THE IMPLEMENTATION OF THE MEDIUM-TERM EXPENDITURE FRAMEWORK IN CENTRAL AMERICA

THE IMPLEMENTATION OF THE MEDIUM-TERM EXPENDITURE FRAMEWORK IN CENTRAL AMERICA Index Foreword 2 What is the Medium-Term Expenditure Framework? 4 The process in Nicaragua: The strategy for development and implementation 6 Expansion in the region and the role of COSEFIN 8 Lessons Learned 10 The future of 12

Foreword From the beginning of its mandate, our Government of Reconciliation and National Unity (GRUN), in its drive to improve the effectiveness of public expenditure, identified the Medium-Term Expenditure Framework as a useful tool to integrate the country s fiscal policy, the National Human Development Plan (PNDH) and our national Budget, while focusing on results. The Swiss Cooperation, through the State Secretariat for Economic Affairs (SECO) has been supporting us by providing Technical Assistance throughout the ten-year implementation process. «- a useful tool for integrating national fiscal policy, the National Plan and the Budget» The Medium-Term Expenditure Framework () was established with the objective of providing transparency, promoting fiscal discipline and achieving a more equitable distribution in the use of the resources of the State. It is also sought to enhance the quality, efficiency and effectiveness of the goods and services delivered by the public sector to the population. It has also helped to account for the results achieved by the Government s entities, so that our people can assess our institutional performance in all its dimensions and how far it is contributing to their well-being. With the support of this project, synergies were created between the national institutions in charge of planning and budgeting. In addition to the, other tools were developed, including the Joint Budget-Plan Matrix through which targets and indicators were harmonized between the GRUN s Commitments of Good Governance and the Medium-Term Expenditure Frameworks of each institution. The Early Warning System was developed and implemented as one of the instruments used to monitor the performance of public institutions. Finally, we had the chance to share the experience acquired with the rest of COSEFIN member countries. We thank SECO and COSEFIN for all their support and express our commitment to continue to learn and adapt our tools and working processes to seek the common good of our people, as well as to share our experiences with our brother countries. Iván Acosta Montalbán, Minister of Finance and Public Credit Republic of Nicaragua Since the onset of the 21st century, citizens of many Latin American countries have increasingly demanded improvements in the provision of public services. This demand has been growing throughout the last decade against the backdrop of the global financial crisis, rising inequality, the struggle to reduce poverty levels and challenges in addressing basic needs in key sectors such as health, education and security. At the same time, there has been a need to maintain prudent macroeconomic policies and budgetary sustainability, while consolidating transparency in government. In their quest to address these challenges, many governments have given increased attention to raising the efficiency and effectiveness of public administration, progressively adopting new approaches and management practices in a move towards Results-Based Management and related methodologies. «We are confident that Nicaragua and its neighbouring countries will be able to continue advancing in the modernization of their public management» I believe that these developments hold particular significance for the Central American region, given, among other things, its strategic geographical position, the vulnerability of its economies and its particular development needs. Within this region, the case of Nicaragua stands out as a pioneer country in the design and implementation of a key planning and budgeting tool: The Medium-Term Expenditure Framework (). Switzerland, through the State Secretariat for Economic Affairs (SECO), has supported the Nicaraguan authorities during a decade of ambitious reforms with the provision of high-level expertise, training and capacity building for civil servants and institutions. Full coverage of the formulation process was reached in 2010 and in the period up to end 2016 significant progress was made in the monitoring and evaluation of the budgetary programmes within the. The experience of Nicaragua encouraged other countries such as Guatemala, El Salvador and Costa Rica, which since 2013 have also been able to receive the support of SECO, in close coordination and collaboration with the Council of Ministers of Finance of Central America, Panama and the Dominican Republic (COSEFIN). At SECO, we are satisfied with the excellent relationships we have been able to establish with our counterparts and even more pleased with the achievements attained after these ten years. We are confident that Nicaragua and its neighbouring countries, with the necessary support of COSEFIN, will be able to continue advancing in the modernization of their public management for the benefit of their populations. Rosemarie Schlup, Head of the Macroeconomic Support Unit State Secretariat for Economic Affairs, SECO Swiss Cooperation 2 FOREWORD 3

