Hidden gems in PFM manuals and handbooks

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This is a series of posts presenting ‘hidden gems’ i.e. elements, considerations and recommendations in PFM, which might have gone under the radar, not being referenced often by practitioners.

My posts will present ‘hidden gems’ from the Fiscal Transparency Code Handbook by the IMF (2018).

If you feel like it, post your own 'hidden gems' from other evaluation manuals. Or enter the conversation to add your views on the presented ones.   

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The first 'hidden gem' is an unusual definition:

Indicator shopping by Government: in relation to the integrity and trasparency of fiscal data, this definition warns abouth the risk of Government 'to seek to focus attention on the figures that most flatter the current fiscal position' [IMF Fiscal Transparency Handbook, page 50). It is part of the Dimension 1.4 'Integrity of fiscal reporting'

Memorandum Item
Good practice requires some operational independence for the agency compiling fiscal statistics and encourages the introduction of policies on statistical integrity and professional independence. It also calls for a more transparent process starting from the producers of source data all the way to the potential users

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The second ‘hidden gem’ in the IMF Fiscal Transparency Code (2018) is related to PFM accounting practice used for fiscal reconciliation

Fiscal reports should include reconciliations between alternative measures of summary fiscal aggregates (page 38 under the principle of Internal Consistency):
-   Fiscal balance with net financing (linking the ‘above-the-line’ to the ‘below-the-line’)
-   The stock of debt issued with the stock of debt held by counterparties
-   Net financing with the change in the stock of government debt

Where countries are producing accrual accounts, operating, cash flow, and balance sheet statements make these reconciliations easy to produce. If countries are operating on a cash basis without financial statements, the reconciliations need to be integrated with and/or informed by data produced by the central bank.

Memorandum items
'Most countries have cash-based budgets, while financial statements and fiscal statistics are increasingly being prepared on an accrual basis. These differences could lead to large discrepancies among various reports. For example, arrears may be reported in accrual terms in debt management reports but ignored in cash accounting’.

A reported fiscal deficit “above-the-line” that is smaller than the net financing (below-the-line) may indicate that there are many off-budget operations.

Any discrepancies between the government’s debt liabilities and private-sector debt holdings may indicate misreporting of public debt figure'.

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Another ‘hidden gem’ in the IMF Fiscal Transparency Code (2018), this time under the pillar Fiscal Forecasting and Budgeting.

Tax Farms: (page 56) Fees and charges collected from the direct beneficiaries of government services should be reflected in the ministry’s budget allocations. 
Operating revenues from the sale of goods and services should not be retained unless there is strong justification. Such retained revenues should be counted as negative expenditures in the budgets of the respective ministries/agencies.

This means that ministries and agencies can retain and spend any overcollection during the year without exceeding their gross appropriation.
Any collections above budgeted amounts should be returned to the finance ministry to prevent ministries from becoming ‘tax farms’.

Memorandum items: In Uzbekistan expenditures financed from own resources in the Ministry of Agriculture were on Treasury but not on Budget. This despite have an almost  1:1 ratio to the related Budget Allocations of the Ministry. 

53.5% percent of this off-balance budget expenditure allocations went to pay salary tops-up in different departments and dependent agencies. The remaining 46.5% was allocated to Type IV economic item ‘Other Expenditures’, mostly under the generic sub-code ‘other expenditures’.

Based on the above findings, it is legitimate to say that the Ministry of Agriculture’s expenditures were not strategically planned during budget preparation but rather tactically spent during budget implementation. Needless to say that rumours of corrupted practices were abundant.   

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For the fourth ‘hidden gem’ we temporarily move away from the IMF Fiscal Transparency Code, to present a well-known McKinsey jargon, that of hockey stick forecast applied in our case to MTEF projections.

Hockey stick forecast: (https://www.linkedin.com/pulse/how-investors-can-spot-company-whose-hockey-stick-growth-sven-smit/ ) ‘One of the most common artifacts of the corporate strategy process is the so-called hockey stick plan, showing a line that sails upward on the graph to account for upfront investment.

The projections tend to be overly aggressive in the longer term, but they give boards, analysts and investors confidence that the company is poised for a glorious future. Over the years, however, unrealized hockey sticks string together and turn into an ugly phenomenon we’ve dubbed the hairy back.’

This can be extended in PFM to overoptimistic forecasts by the MoF for the outer years of MTEF. This phenomenon occurs when new programmes, often financed by donors, are planned either beyond the implementation capabilities of Government agencies and/or over the spending framework allowed by legislation. In the latter case fiscal rules require fiscal constraints in annual budget planning, forcing the MoF to push unrealistic programme expenditures in the MTEF outer years.

Memorandum item:  In Albania the rolling three-year MTEFs in the period 2014-2019 showed the ‘hockey sticks’ trend. The sticks indicated that the medium-term forecast beyond the budget year is not financially sustainable and  the Albania was falling back to a de-facto one-year planning and budgeting.

The attached table (click once on the pic) is the visual representation of what McKensey calls ‘hockey stick dreams and airy back results’.