Medium-Term Budgeting in Medium-Term Budgeting in MoldovaMoldova

Progress and Progress and Future ChallengesFuture Challenges

February 2009February 2009

A. ContextA. Context

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Objectives Objectives in Introducing the MTEFin Introducing the MTEF In 2002 Government introduced MTEF to bring a In 2002 Government introduced MTEF to bring a

more strategic approach to budget planningmore strategic approach to budget planning

ObjectivesObjectives

Multi-Year OutlookMulti-Year Outlook – Budgets need to be planned within a – Budgets need to be planned within a medium-term context.medium-term context.

Policy LinkagePolicy Linkage – the National Public Budget is a key – the National Public Budget is a key instrument in realising government policies. instrument in realising government policies.

ComprehensivenessComprehensiveness – medium-term budget planning – medium-term budget planning covers all public revenues and expenditures. covers all public revenues and expenditures.

RealismRealism – government programmes must be planned – government programmes must be planned against a realistic assessment of available resources.against a realistic assessment of available resources.

PrioritisationPrioritisation – programme planning must recognise – programme planning must recognise budget constraints, include cost analysis, and allow for budget constraints, include cost analysis, and allow for reallocation of resources to higher priority areas.reallocation of resources to higher priority areas.

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Institutional ContextInstitutional Context Central Policy Development and CoordinationCentral Policy Development and Coordination

• national plans and policies prepared without reference to fiscal national plans and policies prepared without reference to fiscal consequences and constraintsconsequences and constraints

• strengthened central policy coordination process established in strengthened central policy coordination process established in 2007 linked to National Development Strategy2007 linked to National Development Strategy

• greatly improved linkage between policy and budget processesgreatly improved linkage between policy and budget processes

Relatively strong finance ministryRelatively strong finance ministry• established record of sound fiscal managementestablished record of sound fiscal management• expenditure planning inertial rather than strategic expenditure planning inertial rather than strategic

Line ministriesLine 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

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Economic ContextEconomic Context MTEF reforms took place in a evolving MTEF reforms took place in a evolving

economic environment:economic environment:

Revenue growth has been driven by economic Revenue growth has been driven by economic recovery and the rapid rise in remittance recovery and the rapid rise in remittance financed imports.financed imports.

Over the last five years the National Public Over the last five years the National Public Budget has increased by more than Budget has increased by more than 5050% in % in real terms.real terms.

Revenues have increased from Revenues have increased from 3434% of GDP% of GDP in in 20032003 to to 4040% of GDP % of GDP in 200in 20088 and are high and are high compared with other countries of similar levels compared with other countries of similar levels of economic development.of economic development.

B. Institutional B. Institutional FrameworkFramework

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MTEF/Budget IntegrationMTEF/Budget Integration MTEFMTEF is comprehensive of is comprehensive of

• State Budget, State Budget, • Local Government Budgets, Local Government Budgets, • Medical Insurance Fund and Medical Insurance Fund and • Social Security FundSocial Security Fund

MTEFMTEF is updated every year to maintain 3 year is updated every year to maintain 3 year planning horizonplanning horizon

MTEF MTEF sets the strategic framework for budget sets the strategic framework for budget preparationpreparation

MTEFMTEF forecasts are prepared before budget forecasts are prepared before budget guidelines and ceilings issuedguidelines and ceilings issued

MTEF MTEF first year allocations for State Budget = first year allocations for State Budget = annual budget law.annual budget law.

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MTEF – Linking Policy and Budget ProcessesMTEF – 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

Seq

uenc

ing

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MTEF calendarMTEF calendar January January – process launched - – process launched - MTEF Concept PaperMTEF Concept Paper

January – March January – March – Macroeconomic and fiscal framework – Macroeconomic and fiscal framework updated, elaboration of strategic expenditure plans linked with updated, elaboration of strategic expenditure plans linked with NDP policies, resource ceilings determinedNDP policies, resource ceilings determined

April April – – MTEF Forecasts DocumentMTEF Forecasts Document presented to the presented to the Government (Government Committee for Strategic Planning), Government (Government Committee for Strategic Planning), which approves the expenditure ceilings.which approves the expenditure ceilings.

