PUBLIC EXPENDITURE

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PUBLIC EXPENDITURE FINANCIAL ACCOUNTABILITY
REVIEW 2005 Review of Fiscal
Developments, Public Expenditure Management and
Financial Accountability Issues 2003/04 -
2004/05 Joint Evaluation ReportMay 23,
2005 Golden Tullip Hotel, Dar es Salaam
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Introduction

• 7th year of PER consultative process in TZ
• PER FY05 distinguishing features
• Sector analytic work was suspended. Instead,
  sectors pulled out strategic issues from previous
  sector PERs
• PER WGs f/work continued as in previous PERs
• External review retained but integrated with
  financial accountability/fiduciary issues (1st
  PEFAR for TZ).
• Zanzibar PER/MTEF
• URT model implemented to support implementation
  of ZPRP but constrained by resource constraints.
• Evaluation Team
• WB, DFID, KfW, IMF, AfDB, EC, NPF Consultants

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I Aggregate Fiscal Performance

• Fiscal Prudence
• FD 3.3 of GDP. Better than comparators in
  SSA.
• FD widened fast from 2002
• Increased spending on social services permitted
  by higher aid inflow

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Domestic Revenue Performance

• Good progress on revenue mobilization (R/GDP
  12.1 gt13).
• Tax admn. reforms paying-off. GoT urged to move
  ahead with reforms
• Domestic revenue still low relative to
  expenditure needs
• Focus on expanding tax base via creation of space
  for private sector to invest and operate

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Foreign Aid increased but .

• Basket grants and HIPC grants were 25 below
  budget
• Education basket almost 50 below budget
• Program loans were 50 higher than budgeted
• Basket loans were 97 lower than budgeted
• Need to Improve Predictability

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Expected Effects of Large Aid Inflows not Apparent

• REER depreciated since 2002
• FDI stable at 15 of GDP
• X increased 16-18 of GDP

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However.

• Aid growing faster than domestic revenue
• Ext debt on the upswing since 2001 (US6.8 - 7.5
  bn)
• Large proportion of aid goes to non-tradables
• Domestic savings declined from 13 - 9.7
• Macro effects of large aid flows will need to
  be managed carefully in the medium term.
• gtEnsure robust growth higher revenue effort
• gtEnsure private sector participation when aid
  goes via public sector

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Table 3 Government Expenditures, FY00 FY04 (
of GDP)
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Expenditure Performance

• GoT spending rose from 19.8 of GDP in FY03 to
  22.5 of GDP in FY04
• gt esp. G services
• Pre-election expansionary fiscal policy not
  established but..
• Significant differences in expenditure for first
  1/2 of FY05 reported in EFR and BER need to be
  reconciled.
• GoT encouraged to adhere to Commitment control

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II Strategic Resource Allocation

• Public Investment Program
• Big projects (NA bldg, stadium, Airports,
  bridges?
• Ensure public investment program remains
  strategic (growth,fiscal prudence)
• Ensure a robust screening process for big projects

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Strategic Resource Allocation

• Composition of Expenditure
• 2/3 of the increase in FY04 recurrent exp went to
  MDAs Vs regions/districts.
• Most of the increase in MDAs recurrent exp. was
  on admn
• Most of the increase in recurrent social sector
  exp. was on health. No increase for education
• Most of the increase in devt. Exp went to social
  sectors

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Strategic Resource Allocation

• Regional Distribution of Expenditure
• Recurrent expenditure more evenly distributed
  across the regions.
• 71.6 of annual regional devt expenditure spent
  in only 7/20 regions!
• Need for better regional targeting to address
  geographic disparities improve growth/poverty
  impacts of expenditure

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Public Expenditure vis-à-vis MKUKUTA

• Devt spending in the 90s had no clear bias toward
  infrastructure
• BG FY06-FY08 shows no major departure in favor of
  infrastructure
• Examine carefully the financing options
  (infrastructure bond, special facility)
• Integrate financing strategy into the macro
  f/work.
• Clearly define project selection, handling of
  project risks, legal, regulatory, institutional
  f/works.
• Re-assess fiscal incentives f/work for
  agriculture.

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III. Budget Consistency with Actual Expenditure

• Budget deviations (measured by absolute deviation
  as of original budget) are inevitable
• But large, across-the-board variances indicate a
  lack of budget predictability

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Recurrent Budget Deviation at Vote Level

• Significant variances FY01-2 improvement in
  FY03
• But, Overall deviations widened in FY04
• At functional level Recurrent bdgt deviations are
  large ( 25 for CFS 45 for econ services)

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Recurrent Budget Deviation at Vote Level

• 33 votes (67) were within a reasonable range of
  -10 to 10
• 16 votes (33) exhibited larger fluctuations.
  Even after taking out votes affected by supp.
  Budget
• 13 votes (27) showed substantial variances from
  their initially approved budgets.

