Expenditure Commitment Controls, the essence of fiscal discipline – IMF Technical Guidance Note
Posted by Dimitar Radev and Pokar Khemani
Fiscal discipline, one of the key objectives of good public financial management (PFM), requires a well developed expenditure control framework, including at the commitment level, to prevent accumulation of payment arrears. A July 2006 IMF FAD Technical Guidance Note, "Commitment Controls," by FAD staff members Dimitar Radev and Pokar Khemani, provides technical advice on a number of areas related to commitment controls, including objectives, preconditions for successful implementation, and institutional design. These guidelines are intended to apply primarily to IMF operational work and technical assistance but have also implications for the relevant government departments and agencies within national, provincial/state and local jurisdictions.
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Definition and Objectives
Commitment, in the PFM context, means an obligation to effect a future payment subject to the fulfillment of certain conditions (contractual or otherwise). Commitment is the critical stage of the expenditure process. Controlling commitment is essential for controlling expenditure. The key objective of commitment controls is to manage the initial incurrence of obligations, rather than the subsequent cash payments, in order to enforce expenditure ceilings and avoid expenditure arrears. To this end, the commitment control system imposes limits on commitments.
The limits on commitments can be based on budget appropriations or on cash plans. Ideally, commitments should be regulated by annual budget appropriations. However, this approach could prove to be insufficient in preventing the incurrence of arrears in case of overall revenue shortfalls. Commitment controls based on expenditure ceilings or cash limits reconcile the availability of resources with commitments, thus ensuring that spending units enter only into contracts or other arrangements for which sufficient unencumbered cash balances are available or likely to be available at the time of their payments.
Preconditions for Successful Implementation
The introduction of effective commitment controls requires a comprehensive approach involving a number of PFM areas.
- A realistic budget is a key precondition for efficient budget execution, including commitment controls.
- A good cash planning system for setting credible expenditure ceilings is needed to support commitment controls.
- A good accounting and reporting system is also required for effective commitment controls. The ideal situation would be when the accounting and reporting system is organized on an accrual basis, because commitments are formally accounted in the system. However, it is not the case of developing countries that apply cash-based recording and reporting. The cash-based systems require additional records with respect to commitments.
Institutional Design and Operational Arrangements
Institutional design and operational arrangements for commitment controls vary from one country to another. However, the many varieties of commitment control arrangements can be broadly classified in two main categories:
(1) centralized commitment controls are performed by a central agency, usually ministry of finance (MoF)/treasury.
(2) decentralized commitment controls are performed by respective line ministries/spending agencies.
If the basic PFM system and control procedures are weak and the organizational arrangements are fragmented with limited skills and capacity, building a centralized system is the more appropriate and cost-effective way to control expenditure commitments. On the other hand, when the basic PFM system is well established and supported by modern technologies, decentralized commitment controls could be a viable alternative.
Regardless of the institutional design, a commitment control system should meet the following basic operational requirements:
- a commitment should be incurred only when it is within the budget appropriations, respectively within the expenditure ceilings/cash releases approved by the MoF;
- no payment should be made unless it is based on an approved commitment;
- outstanding commitments and unpaid bills should be monitored on a regular (preferably monthly) basis; and
- payment arrears should not be allowed to accumulate, and if they do, they should be cleared as a matter of priority.