NICARAGUA: TRACKING POVERTY RELATED SPENDING IN HEAVILY INDEBTED POOR COUNTRIES (HIPC) July 2004
ACRONYMS AND ABBREVIATIONS ANBE AP CBN CGA CFAA CPAR DGB DGI DGPI DGSA DGT EMTA GAO GBR GCO GoN HIPC IDB IMF MFPC PER PRPE PRSC PSTAC SECEP SIGFA SPRS SSF TA TSA Autonomous Non-Business Entities Action Plan Central Bank of Nicaragua Centralized Government Administration Country Financial Accountability Assessment Country Procurement Assessment Report Directorate General for the Budget Directorate of Internal Revenues Directorate General of Public Investment Directorate General of Customs Directorate General of Treasury Economic Management technical Assistance General Accounting Office General Budget of the Republic General Comptroller Office Government of Nicaragua Highly Indebted Poor Countries Interamerican Development Bank International Monetary Fund Ministry of Finance and Public Credit Public Expenditure Review Poverty Reducing Public Expenditure Poverty Reduction Strategy Credit Public Sector Technical Assistance Credit Secretariat of Strategy and Coordination of the Presidency Sistema Integrado de Gestión Financiera y Auditoría Strengthened Poverty Reducing Strategy Supplementary Social Fund Technical Assistance Treasury Single Account 2
NICARAGUA TRACKING POVERTY-REDUCING PUBLIC EXPENDITURE ASSESSMENT AND ACTION PLAN This document presents an update of the Tracking Poverty-Reducing Public Expenditure Assessment and Action Plan. Its purpose is to bring up to date the Assessment on Nicaragua s Capacity to Track Poverty Reducing Public Expenditure (PRPE) performed in July 2001 and the action plan (AP) to improve that capacity. The report consists of four sections: 1) An assessment of Nicaragua's capacity to track PRPE. The assessment focuses on the four components identified in the document approved by the Executive Boards of the Fund and the Bank. Three of them related to the Budgeting process (budget preparation, execution, and reporting) and a new component incorporated in this version which intends to determine the quality and transparency of the procurement system in Nicaragua. 2) A list of technical assistance operations (TA) in progress and planned by the World Bank, the IMF, and other organizations, which could help improve the capacity of the public financial management system. The list presents the specific assistance projects and the results expected from them. 3) A description of needed reforms not supported by technical assistance operations in progress or planned. 4) Finally, an AP to improve tracking capacity is presented, including reforms that would have an impact in the medium term, an implementation schedule, and certain short-term measures and bridging mechanisms consistent with the medium-term reforms. I. ASSESSMENT OF PRPE TRACKING CAPACITY A. Involvement of the various levels of government This assessment relates exclusively to the central government's capacity to track PRPE. B. Budget preparation Comprehensiveness of the budget 1. Budgetary information follows the definition of central government in the IMF's Manual on Government Finance Statistics (GFS). The General Budget of the Republic (GBR) shows only the expenditures of the 3
Central Government Administration (CGA). the National Assembly, the Supreme Court, the Electoral Council, the General Comptroller Office of the Republic (GCO), the Office of the President of the Republic, and the Government Ministries. The GBR does not provide information about local government finances nor does it cover all central government activities since it does not include the budgets of all autonomous non-business entities (ANBE). All foreign donations and disbursements are included in the document. The budget documentation does not include a consolidation of the budgets of the various entities that make up the central government. The periodic budgetary execution reports provide information about the CGA, and about execution of the investment projects included in the public investments program, including those executed by autonomous entities. However, information is not provided with regard to current expenditures of the ANBE. 2. Government's activities are not financed to a significant extent by extra budgetary funds. All Government s activities are financed through budgetary funds. All revenues including those with specific allocations are channeled through the Treasury Single Account (TSA) before they are assigned to finance expenditures of government s entities (universities, Supreme Court, DGI, and DGSA). All donations and external disbursements are channeled through the Central Bank, reported to the Directorate General of Treasury (DGT) and assigned to each corresponding entity. 3. Level and composition of outturns is quite close to budget. In 2003, the level of Total Expenses out turns quite close to the original figure formulated in the GBR. The table below shows the level of current and capital expenditure execution vs. the original figure stated in the GBR for the last 3 years: Execution/ Budgeted 1 (%) 2001 2002 2003 Total Current Expenditure Execution Total Capital Expenditure Execution 86.2 66.7 92.5 76.6 97.4 93.2 The level of execution of the ministries has improved significantly since 2001 when only 38% of government institutions executed above 90% of the figure stated in the GBR. In 2003 66.7% of government institutions performed above 90%. The process of estimating revenues has been improved in recent years. Better coordination between MFPC, the DGI, DGSA and the DGT in the process of estimating current and capital revenues has led to a more accurate and reliable GBR. 1 MHCP -Informe de Ejecución presupuestaria 2001, 2002, 2003 4
