1. Medium-Term Budgeting in Moldova Progress and Future Challenges February 2009

2. A. Context

3. 3 Objectives in Introducing the MTEF In 2002 Government introduced MTEF to bring a more strategic approach to budget planning In 2002 Government introduced MTEF to bring a more strategic approach to budget planning Objectives Objectives Multi-Year Outlook – Budgets need to be planned within a medium-term context. Multi-Year Outlook – Budgets need to be planned within a medium-term context. Policy Linkage – the National Public Budget is a key instrument in realising government policies. Policy Linkage – the National Public Budget is a key instrument in realising government policies. Comprehensiveness – medium-term budget planning covers all public revenues and expenditures. Comprehensiveness – medium-term budget planning covers all public revenues and expenditures. Realism – government programmes must be planned against a realistic assessment of available resources. Realism – government programmes must be planned against a realistic assessment of available resources. Prioritisation – programme planning must recognise budget constraints, include cost analysis, and allow for reallocation of resources to higher priority areas. Prioritisation – programme planning must recognise budget constraints, include cost analysis, and allow for reallocation of resources to higher priority areas.

4. 4 Institutional Context Central Policy Development and Coordination Central Policy Development and Coordination national plans and policies prepared without reference to fiscal consequences and constraintsnational plans and policies prepared without reference to fiscal consequences and constraints strengthened central policy coordination process established in 2007 linked to National Development Strategystrengthened central policy coordination process established in 2007 linked to National Development Strategy greatly improved linkage between policy and budget processesgreatly improved linkage between policy and budget processes Relatively strong finance ministry Relatively strong finance ministry established record of sound fiscal managementestablished record of sound fiscal management expenditure planning inertial rather than strategicexpenditure planning inertial rather than strategic Line ministries Line ministries small and limited secretariat functionsmall and limited secretariat function weak policy and budgeting rolesweak policy and budgeting roles ministry reorganisations started in 2006ministry reorganisations started in 2006 policy units only established in 2007policy units only established in 2007

5. 5 Economic Context MTEF reforms took place in a evolving economic environment: MTEF reforms took place in a evolving economic environment: Revenue growth has been driven by economic recovery and the rapid rise in remittance financed imports. Revenue growth has been driven by economic recovery and the rapid rise in remittance financed imports. Over the last five years the National Public Budget has increased by more than 50% in real terms. Over the last five years the National Public Budget has increased by more than 50% in real terms. Revenues have increased from 34% of GDP in 2003 to 40% of GDP in 2008 and are high compared with other countries of similar levels of economic development. Revenues have increased from 34% of GDP in 2003 to 40% of GDP in 2008 and are high compared with other countries of similar levels of economic development.

6. B. Institutional Framework

7. 7 MTEF/Budget Integration MTEF is comprehensive of MTEF is comprehensive of State Budget,State Budget, Local Government Budgets,Local Government Budgets, Medical Insurance Fund andMedical Insurance Fund and Social Security FundSocial Security Fund MTEF is updated every year to maintain 3 year planning horizon MTEF is updated every year to maintain 3 year planning horizon MTEF sets the strategic framework for budget preparation MTEF sets the strategic framework for budget preparation MTEF forecasts are prepared before budget guidelines and ceilings issued MTEF forecasts are prepared before budget guidelines and ceilings issued MTEF first year allocations for State Budget = annual budget law. MTEF first year allocations for State Budget = annual budget law.

