Assessing Public Financial Management of Mongolia: PEFA ...

Assessing Public Financial Management of Mongolia:

PEFA Comparisons with Other Transition and Developing Countries

Hiroshi UENO 1

I. Introduction: Purposes and Method

The purposes of this paper are to (1) evaluate the public financial management

(PFM) system of Mongolia, a transition country in Central Asia, (2) compare its results

with other transition countries and developing countries, and (3) through these

exercises, abstract major problems associated with the PFM of Mongolia. The public

financial management, in effect, means the management system and actual

performance of government budget and its execution. To evaluate and compare

Mongolian PFM with other transition and developing countries, the method of PEFA

PM Framework (hereafter the Framework 2 ) is used. The Framework essentially is

a method to evaluate appropriateness of the existing PFM system and of the

performance of PFM of any developing country 3. Main focus of PFM is on the

planning, execution, and ex-post evaluation of budgets.

The evaluation of Mongolian PFM is being done (though not complete yet)

through the Joint Research Project of the author and two Mongolian specialists 4. The

joint study is not completed yet and its partial results were summarized in Manduul

(2009), which was revised by Hiroshi UENO in October 2009 and the revised results

are used in this paper. Although the Framework is concerned with central government

budgets, we evaluated the general budget (which contains both central and local

government budgets) of Mongolia mainly because of data availability.

1 Professor of economics, Faculty of Policy Studies, Nanzan University, Nagoya, Japan. 2 PEFA stands for Public Expenditure and Financial Accountability. PEFA is a

multi-agency partnership program sponsored by 8 agencies (the World Bank, the IMF, the

European Commission, the UK Department for International Development, the Royal

Norwegian Ministry of Foreign Affairs, the Swiss State Secretariat for Economic Affairs,

the French Ministry of Foreign Affairs, and the SPA Strategic Partnership with Africa). It

intends to assist developing countries to develop effective institutions and systems of public

financial management (PFM). For more detail, refer to PEFA Secretariat (2005), and

Ueno (2005, 6, and 9a). PM Framework stands for performance measurement framework

and was developed by PEFA. 3 The Framework can be applied to developed countries and it is said that several

developed countries have already tried to apply the method to their PFM systems. 4 The Mongolian specialists are Mr. Manduul NYAMANDELEG, Fiscal Policy Officer,

Ministry of Finance, and Mr. Naidalaa BADRAKH, Head of Business Development

Department, UNITEL, Mongolia.

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The revised evaluation results of Mongolian PFM are compared with those of (1)

three Central Asia transition countries (Kyrgyz, Tajikistan, and Ukraine), (2) three

Eastern Europe transition countries (Moldova, Serbia, and Albania), and (3) 17

developing countries 5. The evaluation results for these transition and developing

countries were obtained from various publicly available reports 6.

The Framework has 28 high level performance indicators (hereafter performance

indicators or PIs) for a recipient country and 3 performance indicators (PIs) for donor

countries 7. This paper intends to deal with the former 28 PIs since it is interested in

the performance of recipient countries. The 28 PIs for recipient countries are

summarized in Table 1 below, which also shows 6 Core Indicators (hereafter CIs) into

which the 28 PIs are grouped. The 6 CIs are A=budget credibility, B=budget

cross-cutting issues, C1=appropriate planning and budgeting, C2=appropriate budget

execution, C3=accounting, recording and reporting of the execution, and C4=external

scrutiny and auditing of the execution results. This paper, however, covers only up to

PI-17(or C2) simply because the Joint Study has not been completed. This means this

paper deals with only four CIs: A, B, C1 and C2.

Each PI has several sub-indicators, which is called Dimensions, to measure more

detailed and concrete performances. The performance result for one PI is evaluated

based on the results of the Dimensions. The performance is evaluated using four

grades A through D. A is the best which satisfies all requirements by the Dimensions,

and D is the worst which satisfies none of Dimensional requirements, with B+, B, C+,

C and D+ inbetween. For simplicity’s sake, we judge that A is good, B is OK, C is bad,

and D is very bad. Since the final purpose of our evaluation is to improve the PFM

system and performance of Mongolia, we concentrate on PIs with very bad results, i.e.

D and D+.

5 The 17 countries are 8 Sub-Saharan countries (Congo, Ghana, Malawi, Mozambique,

Lesotho, Tanzania, Uganda, and Zambia), 2 Latin American countries (Guatemala and

Panama), 2 South Asian countries (Afghanistan and Bangladesh), 2 Europe and Central

Asia countries (Moldova and Kyrgyz), 2 East Asia and Pacific countries (Fiji and

Papua-New-Guinea), and 1 Middle East country (Syria). These are only countries that have

PEFA evaluation of PFM by 2006. Source: PEFA (2006, pp.47-8). 6 The following reports were used respectively: for the data of Kyrgyz, Tajikistan, and

Ukraine, Oxford Policy Management (2006), World Bank(2007c), and World Bank (2007a);

for the data of Moldova, Serbia, and Albania, International Consultants(2006), World

Bank(2007b), and Government of Albania and the World Bank (2006); and for 17

developing countries, PEFA (2006). 7 The words of recipient and donor countries are used here following the practice in the

Framework. The Framework uses these words because it was developed in order to assess

the performance of PFM typically after donors providing the financial assistance for budget

support to recipient countries.

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Table 1. Evaluation Results of Mongolian PFM Using PEFA-PM Framework (2006-2008)

Perfm.

