Fiscal Transparency, ROSCs and Budget Execution THE IMF CODE OF GOOD PRACTICES IN FISCAL TRANSPARENCY WAS ADOPTED BY THE (THEN) INTERIM COMMITTEE OF THE BOARD OF GOVERNORS OF THE INTERNATIONAL MONETARY FUND IN APRIL 16, 1998 AND ENDORSED BY ALL MEMBER COUNTRIES. SINCE THAT TIME, THE FUND HAS BEEN WORKING WITH A WIDE RANGE OF MEMBER COUNTRIES ON STAFF ASSESSMENTS OF THEIR PRACTICES RELATIVE TO THOSE RECOMMENDED IN THE FISCAL TRANSPARENCY CODE—KNOWN AS FISCAL TRANSPARENCY REPORTS ON THE OBSERVATION OF STANDARDS AND CODES (ROSCS). (SIMILAR APPROACHES ARE ADOPTED FOR OTHER STANDARDS (NOW 12 CORE STANDARDS) BEING FOSTERED BY THE INTERNATIONAL COMMUNITY. AS WELL AS THE IMF AND THE BANK, THESE STANDARDS ARE SUPPORTED BY THE FINANCIAL STABILITY FORUM (FSF), THE G-20, THE MANILA FRAMEWORK GROUP, ASIA AND PACIFIC ECONOMIC COOPERATION (APEC), AND WESTERN HEMISPHERE FINANCE MINISTERS). THE BROAD OBJECTIVE IS TO HELP COUNTRIES TO OBJECTIVELY REVIEW THE DECISION PROCESSES AND QUALITY OF FISCAL INFORMATION AVAILABLE TO DECISION MAKERS AND THE PUBLIC—AND THEREBY TO HELP COUNTRIES IMPROVE THE BASIS FOR AND PUBLIC SUPPORT OF FISCAL POLICIES. World Bank Seminar Washington DC January 17, 2003

TOPICS Rationale for transparency ROSC process Key findings Linkages with GFS and accounting standards

Structure of the Code The Code is based on four general principles: Roles and responsibilities of and within government should be clear Comprehensive reliable information on fiscal activities should be available to the public The processes of budget preparation, execution, and reporting should be open Integrity of information should be assured The four general principles are conceived of as an integrated structure providing assurance of comprehensive, reliable, timely, and analytical fiscal information. The first and second principles aim to spread the “net” to capture all relevant fiscal information. The first principle, by requiring clear definition of roles and responsibilities provides a basis for accountability as well as transparency. At this point, it could be noted that if extensive QFAs and tax expenditures are identified, governments have a choice of improving transparency either by reporting these or by eliminating them--though the Code takes no position on the desirability of the latter. The second principle requires that all forms of fiscal activity be reported and asks governments to make explicit commitments (preferably in a law) to report at specific times. The third principle is concerned to provide assurance that the basic mechanisms of fiscal policy formulation, budgeting, accounting, and reporting are in place for all activities identified under the first two principles. The fourth principle “closes the loop” by requiring that mechanisms be established whereby the effective operation of the other three principles is open to scrutiny by experts that are independent of the executive branch of government.

Why Transparency? Improved transparency is seen as a necessary basis for improving efficiency and effectiveness of fiscal management: Better information will make government more accountable and lead to better fiscal policies Transparency will be reinforced by financial markets—which will provide further incentives for sound fiscal policies A key objective of defining and encouraging assessment of transparency is to provide a strong link between government fiscal decisions and financial markets. Rather than focusing on specific technical needs to establish “rational” budget systems, the presence or absence of transparency will provide an incentive for decision-makers to undertake appropriate improvements in their system. For such an incentive system to be effective, it has to be widely supported. The principal aim of the Code is to promote fiscal transparency by making governments more accountable for the design and implementation of fiscal policy. Transparency and accountability should exert discipline on policymakers, and in turn lead to better, more credible policies, to a less uncertain policy environment, and to an earlier and smoother fiscal policy response to emerging economic problems. Ultimately, fiscal transparency should be associated with, and may directly result in, improved economic performance..

