key stages of policy making: (i) understanding the fiscal outlook and challenges; (ii) formulating a credible fiscal strategy; and (iii) implementing that strategy.
  - Originally developed for G-20 countries and subsequently applied to a wider group of countries seeking either fiscal consolidation or overall fiscal discipline.
- Structure of the chapter:
  - Section II: twelve budget institutions across the three stages.
  - Section III: application to seven low-income countries and comparison with G-20 advanced and emerging market countries.
  - Section IV: recommendations for designing and implementing fiscal strategy, with attention to prioritization and sequencing.
  - Appendix I: full institutional framework; Appendix II: PEFA scoring methodology.

### II. Budget Institutions for a Credible Fiscal Strategy — Overview
- Twelve institutions (grouped by stage):
  - A. Understanding the Fiscal Outlook and Challenges
    1. Fiscal Reporting
    2. Macroeconomic and Fiscal Forecasting
    3. Fiscal Risk Management
    4. Independent Fiscal Agency
  - B. Formulating a Credible Fiscal Strategy
    5. Fiscal Objectives and Rules
    6. Medium-term Budget Framework
    7. Performance Orientation
    8. Intergovernmental Fiscal Arrangements
  - C. Implementing the Fiscal Strategy
    9. Budget Unity
    10. Top-down Budgeting
    11. Parliamentary Budget Approval
    12. Budget Execution
- Caveats:
  - Not a generic guide to reforms; sequencing depends on country-specific circumstances and implementation capacity.
  - Institutions selected based on ability to support planning and implementation of a credible fiscal strategy.

### III. Evaluation Methodology
- Institutional translation to evaluation:
  - The twelve institutions translated into factually verifiable evaluation questions: 52 questions in total.
- Scoring per question:
  - 0 if criterion is not met;
  - 1 if criterion is partly met;
  - 2 if criterion is fully met.
- Aggregation:
  - Ratings against each question are averaged to produce an overall score of strength for each of the twelve institutions.
  - Each of the twelve institutions has the same weight in these averages, regardless of the number of questions used.
- Ratings derived from expert assessments familiar with each country’s institutional set up.

### IV. Empirical Findings — Comparative Observations
- Cross-country patterns:
  - Budget institution scores are lower in low-income countries compared to emerging market and advanced countries; the largest institutional gaps for low-income countries appear in the understanding and planning stages.
  - Institutional scores and GDP per capita broadly move together in the country sample.
  - Low-income countries score lowest on average across country-groups in all categories except three:
    - top-down budgeting (slightly higher than emerging),
    - parliamentary approval (tied with emerging),
    - budget unity (tied with emerging markets and advanced).
  - Advanced countries score higher on average than others in all other categories.
  - Variance of scores by institution is generally larger for low-income and emerging market countries compared to advanced countries.
  - For understanding and planning stages, many low-income countries scored zero on a number of individual institutions, indicating absence of basic arrangements.
- Evidence on budget deviations in low-income countries (PEFA Database):
  - Deviations from original budget have been substantial in low-income countries, particularly regarding allocation (composition) of expenditure.
  - Score definitions reproduced from Figure 1:
    - A (deviation up to 9 % in 1 out of 3 yrs)
    - B (deviation up to 15 % in 1 out of 3 yrs)
    - C (deviation more than 15 % in 1 out of 3 yrs)
    - D (deviation more than 15 % in 2 or 3 out of 3 yrs)
  - The figure uses PEFA framework scoring methodology (see Appendix II).

### V. Detailed Institutional Roles and Key Design Features — Key Findings by Stage

- A. Understanding the Fiscal Outlook and Challenges
  - Fiscal Reporting:
    - All low-income countries produce financial statements which cover at least the budget; in most countries financial statements are audited by external auditor.
    - Most countries produce a balance sheet, but generally without including all assets and liabilities.
    - About half of the countries produce financial statistics for central and general government but generally not for the whole of the public sector.
    - In almost all countries financial statistics are produced by an independent office but generally not in line with international standards.
  - Macroeconomic and Fiscal Forecasting:
    - About a half of the low-income countries publish medium term forecasts in the budget documents with related assumptions but generally without quality control through ex post comparison of previous forecasts with actual outturn.
    - An update half-way through the budget year, with updated projections of key fiscal variables is missing in almost all countries.
    - Long-term fiscal projections are rare.
  - Fiscal Risk Management:
    - Main fiscal risks (macro-fiscal, guarantees, international commitments, social commitments, PPPs, legal claims) are not discussed nor quantified in the budget documents.
    - Alternative medium-term budget scenarios are not produced.
    - Majority prepare a medium-term debt management strategy including debt-related risks but typically without asset-related risks.
    - In almost all countries, parliamentary approval is sought for new guarantees and in very few, for other significant contingent liabilities.
  - Independent Fiscal Agency:
    - With some exceptions, countries do not have independent agencies to assess the credibility of forecasts and government fiscal performance on a regular basis.

- B. Formulating a Credible Fiscal Strategy
  - General:
    - Many institutions related to formulation of a fiscal strategy are relatively underdeveloped.
    - Fiscal objectives and medium-term budget frameworks receive the lowest scores on average among the low-income countries.
    - Performance orientation is still at its infancy.
    - Intergovernmental financial arrangements are not clearly specified in many countries.
  - Fiscal Objectives and Rules:
    - About half of the countries have specified some type of medium-term fiscal objective and regularly report performance against the stated objective.
    - In very few countries, the objective has been enshrined in the law; in almost all countries exceptions to the rule are frequent.
    - Fiscal objectives do not accommodate the impact of the business cycle.
  - Medium-term Budget Framework:
    - About half of the countries have some type of multi-year estimates for major categories of revenue and expenditure but they constitute only a non-binding restriction to future budgets.
    - No reconciliation of changes in sectoral allocations from year to year is produced.
    - Budget documents do not present any consolidated summary of the fiscal impact of proposed new revenue and expenditure measures.
  - Performance Orientation:
    - About half include a program classification for information; only very few use it as basis for legislative appropriation.
    - Many countries have established performance targets or objectives but typically these are not systematically monitored.
    - Comprehensive and systematic expenditure reviews are rare.
  - Intergovernmental Fiscal Arrangements:
    - About a half produce a year-ahead or medium-term forecast of the budget or the central or federal government but typically not broken down by sector/level of government.
    - Majority have fiscal rules for sub-national governments but without centralized sanctions or enforcement mechanisms.
    - About a half have a legal framework for coordinating and sharing the burden of fiscal policy between layers of government.