Description of Performance Indicator of PEFA-PM Framework

Evaln

Indictr Rslt

Core Indicator A: PFM Out-turns: Ex-post Credibility of Budget

PI-1 Aggregate expenditure out-turn compared to original budget: how many % deviated

D

PI-2 Composition of expenditure out-turn compared to original budget: deviations b/w items Ｂ

PI-3 Aggregate revenue out-turn compared to original budget: deviations in revenues

Ｂ

PI-4 Stock and monitoring of expenditure arrears: total payment arrears as % of total exp. A

Core Indicator B: Key Cross-cutting Issues: Comprehensiveness & Transparency

PI-5 Classification of the budget: does it include activity-based or functional budget? C

PI-6 Comprehensiveness of information included in budget documentation: 9 necessary info. A

PI-7 Extent of unreported government operations: revenues & expenditures unlisted in doc. B+

PI-8 Transparency of inter-governmental fiscal relations: issue of political arbitrariness A

PI-9 Oversight of aggregate fiscal risk from other public sector entities (e.g. local g.) A

PI-10 Public access to key fiscal information: public availability of 6 information

A

Core Indicator C: Budget Cycle: Issues for Each Step of Budget Process

Core Indicator C1: Policy-Based Budgeting: i.e. Links b/w planning and budgeting

PI-11 Orderliness and participation in the annual budget process: clear budget circular etc. A

PI-12 Multi-year perspective in fiscal planning, expenditure policy and budgeting

C

Core Indicator C2: Predictability and Control in Budget Expenditure

PI-13 Transparency of taxpayer obligations and liabilities: e.g. limiting discretions etc. A

PI-14 Effectiveness of mechanisms for tax payer registration and tax assessment

C+

PI-15 Effectiveness of collection of tax payments: e.g. reducing cumulative tax arrears

D+

PI-16 Predictability in the availability of funds to lower government entities

B

PI-17 Recording and management of cash balances, debt and guarantees: e.g. single treasury act. B+

PI-18 Effectiveness of payroll controls: to limit the common mismanagement and corruption

PI-19 Competition, value for money and controls in procurement: for efficiency & non-crptn

PI-20 Effectiveness of internal controls for non-salary expenditure: for effective control

PI-21 Effectiveness of internal audit: about coverage and quality of audit and its reports

Core Indicator C3: Accounting, Recording and Reporting: Internal Controlling

PI-22 Timeliness and regularity of accounts reconciliation: including consistency

PI-23 Availability of information on resources (un)received by service delivery units

PI-24 Quality and timeliness of in-year budget reports (i.e. expenditure performance report)

PI-25 Quality and timeliness of annual financial statements: e.g. intern'l acct. standards

Core Indicator C4: External Scrutiny and Audit (by Ext. Auditors and Legislature)

PI-26 Scope, nature and follow-up of external audit: e.g. follow-up by executives & others

PI-27 Legislative (ex-ante) scrutiny of the annual budget law (incl. amendments)

PI-28 Legislative scrutiny of external audit reports: e.g. hearings, & follow-up actions

Source: Manduul(2009) with modifications by H.Ueno; Ueno(2005).

The original source is PEFA Secretariat (2005, p.9, Annex1).

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II. Evaluation of the PFM of Mongolia

The right end column of Table 1 shows the revised results of evaluation of

Mongolian PFM.

Mongolia has the worst evaluation D with respect to PI-1. The grade D means

that the actual total expenditure has deviated by more than 15% from the

originally-budgeted total expenditure and that the deviation occurred in two or three of

the last three years (PEFA Secretariat 2005, p.12). For Mongolia, we examined the

performance of 2006 through 2008 8. As for Mongolia, the total actual expenditure

exceeded the budget total by 39.5% for 2006, by 43.0% for 2007, and fell short by 0.1%

for 2008 (Manduul 2009, p.4 Table 1.2). The fact that the total expenditure exceeded

the original budget by roughly 40% in two out of three years suggests that the budget

did not work as the ceiling constraint on actual expenditure and that actual

expenditure were expanded after the appropriation of original budgets. It implies

that the budget is not credible (the requirement of Core Indicator A in Table 1). This is

a serious problem of Mongolian budget performance. There is one reason for this

deviation, which is the fact that the actual revenues in those years jump-increased by a

wide margin from the originally budgeted revenues. This is caused by the surge in

international prices of copper and gold which are the major exports of Mongolia, and

consequently the major revenue sources of the government. There was even a budget

surplus at the end of 2006 (Ueno 2008a, p.140). That is, the Central Government

could not use up all the revenues in 2006 even though they amended the budget

upward and increased the expenditures. For 2007, because the government increased

the original budget by huge 104% (i.e. more than double) in nominal term from 2006,

there was a small budget deficit at the end of the year. Of course, its primary balance

was plus (Manduul 2009 p.4).

The government should have saved all or most of the windfall revenues arising

from the mineral price surge that exceeded the originally budgeted revenue numbers

in those years in order for using it during low revenue years in the future. The

government should have implemented the stabilization policy, which is the main

purpose of the newly introduced Windfall Tax Law started to be effective in the middle

of 2006. In 2006 and 2007, instead, the government responded quickly to the windfall

revenue increases, amending the budget upward and spending much more than the

original budget. The problems here are two: (1) the government did not take a

stabilization policy or counter-cyclical policy of expenditures which are commonly

recommended for resource driven economies, and (2) the government was not cautious

8 The fiscal year of Mongolia coincides with calendar year. Hence, “fiscal year” is omitted

hereinafter for convenience.

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or conservative enough in expanding its actual expenditure. Of course, flexibility in

budget management itself is important, but the flexibility is important in the case of

revenue decrease (Ueno 2009, pp.139-45) and is not recommendable in the case of

revenue increase. The revenue reduction has actually occurred in 2008 because of

sudden drop in international prices of its mineral exports. In 2008, the government

responded quickly and reduced its expenditures, which is commendable. This policy

of quick reduction in 2008 was much better than a policy of no-reduction. But the best

policy could have been the use of saved money to maintain the expenditure levels of the

original budget in 2008 if 2006 and 2007 saved enough fund. In reality, there were

not much savings. It implies that Mongolian system of Windfall Tax 9 did not work

as intended in 2006 and 2007.

The government of Mongolia should (1) rigorously implement the counter-cyclical

fiscal policy to save as much as possible during the booming years of mineral prices, (2)

try to stick to its original budgets, and (3) re-examine and revise the Windfall Tax

system which did not work well in 2006 and 2007. If worked well, the saved revenues

could have been used for 2008 which experienced the sudden drop in revenues that

forced the government to borrow from IMF, World Bank, Asian Development Bank,

and other bi-lateral donors in 2009 (IMF 2009, p.12).