What is the Medium-Term Expenditure Framework? The Medium-Term Expenditure Framework () is a budget formulation tool that aims to strengthen the management capacity of public institutions and facilitate the evaluation of their performance against the achievement of results. «The is a tool that brings together the national planning and budget cycles» Depending on the context of the country in question, implementing an may have several objectives such as increasing predictability of the flow of financial resources to institutions, fostering stronger links between public policies, strategic priorities and availability of resources, contributing to transparency, and encouraging the improved performance of public entities. The framework is developed through processes that operate both from top to bottom, that is from the national planning authorities (Office of the President or Ministry of Planning) and the Budget (Ministry of Finance) down to sector institutions (Ministries and other entities), and, from the bottom up, from the sector entities to the planning and budgeting authorities. In brief, the is a national financial management tool, composed of different instruments, which work as a bridge between the planning and budgeting processes of a country s public sector. Elements of an The Medium-Term Expenditure Framework, also referred-to as the multiannual budget, is often included as an annex to a country s annual Budget Law. The is made up of four elements that integrate with each other to cover every important aspect, from the macroeconomic and fiscal perspectives to the policy targets and the budgets of the different Government institutions or sectors: The Multiannual Macroeconomic Framework (MMF) contains an analysis of the economic context at national and international levels, and on this basis presents medium-term projections of the country s main macroeconomic variables. «The is made up of four interlinked elements» The Medium-Term Fiscal Framework (MTFF) presents the Government s fiscal policy objectives and related commitments, and the resulting medium term projections for revenue, expenditure and the level of indebtedness of the State. The The Medium-Term Expenditre Framework () sometimes referred-to as the The Medium-Term Budget Framework (MTBF), presents the planned allocation of budget ceilings either across the sectors or the institutions and agencies of government for a period of 3 to 5 years, in a manner consistent with the MTFF and with national and sectoral planning and policy priorities. National Development Plan Medium-Term Fiscal Framework Multiannual Macroeconomic Framework The Institutional or Sector Medium-Term Expenditure Frameworks contain the detailed distribution of budgetary resources, by sector or institution, structured in programmes, projects and institutional activities, with corresponding output and outcome targets. Institutional Strategic Plan Annual Operational Plan Medium-Term Expenditure Frameowrk Medium-Term Budget Framework MMF MULTIANNUAL MACROECONOMIC FRAMEWORK Annual Budget MEDIUM-TERM FISCAL FRAMEWORK MTFF MEDIUM-TERM EXPENDITURE FRAMEWORK For over 10 years, SECO supported several processes of implementation through the financing and contracting of Technical Assistance provided by a consortium formed by Eptisa of Spain and Fiscus of the United Kingdom. In the formulation and launch of SECO s intervention the British consultancy firm Oxford Policy Management was also involved. INSTITUTIONAL MEDIUM-TERM INSTITUTIONAL EXPENDITURE FRAMEWORK 4 WHAT IS THE MEDIUM-TERM EXPENDITURE FRAMEWORK? 5

The process in Nicaragua: The strategy for development and implementation «The Results-Oriented medium term budget became an instrument to implement the National Human Development Plan» Cronology of in Nicaragua Nicaragua was the first Central American country to decide to implement an, with the intention of strengthening the link between the allocation of resources and the country s strategic policy objectives, especially in the context of the national poverty reduction strategy that was in force at the time. In April 2005, the Ministry of Finance and Public Credit (MHCP, as per its acronym in Spanish) approved the Strategy for the Development of an. This document, prepared with the support of SECO, provided an outline of the reform process as well as a plan for short and medium-term action. In November of that year, a reform to the Financial Administration Act (Law 550) formalized the minimum requirements and content of the, incorporating it as an annex to the annual Budget. After the elections of November of 2006, a change of government took place with the arrival of Daniel Ortega as President. The new administration not only confirmed but also accelerated the implementation of reforms towards the implementation of the. The medium term budget was then focused on the achieving the targets included in the strategic documents of the new Government: The 2008-2012 National Human Development Plan and the 2007-2010 Financial Economic Program. MHCP led a rapid expansion of the tool and the consolidation of the began. Full coverage was achieved in 2010, with 58 public bodies formulating their Institutional Medium-Term Expenditure Frameworks that year. The same year, multiannual ceilings were introduced in the planning of capital expenditure. Since then, the emphasis has been on improving the quality of the targets and financial projections included in the institutional s produced by the government entities. In order to improve the content of the institutional s and the quality of the as a whole, the official Methodological Guide was updated in 2011. Additionally, since 2013, work was done in three specific areas to complete the whole cycle of planning and budgeting: The integration of planning with budgeting was strengthened through the use of an Articulated Matrix that helps to ensure that institutions include in their institutional targets the government s priorities as expressed in the National Plan targets, and that budgetary allocations are programmed in a manner consistent with those priorities. The National Technical Committee (CTN in Spanish), led by the Ministry of Finance, designed and launched the Early Warning System (EWS) in 2015. The EWS is a tool that facilitates the monitoring of the budget, both financially and in terms of physical outputs, through the consolidation of the information produced by the different management systems of the State (SIAF, SIGRUN, SNIP, etc.) and, based on this information, the formulation of reports using a traffic-light system, depending on the level of compliance with the pre-defined targets. Finally, in 2015 the implementation of a system aimed at evaluations of Budgetary Programmes was launched. Through this system, the CTN can commission an analysis of a Programme s design (internal consistency, sequencing, coherence with national priorities and budget coherence), efficiency (financial, operational and technical) and effectiveness. Nicaragua has thus been able to obtain significant improvements in its fiscal discipline, achieving at the aggregate level a Public Financial Management system with a reliable budget that is aligned with the best international practices, according to the PEFA methodology. Also, although the allocation of resources between institutions has remained largely stable, facilitated the reallocation of spending within ministries to better respond to government priorities for poverty reduction as expressed in the National Plan. «Nicaragua has achieved important advances in fiscal discipline and public financial management» implementation strategy Improvements to MMF, MTFF Full coverage Joint calendar MHCP-SEPRES Articulated Planning-Budgeting Matrix Multiannual Capital Expenditure Ceilings 2005 2006 2010 2011 2012 2013 2015 2016 Start of Technical Assitance Methodological Guide Early Warning System (EWS) Pilot evaluations of budget programmes SECO s support Phase 1 Phase 2 Phase 3 6 THE PROCESS IN NICARAGUA: THE STRATEGY FOR DEVELOPMENT AND IMPLEMENTATION 7