- C. Implementing the Fiscal Strategy
  - Overall:
    - Institutions related to implementing the fiscal strategy emerge as the strongest among the three stages, though gaps remain in top-down budgeting and budget execution.
    - Ex ante ceilings are commonly fixed early but often overlooked later in the process.
  - Budget Unity:
    - Low-income countries receive equal scores on average on budget unity compared with emerging market and advanced countries.
    - In all countries the budget, unemployment and social security funds or spending cover at least 80 percent, and in many, more than 90 percent of central government expenditure.
    - In all countries more than 90 percent of the budget spending requires annual authorization by parliament.
    - Most countries produce an annual quantification of tax expenditures, but there is no control on their size.
  - Top-Down Budgeting:
    - In almost all countries there are ex ante limits on both aggregate and sectoral or ministerial spending provided in budget submissions, but in about half of the countries these ceilings are rarely respected.
    - In almost all countries less than 10 percent of central government revenue is subject to earmarking or standing spending commitments.
    - In about half of the countries, major revenue and expenditure decisions are often or sometimes taken outside the budget process.
  - Parliamentary Budget Approval:
    - Typically, the parliament does not endorse a medium-term fiscal target or objective.
    - With some exceptions, there are limits on the legislature's right to amend the government's draft budget.
    - In about a half of the countries, the annual budget is not approved in a top-down sequence.
    - In majority of the countries, there is a legal requirement that a budget has to be approved before the start of the fiscal year.
  - Budget Execution:
    - Most countries have restrictions in place on overspending; most require submission of a supplementary budget to parliament.
    - Typically, carry-overs are not allowed or the government imposes a ceiling on the size of annual carry-over or on carry-over draw-downs.
    - Contingency arrangements for specific expenditure categories exist in all countries but access criteria could be specified more clearly in some cases.
    - In most countries, the finance minister can defer or cut expenditure, without prior approval of parliament, at least up to a certain limit.
    - All countries lack comprehensive limits or controls on multi-annual expenditure commitments.

### VI. Recommendations and Priorities for Reform
- Overarching guidance:
  - Balance ambition and realism given low capacity, political economy constraints, and weak governance systems.
  - Reforms should be comprehensive and coordinated across budget stages and between branches and levels of government.
  - Prioritization and sequencing are required; not all deficiencies can be addressed simultaneously.
  - Reforms should address country-specific problems and be placed in an appropriate order.
- Priorities for understanding the fiscal outlook and challenges (paragraph 23):
  - Expand coverage of annual financial statements to central government and general government, and ensure published external audit.
  - Produce financial statistics by an independent office, in line with international standards.
  - Include comprehensive information about fiscal risks in budget documentation, particularly where PPPs are used.
  - Produce and publish macroeconomic forecasts alongside related assumptions; update forecasts in line with the budget process.
  - Once forecasting capacity improves, introduce medium-term forecasts with alternative medium-term budget scenarios.
- Priorities for formulating a credible fiscal strategy (paragraph 24):
  - Adopt a medium-term objective where absent and regularly report performance against it.
  - Where no medium-term framework exists, develop a simple framework projecting the fiscal balance and providing envelopes to line ministries for medium-term spending plans.
  - Once prerequisites are in place (solid macro-fiscal forecasting, credible budget, top-down budget process, medium-term fiscal objectives), develop the framework into a more binding direction.
  - Ensure proper interaction between central/federal and subnational governments, at least through regular information exchange or ideally via a legal framework for coordination and burden sharing.
- Priorities for implementing the fiscal strategy (paragraph 25):
  - Issue ex ante limits on aggregate and sectoral/ministerial spending early in budget preparation and ensure limits are realistic.
  - Change parliamentary procedures to a top-down sequence: parliament first approves overall total revenues and expenditures, then allocation within totals.
  - Put in place appropriate restrictions for overspending during budget execution and gradually introduce limits on multi-annual expenditure commitments.

### VII. Sequencing Principles and Lessons from Advanced Countries
- Sequencing guidance:
  - Distinguish sequencing of different initiatives across reforms and sequencing of tasks within single reforms.
  - Do not attempt too many reforms simultaneously; risk of overstretching human and financial resources.
  - Important basic elements should be established before more advanced elements (e.g., MTBF, accrual accounting, TSA).
  - Complex reforms require: strong leadership; a detailed action plan; a dedicated project management and communications team; active human resource management.
  - Failure to manage these can lead to resistance, delays, higher costs, and lower benefits.
  - Reforms need to consider views of external stakeholders (line ministries, president’s office, consumers of public services) and internal opposition.
- Lessons and patterns:
  - Reform is incremental, often not governed by a grand design, and generally takes a long time.
  - Basic systems (accounting, budgeting, reporting) are typically established first; advanced PFM practices follow.
  - Reform drivers include crises, political changes, and strong political leadership; absence of drivers leads to slower incremental reforms.
  - Reforms are iterative and adaptive; organization of central finance agencies often adjusted in parallel with reforms.

### VIII. Appendix Highlights — Institutional Criteria & PEFA Scoring
- Appendix I: Evaluation framework provides detailed criteria across the 12 institutions (examples of exact thresholds and fully/partly/not met definitions are specified for fiscal reporting, forecasting, fiscal risk management, independent fiscal agencies, medium-term objectives, MTBFs, performance orientation, intergovernmental arrangements, budget unity, top-down preparation, parliamentary approval, and constrained flexibility in budget execution).
- Appendix II: PEFA scoring methodology for expenditure out-turn and composition:
  - Aggregate expenditure out-turn compared to original approved budget:
    - A. In no more than one out of the last three years has the actual expenditure deviated from budgeted expenditure by an amount equivalent to more than 5% of budgeted expenditure.
    - B. In no more than one out of the last three years has the actual expenditure deviated from budgeted expenditure by an amount equivalent to more than 10 % of budgeted expenditure.
    - C. In no more than one of the last three years has the actual expenditure deviated from budgeted expenditure by more than an amount equivalent to 15% of budgeted expenditure.
    - D. In two or all of the last three years did the actual expenditure deviate from budgeted expenditure by an amount equivalent to more than 15% of budgeted expenditure.
  - Composition of expenditure out-turn compared to original approved budget:
    - A. Variance in expenditure composition exceeded 5 % in no more than one of the last three years.
    - B. Variance in expenditure composition exceeded 10 % in no more than one of the last three years.
    - C. Variance in expenditure composition exceeded 15 % in no more than one of the last three years.
    - D. Variance in expenditure composition exceeded 15 % in at least two of the last three years.