Mongolian evaluation of PI-3 is related to the problem of PI-1 since it evaluates

the deviation of actual revenue from the originally budgeted revenue. The evaluation

of PI-3 could have been as low as D or C (Manduul 2009, p.7). But it was upgraded to

be B, because there was an exception rule to PI-3 that allows substantial deviations in

revenues if there was unexpected change in external environment (PEFA Secretariat

2005, p.13). This rule applies to Mongolia since there was unexpected rise in

international mineral prices that substantially increased the revenues. We judged

that, without this unexpected external change, the government could have behaved

relatively well with respect to revenues, and we evaluated it as B. The problem was

that the government responded pro-cyclically, rather than counter-cyclically, to the

revenue increases as we discussed earlier.

Mongolian PI-15 has the second worst evaluation of D+. PI-15 is related to tax

collection performance and has 3 Dimensions, and its overall grade is given by the

lowest grade among the 3 Dimensions (PEFA Secretariat 2005, p.32). The

Dimensions are (1) the percentage of tax arrears at the beginning of a fiscal year ,

which was collected during that fiscal year (average of the last two fiscal years) or the

share (%) of total amount of tax arrears in the total annual collections; (2) the speed of

9 The government introduced Windfall Tax system to be effective in the middle of 2006.

The intention of the Tax is to capture, as tax, the excess revenues of mineral exporting

companies.

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transfer of tax collected by the revenue administration (RA) to the Treasury Account

(i.e. daily, weekly, monthly or quarterly); and (3) the frequency of complete accounts

reconciliation among tax assessed, collected, arrear records, and receipts by the

Treasury Account (monthly, quarterly, annually or longer than one year). Dimension

1 is evaluated to be D, if the debt collection ratio of the previous year ’s arrears is less

than 60% and if the share of total arrears in the total collection is more than 2% in the

most recent year. As for Mongolia, the debt collection ratio was 70-80% and the share

of total arrears was 20% (Ueno 2009c, pp.7-8). Hence, the overall grade for

Mongolian Dimension 1 is D+. As for Dimension 2, Mongolian revenue

administration transfers the tax collected to the Treasury daily, and hence its grade is

A (ditto). As for Dimension 3, it is C if the reconciliation is done annually.

Mongolian revenue administration produces internal consistency reports monthly for

the value added tax, quarterly for corporate income tax, and annually for individual

income tax (ditto). Taking the worst performance, the Mongolian grade for Dimension

3 is C. Hence, the overall grade for Mongolian PI-15 is D+.

The fact that the collection arrear was as high as 20% of the total tax collection is

alarming. This implies three things: (1) Mongolian revenue administration (called

General Department of National Taxation or GDNT) may not have enough legal

authority and power to enforce tax compliance on the tax payers, (2) the tax court

system may not be functioning well and may not give decisive authority to GDNT in its

rulings, or the tax court system and/or the judicial system in general do not have

authority among the private sector because of their miss-judgment/miss-behavior in

the past (Ueno 2008b, p.204), and (3) GDNT or the government might have lost

enthusiasm in collecting taxes because of the huge influx of mineral related revenues

in 2006 and 2007. GDNT and its tax-court system must take actions to reduce this

ratio of arrears down below 2% as recommended by the Framework, and the Ministry

of Finance (MOF) should monitor and control these actions.

PI-14 for Mongolia is graded C+ and invites our concern. It has 3 Dimensions:

(1) good control over taxpayer registration; (2) effectiveness of penalties on

non-compliance with tax registration; and (3) proper tax audit and fraud-investigation

programs. As for Mongolia, Dimension 1 for the past performance is B, but the grade

will be C in 2009 because the National Registration Agency (NRA) that issues business

licenses to entrepreneurs was made independent of GDNT in January 2009 (Ueno

2009c, p.4). This separation reduces the power of GDNT in enforcing the tax

registration since entrepreneurs can obtain business licenses without registering to

the tax office. Hence, we graded Dimension 1 as C. Dimension 2 is graded B. As

for Dimension 3, GDNT has clear audit plan covering all taxpayers whose number is

huge, i.e. 14,500 audits and about 9,000 audit reports in 2007 (ditto). Dimension 3,

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however, requires that audit selection process must be refined to identify taxpayers

with largest potential risk of non-compliance. GDNT seems not doing it. Hence, we

graded Dimension 3 as C. Based on the weighting rules of Dimensions with different

grades (which is called Method 2, PEFA secretariat 2005, p.11), the overall grade is C+

for Mongolian PI-14.

The systemic concerns are with the results of Dimensions 1 and 3. As for

Dimension 1, the Government of Mongolia (GOM), particularly MOF, should consider

amending the new law of National Registration Agency in order for GDNT to be able to

force entrepreneurs to enter the tax registration system when they apply for their

business licenses. As for Dimension 3, GDNT should be selective in auditing the

taxpayers so that a smaller number of high risk taxpayers are investigated more

thoroughly.

III. Comparison with Central Asia Transition Countries

A. Performance of the Central Asia Transition Countries

The evaluation results for the three Central Asia countries are shown in Table 2

below. To summarize the Central Asia countries, the evaluation results A-D were

converted into scores 4-1 following the practice done by World Bank (2007b), i.e., A=4,

B=3, C=2, and D=1. By this way, we calculated the average points for the Central

Asia countries, which are shown in the second column from the right in Table 2. The

average values (in the second column from right) show bad performances (D+) with

respect to 3 PIs: (1) aggregate fiscal risk arising from departments and agencies

/state-owned-enterprises (PI-9), (2) multi-year perspectives in budget (PI-12), and (3)

predictability of funds available from Treasury to executing departments and agencies

(PI-16). (1) and (3) seem to be the remaining legacies of socialist regimes. (2) will be

discussed in Chapter IV.