Promotion depends on many groups... IFIs and bilateral support of government Financial analysts concern with transparency Civil society concern with public information and participation

Build a dynamic partnership... IMF/MDBs Government Civil Society Financial Analysts Public Investors

IMF Objectives and tools Promote principles and good practice --Code and Manual Integrate with Fund surveillance --ROSCs* Build incentives & improve practices --technical assistance & outreach * Reports on Observance of Standards and Codes

ROSC procedures Questionnaire and self-assessment Staff review and assessment Country review Publication Article IV and ROSCs THE QUESTIONNAIRE COMPLETED BY THE AUTHORITIES IS THE STARTING POINT OF THE ROSC PROCESS. IT IS VITAL THAT THE AUTHORITIES LOOK CAREFULLY AT THEIR OWN PROCESSES—AND EXAMINE ACTUAL PRACTICES AS WELL AS THE LAWS GOVERNING PROCESSES. STAFF USE THE QUESTIONNAIRE AND OTHER DOCUMENTS PROVIDED BY THE AUTHORITIES, PAST STAFF REPORTS, TECHNICAL ASSISTANCE STUDIES, AND DETAILED DISCUSSION OF PROCEDURES TO PREPARE A DRAFT ROSC. IT IS IMPORTANT THAT A COUNTERPART GROUP BE ESTABLISHED TO WORK WITH THE STAFF TEAM. THE STAFF COMMENTARY WILL INDICATE AREAS WHERE THE STAFF CONSIDER THAT IMPROVEMENTS CAN BE MADE. THE ROSC WILL THEN BE REVIEWED BY THE AUTHORITIES—AS WELL AS BY IMF HQ—AND CORRECTIONS OF FACT OR INTERPRETATION CAN BE MADE. ISSUES CAN BE DISCUSSED FURTHER DURING ARTICLE IV CONSULTATIONS. THE ROSC WILL BE PRESENTED TO THE IMF BOARD IN MOST CASES, AGREEMENT IS REACHED BETWEEN THE AUTHORITIES AND THE STAFF FOR PUBLICATION ON THE IMF WEBSITE. PUBLICATION IS ADVANTAGEOUS IN THAT IT GIVES A CLEAR PUBLIC COMMITMENT TO IMPROVE FISCAL TRANSPARENCY. MOST PUBLISHED ROSCS INDICATE SOME (EVEN MANY) WEAKNESSES OF TRANSPARENCY AND IDENTIFY STEPS TO IMPROVE FISCAL MANAGEMENT SYSTEMS TO OVERCOME THESE. THE ROSC IS PART OF ARTICLE IV DISCUSSIONS AND PROGRESS IN IMPLEMENTING TRANSPARENCY IMPROVEMENTS WILL BE DISCUSSED EACH YEAR AND UPDATES PUBLISHED.

ROSCs play a central role Dialogue with member countries on importance of transparency Links with Fund programs and TA from Fund and others Publication signals a commitment to improve transparency ROSCS PROVIDE A VEHICLE FOR CONTINUOUS DIALOGUE WITH A COUNTRY ON PROGRESS IN IMPROVING PRACTICES OF IMPORTANCE TO TRANSPARENCY ON MOST ASPECTS OF MACROECONOMIC MANAGEMENT. ROSCS ARE CONSIDERED BY THE BOARD IN THE CONTEXT OF ARTICLE IV CONSULTATIONS, BUT IMPROVEMENTS IN TRANSPARENCY IDENTIFIED IN ROSCS MAY BECOME PART OF PROGRAM DESIGN AND TECHNICAL ASSISTANCE MAY BE PROVIDED BY THE FUND OR OTHERS TO HELP BUILD MORE TRANSPARENT INSTITUTIONS REPORTS ON STANDARDS AND CODES (ROSCS) PROVIDE A CLEAR STATEMENT THAT THE GOVERNMENT RECOGNIZES THE NEED FOR IMPROVEMENT IN SOME ASPECTS OF TRANSPARENCY AND IS COMMITTED TO IMPROVEMENT.