*Source: IMF (2014), _wp14164 - References.*

### References .............................................................................................................

### _wp14164 - References .............................................................................................................

### I. Introduction and Purpose
- Presents a framework of budget institutions needed to support countries’ fiscal efforts at three key stages of policy making:
  - (i) understanding the fiscal outlook and challenges;
  - (ii) formulating a credible fiscal strategy; and
  - (iii) implementing that strategy.
- Framework originally developed for G-20 countries and subsequently applied to a wider group of countries seeking either fiscal consolidation or overall fiscal discipline.
- Structure:
  - Section II: twelve budget institutions across the three stages.
  - Section III: application to seven low-income countries and comparison with G-20 advanced and emerging market countries.
  - Section IV: recommendations for designing and implementing fiscal strategy, with attention to prioritization and sequencing.
  - Appendix I: full institutional framework; Appendix II: PEFA scoring methodology.

### II. Budget Institutions for a Credible Fiscal Strategy — Overview
- Twelve budget institutions identified to support planning and delivery of credible fiscal strategies at the three stages (Box 1):
  - A. Understanding the Fiscal Outlook and Challenges
    1. Fiscal Reporting
    2. Macroeconomic and Fiscal Forecasting
    3. Fiscal Risk Management
    4. Independent Fiscal Agency
  - B. Formulating a Credible Fiscal Strategy
    5. Fiscal Objectives and Rules
    6. Medium-term Budget Framework
    7. Performance Orientation
    8. Intergovernmental Fiscal Arrangements
  - C. Implementing the Fiscal Strategy
    9. Budget Unity
    10. Top-down Budgeting
    11. Parliamentary Budget Approval
    12. Budget Execution
- Caveats on the framework:
  - Not a generic guide to reforms; sequencing depends on country-specific circumstances and implementation capacity.
  - Institutions selected based on ability to support planning and implementation of a credible fiscal strategy.

### III. Detailed Institutional Roles and Key Design Features
- A. Understanding the Fiscal Outlook and Challenges
  - Fiscal reporting should provide comprehensive, timely, credible, and transparent information, including financial statements audited by an independent audit institution and fiscal statistics from an independent statistics agency.
  - Macroeconomic and fiscal forecasting should be multi-year, updated frequently, cover all fiscal aggregates, and use a range of realistic economic assumptions.
  - Disclosure and management of fiscal risks: main fiscal risks (macro-fiscal, guarantees, international commitments, social commitments, public-private partnerships, and legal claims) should be disclosed in budget documents with alternative medium-term scenarios; contingent liabilities should face scrutiny and approval similar to regular appropriations.
  - Independent fiscal agencies: clear mandate to assess credibility of forecasts and government fiscal performance on a regular basis.
- B. Formulating a Credible Fiscal Strategy
  - Fiscal objectives and rules: comprehensive, transparent, stable objectives connected to numerical targets; flexibility via cyclical accounting or explicit escape clauses can enhance credibility.
  - Medium-term budget frameworks: convert targets into documented multi-year revenue and expenditure plans; provide binding restrictions on multi-year expenditure and state clear medium-term priorities within a total expenditure ceiling; should cover most central government expenditure.
  - Performance-oriented budgeting: link spending on programs/projects to outcomes or outputs; regular spending reviews to provide evidence for expenditure rationalization.
  - Intergovernmental fiscal arrangements: ensure consistency of fiscal stance across government levels and enable coordination and burden-sharing.
- C. Implementing the Fiscal Strategy
  - Budget unity: most central government expenditure authorized under one decision-making process; major tax expenditures should be quantified and published.
  - Top-down budgeting: early-stage agreement on aggregate and sectoral spending limits; limit revenue earmarking; take major revenue and expenditure decisions within the annual budget process.
  - Constraints on parliamentary budget approval: encourage pre-budget or orientation debates; parliament endorsement of medium-term objectives before annual budget consideration; promote collective responsibility and top-down parliamentary voting sequence (approve main fiscal aggregates before allocations).
  - Discipline in budget execution: minimize open-ended or standing appropriations; overspending against totals should require supplementary budget with offsetting cuts; restrict carry-over of expenditure and controls on multi-annual commitments.

### IV. Evaluation Methodology (Box 2)
- The twelve institutions translated into factually verifiable evaluation questions: 52 questions in total.
- Scoring per question:
  - 0 if criterion is not met;
  - 1 if criterion is partly met;
  - 2 if criterion is fully met.
- For every country:
  - Ratings against each question are averaged to produce an overall score of strength for each of the twelve institutions.
  - Each of the twelve institutions has the same weight in these averages, regardless of the number of questions used.
- Ratings are derived from assessments made by experts familiar with each country’s institutional set up.

### V. Empirical Findings and Comparative Observations
- General observations based on institutional scores (see Figures 1–3):
  - Budget institution scores are lower in low-income countries compared to emerging market and advanced countries; the largest institutional gaps for low-income countries appear in the understanding and planning stages.
  - Institutional scores and GDP per capita broadly move together in the country sample.
  - Low-income countries score lowest on average across country-groups in all categories except three:
    - top-down budgeting (slightly higher than emerging),
    - parliamentary approval (tied with emerging),
    - budget unity (tied with emerging markets and advanced).
  - Advanced countries score higher on average than others in all other categories.
  - Variance of scores by institution is generally larger for low-income and emerging market countries compared to advanced countries, indicating large differences between and among countries.
  - For understanding and planning stages, many low-income countries scored zero on a number of individual institutions, indicating absence of basic arrangements.
- Evidence on budget deviations in low-income countries (Figure 1, compiled from PEFA Database):
  - Deviations from original budget have been substantial in low-income countries, particularly regarding allocation (composition) of expenditure.
  - Score definitions reproduced from Figure 1:
    - A (deviation up to 9 % in 1 out of 3 yrs)
    - B (deviation up to 15 % in 1 out of 3 yrs)
    - C (deviation more than 15 % in 1 out of 3 yrs)
    - D (deviation more than 15 % in 2 or 3 out of 3 yrs)
  - The figure uses PEFA framework scoring methodology (see appendix II).