Figure 1 below and the table attached to it show the average scores for Core

Indicators A through C2. The performance of Central Asia countries on average was

not so good. Their performance was the highest and OK with respect to the budget

credibility (CI-A) attaining 2.9, bad with other CIs all being below 2.5 (C+), and worst

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Table 2. Comparison of PFM Performance between Mongolia and Central Asia Transition Countries

PI Description Performance Evaluation Result of PFM /1/ Comparison

Mongolia Central Asia Transition Countries & Ukraine Point Deviation

Kyrgyz Tajikistan Ukraine 3 Cntry Differce (Differce/

Yr of Latest Data Used /2/→

2008

2004

2006

2005 Average

3 Ctry Av)

Evln Point Evln Point Evln Point Evln Point Evln Point *100(=%)

A.Ex-post Budget Credibility

(2.8)

(2.5)

(2.9)

(3.4)

(2.92)

PI-1 Deviation b/w budget & out-turn D 1.0 D 1.0 B 3.0 B 3.0 C+ 2.33 -1.3 -57%

PI-2 Deviation of budget composition B 3.0 A 4.0 C 2.0 B 3.0 B 3.00 0.0 0%

PI-3 Deviation of revenue out-turn B 3.0 A 4.0 A 4.0 A 4.0 A 4.00 -1.0 -25%

PI-4 Cumulative payment arrears A 4.0 D 1.0 C+ 2.5 B+ 3.5 B+ 2.33 1.7 71%

B. Key Cross-cutting Issues

(3.6)

(2.2)

(2.3)

(2.9)

(2.44)

PI-5 Classification system of budget C 2.0 C 2.0 D 1.0 A 4.0 C+ 2.33 -0.3 -14%

PI-6 Comprehensiveness of Budget Doc. A 4.0 B 3.0 A 4.0 A 4.0 B+ 3.67 0.3 9%

PI-7 Extent of unreported rev.&exp. B+ 3.5 n.a. C+ 2.5 D+ 1.5 C 2.00 1.5 75%

PI-8 Transparency of intergov. transfer A 4.0 C+ 2.5 B 3.0 B+ 3.5 B 3.00 1.0 33%

PI-9 Aggregate fiscal risk from lower ent. A 4.0 D+ 1.5 C 2.0 D+ 1.5 D+ 1.67 2.3 140%

PI-10 Public access to key fiscal info. A 4.0 C 2.0 D 1.0 B 3.0 C 2.00 2.0 100%

C. Issues in Each Step of Budget Cycle

C1. Appropriate Plng & Budgetng

(3.0)

(2.3)

(2.3)

(2.8)

(2.42)

PI-11 Orderliness in budget process A 4.0 B 3.0 B 3.0 B+ 3.5 B 3.17 0.8 26%

PI-12 Multi-year perspective in budget C 2.0 D+ 1.5 D+ 1.5 C 2.0 D+ 1.67 0.3 20%

C2. Appropriate Budget Execution

(2.9)

(2.5)

(1.9)

(2.0)

(2.12)

PI-13 Transparency in taxing A 4.0 C 2.0 C 2.0 C 2.0 C 2.00 2.0 100%

PI-14 Effectiveness of taxpayer registrn C+ 2.5 n.a. D+ 1.5 C 2.0 C 1.75 0.8 43%

PI-15 Effectiveness of tax collection D+ 1.5 B+ 3.5 n.a. D+ 1.5 C+ 2.50 -1.0 -40%

PI-16 Predictability of fund availablty B 3.0 D 1.0 D+ 1.5 D+ 1.5 D+ 1.33 1.7 125%

PI-17 Recording of cash, debt & guarantee B+ 3.5 B+ 3.5 C+ 2.5 B 3.0 B 3.00 0.5 17%

Average of PI-1 ～ PI-17

3.1 2.1 2.2 2.7 2.5 0.7 27%

PI-18 Effectiveness of payroll control

n.a. D+ 1.5 D+ 1.5 D+ 1.50

PI-19 Control and others in procurement

C+ 2.5 C 2.0 D+ 1.5 C 2.00

PI-20 Control of non-salary expenditures

D+ 1.5 C+ 2.5 C+ 2.5 C 2.17

PI-21 Effectiveness of internal audit

D 1.0 D+ 1.5 C+ 2.5 D+ 1.67

C3. Accounting, Recording & Reporting

(1.5)

(2.3)

(2.8)

(2.33)

PI-22 Appropriate account reconciliation

n.a. B 3.0 A 4.0 B+ 3.50

PI-23 Fund availability to executing body

D 1.0 C 2.0 B 3.0 C 2.00

PI-24 Appropriate in-year budget reports

C+ 2.5 C+ 2.5 C+ 2.5 C+ 2.50

PI-25 Appropriate financial statements

D 1.0 D+ 1.5 D+ 1.5 D+ 1.33

C4. External Scrutiny & Audit

(1.2)

(1.5)

(2.2)

(1.61)

PI-26 Quality/follow-up of external audit

D 1.0 D+ 1.5 D+ 1.5 D+ 1.33

PI-27 Legislative scrutiny of budget law

D+ 1.5 C 2.0 B+ 3.5 C+ 2.33

PI-28 Legisl. scrutiny of external audit D 1.0 D 1.0 D+ 1.5 D 1.17

Notes: /1/ A=very good and all dimensional conditions are satisfied ～ D=very bad and all the conditions are unsatisfied.

/2/ The latest year of data used in aluation.

/3/ n.a. stands for not assessable (evaluable).

/4/ Points were given as follows: A=4, B=3, C=2, D=1. This is based on the ananlysis done by World Bank (2007b).

Source: Calculated by the author. Original sources of data are as follows:

Mongolia: Manduul (2009) with modifications by H. Ueno;

Kyrgyz: Oxford Policy

Management (2006);

Tajikistan: World Bank(2007c); and Ukraine: World Bank (2007a).