June - August June - August – – annual budget elaborated. Macro-fiscal annual budget elaborated. Macro-fiscal framework and MTEF forecasts. MTEF document finalized framework and MTEF forecasts. MTEF document finalized and included as an explanatory document accompanying and included as an explanatory document accompanying submission of the Annual Budget Law to Parliament.submission of the Annual Budget Law to Parliament.

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Stakeholder InvolvementStakeholder Involvement ParliamentParliament

MTEF provides the policy context for discussion of annual MTEF provides the policy context for discussion of annual budgetbudget

a more strategic approach to budget debate in Parliament is a more strategic approach to budget debate in Parliament is requiredrequired

Government (Committee on Strategic Planning)Government (Committee on Strategic Planning) discusses and approves MTEF Concept Paper (Jan/Feb), MTEF discusses and approves MTEF Concept Paper (Jan/Feb), MTEF

Forecasts (Apr/May) and final MTEF Document (Sep)Forecasts (Apr/May) and final MTEF Document (Sep) also responsible for approving National Development Strategy also responsible for approving National Development Strategy

Update and Action PlanUpdate and Action Plan

MTEF Coordination GroupMTEF Coordination Group a consultative body in the decision making processa consultative body in the decision making process wider participatory approach (Parliament, Presidency, wider participatory approach (Parliament, Presidency,

Government, public authorities, trade union, syndicate)Government, public authorities, trade union, syndicate) detailed discussions and regular meetingsdetailed discussions and regular meetings

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Working Group for Macroeconomic Framework, Fiscal Policy and Resource Framework

Responsible – Ministry of Economy

Working Group for Public Expenditure Policy and

PrioritiesResponsible – 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 ChartMTEF Organization Chart

Government (Government Committee for Strategic Planning)

Sector Finance Divisions of the MoF

Public investment Wage bill

C. Main ElementsC. Main Elements

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Core Elements of the MTEF Core Elements of the MTEF AnalysisAnalysis

1.1. Macro-Fiscal Analysis and ForecastsMacro-Fiscal Analysis and Forecasts

2.2. Analysis of Cross-Cutting Budget Analysis of Cross-Cutting Budget IssuesIssues

3.3. Ministry Expenditure StrategiesMinistry Expenditure Strategies

4.4. Expenditure CeilingsExpenditure Ceilings

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Macro-Fiscal Analysis and Macro-Fiscal Analysis and ForecastsForecasts

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 MEC uses multiple macroeconomic models and produces at least 2 scenariosleast 2 scenarios

MoF has its own fiscal model, based on macro indicators, MoF has its own fiscal model, based on macro indicators, forecasts main types of revenue and generates overall forecasts main types of revenue and generates overall resource framework available for expenditure. It also resource framework available for expenditure. It also divides resources between components of NPBdivides resources between components of NPB

Level of deficit is forecast taking into account resource Level of deficit is forecast taking into account resource availability and cost of debt servicingavailability and cost of debt servicing

Challenges AheadChallenges Ahead: improve macroeconomic forecasting, : improve macroeconomic forecasting, increase accuracy of revenue forecasts, obtain better increase accuracy of revenue forecasts, obtain better information for forecasting donor financinginformation for forecasting donor financing

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Analysis of Cross-Cutting Resource Analysis of Cross-Cutting Resource IssuesIssues

Wagebill analysisWagebill analysis --> set limit on wagebill and --> set limit on wagebill and concept on reducing employment in public sector concept on reducing employment in public sector is elaboratedis elaborated

Public InvestmentPublic Investment grater emphasis on public grater emphasis on public investment, significantly more allocation for PI, investment, significantly more allocation for PI, especially for infrastructureespecially for infrastructure

NDP PrioritiesNDP Priorities -> better link b/w policy and -> better link b/w policy and resource allocation, does not rely on foreign resource allocation, does not rely on foreign assistance to finance new policy incentivesassistance to finance new policy incentives

Challenges AheadChallenges Ahead: Ensure all policy decisions are : Ensure all policy decisions are made with financial coverage, adopt improved made with financial coverage, adopt improved procedures for PI selection and prioritization procedures for PI selection and prioritization