### VI. Implications for Reform and Sequencing (summary of issues to be addressed)
- Strong institutions improve fiscal performance by:
  - Highlighting need for sustainable policies;
  - Exposing full cost of public interventions;
  - Emphasizing collective responsibility over sectoral interests;
  - Raising the cost of deviating from stated fiscal objectives.
- Reform priorities should consider:
  - Country-specific sequencing according to capacity to implement reforms;
  - Emphasis on addressing gaps in understanding and planning institutions in low-income countries as a foundation for credible fiscal strategies;
  - Ensuring budget execution and approval processes are aligned with medium-term objectives to prevent derailing of consolidation plans.

*Source: IMF (2014), _wp14164 - References.*

### 14.      Most low-income countries in the sample seem to have basic fiscal reporting

### 14.      Most low-income countries in the sample seem to have basic fiscal reporting practices in place which should give them reasonable information about the present financial position. However, arrangements related to forecasting future fiscal developments and related risks are less robust. These are the areas where the gaps in the G-20 advanced countries are also most pronounced.

### Understanding the Fiscal Outlook and Challenges — Key Findings
- Fiscal Reporting:
  - All low-income countries produce financial statements which cover at least the budget, and in most countries financial statements are audited by external auditor.
  - Most countries produce a balance sheet, but generally speaking without including all assets and liabilities.
  - About half of the countries produce financial statistics for central and general government but generally not for the whole of the public sector.
  - In almost all countries financial statistics are produced by an independent office but generally not in line with international standards.
- Macroeconomic and Fiscal Forecasting:
  - About a half of the low-income countries publish medium term forecasts in the budget documents with related assumptions but generally speaking without any quality control through ex post comparison of previous forecasts with actual outturn of key macroeconomic and fiscal aggregates.
  - An update half-way through the budget year, with updated projections of key fiscal variables is missing in almost all countries.
  - Long-term fiscal projections are also a rarity.
- Fiscal Risk Management:
  - Main fiscal risks (macro-fiscal, guarantees, international commitments, social commitments, PPPs, legal claims) are not discussed nor quantified in the budget documents.
  - Alternative medium-term budget scenarios are not produced.
  - In the majority of the countries, the government prepares a medium-term debt management strategy, including analysis of debt-related risks, but without including asset-related risks (for example changes in the asset values or cash-flow they provide).
  - In almost all countries, parliamentary approval is sought for new guarantees and in very few, for other significant contingent liabilities.
- Independent Fiscal Agency:
  - With some exceptions, countries do not have independent agencies to assess the credibility of the forecasts and the government’s fiscal performance on a regular basis.

### Developing a Credible Fiscal Strategy — Key Findings
- General:
  - Many institutions related to formulation of a fiscal strategy are relatively underdeveloped.
  - Fiscal objectives and medium-term budget frameworks receive the lowest scores on average among the low-income countries.
  - Performance orientation is still at its infancy.
  - Intergovernmental financial arrangements are not clearly specified in many countries.
- Fiscal Objectives and Rules:
  - About half of the countries have specified some type of medium-term fiscal objective and regularly report performance against the stated objective.
  - In very few countries, the objective has been enshrined in the law, and in almost all countries, exceptions to the rule are frequent.
  - Fiscal objectives do not accommodate the impact of the business cycle.
- Medium-term Budget Framework:
  - About half of the countries have some type of multi-year estimates for major categories of revenue and expenditure but they constitute only a non-binding restriction to future budgets.
  - No reconciliation of changes in sectoral allocations from year to year is currently produced.
  - Budget documents do not present any consolidated summary of the fiscal impact of proposed new revenue and expenditure measures.
- Performance Orientation:
  - About half of the countries include a program classification for information, and only in very few of these form the basis for legislative appropriation.
  - Many countries have established some type of performance targets or objectives but typically these are not systematically monitored.
  - Comprehensive and systematic expenditure reviews are rare among the low-income countries in the sample.
- Intergovernmental Fiscal Arrangements:
  - About a half of the countries produce a year-ahead or a medium-term forecast of the budget or the central or federal government but it is typically not broken down into the respective contribution of individual sectors/level of government (budget, social security funds, extra-budgetary funds, local government and state-owned enterprises).
  - Majority of the countries have fiscal rules for sub-national governments in place but without centralized sanctions or enforcement mechanisms.
  - About a half of the countries have a legal framework for coordinating and sharing the burden of fiscal policy between layers of government.

### Implementing the Fiscal Strategy — Key Findings
- Overall:
  - Institutions related to implementing the fiscal strategy emerge as the strongest among the three key stages of the fiscal policy-making process included in the framework.
  - Gaps relative to the advanced G-20 countries persist particularly in top-down budgeting and budget execution.
  - While it is common to fix the ceilings at the early stages of the budget process, these restrictions are often overlooked at subsequent stages.
- Budget Unity:
  - Low-income countries receive equal scores on average on budget unity when compared to emerging market and advanced countries.
  - In all of the countries, the budget, unemployment and social security funds or spending cover at least 80 percent, and in many, more than 90 percent of central government expenditure.
  - In all countries more than 90 percent of the budget spending requires annual authorization by parliament.
  - Most countries produce an annual quantification of tax expenditures, but there is no control on their size.
- Top-Down Budgeting:
  - In almost all countries, there are ex ante limits on both aggregate and sectoral or ministerial spending provided in budget submissions, but in about half of the countries these ceilings are rarely respected.
  - In almost all countries less than 10 percent of central government revenue is subject to earmarking or standing spending commitments.
  - In about half of the countries, major revenue and expenditure decisions are often or sometimes taken outside the budget process.
- Parliamentary Budget Approval:
  - Typically, the parliament does not endorse a medium-term fiscal target or objective.
  - With some exceptions, there are limits on the legislature's right to amend the government's draft budget.
  - In about a half of the countries, the annual budget is not approved in a top-down sequence.
  - In majority of the countries, there is a legal requirement in place that a budget has to be approved before the start of the fiscal year.
- Budget Execution:
  - Most countries have restrictions in place on overspending during the execution of the annual budget; most countries require a submission of a supplementary budget to parliament.
  - Typically, carry-overs are not allowed or the government imposes a ceiling on the size of annual carry-over or on carry-over draw-downs.
  - Contingency arrangements for specific expenditure categories exist in all countries but in some cases access criteria to such funds could be specified more clearly.
  - In most countries, the finance minister (the executive) can defer or cut expenditure, without prior approval of parliament, at least up to a certain limit.
  - All countries lack comprehensive limits or controls on multi-annual expenditure commitments.