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Figure 1. Comparison of Mongolia, Central Asia Transition Countries,

and Eastern Europe Transition Countries

Note: Axes and data for Figure 1.

Axis Name of the Axis Mongolia Central Eastern Standard

in the Asia Ctry Europe Ctry for

Figure Yr of Latest Data Used /2/→ 2008 2004-6 2004-5 Comparison

Point Average Pt Average Pt

1 A. Ex-post Budget Credibility 2.75 2.92 2.67 3.00

2 B. Key Cross-Cutting Issues 3.58 2.44 2.89 3.00

3 C1.Issues in Each Step of Budget 3.00 2.42 3.17 3.00

4 C2.Appropriate Budget

Execution 2.90 2.12 3.05 3.00

Source: Author based on Tables 2 and 3.

with respect to the appropriate budget execution (CI-C2) attaining only 2.1 (refer to

the table attached to Figure 1). To see more detail with PIs, we refer to the second

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column from the right in Table 2. The PIs were bad (D+) with respect to (1)

predictability of fund availability from the treasury to executing/front line agencies

(PI-16), (2) multi-year perspective (typically 3 year planning) in fiscal planning,

expenditure policy and budgeting (PI-12), and (3) aggregate fiscal risk to the treasury

from government entities and agencies (PI-9) 10.

B. Comparison of Mongolia with the Central Asia Countries

In overall, Mongolia’s performance is better than that of Central Asia countries

(refer to Figure 1 and the table attached to it). Only exception to this is the budget

credibility (CI-A).

With respect to details using PIs, the comparison of Mongolia with the three

Central Asia countries is shown in Table 2, in the far right column. The column

suggests that Mongolia is better than Central Asia countries in general, which is

shown by the fact that Mongolia is better in 13 PIs and worse in 4 PIs. This can also

be verified by the average scores of 17 PIs, which is shown in the row after PI-17. The

average scores are 3.1 (or about B) for Mongolia and 2.5 (or C+) for the Central Asia

countries.

Mongolia’s performance was worse than those of the Central Asia countries with

respect only to PIs- 1, 15, 3, and 5, following the order of magnitude (Table 2). We

have already discussed PIs-1, 3, and 15. To recapitulate the previous discussion, the

Mongolian problems of PIs-1 and 3 are caused by (1) the wide fluctuation of

international mineral prices, which suggests that Mongolia is becoming a

resource-based economy, and (2) Mongolian government did not take a proper

counter-cyclical policy toward this wide fluctuation of the prices but took pro-cyclical

policies.

PI-5 evaluates mainly the level of expenditure classification 11 to be coherently

used for formulation, execution and reporting of central government budget. The

level is determined by whether a expenditure budget is using (1) only the

administrative classification (grade D), (2) administrative and economic classifications

(grade C), (3) administrative, economic, and functional classifications with 10 main

functional levels (grade B), or (4) administrative, economic, and sub-functional

classifications with 69 sub-functional levels (grade A). Mongolia is using all the three

classifications but not coherently. That is, its budget uses the functional classification,

but its execution does not use the functional classification. Hence, it is evaluated to

be C. The performance with respect to PI-5 of Central Asia countries are similar to

Mongolia except for Ukraine which was evaluated to be A. Because of this Ukraine,

10 We ignore PIs 18 through 28, because we don’t have Mongolian data yet. 11 The expenditure classifications are in accordance with Government Financial Statistics Manual of IMF (2001, pp.75-110), which

is based on COFOG of UN (2000). For COFOG, refer to IMF (2001, p.75).

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the average performance of Central Asia countries was higher than that of Mongolia.

It seems the budget classification is a common problem among Mongolia and Central

Asia countries except for Ukraine.

Three problems common to both Mongolia and the Central Asia countries are PIs

15, 14, and 12. The first two are tax related and were already discussed. These two

suggest that Central Asia countries including Mongolia seem to have problems with

tax collection. The PI-12, the performance level of multi-year perspective in budget, is

new and not related to tax. With respect to PI-12, Mongolia was C and the average of

Central Asia countries was D+. The issue of PI-12 will be discussed in the next

chapter IV.

Let us return to the issue of PI-5 that is the budget classification. Is it necessary

for Mongolia to endeavor into full application of functional budget? A budget system

that includes a functional classification is advanced and ideal. There are, however,

more urgent issues in Mongolian PFM such as the fluctuation of mineral revenues,

pro-cyclical expenditure policy, and huge arrears in tax collection. For the moment,

rather than getting into an ideal functional budgeting, Mongolia would be better

concentrating on those urgent and basic issues 12.

IV. Comparison with Eastern Europe Transition Countries

The comparison of Core Indicators of three Eastern Europe transition countries

to Mongolia is also shown on Figure 1 and its attached table. As Figure 1 indicates,

the performance of Eastern Europe is stable with respect to all Core Indicators and

moves around the reference performance of 3.00. That is, the average performance of

Eastern Europe could be used as a reference performance for other transition countries.

The average performance of Mongolia for 17 PIs (3.1) is better than that of Eastern

Europe countries (2.9, see the raw below PI-17 in Table 3 below), which is a bit of

surprise. Hence, coming back to Figure 1, the average performance is better in the

order of Mongolia, Eastern Europe countries and Central Asia countries. With

respect to budget credibility (Core Indicator A), however, this order reverses because of

bad performance of Mongolia and Eastern Europe countries.

The PI evaluation results for the Eastern Europe countries are shown in Table 3

below. The result shows that bad performances of Eastern Europe countries (D or D+)

are associated with only two PIs: (1) the deviation of expenditure composition from the

original budget composition (PI-2), and (2) cumulative payment arrears by the central

government (PI-4). Interestingly, these are of not much problem to Mongolia and

12 This is consistent with the opinion “getting the basics right” by Schick (1997), which claims that there are basic things that

must be done before venturing into advanced and more sophisticated system of budgeting.

- 12 -

Central Asia countries, and these are more common problems among developing

countries in general which will be discussed in the next Chapter V.