4. Fiscal Reports Include grants projected to be provided by donors The GBR presents sections that exhibit: (i) donations and loans by origin and use, (ii) a section showing the use of HIPC debt relief by origin, executing entity and classification of expenditure, and (iii) a section that provides general information of PRPE by executing entity, program and classification of expenditure. The Budget Execution Review includes a section of the level of execution of current and capital expenditure financed through external donations or loans, including HIPC debt relief. Budget classifications 5. Functional and/or program information provided. All budgetary expenses and the GBR are classified in an administrative, economic and programmatic basis. No changes have been made in the classification system. 6. Poverty-reducing expenditures clearly identified in the budget. PRPE are defined in SPRS. They are broken down by programs and policy actions. For each action, the executing agency and the dates of execution are identified. The GBR includes a section that specifies the origin, use and classification of HIPC-debt relief and PRPE. The Social Supplementary Fund (SSF) is the mechanism the government uses to manage the immediate priorities in the SPRS and through SECEP, the government provides a yearly (quarterly starting 2004) follow-up to PRPE. Medium-term projections 7. Multi-year expenditure forecasts integrated into the budget cycle. Although there are some multi-year forecasts, particularly with regard to Public Investments, no medium-term expenditure scenario is used in GBR preparation. The 2004 Government Action Plan to Improve Financial Management on its I- Phase introduces the preparation of middle-term projections of fiscal revenues and expenditures. On its II-Phase, the plan includes the preparation of a 2006 GBR in a middle-term framework. 5
C. Budget execution Internal controls 8. Level of arrears. The level of arrears in central government ministries is low. Commitments and payments are controlled by quarterly and monthly quotas set by the MFPC for budgeted institutions. Current Budgetary Norms establish that as long as an expense is compromised and registered in SIGFA, payment will be recognized ex-post the closing date. Some arrears exist in other branches of the government such as the National Assembly, Electoral Council due to weak managerial practices and cash flow programming. 9. Internal auditing is active. A diagnosis of the quality and effectiveness of internal auditing units was performed in some Ministries in 2003. In 2004, the government started the implementation of an action plan (CFAA) to strengthen internal controls and auditing capacity to assure an effective and transparent budget execution. The AP includes training (6 seminars) auditing units in SIGFA program including the CGR. By December 2004 the governments will build up auditing capacity in 10 central government institutions including MTI, MECD and MINSA. 10. Tracking surveys to supplement internal controls. Tracking surveys are not conducted to supplement internal controls. The 2004 Government Action Plan incorporates the implementation of public expenditure tracking surveys. Reconciliations 11. Fiscal and bank reconciliations are performed periodically. Bank reconciliations are now performed periodically. A new procedure, Minuta Unica de Recaudacion, has simplified the process of bank reconciliations, providing real time information of revenues collected through the banking system. Fiscal conciliations of revenues collected through DGI and DGSA is satisfactory but not timely. Expenditure reconciliations with executing units are performed periodically by the MFPC through SIGFA. Some discrepancies arise from the timing in entities that do not have a real time connection. Internal and External debt conciliations are performed by the Directorate of Public Credit in MFPC and The Central Bank of Nicaragua (CBN) respectively. 6
D. Budget reporting Reports 12. Monthly expenditure reports provided within four weeks of end of month. SIGFA enables the MFPC's General Accounting Office (GAO) to obtain monthly reports on the budgetary execution of the various ministries. However, not all ministries provide the complete information on time. 13. Good quality classification of poverty reducing spending is reflected in the in-year budget reports. The quarterly budgetary execution reports submitted to the National Assembly and the GCO include the functional classification of expenditures. These reports provide information by institutions, economic categories and investment projects. The SSF through SECEP publishes a quarterly report on PRPE. The report includes information on Total PRPE, PRPE by pillar, institution and project, and sources of financing including HIPC Debt relief funds. Audited final accounts 14. Accounts closed within two months of year end. Accounts are closed within six weeks following the end of the fiscal year. 15. Audited accounts are submitted to the legislative branch within twelve months following the end of the fiscal year. The final budget settlement account is submitted to the National Assembly and the GCO three months after the end of the fiscal year, but the account is not externally audited by the GCO. E. Procurement 16. The new procedure system supports efficiency and effectiveness in the expenditure of public funds through clear and enforceable rules that promote competition, transparency and value for money. The procurement system is based on the Law 323. The government is working in an amendment that will provide a modern and efficient procurement system. Meanwhile, work is being done in the standardization of procurements documents that will meet international criteria. The government is also strengthening the transparency of the procurement system through the use of Internet services such as e-disclosure (disclosure of information), e-tendering (Bidding mechanism) y e-purchasing (Purchases). The assessment is summarized in Table 1 7
