1. Budget Execution An aid to fiscal discipline Abdul Mudabbir Khan Fiscal Affairs Department, IMF FAD mission to Iran Tehran July/August 2015

2. Outline of Presentation Definition and objectives of budget execution Stages of budget execution Issues in budget execution Arrears and commitment control Impact of weaknesses in overall PFM framework 2

3. What is budget execution? Institutions, systems and processes to ensure that policies and programs are implemented as intended in the budget, including –Laws, rules, and regulations –Systems and procedures to authorize, control, and incur expenditure –Accounting and reporting Effective budget execution is essential for sound PFM 3

4. 4 Are deficit targets likely to be met? Are revenue estimates being realized Are expenditure outturns likely to be as budgeted Are any new/changed policies being implemented as planned? Are any problems being encountered in budget execution, (e.g., buildup of payment arrears)? Budget execution and macro issues

5. Objectives of budget execution Manage Spending and Revenues to budget –allow budget to be effective planning and steering tool –promote macrofiscal discipline –reduce opportunities for corruption Enable program implementation –assure resources flow to programs –assist program managers to achieve objective Assist discharge of accountability –ensure adequate coverage, content, timeliness and frequency of reporting –meet internal and external audit requirements 5

6. Stages in Budget Execution Allocation or Funding Ministry commitment and spending plans Commitments – contracts, orders Liability - receipt and verification of goods/services Payment Accounting Reporting Independent Audit Accountability- Parliamentary Scrutiny (Note : These stages are not necessarily sequential)

7. Issues in Budget Execution (1/2) Predictability in the availability of funds –linkage with cash and debt management –importance of a realistic budget In year transfers – credibility of the budget Weak procurement processes –bunching of expenditures towards the year end Weak internal control system –Lack of effective commitment control – arrears –Other internal controls weak – waste or abuse of resources –Ineffective reconciliation and clearance of suspense accounts and advances – weakening of budget discipline

8. Issues in Budget Execution (2/2) Weak accounting and reporting –Relevant information not available in time or at all for management, decision making and accountability Ineffective internal audit – weakens internal control framework Weak external audit –delay in audits - little evidence of response or follow up on audit reports Weak accountability - Legislature’s review is non-existent or limited

9. Arrears are a threat to fiscal discipline Arrears are overdue liabilities – defined as those that remain unpaid more than X days after the due date. Arrears relate to all expenditures, including employee costs, interest, utilities, other goods and services, and capital expenditure. Arrears represent additional expenditure and a form of borrowing and must be prevented as part of expenditure control. 9

10. Commitment control is essential to prevent the creation of arrears (1/2) Expenditure process comprises three main stages: commitment, liability, and payment –Commitment arises when government enters into an agreement with a third party Commitment relates to all types of expenditure, including employee costs, interest, utilities, other goods and services and capital expenditure –Liability arises when third party delivers according to contract –The payment extinguishes the liability. 10

11. Commitment control is essential to prevent the creation of arrears (2/2) Expenditure must be controlled at commitment stage Once the commitment is incurred, government cannot avoid payment; therefore it is too late to exercise expenditure control Not recording or paying the invoice merely creates arrears, which the government has to settle eventually. 11

12. A possible approach to strengthening commitment control All commitments must have a serial number, preferably generated automatically Invoices should only be paid when supported by commitment numbers Incorporate these arrangements in purchase orders and contracts Publicize these arrangements 12

13. 13 Managing multi-year contracts imposes additional responsibilities Continue d... Ministry of Finance/budget managers must make full provision for the annual commitments in the annual budget Budget user must provide for payments anticipated during the budget year Ministry of Finance must monitor and control multi-year commitments to avoid undue pressure on future budgets

14. 14 The Treasury must update its medium-term cash plans for the budget year to provide for the anticipated cash flow. During the implementation phase, contract manager must keep the contract under constant review and report to the budget managers/the Treasury any changes in the appropriations/cash plans foreseen. Multi-year Commitments

15. Budget execution should be integrated with accounting and reporting Integration is necessary to assure accuracy and integrity of data Budget execution data must be reconciled with aggregate financial statements Revenue and expenditure per budget execution reports, must be reconciled with movements in stock of bank and cash 15

16. 16 Coverage of budget may be limited Entities and activities outside the budget may account for significant revenues and expenditures Budget execution processes will not rectify this deficiency – budget coverage must be extended Budget may be unrealistic Unrealistic revenue estimates may be used as basis for fund allocation Budget execution based on these funding, will lead to arrears Budget execution is affected by weaknesses in the overall PFM framework (1/2)

17. 17 Cash based budget does not focus on liabilities Budget execution may be effective in controlling cash expenditure, but not in preventing growth of liabilities Ideally budget approval should incorporate both cash expenditures and liabilities to be incurred Reconciliation procedures may not be effective Bank accounts may not be reconciled properly with bank statements Movements in cash resources may not be reconciled with budget execution report Budget execution reports should provide evidence or confirmation that these basic reconciliations have been completed Budget execution is affected by weaknesses in the overall PFM framework (2/2)

18. 18 An effective budget execution system is essential for Macrofiscal discipline Compliance with budget policies and decisions Efficient delivery of government services Budget execution should lead to effective commitment control and prevention of arrears. System should prevent Commitments not supported by adequate funds Payments not supported by valid commitments Weaknesses in other areas of PFM system need to be addressed to improve effectiveness of budget execution In conclusion….

19. 19 IMF, Guidelines for Public Expenditure Management, http://www.imf.org/external/pubs/ft/expend/guide4.htm International Budget Partnership, Budget Execution, http://internationalbudget.org/budget-analysis/budget-execution/ http://internationalbudget.org/budget-analysis/budget-execution/ Sanjay Vani, World Bank (2007), Budget Execution Sailendra Pattanayak, IMF (to be published), Expenditure Control: Key Features, Stages, and Actors References

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