The PI comparison of Mongolian result with those of Eastern Europe countries is

also in Table 3. The result is similar to the comparison with the Central Asia

countries. That is, in overall, Mongolia’s performance is better than that of Eastern

Europe countries as stated in the previous paragraph. Only 6 PIs out of 17 PIs are

evaluated below the average of Eastern Europe (the right end column of Table 3).

Looking at Table 3, Mongolian performances lower than those of Eastern Europe

countries are related to PIs 1, 15, 14, 3, 5, and 12 (in the order of magnitude). This

result is quite similar to the comparison with Central Asia countries, i.e., the 4

under-performing PIs (1, 15, 3 and 5) are the same among the two comparisons. One

difference in terms of under-performance is that the number of under-performing PIs

increased by two, which suggests that Eastern Europe countries are better performers

than Central Asia countries. The new under-performing PIs with respect to Mongolia

are PIs 14 and 12. PI-14 was already discussed in Chapter II. Hence we will

examine PI-12 below.

PI-12. The problems common to both Mongolia and Eastern Europe countries

are PIs 15 and 12. PI-15 was already discussed elsewhere, and we concentrate on the

Mongolian problem measured by PI-12. PI-12 evaluates the multi-year perspective in

fiscal planning, expenditure policy and budgeting (Table 1). The multi-year typically

refers to 3 years. PI-12 is measured by 4 Dimensions: (1) preparation of multi-year

fiscal forecasts and functional allocation, (2) scope and frequency of debt sustainability

analysis, (3) existence of sector strategies with multi-year costing of recurrent and

investment expenditures, and (4) linkages between investment budgets and forward

expenditure (particularly recurrent expenditure) estimates (PEFA Secretariat 2005,

p.26). All Dimensions are quite important. Mongolia was C with dimension (1)

because it does not have multi-year functional allocation plan even though it has the

multi-year fiscal forecasts. Mongolia was A with Dimension (2). Mongolia was D

with Dimension (3) because sector strategies exist for some sectors but none of them

have substantially complete costing of investments and recurrent expenditures.

Mongolia was D with Dimension (4) because budgeting for investment and recurrent

expenditures are separate processes and because there is no estimation of future

recurrent costs arising from investments.

Using a kind of averaging method called Method 2 (PEFA Secretariat 2005, p.11),

the overall evaluation of PI-12 is C. Hence, Mongolian performance with respect to

PI-12 (C) is below that of Eastern Europe countries (C+). Though Mongolia is slightly

weaker than Eastern Europe countries, we think that the weakness in multi-year

perspective in fiscal planning is rather a common problem in all transition countries

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examined, including both Central Asia and Eastern Europe countries with only one

exception of Moldova (B+). In fact, it is also the common problem to the developing

countries in general as we will see in the next Chapter V. Farther more, even Japan

does not have a multi-year budget framework because of its single-year budgeting

system. There are many developed countries that adopt a single-year budgeting

system. Hence, the lack of multi-year perspectives seems to be a problem even for

developed countries. The link between the budget and its multi-year framework is a

relatively new concept in fiscal system, and there seem to be many countries including

developed countries that have not adopted the concept properly into budgeting and its

execution.

- 14 -

Table 3. Comparison of PFM Performance between Mongolia and Eastern Europe Countries

PI Description Performance Evaluation Result of PFM /1/ Comparison

Mongolia Eastern Europe Transition Countries Point Deviation

Moldova Serbia Albania 3 Cntry Differce (Differce/


2008

2004

2005

2004 Average

3 Ctry Av)

/4/→ Evln Point Evln Point Evln Point Evln Point Evln Point *100(=%)


(2.75)

(2.9)

(3.1)

(2.0)

(2.67)

PI-1 Deviation b/w budget & out-turn D 1.0 A 4.0 A 4.0 B 3.0 B+ 3.67 -2.7 -73%

PI-2 Deviation of budget composition B 3.0 C 2.0 C 2.0 D 1.0 D+ 1.67 1.3 80%

PI-3 Deviation of revenue out-turn B 3.0 A 4.0 A 4.0 B 3.0 B+ 3.67 -0.7 -18%

PI-4 Cumulative payment arrears A 4.0 D+ 1.5 C+ 2.5 D 1.0 D+ 1.67 2.3 140%


(3.58)

(3.3)

(2.8)

(2.6)

(2.89)

PI-5 Classification system of budget C 2.0 C 2.0 C 2.0 A 4.0 C+ 2.67 -0.7 -25%

PI-6 Comprehensiveness of Budget Doc. A 4.0 A 4.0 B 3.0 C 2.0 B 3.00 1.0 33%

PI-7 Extent of unreported rev.&exp. B+ 3.5 B+ 3.5 B+ 3.5 D+ 1.5 B 2.83 0.7 24%

PI-8 Transparency of intergov. transfer A 4.0 A 4.0 B+ 3.5 C+ 2.5 B+ 3.33 0.7 20%

PI-9 Aggregate fiscal risk from lower ent. A 4.0 C 2.0 C 2.0 C+ 2.5 C 2.17 1.8 85%

PI-10 Public access to key fiscal inf. A 4.0 A 4.0 B 3.0 B 3.0 B+ 3.33 0.7 20%


C1. Appropriate Planning & Budgeting

(3.00)

(3.5)

(3.0)

(3.0)

(3.17)

PI-11 Orderliness in budget process A 4.0 B+ 3.5 A 4.0 A 4.0 A 3.83 0.2 4%

PI-12 Multi-year perspective in budget C 2.0 B+ 3.5 C 2.0 C 2.0 C+ 2.50 -0.5 -20%


(2.90)

(3.6)

(2.6)

(2.8)

(3.05)

PI-13 Transparency in taxing A 4.0 A 4.0 B 3.0 n.a. B+ 3.50 0.5 14%

PI-14 Effectiveness of taxpayer registrn C+ 2.5 B+ 3.5 B 3.0 n.a. B/B+ 3.25 -0.8 -23%

