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January 14, 2016

Managing Expenditure Arrears in East Africa

Afritac east

Posted by Amitabh Tripathi[1]

Accumulation of expenditure arrears is a persistent problem across some East AFRITAC (AFE) countries[2] where they range between 1-3% of GDP. These arrears distort the planned implementation of the budget and negatively impact on the government’s finances and ability to deliver essential public services. In addition, incomplete information on arrears presents a risk that the real size of the government’s deficit is concealed and the level of its liabilities understated.

In recent years, member countries have been focusing on establishing the level and sources of expenditure arrears and taking steps to prevent their recurrence. These initiatives have benefitted from enhanced provisions on commitment controls, multi-year commitments, and in-year changes to the budget, coupled with improvements in the disclosure of arrears and other liabilities. However, despite some improvements, there remain many gaps in the recognition, reporting, monitoring and prevention of arrears.

These issues have become even more significant in the context of the East African Monetary Union (EAMU) protocol that requires partner states to monitor, disclose and manage their fiscal risks[3]. Accordingly, following requests from some of its member countries, AFE organized a four-day regional workshop on “Expenditure Arrears: Strategies for a Recurring Problem” in Dar es Salaam, Tanzania during December 2015. This workshop was attended by 27 officials from the Ministries of Finance and Planning in Ethiopia, Kenya, Malawi, Rwanda, Tanzania (including Zanzibar), Uganda and South Sudan. The Permanent Secretary of the Ministry of Finance in Tanzania, who opened the workshop, underlined the importance of preventing and managing arrears for countries in the region.  

The workshop sessions were designed around the following themes: 

  • Establishing a robust framework for defining, categorizing and reporting on expenditure arrears.
  • Enhancing the legal and regulatory framework for managing arrears, improving the credibility and reliability of the budget, the budget release process, commitment controls and role of IFMIS in the expenditure control environment.
  • Strengthening procedures for the control and prevention of future arrears and developing a comprehensive, transparent and credible arrears clearance strategy.  

The workshop examined international good practices and identified practical challenges to the prevention and management of expenditure arrears. Like other AFE regional workshops, the workshop provided a platform for knowledge sharing across the region. Country teams presented an assessment of the current situation, the issues and challenges in monitoring and preventing expenditure arrears, and proposed measures to address these challenges. 

The workshop discussed measures in five main areas:

  1. Improving budget credibility and reliability – while most AFE countries have adopted a multi-year perspective to their budget formulation process, the links between multi-year estimates and annual budget preparation continues to be weak. The challenges identified included expenditure appropriations being based on overestimated revenue and financing assumptions; pressure to fit additional capital projects in the annual budget envelope resulting in reduced allocations for on-going projects; and under-provisioning for essential expenditures such as utilities, entitlements, and medicines. Strengthening the medium term expenditure framework and improving the reliability of revenue and expenditure projections were seen as essential steps towards improving budget credibility.  
  1. Effective commitment controls and cash management– most AFE countries have a basic commitment control system as part of their IFMIS design. However, several factors compromise the effectiveness of these controls, including revenue shortfalls, cash rationing and unpredictability in budget releases. These factors encourage spending agencies to enter into commitments outside of IFMIS; non-recording of commitments relating to utilities, rents and subscriptions; and ineffective monitoring of multi-year contracts that are the biggest source of arrears in the region. Participants recognized that implementing effective commitment controls required improvements in cash planning and management, the budget release process, and better recording and monitoring of multi-year commitments.  
  1. Reporting of arrears - participants argued that arrears reports should be included in the normal budget execution and reporting framework, as well as the annual financial statements. Reports should provide information on the size, age and composition of arrears. The coverage of reports should be progressively expanded from budgetary central government to the wider public sector. Anchoring reports on arrears within the overall fiscal reporting framework should enable early detection of arrears accumulation.
  1. Strengthening PFM legal frameworks – participants noted that recent revisions to the legal frameworks in Kenya, Rwanda, Uganda and Tanzania had not specifically addressed issues related to expenditure arrears. PFM laws and regulations should provide a clear definition of when a payment is in arrears, appropriate reporting requirements for spending agencies, and strengthened enforcement provisions. 
  1. Strategy for preventing and clearing arrears - international experience suggests the importance of a comprehensive, transparent and credible strategy for controlling and preventing future arrears. Most AFE countries are taking steps to establish and enforce preventive mechanisms so that spending agencies do not incur arrears in the expectation that government will release funds to clear them. The participants recognized the need for a sound clearance strategy when arrears have built up. This would require countries to analyze the existing stock of arrears, the sectors and agencies that are prone to incurring arrears, and the main causes of arrears accumulation. Countries should also establish mechanisms that facilitate the independent verification of arrears, and the development of transparent criteria for prioritizing their settlement, taking into account the available fiscal space.

East AFRITAC will continue to provide technical assistance to support expenditure arrears prevention in the region. The workshop identified an immediate need for assistance in strengthening the credibility of budget formulation, enhancing the effectiveness of multi-annual commitment controls, and supporting the design and adoption of standard reporting templates for improving the coverage of arrears reporting.

Further information on the workshop is available at http://www.eastafritac.org. Readers are encouraged to share any comments and relevant experience on the topics discussed at the workshop.

[1] Public Financial Management Advisor, East AFRITAC.

[2] The AFE countries include Eritrea, Ethiopia, Kenya, Malawi, Rwanda, Tanzania and Uganda.   

[3] Disclosure of information on the stock of arrears and measures for their mitigation are part of the Fiscal Risk template agreed to by the EAC countries. 

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.

Comments

Its true that reporting of arrears should be regularised. But we should not underestimate the challenge this presents. Reporting of arrears needs to go beyond the normal budget execution and reporting framework. Many of the liabilities reflect informal contracts or arrangements with construction firms and other suppliers (reflecting non competitive procurement) where there is an implicit understanding the supplier will not be paid in the current financial year, with a compensatory inflated price. Many PEFA assessments also ignore this larger pool of arrears, limiting their analysis to arrears to liabilities recorded in the finance system without consulting the private sector directly or at least quantifying invoices held by line ministries outside of any FMIS purchasing and payments systems.

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