### Strengthening Budget Institutions in Low-Income Countries: Priorities for Institutional Reform
- Institutional gaps are largest in the understanding and planning stages of the fiscal policy-making process, though important challenges remain in implementation.
- The composition and size of expenditure outturns have deviated substantially from the original, approved budgets in low-income countries, indicating problems with budget planning.
- Higher relative scores in the implementation stage may reflect a tradition of administrative and fiscal centralization among the countries in this group.
- Reform design considerations:
  - Need to balance ambition and realism given low capacity, political economy constraints, and weak governance systems.
  - Reforms should be comprehensive and coordinated across budget stages and between branches and levels of government to maximize impact.
  - Prioritization and sequencing are required; not all deficiencies can be addressed simultaneously.
  - Reforms should address particular country-specific problems and be placed in an appropriate order.
- Lessons from advanced countries (summary of Box 3):
  - Reform is incremental, usually not governed by a grand design, and generally takes a long time.
  - Basic systems of accounting, budgeting, and financial reporting are typically established first; more sophisticated PFM practices (medium term budget frameworks, performance budgeting, accrual accounting) come later.
  - Logical sequencing: basic reforms first, then build more advanced reforms on top.
  - Reform drivers include economic and financial crises, sizeable political changes, and strength of political leadership; absence of strong drivers leads to slower, more cautious, incremental reforms.
  - Reforms driven by powerful forces can be faster but still require considerable time for design and implementation (example cited of South Africa: at least 10 years to implement and still being developed and refined 20 years later).
  - Reforms are iterative and adaptive; initiatives require adaptation as experience is gained or technology changes (e.g., FMIS or debt management systems).
  - Advanced countries adjusted the organization of central finance agencies in parallel with reforms to ensure core functions are appropriate and sufficient resources are available.

*IMF staff analysis as presented in the source chapter.*

### 20.      Most advanced countries have reached decisions about the sequencing of reform

### 20.      Most advanced countries have reached decisions about the sequencing of reform

### Sequencing principles and general guidance
- Distinguish two kinds of sequencing:
  - the order in which different initiatives within an overall PFM reform strategy are introduced (examples: establishing a macro-fiscal forecasting unit, a treasury single account; a modern debt management agency);
  - the sequencing of individual tasks and activities within a single component of such a strategy (example: steps needed to convert the government’s accounting and reporting system from a cash basis to an accrual basis, or to establish and make fully operational a unified revenue authority).
- Countries should not attempt too many reforms at one time. If too many reforms are attempted simultaneously, they are unlikely to succeed, e.g., because sufficient resources (human and financial) are not available, or the management capacity of the finance ministry is overstretched.
- Important basic elements of a budgeting system need to be put in place first before more advanced elements are incorporated.
- Many countries have tended to underestimate the complexity of the reform process, and the need for careful handling of the implications for resources and staffing and supporting IT systems.
  - Reforms demanding in terms of skills and resources—such as introducing an MTBF, an accrual accounting system, or a TSA—require:
    - strong leadership;
    - the development of a detailed action plan;
    - a dedicated project management and communications team to implement the reform;
    - active management of the human resource aspects of the reform.
  - If these factors are given insufficient attention it is possible, if not likely, that the reform will:
    - meet with substantial resistance inside and outside the finance ministry;
    - take longer than expected to implement;
    - cost more than necessary; and
    - deliver less than the full expected benefits, or fail completely.
- Reforms also need to take into account the views of stakeholders external to the finance ministry. Strong opposition may build up to reforms from line ministries, the president’s office, or consumers of public services. There may also be opposition from managers and staff within the finance ministry.

### B. Priorities for Institutional Reform for Low-Income Countries — overview
- Many budget institutions in the framework can be seen as prerequisites to others.
  - Example: binding medium term budget frameworks have proved useful and efficient in many advanced economies; preconditions to a successful binding medium term budget framework include:
    - credible and predictable annual budget;
    - accurate medium-term macroeconomic and demographic projections;
    - medium-term fiscal objectives and rules;
    - comprehensive, unified, top-down budget process (Harris et al, 2013).
- Low-income countries should ensure basic PFM systems are in place before attempting more sophisticated arrangements.
- Appropriate reform strategies require country-specific reform programs; generic advice is incomplete but common institutional shortcomings can be highlighted.

### Understanding the Fiscal Outlook and Challenges — recommendations (paragraphs 23)
- Observation: most low-income countries in the sample seem to have basic fiscal reporting practices in place but arrangements related to forecasting future fiscal developments and related risks are less robust.
- Considerations to improve understanding of current and future fiscal position:
  - expanding the coverage of their annual financial statements to central government, and further to general government, and ensure that there is a published external audit;
  - producing financial statistics by an independent office, in line with international standards;
  - including comprehensive information about fiscal risks in their budget documentation, particularly in countries where PPPs, for example, are being used;
  - producing and publishing macroeconomic forecasts alongside related assumptions; and updating the forecasts in line with the budget process;
  - once the forecasting capacity improves, introducing medium-term forecasts with alternative medium-term budget scenarios which would provide policymakers with a better sense of the country-specific vulnerability to uncertainty.