8. 8 MTEF – Linking Policy and Budget Processes National Development Strategy Update Annual Budget MTEF (strategy and forecasts) Resource Framework for Public Expenditure Strategies and Programme Priorities Sector Resource Ceilings and Spending Priorities Detailed Resource Allocations Dec-May (updated and finalised in September) May-Sep Jun-Nov Sequencing

9. 9 MTEF calendar January – process launched - MTEF Concept Paper January – process launched - MTEF Concept Paper January – March – Macroeconomic and fiscal framework updated, elaboration of strategic expenditure plans linked with NDP policies, resource ceilings determined January – March – Macroeconomic and fiscal framework updated, elaboration of strategic expenditure plans linked with NDP policies, resource ceilings determined April – MTEF Forecasts Document presented to the Government (Government Committee for Strategic Planning), which approves the expenditure ceilings. April – MTEF Forecasts Document presented to the Government (Government Committee for Strategic Planning), which approves the expenditure ceilings. June - August – annual budget elaborated. Macro-fiscal framework and MTEF forecasts. MTEF document finalized and included as an explanatory document accompanying submission of the Annual Budget Law to Parliament. June - August – annual budget elaborated. Macro-fiscal framework and MTEF forecasts. MTEF document finalized and included as an explanatory document accompanying submission of the Annual Budget Law to Parliament.

10. 10 Stakeholder Involvement Parliament Parliament MTEF provides the policy context for discussion of annual budget MTEF provides the policy context for discussion of annual budget a more strategic approach to budget debate in Parliament is required a more strategic approach to budget debate in Parliament is required Government (Committee on Strategic Planning) Government (Committee on Strategic Planning) discusses and approves MTEF Concept Paper (Jan/Feb), MTEF Forecasts (Apr/May) and final MTEF Document (Sep) discusses and approves MTEF Concept Paper (Jan/Feb), MTEF Forecasts (Apr/May) and final MTEF Document (Sep) also responsible for approving National Development Strategy Update and Action Plan also responsible for approving National Development Strategy Update and Action Plan MTEF Coordination Group MTEF Coordination Group a consultative body in the decision making process a consultative body in the decision making process wider participatory approach (Parliament, Presidency, Government, public authorities, trade union, syndicate) wider participatory approach (Parliament, Presidency, Government, public authorities, trade union, syndicate) detailed discussions and regular meetings detailed discussions and regular meetings

11. 11 Working Group for Macroeconomic Framework, Fiscal Policy and Resource Framework Responsible – Ministry of Economy Working Group for Public Expenditure Policy and Priorities Responsible – Ministry of Finance Budget Synthesis Department within Ministry of Finance Sector Working Groups (education, health, social protection, agriculture, culture, defense etc.) Responsible – Relevant Line ministries MTEF Coordination Committee Responsible – Ministry of Finance MTEF Organization Chart MTEF Organization Chart Government (Government Committee for Strategic Planning) Sector Finance Divisions of the MoF Public investmentWage bill

12. C. Main Elements

13. 13 Core Elements of the MTEF Analysis 1. Macro-Fiscal Analysis and Forecasts 2. Analysis of Cross-Cutting Budget Issues 3. Ministry Expenditure Strategies 4. Expenditure Ceilings

14. 14 Macro-Fiscal Analysis and Forecasts Key players: MoF, Min. of Economy and Commerce, NBM Key players: MoF, Min. of Economy and Commerce, NBM MEC uses multiple macroeconomic models and produces at least 2 scenarios MEC uses multiple macroeconomic models and produces at least 2 scenarios MoF has its own fiscal model, based on macro indicators, forecasts main types of revenue and generates overall resource framework available for expenditure. It also divides resources between components of NPB MoF has its own fiscal model, based on macro indicators, forecasts main types of revenue and generates overall resource framework available for expenditure. It also divides resources between components of NPB Level of deficit is forecast taking into account resource availability and cost of debt servicing Level of deficit is forecast taking into account resource availability and cost of debt servicing Challenges Ahead: improve macroeconomic forecasting, increase accuracy of revenue forecasts, obtain better information for forecasting donor financing

15. 15 Analysis of Cross-Cutting Resource Issues Wagebill analysis --> set limit on wagebill and concept on reducing employment in public sector is elaborated Wagebill analysis --> set limit on wagebill and concept on reducing employment in public sector is elaborated Public Investment grater emphasis on public investment, significantly more allocation for PI, especially for infrastructure Public Investment grater emphasis on public investment, significantly more allocation for PI, especially for infrastructure NDP Priorities -> better link b/w policy and resource allocation, does not rely on foreign assistance to finance new policy incentives NDP Priorities -> better link b/w policy and resource allocation, does not rely on foreign assistance to finance new policy incentives Challenges Ahead: Ensure all policy decisions are made with financial coverage, adopt improved procedures for PI selection and prioritization