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Ministry Expenditure StrategiesMinistry Expenditure Strategies Gradual roll-out and sectors covers: from 3 sectors to Gradual roll-out and sectors covers: from 3 sectors to

12 sectors at present (budget coverage is about 72%)12 sectors at present (budget coverage is about 72%)

Sector Working GroupsSector Working Groups • typically a lead ministry in each sector.typically a lead ministry in each sector.• provide basis for coordinating expenditure planning provide basis for coordinating expenditure planning across the sectoracross the sector

Format and contents of the strategiesFormat and contents of the strategies • linked with new budget program classificationlinked with new budget program classification• highlights link with NDP highlights link with NDP

Challenges AheadChallenges Ahead: build policy, planning and : build policy, planning and budgeting capacities in ministries following recent budgeting capacities in ministries following recent reorganisation.reorganisation.

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Inter-Sectoral Expenditure Priorities Inter-Sectoral Expenditure Priorities and Ceilingsand Ceilings

Preliminary ceilingsPreliminary ceilings set at the beginning of set at the beginning of process (based on outer year ceilings from process (based on outer year ceilings from current MTEF rolled forward by one year)current MTEF rolled forward by one year)

Final ceilingsFinal ceilings (by budget, sector and ministry (by budget, sector and ministry within indicative breakdown for wagebill and within indicative breakdown for wagebill and capital spending) set before preparation of annual capital spending) set before preparation of annual budgetbudget

Challenges AheadChallenges Ahead: clarify inter-sectoral priorities, : clarify inter-sectoral priorities, more rigorous methodology formore rigorous methodology for setting ceilings, setting ceilings, more realistic costing of plans, focus on budget more realistic costing of plans, focus on budget effectiveness and efficiencyeffectiveness and efficiency

D. ConclusionsD. Conclusions

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Impact on the Budget Process and Impact on the Budget Process and NegotiationsNegotiations

The budget now involves a strategic phase before The budget now involves a strategic phase before detailed annual budget is prepared detailed annual budget is prepared

MTEF makes annual budget easier and faster to MTEF makes annual budget easier and faster to prepare prepare

Expenditure Ceilings have led to more realistic budget Expenditure Ceilings have led to more realistic budget proposals, by encouraging ministries to focus on proposals, by encouraging ministries to focus on “needs” instead of “priorities ““needs” instead of “priorities “

All legislative amendments, required for policy All legislative amendments, required for policy implementation (agreed under MTEF ) are approved implementation (agreed under MTEF ) are approved by the Parliament before annual budget is approvedby the Parliament before annual budget is approved

MTEF offer strategic background for Budget readings MTEF offer strategic background for Budget readings in the Parliament. in the Parliament.

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Sustainability of the MTEF ReformsSustainability of the MTEF Reforms

Demand and ownership – political and Demand and ownership – political and administration.administration.

Unified – MTEF is the budget planning cycle.Unified – MTEF is the budget planning cycle.

Integrated – policy and budgeting cycle is Integrated – policy and budgeting cycle is emergingemerging

Inclusive – collaboration among many Inclusive – collaboration among many stakeholders.stakeholders.

Evolving – annual review and improvement.Evolving – annual review and improvement.

Capacity – not reliant on external consultants.Capacity – not reliant on external consultants.

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Key Challenges AheadKey Challenges Ahead

Managing the impact of the global crisisManaging the impact of the global crisis

Reform of line ministry institutional Reform of line ministry institutional structures and capacitiesstructures and capacities

Making better use of existing resources Making better use of existing resources

Building the credibility of the outer year Building the credibility of the outer year ceilingsceilings

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Ministry of Finance Ministry of Finance of the Republic of Moldovaof the Republic of Moldova

MTEF’s documents available in MTEF’s documents available in English :English : http://minfin.md/en/middlecost/Russian:Russian: http://minfin.md/ru/middlecost/

More information (instructions, More information (instructions, methodological guidance organizational methodological guidance organizational framework, etc.) is available in Romanian: framework, etc.) is available in Romanian:

http://minfin.md/ro/middlecost/