### Formulating a Credible Fiscal Strategy — recommendations (paragraph 24)
- Many institutions related to formulation of a fiscal strategy seem relatively underdeveloped; many countries have taken first steps in introducing some medium-term elements but challenges remain.
- Where appropriate, low-income countries could consider:
  - adopting a medium-term objective, in countries currently without such objective to provide guidance to fiscal planning, and once such objective is in place, regularly report on the fiscal performance against the stated objective;
  - in countries without any medium-term fiscal or budget framework, developing a simple framework, which would provide a projection of the fiscal balance, include estimates of government revenues and spending at a more aggregate level, and at the second stage providing guidelines (envelopes) to line ministries to prepare medium-term spending plans;
  - once the prerequisites, such as solid macro-fiscal forecasting, credible budget, top-down budget process and medium-term fiscal objectives are in place, developing the framework into a more binding direction; and
  - ensuring proper interaction between central or federal government and subnational governments, at least by exchanging information regularly on fiscal policy, or ideally putting in place a legal framework for coordinating and sharing the burden of fiscal policy between layers of government.

### Implementing the Fiscal Strategy — recommendations (paragraph 25)
- Institutions related to implementing the fiscal strategy seem the strongest among the three key stages reviewed, but important challenges remain, mainly relating to top-down budgeting and budget execution.
- Considerations for low-income countries:
  - issuing ex ante limits on both aggregate and sectoral or ministerial spending at an early stage in the budget preparation process, making sure that the size of the limits is realistic;
  - changing parliamentary procedures to follow a top-down sequence where the parliament first approves an overall annual budget framework for total revenues and total expenditures, and then discusses the allocation within these totals;
  - putting in place appropriate restrictions for overspending during the execution of the budget, and gradually introducing limits on multi-annual expenditure commitments.

### Appendix I: Budget Institutions Evaluation Framework — major themes and criteria
- A. Understanding the Fiscal Outlook and Challenges
  1. Comprehensive, Timely, and Credible Fiscal Reporting
    - a. Consolidation of central government annual financial statements: Criteria: Not met=...; Partly met=...; Fully met=...
    - b. Inclusion of assets and liabilities in annual financial statements: Criteria: Not met=...; Partly met=...; Fully met=...
    - c. External audit by an independent supreme audit institution and opinion on true and fair view: Criteria: Not met=...; Partly met=...; Fully met=...
    - d. Timeliness of publication and audit of annual financial statements: Criteria: Not met=financial statements are published more than six months after the end of the financial year; Partly met= financial statements are published within six months OR audited within nine months of the end of the financial year; Fully met=financial statements are published and audited within six months of the end of the financial year.
    - e. Comprehensiveness of government financial statistics: Criteria: Not met=...; Partly met=...; Fully met=...
    - f. Production of government financial statistics by an independent statistics office consistent with an international standard: Criteria: Not met=neither; Partly met=...; Fully met=government financial statistics are produced by an independent office and in line with SNA93, ESA95, or GFS2001.
  2. Robust Macroeconomic and Fiscal Forecasting
    - a. Publication of macroeconomic forecasts in budget documents: Criteria: Not met=...; Partly met=...; Fully met=medium-term macro projections are published in or alongside the budget documents.
    - b. Publication of forecasts of all major fiscal aggregates inclusive of major economic assumptions: Criteria: Not met=...; Partly met=...; Fully met=medium-term fiscal projections and assumptions are published.
    - c. Mid-year budget update: Criteria: Not met=...; Partly met=...; Fully met=the government publishes a mid-year update with projections of key fiscal variables for the budget year and over the medium term.
    - d. Regular quality control through ex post comparison of previous forecasts with actual outturn: Criteria: Not met=...; Partly met=...; Fully met=there are comparisons of both the government’s macroeconomic and fiscal forecasts with the outturn.
    - e. Long-term fiscal projections (at least 20 years) prepared and published at least every three years and inclusion of demographic and other factors: Criteria: Not met=...; Partly met=...; Fully met=comprehensive long-term fiscal sustainability reports are prepared at least every three years, and look at either a range of demographic scenarios or utilize one or more additional factors (e.g., health care costs, climate change, etc.).
  3. Fiscal Risk Management
    - a. Discussion and quantification of main fiscal risks in budget documents: Criteria: Not met=...; Partly met=...; Fully met=budget documentation includes a comprehensive and quantified fiscal risk statement.
    - b. Parliamentary approval for new contingent liabilities: Criteria: Not met=...; Partly met=...; Fully met=parliamentary approval is sought for new guarantees and other significant, predictable and quantifiable contingent liabilities.
    - c. Presentation of alternative medium-term budget scenarios in annual budget documents: Criteria: Not met=...; Partly met=...; Fully met=alternative medium-term scenarios and their implications for the main fiscal aggregates are presented as part of the annual budget documentation.
    - d. Examination of risks associated with government assets alongside debt and liabilities: Criteria: Not met=...; Partly met=...; Fully met=the government publishes a medium-term debt management strategy, including analysis of debt-related risks and risks from government assets.
  4. Independent Fiscal Agencies
    - a. Independent agency preparing macroeconomic and fiscal forecasts or scrutinizing government assumptions: Criteria: Not met=...; Partly met=...; Fully met=an independent agency prepares both macroeconomic and fiscal forecasts.
    - b. Independent agency evaluating government’s ex ante fiscal objective and/or policy and publication of advice: Criteria: Not met=...; Partly met=...; Fully met=an independent agency evaluates the government’s fiscal objective and/or policy, and its advice is published.
    - c. Regular ex ante comparison with other forecasting institutions: Criteria: Not met=...; Partly met=...; Fully Met=There are ex ante comparisons of both the government’s macroeconomic and fiscal forecasts with those of other forecasters.
    - d. Independent agency charged with evaluating government’s ex post performance against fiscal objectives: Criteria: Not met=...; Partly met=...; Fully met=there is an independent agency that is charged with providing an authoritative evaluation (i.e., one that requires follow-up) of the government’s performance against its fiscal targets, objectives or rules.
- C. Formulating a Credible Fiscal Plan
  5. Clear and Transparent Medium-Term Fiscal Objectives
    - a. Precision and time-bound medium-term fiscal objective: Criteria: Not met=...; Partly met=...; Fully met=both the precise value and time period are specified.
    - b. Routine reporting on performance against fiscal objectives: Criteria: Not met=...; Partly met=...; Fully met=the government reports performance against its fiscal objectives at least annually.
    - c. Fiscal objectives as a permanent numerical fiscal rule: Criteria: Not met=...; Partly met=...; Fully met= the fiscal rule has been enshrined in law.
    - d. Adequate escape clause for the fiscal rule framework: Criteria: Not met=...; Partly met=...; Fully met=exceptions to the fiscal rule are tightly defined by law and require approval by parliament.
    - e. Accommodation of the business cycle by fiscal rules: Criteria: Not met=...; Partly met=...; Fully met=the fiscal rule framework is explicitly designed to accommodate the impact of the business cycle?
  6. Medium-term Budget Framework
    - a. Annual budget prepared within medium-term revenue and expenditure projections: Criteria: Not met=...; Partly met=...; Fully met=budget documentation includes multi-year estimates for each major revenue category and medium-term costings of expenditure by sector, ministry or program.
    - b. Binding multi-year restrictions on aggregate expenditure: Criteria: Not met=...; Partly met=...; Fully met=there is a binding multi-year restriction on the outturn for aggregate expenditure and the spending ceilings remain fixed for at least two years.
    - c. Clear statement of medium-term ministerial, sectoral or programmatic priorities within the ceiling on total expenditure: Criteria: Not met=...; Partly met=...; Fully met=the government provides detailed medium-term sectoral expenditure estimates with a full explanation of any changes from year to year.
    - d. Coverage of multi-year expenditure ceilings over central government expenditure: Criteria: Not met=...; Partly met=...; Fully met=the medium-term expenditure ceilings cover more than 75 percent of central government expenditure.
    - e. Identification in fiscal projections of impact of current versus new policies: Criteria: Not met=...; Partly met=...; Fully met=budget documents present a consolidated summary of the fiscal impact of all proposed new revenue and expenditure measures.