PI-15 Effectiveness of tax collection D＋ 1.5 B+ 3.5 D+ 1.5 n.a. C+ 2.50 -1.0 -40%

PI-16 Predictability of fund availability B 3.0 A 4.0 C+ 2.5 C+ 2.5 B 3.00 0.0 0%

PI-17 Recording of cash, debt & guarantee B+ 3.5 B 3.0 B 3.0 B 3.0 B 3.00 0.5 17%


3.1

3.3

2.9

2.5 2.88 0.2 8%


D+ 1.5 C+ 2.5 B+ 3.5 B 3.00


B 3.0 C+ 2.5 D+ 1.5 C+ 2.33


C+ 2.5 C 2.0 B 3.0 C+ 2.50


C+ 2.5 C+ 2.5 C+ 2.5 C+ 2.50


(2.4)

(2.8)

(2.8)

(2.69)


B 3.0 B+ 3.5 A 4.0 B+/A 3.75


B 3.0 B 3.0 B 3.0 B 3.00


C+ 2.5 B+ 3.5 C+ 2.5 B 2.83


D 1.0 D 1.0 D+ 1.5 D 1.17


(2.5)

(1.5)

(2.2)

(2.06)


C+ 2.5 D 1.0 D+ 1.5 D+ 1.67


B+ 3.5 C+ 2.5 B+ 3.5 B 3.17

PI-28 Legisl. scrutiny of external audit D+ 1.5 D 1.0 D+ 1.5 D+ 1.33

Notes: /1/ A=very good=all dimensional conditions are satisfied ～ D=very

bad=all the conditions are unsatisfied.

/2/ The latest year of data used in evaluation.


/4/ Points were given as follows: A=4, B=3, C=2, D=1. This is based on the ananlysis done by World Bank (2007b).

Source: Calculated by the author. Date sources are as follows:

Mongolia: Manduul (2009) with modifications by H. Ueno; Moldova: International Consultants(2006);

- 15 -

Serbia: World Bank(2007b); and Albania: Government of Albania and the World Bank (2006).

Though it seems to be the common problem to most of countries including

developed ones, Mongolia needs to improve its multi-year perspective in fiscal

planning, expenditure policy and budgeting.

V. Comparison with 17 Developing Countries

Departing from the comparison between Mongolia and other transition countries,

this section compares the PFM performance between 17 developing countries (refer to

Footnote 5) and Mongolia. The PI performance of the 17 countries obtained from

PEFA (2006, pp.60-1) is summarized in Table 4 below, and the performance comparison

of Core Indicators among Mongolia, Eastern Europe countries, and the 17 developing

countries is on Figure 2.

As can be seen in Figure 2 and the table attached to it, the Core Indicator

performance of the 17 developing countries is worse than those of Eastern Europe and

Mongolia. Comparing Figures 1 and 2, it is clear that the performance of the 17

developing countries is worse than that of Central Asia countries. Hence, the

performance is better in Mongolia, Eastern Europe counties, Central Asia countries,

and the 17 developing countries in this order.

- 16 -

Table 4. Comparison of PFM Performance between Mongolia and 17 Developing Countires

PI Description Evaluation Result of PFM /1/ Comparison

Mongolia 17 Developing Point Deviation(=%)

Countries Difference (Difference/


2008 2003-2005

3 Country Av.)

/4/→ Evln Point Evln Point *100


(2.8)

(2.6)

PI-1 Deviation b/w budget & out-turn D 1.0 B 3.1 -2.1 -68%

PI-2 Deviation of budget composition B 3.0 C 2.1 1.0 46%

PI-3 Deviation of revenue out-turn B 3.0 B+ 3.5 -0.5 -14%

PI-4 Cumulative payment arrears A 4.0 D+ 1.7 2.3 131%


(3.6)

(2.3)

PI-5 Classification system of budget C 2.0 C+ 2.5 -0.5 -20%

PI-6 Comprehensiveness of Budget Doc. A 4.0 C+ 2.7 1.3 46%

PI-7 Extent of unreported rev.&exp. B+ 3.5 C+ 2.5 1.0 42%

PI-8 Transparency of intergov. transfer A 4.0 C 2.0 2.0 104%

PI-9 Aggregate fiscal risk from lower ent. A 4.0 D+ 1.6 2.4 145%

PI-10 Public access to key fiscal inf. A 4.0 C+ 2.5 1.5 58%


C1. Appropriate Planning & Budgeting

(3.0)

(2.4)

PI-11 Orderliness in budget process A 4.0 B 2.8 1.2 42%

PI-12 Multi-year perspective in budget C 2.0 C 1.9 0.1 7%


(2.9)

(2.3)

PI-13 Transparency in taxing A 4.0 B+ 2.6 1.5 57%

PI-14 Effectiveness of taxpayer registrn C+ 2.5 B 2.0 0.5 28%

PI-15 Effectiveness of tax collection D+ 1.5 B 2.0 -0.5 -26%

PI-16 Predictability of fund availability B 3.0 B 1.9 1.1 56%

PI-17 Recording of cash, debt & guarantee B+ 3.5 B 2.8 0.7 25%


3.1 2.4 0.8 32%


C 1.8


C+ 2.3


C 1.9


D+ 1.6



C 2.2


C 2.0


C 2.2

- 17 -


C 1.8



C 1.8


C 2.2

PI-28 Legisl. scrutiny of external audit D+ 1.7

Notes: /1/ A=very good=all dimensional conditions are satisfied ～ D=very bad=all the conditions are unsatisfied.

/2/ The latest year of data used in evaluation.


/4/ Points were given as follows: A=4, B=3, C=2, D=1. This follows the ananlysis done by World Bank (2007b).

Source: Calculated by the author. The original sources of data are as follows:

Mongolia: Manduul (2009) with modifications by H. Ueno; and

17 developing countries: PEFA (2006, pp.60-1, Annex3).

- 18 -

Figure 2. Comparison of Mongolia, Eastern Europe Transition Countries,

and 17 Developing Countries

Note: Axes and data for Figure 2.