II. ONGOING OR PROJECTED TA. Table 2 presents information on the main TA in progress or planned by multilateral institutions or donors that will help improve PRPE tracking over the next two/three years. Ongoing TA The Bank, through its Economic Management Technical Assistance (EMTA), is the main provider of assistance. EMTA includes various major reforms that will improve Nicaragua's capacity to track PRPE: the expansion and reform of SIGFA, strengthening programming and fiscal management capacity, and the creation of the civil service. The IDB has provided support to strengthen the national public investment system, improve the efficiency and transparency of government procurement and contracting, and the strengthening of the tax administration institutions. The US Treasury Department has assigned a special advisor to support debt management and the development of a strong capital market in Nicaragua. Projected TA The Bank, through PSTAC project, will provide TA for the next three years in order to continue with the implementation of EMTAC, allowing the government to execute policies included in SPRS and comply with the commitments and the PRSC action plan. Specifically, the project will (i) strengthen the government s financial and fiscal management capacity, (ii) implement the civil service and public administration reform, and the strategic planning capacity and public policy follow up. The IDB will continue supporting the technical capacity of the MFPC s DGT and the strengthening of the procurement system. Furthermore, it will support the government s budgeting process and its debt management capacity. The European Union will also pool resources to strengthen the government s public financial management. Specifically, it will support the MFPC s DGB. COSUDE will assist to build up the financial planning capacity of the government through the implementation of a medium term expenditure framework. III. NEEDED REFORMS NOT SUPPORTED BY TA The Bank, IDB and other donors are supporting the reforms included in the governments AP. The AP is the results of the findings stated in the Country Financial Accountability Assessment (CFAA), Country Procurement Assessment Report (CPAR), Public Expenditure Review (PER), and the Poverty Reduction Strategy Credit (PRSC). 8
Although The Bank through its PSTAC and other bilateral organizations are financially supporting the majority of the short-term reforms to improve the PEM capacity, additional funding will be needed to continue with the consolidation of those institutions linked to the public financial management process. Short-term reforms to improve PRPE tracking capacity. The main reform executed to improve the government s PRPE tracking capacity was the restructuring of The Social Supplementary Fund. The SSF is the channeling and tracking mechanism the government employs to address the immediate priorities of the SPRS. It is a virtual forum that ensures that the HIPC Debt relief funds and other possible sources of financing are allocated to finance PRPE. In 2003 the GoN presented the SSF Operating Regulations which provide the operating guidelines, objectives, member functions, and follow-up information requirements. SECEP has been given the mandate to serve as the channel between the SSF and the executing entities. The MFPC through DGB, DGT and SIGFA, provide SECEP with technical assistance to accomplish its objective. To obtain an adequate tracking of PRPE and expenditures of HIPC resources, the government through SECEP presented a format to the Bank that will be used as the official tracking document for the PRPE. The format was approved by The Bank and established as the official quarterly PRPE and PRSC-PR tracking document. Other reforms implemented since the first evaluation in 2001 are: 1. The expansion of SIGFA to 42 central government agencies and institutions. 2. The design and implementation of the Treasury module in SIGFA. 3. The installing of SIGFA in GCR offices to audit public accounts on line. 4. The inclusion of PRPE tables in the GBR. IV. ACTION PLAN In November 2003, the Government agreed on an action plan to improve its public financial management capacity. The plan includes specific actions to develop the governments: (i) budgeting formulation, execution and evaluation capacity, (ii) treasury function, (iii) internal controls and auditing mechanisms, (iv) accounting system, (v) external donor coordination, (vi) debt management and (vii) revenue system. Table 4 presents a summary of the short-term and medium-term actions included in the governments Action Plan to Improve Public Financial Management 2. Quarterly follow-up meetings and bi-annual progress reports are the mechanisms used to keep track of the actions taken to accomplish the annual objectives. 2 A copy of the government s action plan for 2003, 2004 and 2005 is available 9