*Source: _wp14164 - 20.      Most advanced countries have reached decisions about the sequencing of reform*

### 7. Performance-Orientation of the Budget

### 7. Performance-Orientation of the Budget

### Program classification and legislative appropriation
- Evaluative question: Does the annual budget include a program classification and is it the basis for legislative appropriation?
- Criteria:
  - Not met = the annual budget document does not include a program classification.
  - Partly met = the annual budget document includes a program classification for information but this is not the basis for legislative appropriation.
  - Fully met = the annual budget documentation includes program classification and this is the basis for legislative appropriation.

### Performance objectives and monitoring
- Evaluative question: Are there objectives and targets associated with each major expenditure program? Is achievement monitored at least annually?
- Criteria:
  - Not met = there are no performance objectives or targets for expenditure.
  - Partly met = performance targets or objectives are established but not systematically monitored.
  - Fully met = performance targets and objectives are set with systematic reporting on progress on at least an annual basis.

### Expenditure/sector reviews
- Evaluative question: Are there comprehensive sector reviews on a regular basis?
- Criteria:
  - Not met = expenditure reviews are not part of the budget process.
  - Partly met = expenditure reviews are infrequent or incomplete (rolling reviews are not complete or comprehensive reviews are ad hoc and/or happen more than every three years).
  - Fully met = all expenditure programs are systematically reviewed on either a comprehensive (at least once every three years) or rolling basis (at least 20 percent per year).

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### 8. Intergovernmental Financial Arrangements

### Medium-term projections and sector decomposition
- Evaluative question: Are medium-term general government projections prepared with an explanation of the contributions of each sector/level of government to total, balance and debt?
- Criteria:
  - Not met = there is only a year-ahead forecast or a medium-term forecast of the budget or the central or federal government.
  - Partly met = while there is a medium-term projection of the general government or public sector, this forecast is not broken down into the respective contribution of individual sectors/level of government (budget, social security funds, extra-budgetary funds, local government and state-owned enterprises).
  - Fully met = medium-term projections of key fiscal variables are decomposed into the contribution of individual sectors/levels of government.

### Fiscal objectives coverage
- Evaluative question: Is (are) the fiscal objective(s) comprehensive in scope?
- Criteria:
  - Not met = the fiscal objective covers only the central government budget (or no objective).
  - Partly met = the fiscal objectives covers the entire central government sector, inclusive of extra-budgetary activities controlled by central government.
  - Fully met = covers the general government sector or the public sector.

### Fiscal rules for sub-national governments
- Evaluative question: Are sub-national governments subject to clear fiscal rules and centralized enforcement mechanisms?
- Criteria:
  - Not met = there are no fiscal rules for sub-national governments.
  - Partly met = there are fiscal rules for sub-national governments but no centralized sanctions or enforcement mechanisms.
  - Fully met = there are fiscal rules for sub-national governments and centralized sanctions or enforcement mechanisms in the event of non-compliance.

### Coordination mechanisms among levels of government
- Evaluative question: Are there mechanisms to coordinate fiscal policy among layers of government?
- Criteria:
  - Not met = central or federal government has no interaction with sub-national government on fiscal policy.
  - Partly met = central or federal government has regular information exchange on fiscal policy with sub-national government.
  - Fully met = there is a legal framework for coordinating and sharing the burden of fiscal policy between layers of government.

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### C. Implementing the Fiscal Strategy through the Budget Process

### 9. Budget Unity

- Coverage of central government expenditure:
  - Not met = the budget, unemployment and social security funds or spending cover less than 80 percent of central government expenditure.
  - Partly met = the budget, unemployment and social security funds or spending cover more than 80 but less than 90 percent of central government expenditure.
  - Fully met = the budget, unemployment and social security funds or spending cover more than 90 percent of central government expenditure.
- Annual authorization of central government budget expenditure:
  - Not met = more than 40 percent of the budget spending is authorized by standing appropriations or separate legislation, not requiring annual approval by parliament (e.g. interest payments or fees to international organizations).
  - Partly met = less than 40 percent, but more than 10 percent, of the budget spending is authorized by standing appropriations or separate legislation, not requiring annual approval by parliament.
  - Fully met = more than 90 percent of the budget spending requires annual authorization by parliament.
- Tax expenditures quantification and control:
  - Not met = there is no quantification of tax expenditures and no control on their size.
  - Partly met = there is an annual quantification of tax expenditures but no control on their size.
  - Fully met = there is quantification and annual reporting of all major tax expenditures, and a control on their size.