Axis Name of the Axis Mongolia Eastern 17Developing Standard

in the

Europe

Ctry Countries for

Figure Yr of Latest Data Used /2/→ 2008 2004-5 2003-5 Comparison

Point Average Pt Average Pt

1 A. Ex-post Budget Credibility 2.75 2.67 2.59 3.00

2 B. Key Cross-Cutting Issues 3.58 2.89 2.30 3.00

3 C1.Issues in Each Step of

Budget 3.00 3.17 2.35 3.00

4 C2.Appropriate Budget

Execution 2.90 3.05 2.25 3.00

Source: Author based on Tables 2, 3, and 4.

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As for PIs in Table 4, the 17 developing countries show the worst performances

(D+) with respect to 2 PIs: the cumulative payment arrears (PI-4) and the aggregate

fiscal risks arising from executing departments and agencies (PI-9). And, they show

bad performance (C and C+) with respect to many PIs (2, 8, 12, 5, 6, 7, and 10).

Referring to the end right column of Table 4, the comparison of Mongolia and the

17 developing countries reveals that Mongolian PFM performance is lower than those of

17 developing countries with respect to 4 PIs: (1) large deviations between the original

budget and actual out-turn (PI-1); (2) the deviation of revenue out-turn (PI-3); (3)

imperfect introduction of functional budgeting system (PI-5); and (4) ineffectiveness of

tax collection (PI-15). These are exactly the same PIs that under-performed against

Central Asia and Eastern Europe countries. That is, these are the core of PFM

problems of Mongolia. All are already discussed in Chapter III.

VI. Conclusion: Mongolian PFM Problems and Policies to Counter Them

This comparative analysis of Mongolian and other transition and developing

countries reveals the followings. In overall, Mongolia has relatively good system and

execution of PFM as compared to the transition and developing countries that have

PEFA-PMF evaluation data. On average, Mongolia is better than the transition

countries in both Central Asia and Eastern Europe and the 17 developing countries that

have PEFA-PMF evaluation data.

The PFM of Mongolia, however, have five serious problems as compared to the

transition and developing countries. The problems are (1) the lack or non-execution of

the mechanism to counter the huge fluctuation of international mineral prices,

particularly copper and gold prices (PI-3); (2) its pro-cyclical fiscal policies (PI-1), (3) its

huge arrears in tax collection (PI-15), (4) the problem related to effectiveness of

taxpayer registration (PI-14), and (5) lack of sectoral strategies and reliable cost

estimates of multi-year recurrent and investment costs (PI-12). PI-5 was identified as

a problem since it was under-performing as compared to Central Asia and Eastern

Europe transition countries, but we concluded that, in relative term, it is less

problematic at this moment of time and Mongolia should address more serious issues of

above five.

The problems (1) and (2) seem to arise from the shift of Mongolian economy from

one of typical developing country to one of mineral-resource-rich country. This implies

- 20 -

that Mongolia would be better compared with resource-rich countries rather than with

transition countries as this paper tried.

The problems (3) and (4) seem to arise from the yet remaining legacy of its socialist

economy and politics up to 1990, i.e. weak compliance to and enforcement of laws. The

problem (5) seems to be a common problem of all transition and developing countries.

Policy implications from above analyses are clear, and there are three. First,

Mongolia needs to develop its capacity to handle the issue of “resource-curse” that are

typical to mineral-rich countries (PIs 1 and 3). For this purpose, one system and one

policy are critically important as follows. The government needs to redesign its Windfall

Tax system into a full-fledged stabilization fund for resource-based revenues. Then,

utilizing the fund accumulated in this stabilization fund, the government needs to adopt

a counter-cyclical fiscal policy. The usefulness of the counter-cyclical policy are that (1)

the government does not need to obtain emergency loans from multi-lateral and

bilateral donors as it did in 2009, (2) the policy can reduce the economic fluctuations

arising from the changes in mineral prices, and (3) the government can maintain the

public expenditures at the level originally planned creating stable public activities.

Second, the government needs to strengthen the enforcement of tax collection (PIs

15 and 14). Third, the government needs to develop its capacity to plan properly its

multi-year strategies, costing, and budgeting (PI-12).

VII. Implications to PEFA-PM Framework and Its Evaluation

From above examinations, we can derive some implications for PEFA-PMF

evaluation system itself. They are as follows.

Since we could identify major problems of Mongolian PFM, it seems the

Framework is a useful tool in identifying major problems of PFM of any country.

As we have seen in above analyses, we need to examine down to the level of

Dimensions in order to identify real problems related to PFM. Even the level of

Performance Indicators (PIs) is not enough to understand real problems.

Also as we have seen in above analyses, in order to understand the causes of low

performances in PFM, we have to know the background of the economy in question, i.e.,

Mongolia in our case. A mere evaluation by the Framework alone without knowing the

background of that particular economy does not help us much to understand the

causes. Therefore, PFM evaluation by the Framework would be better undertaken

- 21 -

together with other economic studies.

PI-5 of the Framework could be a problem. It seems that asking developing

countries of functional budgeting is premature at this moment in time. The functional

or program budgeting (PI-5) is a relatively new concept in PFM, and it seems even

developed countries (excluding a few countries such as U.S.A.) have not yet adopted this

concepts in their budgeting. It could be recommended for developing countries to

ignore PI-5 for the time being in order for them to address more serious issues than it is.

In other words, PEFA may need to re-examine whether PI-5 is really needed for

developing countries or to redesign PI-5.

At the end, based on this exercise, we feel that the Framework can be applied to

developed countries to see how they perform. Here, we should include PI-5.

Acknowledgement

The Joint Study and this paper were financially supported by (1) the Grant-in-Aid

for Scientific Research of the Japan Society for the Promotion of Science, Category:

Scientific Research (C), Project Number 19530256 (FY2007 – FY2009), and (2) Nanzan

University Pache Research Subsidy I-A-2 for the 2009 academic year. We would like to

express our deep gratitude to both of them.

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