1. MKUKUTA/PER Consultations 2007 DPG session MKUKUTA/PEFAR 22 May

2. PEFAR 2007 Components PEFAR 2006 LGA Sector/LGA analysis Core analysis May consultations September consultations Scenarios analysisPEFA parastatalsCPAR parastatals Budget outturn Planning/ budgeting

3. Main messages from PEFAR core analysis Rising aggregate expenditure, high level of aid dependency, expenditure needs for sustained growth raise urgent questions of medium and long term expenditure strategy Government has invested heavily in instruments and processes for strategic allocation – Budget Guidelines/MTEF, SBAS – but these are not yet working effectively for strategic planning or as a base for dialogue and accountability

4. Key challenges for medium term budget strategy Aggregate and recurrent expenditure continues to rise (28% GDP), posing serious question on sustainability Major increase in external financing (from 6% to 12% GDP over past five years), need for a medium and long term strategy for reducing aid dependency Effective absorption of aid will depend on making critical strategic choices on expenditure composition Need to plan for – increased investment expenditure, appropriate balance between development/ recurrent, – major focus on growth promoting expenditure, esp infrastructure investment, – medium term strategy on wage bill underpinning public service reform

5. Medium term expenditure planning - how well does the steering work? Observations from budget preparation in FY07 MDA budget requests highly unrealistic (on average 150% above available resources, no link to previous year’s decision on MTEF year 2) ‘Priority investments’ in Budget Guidelines weakly aligned with existing sector plans (eg transport) MDA initial submissions prepared in excessive detail (eg ) absorbs scarce planning capacity, distracts from key strategic decisions

6. How well does the steering work? (part 2) Lack of early consistent policy direction: late preparation of Budget Guidelines, key changes between BG and MTEF (eg implementation of consolidation of allowances in wage bill) Three years after introduction of Strategic Budget Allocation System still no reporting on actual expenditure by main MKUKUTA categories (objective, target, activity) Track record on external financing projections shows deviation of 4-5% GDP, FY07 projections still heavily skewed to existing commitments

7. Problems with the MTEF Existing MTEF has the following weaknesses Absence of clear Cabinet/political decision on strategic priorities early in the cycle MDAs begin detailed budget submissions without guidance on resource constraints and strategic priorities Excessively detailed budget classification for early submissions Uncertainty on external financing within the resource envelope Lack of a clear, user friendly published summary of the MTEF as a base for accountability Lack of reporting on MKUKUTA/MTEF actual expenditure

8. Strengthening the MTEF Scenario analysis – early guidance on resource envelope, – greater clarity on external financing, –focus on key programs at MKUKUTA objective/target level – public debate on strategic allocation

9. Reporting on MKUKUTA expenditure Since 04/05, SBAS has been GOT chosen means of translating MKUKUTA into expenditure plans and budget (objective, target, activity) GBS Annual review October 06 – GoT committed next PEFAR will be based on SBAS reports Assuming reports available shortly, analysis will be carried out prior to next GBS annual review Analysis should combine assessment of outturn with review of classification structure – consultation with DP working groups will be important

10. Key issues local government LGAs heavily dependent on central government transfers: more than 90 per cent of funding comes as transfers Tracking of funds to LGAs through different channels is difficult Transfer of development funds to LGAs is a challenge Balance between PE and OC transfers questionable

11. Scenario analysis Objectives GoT perspective, rrelation to budget process Implications for DPs/ DP working groups

12. Objectives Strengthen GoT capacity to translate the MKUKUTA into a realistic MTEF Improve the transparency and dialogue on moving from broad MKUKUTA objectives to resource constrained strategic priorities Provide a framework for integrating external financing into the MTEF, addressing predictability issues on medium term aid

13. GoT perspective Must be fully integrated with budget process, directly linked to subsequent development of detailed Budget Guidelines Budget Guidelines Committee should provide oversight to ensure link to budget process Keep it simple : simplest option might be existing MTEF resource as base case, second scenario maps spending plans based on trend actual external financing DP /consultant technical support can be useful for background analysis, but scenarios must be firmly rooted in MDA spending plans

14. Proposed work program for DP working groups June : Background note on resources and issues for scenario analysis July-September –reference group for sector issues on scenario development, –analysis of MKUKUTA/SBAS expenditure reports, comments on revised SBAS categories for scenarios/BG –Group review of proposed MTEF financing projections, update of results matrix September : Participate in consultations on GoT MTEF scenarios

15. Background note on resources and issues Inventory/assessment of existing resources on which sector scenarios can be based (MKUKUTA costing, sector expenditure plans, other existing/ongoing sector analysis) Summary of key issues in the sector for enhancing base case (existing MTEF) and developing scaled up scenario