But need to coordinate.... Many agencies assess standards or related aspects Duplication, inefficiency, high country costs, information overload Clarity of agency objectives Sustained, focused efforts.

52 countries have completed fiscal ROSCs http://www.imf.org/external/ IMF at Work/Reports on the Observance of Standards and Codes (ROSCs) 52 countries have completed fiscal ROSCs 45 are published on the IMF website Some focus on emerging market countries—but a wide range covered INFORMATION ON THE FUND’S WORK ON FISCAL TRANSPARENCY IS AVAILABLE FROM THE FUND’S WEBSITE—CLICK ON STANDARDS & CODES. FULL BACKGROUND ON CODES/MANUAL/QUESTIONNAIRE ENGLISH AND MAJOR LANGUAGES PUBLISHED ROSCS IN ENGLISH—GIVING ACCESS TO COUNTRY SITES FOR MORE DETAILED INFORMATION ON PRACTICES 52 HAVE COMPLETED ROSCS FOR THE IMF EXECUTIVE BOARD, AROUND 45 HAVE PUBLISHED ON THE IMF WEBSITE, INCLUDING SOME CIS COUNTRIES. UPDATES OF ROSCS ARE ALSO UNDERTAKEN WITH ARTICLE IV MISSIONS AND THESE ARE PUBLISHED ALONGSIDE THE ORIGINAL ROSC TO SHOW PROGRESS TOWARD IMPROVING TRANSPARENCY

ROSC Program For Year 2003 1st layer (top): Proposed for the end of FY2003 (9) 2nd layer: In Progress (11) 3rd layer: Completed (15)

Key findings to date…. Most ROSC participants are taking some steps to improve transparency Around 60 percent of market access countries are participating A range of common problems identified Poor fiscal data quality Off-budget activity Tax expenditures and discretionary tax administration Poor definition of intergovernmental relations PAPERS SUMMARIZING MAIN DEVELOPMENTS IN THE ROSC PROCESS AND SOME KEY FINDINGS OF ROSCS IS PRESENTED TO THE EXECUTIVE BOARDS OF THE FUND AND THE BANK PERIODICALLY. FOR FISCAL ROSCS THE PROCESS IS NOW WELL DEFINED AND SUFFICIENT NUMBERS HAVE BEEN COMPLETED TO INDICATE SOME OF THE GENERAL ISSUES. ON THE POSITIVE SIDE, PARTICIPANTS HAVE GENERALLY BEEN INTERESTED IN CARRYING OUT REFORM, AND THOSE COUNTRIES THAT ARE SEEKING MARKET ACCESS HAVE BEEN INTERESTED IN PARTICIPATING. BUT THERE ARE A WIDE RANGE OF COUNTRIES THAT DO NOT MEET SOME OF THE BASIC GOOD PRACTICES PROPOSED IN THE CODE, SUCH AS ENSURING PROPERLY RECONCILED AND AUDITED ACCOUNTS, OR REVEALING ADEQUATE INFORMATION ON FISCAL ACTIVITIES CARRIED ON OUTSIDE THE BUDGET. SOME OF THESE PROBLEMS CAN BE ADDRESSED QUICKLY BY PUBLISHING INFORMATION ALREADY IN THE SYSTEM—REQUIRING ONLY A CLEAR COMMITMENT BY THE AUTHORITIES, BUT OTHERS REQUIRE THAT LONG-STANDING CAPACITY WEAKNESSES BE ADDRESSED.

Addressing poor data quality... Establish standard fiscal reporting (GFS) Getting basic reconciliation right Move to accrual basis reporting (GFSM 2001) Adoption of international accounting standards (IPSAS) at an appropriate pace

GFSM 2001 Synchronized with national accounts— 1993 SNA Integrates flows and stocks—a balance sheet approach Cash plus reporting—initially cash, but progressive move to accrual basis reporting Will link with international accounting standards