Expansion in the region and the role of COSEFIN After two successive phases of SECO support, Nicaragua s neighbouring countries, through the Council Ministers of Finance of Central America, Panama and the Dominican Republic (COSEFIN), expressed interest in the Nicaraguan experience of implementation and requested access to similar support from SECO. Thus, in 2013 the initiative became regional, with a double focus: «Neighbouring countries became interested in the Nicaraguan experience and requested support from SECO» Firstly, the project established a permanent collaboration with the Executive Secretariat of COSEFIN (SE-COSEFIN), based in San Salvador, to promote in the region. As part of COSEFIN s Website http://cosefin.org, an Virtual Learning Platform was created. It is an online, interactive resource that allows officials from different countries to interact with each other by using tools such as blogs and forums and accessing a systematized compendium of documents and videos related to results-oriented multiannual planning and budgeting. In addition, the project, together with SE-COSEFIN, organized two Regional Seminars which served as annual meetings of the seven Member States public sector officials in charge of planning, budgeting and management of fiscal policy. The Ministry of Finance of El Salvador called on SECO s support to help with the introduction of the conceptual, functional and technical elements of the new national public investment system, as well as to strengthen the preparation of the Medium-Term Fiscal Frameworks (MTFF) for the periods 2015-2025 and 2016-26, through the incorporation of new instruments and methods to quantify the effects of different fiscal risk factors. These reforms allowed for better coordination of the Capital Budget and closer integration of the fiscal framework with the existing. Costa Rica also requested an initial Situational Analysis, followed by an Action Plan focused on three objectives: Ensuring fiscal sustainability, strengthening development of Results-Based Budgeting (RBB) and improving the coordination between planning and budgetary policies. The project worked on the first two aspects, beginning with building a macroeconomic model and continuing with the establishment of a conceptual and strategic framework for RBB. Finally, specific actions were implemented with the other three member states of COSEFIN: Panama also requested a situational analysis of their advances towards implementation, the Dominican Republic asked for comments on their conceptual budget model To Be, which is supported by other cooperating partners and in Honduras an dissemination workshop was organized. «The regional approach of the project was reinforced by an important collaboration with COSEFIN» COSEFIN Countries COSTA RICA EL SALVADOR GUATEMALA HONDURAS NICARAGUA Participants of the 1 st Regional Seminar. San Salvador, February 2015 Secondly, the project entered into its third phase in Nicaragua, and also introduced the option of working bilaterally with the rest of the COSEFIN States, offering technical support at all stages from design to implementation and monitoring of reforms for the introduction of s or similar methodologies. PANAMA DOMINICAN REP. The first COSEFIN country to request support was Guatemala. The TA team contributed initially with an analysis of the state of the implementation of the multiannual budget, after which it worked with the Ministry of Finance (MINFIN) to produce a macroeconomic model. With the leadership of MINFIN and the Presidential General Secretariat for Planning (SEGEPLAN), progress was made with the Institutional Strategic Plans and Multiannual Operational Plans of two pilot entities: The Ministry of Agriculture and the Ministry of Infrastructures (MCIV). 8 THE IMPLEMENTATION OF THEMEDIUM-TERM EXPENDITURE FRAMEWORK IN CENTRAL AMERICA EXPANSION IN THE REGION AND THE ROLE OF COSEFIN 9