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Recurrent Budget Deviation at Sub-Vote Level

• Var. higher in FY04 even discounting spending on
  non-drought related suppl. items
• Weakness in planning budgeting is one of the
  main causal factors.
• Improving budget formulation mgt is critical
• Greater Parliamentary scrutiny enforcement of
  controls also imperative.

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IV HR Planning, W-Bill Mgt Pay Reform Issues

• Integration of staffing levels and financial
  resource allocations need to be improved.
• Need to decentralize HCMIS to MDAs build
  capacity for HR mgt in LGAs.
• Surge in expenditure on employment allowances
• Urge completion of the review of allowances.
  Consider rationalization/consolidation with pay.
• Explore other ways e.g. review OC composition
  possibility of moving resources out of OC to PE.

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V Achievements in Translating MKUKUTA into a
Budget Strategy

• Impressive effort made to enhance link btn
  MKUKUTA, sector strategies budget allocations
  via SBAS in prep of BG
• (1) Overall Framework
• Need to match expenditure plans with available
  resources for FY06 (aid proj. overly optimistic)
• Develop strategic nature of BG (i) projections
  for the appropriate level of Govt activity (ii)
  upper/lower funding scenarios (iii) ceiling
  implications .

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(2) Consolidated Views from MDAs

• Overall
• Substantive consultation with MOF.
• MDAs able to make substantial input into BG
• Flexibility allowed to MDAs to prepare
  submissions against MKUKUTA categories or own
  strategic plan.
• -------------------------------------------------
  ------------
• Difficulties in aligning with MKUKUTA cluster
  strategy categories directly 
• Future PER work to be more focused timely.
• Weaknesses handling crosscutting areas.

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(3) Areas for Devt of the BG

• Expenditure classification
• Exp. categories used to link MKUKUTA, MTEF exp.
  classification need further rationalization
• Decision making process
• Preferable that Cabinet decides on allocations at
  vote level informed by MTEF/Program allocations
• Sector PERs
• Involve all s/holders in the design/commissioning
  of sector PERs
• Robust Sector PER process provides forum for
  scrutiny of analytic work
• Tighten focus of PER studies (define generic TOR)
• PER process to help handle cross-cutting issues

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Areas for Devt of the BG

• SBAS development
• Challenge of ensuring SBAS-IFMS interface  
• Cross cutting areas
• Collaboration across agencies/sectors remain a
  challenge
• Consultation
• PER WG Consultations unsatisfactory Develop TOR
  for Macro group ensure regular discussions
• Linkage with other processes
• Need to further articulate links between
  MKUKUTA, Implementation, ME, budget process and
  other processes of policy dialogue

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VI Fiscal Issues at the LG Level

• LG reform ground covered during the past two
  years
• formula-based grant allocation FY
  Synchronization LG Financial mgt reforms Reform
  of LG revenue structure  
• Abolition of nuisance taxes led to some problems,
  e.g.
• Inadequacy of remaining revenue sources
• LGAs invented coping mechanisms (Collect more,
  postpone activities)
• Councils not transferring Village share of the
  compensation grants
• Few LGAs still levying abolished levies
• Erosion of the fiscal autonomy of LGAs
• Flow of the compensatory funds from MOF
  unpredictable
• No instructions from MOF to distinguish between
  OC compensation
• Little progress in compiling actual expenditure
  data
• Anecdotal evidence points to politically
  motivated spending
• Leakage of PEDP funds

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VII Zbar PER FY03 -Status

• Overall, implementation rather modest
• Lack of resources to leverage difficult/politicall
  y sensitive reforms
• Specifics
• PER Process for Zanzibar set-up along the URT
• JFC still establishing rules regulations for
  URT-RGOZ fiscal relationship
• Duplication of functions at MDA, regional,
  district gt Strategy paper was prepared.
  Implementation yet to be approved
• Removal of monopoly of ZSTC Study done.
  Preferred option is pending approval by RGOZ

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Zbar PER FY03 -Status

• Privatization and restructuring of remaining
  parastatals
• Some decisions taken but implementation stalled
• Measures to improve domestic revenue
  mobilization
• Some efforts have been made in terms of
  identifying weaknesses in tax administration New
  sources e.g. property tax taxation of the
  informal sector in the pipeline.
• RGOZ introduced a Central wage bill and Payroll
  system in 2004 with support from AccGen URT
• Strengthening control over debt commitments
• Debt Dept established. BoT providing support
• Pre-1997 arrears cleared. Those for 1998 todate
  not
• Public sector pay employment reforms TOR for a
  comprehensive review of the Zbar civil service
  done but still pending (funding process dragging
  WB, URT, RGoZ)