### 10. Top-Down Approach to Budget Preparation

- Early government-approved limits on aggregate and sector/ministerial spending:
  - Not met = ex ante limits on annual spending are not agreed at an early stage of budget preparation within the executive.
  - Partly met = ex ante limits on aggregate expenditures (but not for sectors/ministries) are agreed at an early stage of budget preparation within the executive.
  - Fully met = ex ante limits on both aggregate and sectoral/ministerial spending are agreed at an early stage of budget preparation and prior to receipt of budget submissions from line ministries.
- Respect for aggregate and sectoral ceilings:
  - Not met = ex ante ceilings are not respected.
  - Partly met = ex ante ceilings are sometimes respected.
  - Fully met = ex ante ceilings are almost always respected.
- Revenue earmarking:
  - Not met = central government revenue earmarking exceed 30 percent of total central government expenditure.
  - Partly met = central government revenue earmarking are between 10 and 30 percent of central government expenditure.
  - Fully met = revenue earmarking are less than 10 percent of central government expenditure.
- Inclusion of major revenue/expenditure decisions in annual budget processes:
  - Not met = major revenue or expenditure decisions are often taken outside the annual budget preparation processes.
  - Partly met = major revenue and expenditure decisions are sometimes taken outside the annual budget preparation processes.
  - Fully met = major revenue and expenditure decisions are seldom taken outside the annual budget preparation processes and supplementary budgets are rare and/or limited in size (less than 3 percent of the budget).

### 11. Constraints on Parliamentary Budget Approval

- Parliamentary ownership of medium-term fiscal strategy:
  - Not met = there is no separate budget orientation debate and parliament does not endorse a medium-term fiscal target or objective.
  - Partly met = there is either a separate budget orientation debate or parliament endorses a medium-term fiscal target or objective strategy, but not both.
  - Fully met = there is a separate budget orientation debate and parliament explicitly endorses a medium-term fiscal target or objective.
- Limits on legislature’s right to amend the draft budget:
  - Not met = there are no limits on the right of parliament to amend the government’s draft budget.
  - Partly met = parliament can introduce fiscally neutral amendments to the budget.
  - Fully met = parliament can change the composition of expenditures, but not increase the proposed budget deficit, nor total expenditures (alternatively, parliament must approve the government’s proposed budget, without any modification).
- Top-down approval sequence by parliament:
  - Not met = parliament does not first approve the budget aggregates before voting on detailed spending.
  - Partly met = parliament first approves the budget aggregates, but subsequent changes in budget aggregates are still possible.
  - Fully met = parliament first approves the budget aggregates, then votes on the detailed expenditures within the approved top down constraints on total spending and revenue.
- Timeliness of budget approval:
  - Not met = there are no clear rules regarding the timing of final approval of the budget.
  - Partly met = there is a legal requirement that the budget be approved within three months after the start of the fiscal year.
  - Fully met = there is a legal requirement that a budget is approved before the start of the fiscal year.

### 12. Constrained Flexibility in Budget Execution

- Restrictions on overspending:
  - Not met = the government is not required to go back to parliament before the end of the current fiscal year when spending exceeds annual appropriations.
  - Partly met = the government is required to submit a supplementary budget to parliament if total spending exceeds annual appropriations.
  - Fully met = in case of overspending against the total annual appropriations, the government is required to submit a supplementary budget showing how overspending of total expenditure will be offset through reductions in other appropriations.
- Restrictions on carry-over of appropriations:
  - Not met = there are no restrictions on carried-over appropriations.
  - Partly met = there are restrictions on the types of expenditure subject to carry-over of appropriation, but no limit on the size of carried-over balances into subsequent years or draw-down of previously carried-over balances.
  - Fully met = carry-over is not permitted or the government imposes a ceiling on the size of annual carry-over or on draw-down of previously carried-over balances.
- Contingency reserves and rules for access:
  - Not met = no reserves or contingency arrangements are in place.
  - Partly met = there are reserves or contingency arrangements for specific expenditure categories.
  - Fully met = there is a sizeable general contingency reserve (e.g., 1 to 3 percent of total expenditure) in the annual budget, with clear rules for accessing the reserve.
- Executive mandate to defer or cut expenditure:
  - Not met = expenditures cannot be deferred or cut without prior approval of parliament.
  - Partly met = expenditures can be deferred or cut, without prior approval of parliament, up to a certain limit.
  - Fully met = budget appropriations can be deferred or cut by the executive, without limit.
- Controls on multi-annual expenditure commitments by line ministries:
  - Not met = there are no limits or controls on multi-annual expenditure commitments by line ministries.
  - Partly met = there are limits or controls on some categories of multi-annual expenditure commitments by line ministries.
  - Fully met = there are comprehensive limits or controls on all types of multi-annual expenditure commitments by line ministries.

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### Appendix II: PEFA Scoring Methodology

### Aggregate expenditure out-turn compared to original approved budget
- A. In no more than one out of the last three years has the actual expenditure deviated from budgeted expenditure by an amount equivalent to more than 5% of budgeted expenditure.
- B. In no more than one out of the last three years has the actual expenditure deviated from budgeted expenditure by an amount equivalent to more than 10 % of budgeted expenditure.
- C. In no more than one of the last three years has the actual expenditure deviated from budgeted expenditure by more than an amount equivalent to 15% of budgeted expenditure.
- D. In two or all of the last three years did the actual expenditure deviate from budgeted expenditure by an amount equivalent to more than 15% of budgeted expenditure.

### Composition of expenditure out-turn compared to original approved budget
- A. Variance in expenditure composition exceeded 5 % in no more than one of the last three years.
- B. Variance in expenditure composition exceeded 10 % in no more than one of the last three years.
- C. Variance in expenditure composition exceeded 15 % in no more than one of the last three years.
- D. Variance in expenditure composition exceeded 15 % in at least two of the last three years.

*Source: _wp14164 - 7. Performance-Orientation of the Budget*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2014/_wp14164.pdf_