Lessons Learned More than ten years of SECO support for the implementation of the and similar results-focused multiannual planning and budgeting tools in Central America has provided some interesting lessons learned: A first set of key issues are of a technical nature: The process has worked best in countries that have produced a specific action plan to sequence implementation, as was the case in Nicaragua. Another key lesson is that it is advisable to begin the reform process with the elaboration of a Medium-Term Fiscal Framework that provides a clear vision of planned revenues and expenditures over the medium term; from that point on, the country must decide whether it wants to reach a rapid coverage of sectors through the implementation of in all institutions and, subsequently, work on improving the quality of or, if, on the contrary, the tool should be established in a gradual way focused first on selected institutions or pilot sectors. Both approaches can work, if the capacity and the commitment to reform are present. However, the is not necessarily suitable for the whole public sector, and experience suggests that it may be preferable to limit its scope to those entities or sectors that either absorb a large share of the budget, or focus on productive sectors (agriculture, industry) or focus on delivery of essential public services (education, health, etc.). One last important lesson is that the process cannot be restricted to the budget formulation phase: for the tool to be effective, corresponding monitoring and evaluation systems should function throughout the entire Planning-Budgeting cycle. A second set of lessons relate to the institutional context. Coordination between the leadership of the budget and planning authorities is essential: The annual formulation process should be carried out following a common schedule for planning and budgeting, within which each institution or sector that prepares its medium term expenditure framework must also be included, thus generating a tripartite negotiation of policy targets and budgetary allocations. The should originate at the political level, being developed at the technical level as a tool for implementing political priorities. Its degree of success will depend on how far the is institutionalized and used by the Authorities. A pending task in the COSEFIN countries is that, while the use of within the Executive is growing, there is still little ownership of this instrument within the Legislature. The third group of lessons learnt refers to the model of cooperation that SECO provided: SECO maintained a long-term commitment, supporting Nicaragua for more than ten years in a pragmatic rather than a dogmatic - manner, focusing on capacity development and adapting to national processes. Learning from the Nicaraguan experience, further demand was gradually generated and then addressed in the rest of the region and with COSEFIN. The stability of the Technical Assistance team provided by the Eptisa-Fiscus consortium also contributed to this successful process. 10 LESSONS LEARNED 11

The future of The adoption of methodologies that allow a more effective and efficient management of the public sector is a reality that has gradually been consolidated at an international level, including in Latin America in general and in Central America in particular. «success will depend on its institutionalization and use by Authorities as a planning and budgeting tool» In the short term, reform processes for the implementation of tools such as are expected to continue, as is happening in all countries of the region, albeit at different speeds. In the case of Nicaragua, whose reform process is the longest and most intensive, the tool is methodologically complete and its different elements (MTFF, MTBF, institutional s) are well designed. It should be noted that all entities receiving funds from the Central Government Budget prepare their institutional every year. The rest of COSEFIN countries have made significant progress and count on the support of international cooperation to a greater or lesser extent. Thus, Guatemala, El Salvador and Costa Rica have improved their macroeconomic and fiscal projections and are advancing in their multiannual planning and budgeting processes. For its part, the Dominican Republic is implementing an ambitious reform plan. Honduras is working with multilateral cooperation and Panama considers the as a tool that has potential in the framework of its Public Financial Management reforms. In the medium and long term, the sustainability of the will come through its regular use, especially as an instrument to structure the dialogue on targets and budgetary allocations between the leading planning and budgeting institutions and the sector entities that provide public goods and services. Continued success will also depend on the institutionalization of monitoring and evaluation tools that cover the entire strategic planning and budget cycle, feeding into successive formulation periods. At the regional level, SE-COSEFIN continues its consolidation as a regional reference body to promote a common agenda for Ministers in the reform of PFM and to foster mutual learning and the dissemination of good practice. To this end, it has the mandate of its member countries and external support to further strengthen its structure and capacity. It will be important for international cooperation to continue to support this process, which needs to be encouraged and resourced. This cooperation would be more effective if carried out through or in coordination with COSEFIN. 12 The future of 13

THE IMPLEMENTATION OF THE MEDIUM-TERM EXPENDITURE FRAMEWORK IN CENTRAL AMERICA Financed by Implemented by With the collaboration of