16. 16 Ministry Expenditure Strategies Gradual roll-out and sectors covers: from 3 sectors to 12 sectors at present (budget coverage is about 72%) Gradual roll-out and sectors covers: from 3 sectors to 12 sectors at present (budget coverage is about 72%) Sector Working Groups Sector Working Groups typically a lead ministry in each sector.typically a lead ministry in each sector. provide basis for coordinating expenditure planningprovide basis for coordinating expenditure planning across the sector across the sector Format and contents of the strategies Format and contents of the strategies linked with new budget program classificationlinked with new budget program classification highlights link with NDPhighlights link with NDP Challenges Ahead: build policy, planning and budgeting capacities in ministries following recent reorganisation.

17. 17 Inter-Sectoral Expenditure Priorities and Ceilings Preliminary ceilings set at the beginning of process (based on outer year ceilings from current MTEF rolled forward by one year) Preliminary ceilings set at the beginning of process (based on outer year ceilings from current MTEF rolled forward by one year) Final ceilings (by budget, sector and ministry within indicative breakdown for wagebill and capital spending) set before preparation of annual budget Final ceilings (by budget, sector and ministry within indicative breakdown for wagebill and capital spending) set before preparation of annual budget Challenges Ahead: clarify inter-sectoral priorities, more rigorous methodology for setting ceilings, more realistic costing of plans, focus on budget effectiveness and efficiency

18. D. Conclusions

19. 19 Impact on the Budget Process and Negotiations The budget now involves a strategic phase before detailed annual budget is prepared The budget now involves a strategic phase before detailed annual budget is prepared MTEF makes annual budget easier and faster to prepare MTEF makes annual budget easier and faster to prepare Expenditure Ceilings have led to more realistic budget proposals, by encouraging ministries to focus on needs instead of priorities Expenditure Ceilings have led to more realistic budget proposals, by encouraging ministries to focus on needs instead of priorities All legislative amendments, required for policy implementation (agreed under MTEF ) are approved by the Parliament before annual budget is approved All legislative amendments, required for policy implementation (agreed under MTEF ) are approved by the Parliament before annual budget is approved MTEF offer strategic background for Budget readings in the Parliament. MTEF offer strategic background for Budget readings in the Parliament.

20. 20 Sustainability of the MTEF Reforms Demand and ownership – political and administration. Demand and ownership – political and administration. Unified – MTEF is the budget planning cycle. Unified – MTEF is the budget planning cycle. Integrated – policy and budgeting cycle is emerging Integrated – policy and budgeting cycle is emerging Inclusive – collaboration among many stakeholders. Inclusive – collaboration among many stakeholders. Evolving – annual review and improvement. Evolving – annual review and improvement. Capacity – not reliant on external consultants. Capacity – not reliant on external consultants.

21. 21 Key Challenges Ahead Managing the impact of the global crisis Managing the impact of the global crisis Reform of line ministry institutional structures and capacities Reform of line ministry institutional structures and capacities Making better use of existing resources Making better use of existing resources Building the credibility of the outer year ceilings Building the credibility of the outer year ceilings

22. 22 Ministry of Finance of the Republic of Moldova MTEFs documents available in English : http://minfin.md/en/middlecost/ http://minfin.md/en/middlecost/ http://minfin.md/en/middlecost/ Russian: http://minfin.md/ru/middlecost/ http://minfin.md/ru/middlecost/ http://minfin.md/ru/middlecost/ More information (instructions, methodological guidance organizational framework, etc.) is available in Romanian: http://minfin.md/ro/middlecost/ http://minfin.md/ro/middlecost/ http://minfin.md/ro/middlecost/