The PFM reforms already implemented and those that are being currently discussed could have significant impact on three areas: i) fiscal discipline; ii) allocation of resources among sectors and programs; and iii) technical (or productive) efficiency in budget implementation. For instance, the ongoing reforms aimed at improving the monitoring of public investment execution could help strengthen the productivity of public investment and external aid (which is among the highest in per capita terms in the region and the world). The adoption of an MTEF will contribute to fiscal sustainability and better allocation of resources. And improving treasury and debt management will save public resources, among other positive impacts.
The remainder of this blog post provides a summary of some Nicaragua’s key achievements in PFM, as well as of remaining challenges. The main objective of this post, besides recognizing Nicaragua’s achievements, is to illustrate the obstacles that a relatively small Latin American country faces in improving PFM -- obstacles which are common to other countries of the region, if not of low-income countries in general.
I. Nicaragua’s key PFM reform achievements:
The legal framework for PFM has been modernized. The national assembly approved a financial administration law in July 2005 (Law 550/05, modified by Law 565/2005) which adopted a modern approach for PFM. Among the key elements that could be highlighted from the law are: the inclusion of a transparency principle and its operationalization (art. 5d and 5f); the possibility of including a contingency reserve in the budget (art. 39); the treatment of contingent liabilities as public debt (art. 4g); the establishment of a Treasury Single Account (Caja Unica del Tesoro in Spanish); the obligation to prepare an MTEF and present it in an Annex to the budget, including information on physical execution of the programs, the production of goods and services (art. 37), and the recurrent costs of investments (art. 40); and the obligation to assess if the policies, physical goals and outputs (goods and services) of the programs and projects have been achieved (art. 19, 37 and 48). Although a few key recommendations formulated by FAD’s technical assistance were not included, particularly the integration of the decentralized and autonomous agencies into the budget and the Treasury Single Account (TSA) and the restriction on the assembly’s ability to increase the aggregate budget expenditure ceiling, the new legal framework marks a considerable improvement relative to the previous situation.
New accounting tools have been developed. In 2008 the authorities finalized the preparation of manuals for a new budget classification, integrated in a new chart of accounts (CoA), which were reviewed by FAD and the IMF’s Statistical Department (STA). These tools are now, for the most part, consistent with international standards. Besides facilitating fiscal control, adopting better accounting tools is a precondition for improving the allocation of resources between priorities and the costing of programs and products, and therefore, for improving expenditure efficiency.[2]
A medium-term expenditure framework (MTEF) has been produced since 2006, in line with the provisions under Law 550 (Art. 37). The implementation of the MTEF started as a pilot process for three entities[3] (the ministries of Education, Health and Transport and Infrastructure) and its coverage has been gradually expanded. A unit was created at the Budget Directorate (the Medium-Term Budget Directorate or Direccion de Presupuesto de Mediano Plazo in Spanish) in charge of coordinating the process and preparing the reports. Even though the MoF has received support from some donors to develop the MTEF[4], most of the work has been done by Nicaraguans: in 2005 they developed the methodology for the pilot exercise, they have been responsible for the definition of all output and outcome indicators and the above-mentioned Directorate prepares the MTEF report jointly with another MoF unit (the Office of Fiscal and Economic Affairs or Oficina de Asuntos Fiscales y Económicos, OAFE). The MTEF will facilitate the allocation of resources between sectors and programs, could help guarantee the sustainability of the different programs and by providing more predictability of resources allocated to the budget units, could improve the execution of the different programs and therefore expenditure quality and productivity. Some of the current MTEF’s main characteristics are:
- It is prepared on a rolling basis, for a three-year horizon and by institutions and programs. It contains output and outcome indicators for each program and their respective goals for the three years (the last MTEF that has been prepared covers the period 2009-12). It also includes information on the cost of programs for the period mentioned and information on the public investment program (PIP). SIGFA allows the preparation of the MTEF in the system and the inclusion in it of the outputs, outcomes and impacts of the different programs (the last MTEF includes indicators for approximately 112 institutional programs). Currently, the authorities are monitoring only the social goals established in the Economic and Financial Program (Programa Economico-Financiero-PEF), and monitoring these goals is a manual process. However, the authorities are developing a module (called SISEP) in their financial management information system, SIGFA, for monitoring the products (and outcomes) of the different programs and their objective is to gradually cover all the goals, starting with a pilot process covering the ministries of Education, Health, Transport and Infrastructure and Agriculture and Forestry.[5]
- It currently covers 25 institutions (19 belonging to the Central Government and 6 decentralized entities), and the authorities are planning to extend it to 33 entities in 2009, 45 in 2010 and 58 in 2011 (by including more decentralized entities), achieving in this last year complete coverage of the entities that are completely or partially financed by the budget. They also are planning to work in converting the MTEF into a sectoral, rather than an institutional exercise and in improving the costing of the programs.
The monitoring of public investment execution is being improved. An application is being developed within the existent national public investment system, SNIP (Sistema Nacional de Inversión Pública, in Spanish) to monitor the physical execution of investment projects, which will complement the information on the financial execution of the projects which is already recorded in SIGFA. This will hopefully help reduce the low rate of execution of investment projects—a widespread problem in Latin America. Also, given that a big part of the investment budget is externally -donor- financed (around 70% on average), this measure will improve the productivity of aid resources.
Monitoring of municipal finances has been strengthened. Collection of data on execution of the municipalities’ budget on a regular basis has improved. This will facilitate the task of the MoF in achieving overall fiscal discipline. The second version of TRANSMUNI , an application developed to collect information on municipalities, currently covers all the municipalities (153), capturing all their revenues (including own-source revenues) and expenditures on a quarterly basis and at a very disaggregate level (the first version only captured information on execution of intergovernmental transfers). The information on budget execution by the municipalities is being reported to the National Assembly since 2008. The national authorities are using the transfers as a mechanism to obligate the municipalities to provide this information. However, the information is still provided with delay. Also, since TRANSMUNI is not a transactional system (it does not operate on-line) but a template transmitted through the Web, it does not allow the estimation of the floating debt. Furthermore, the information is only consolidated annually and the MoF has not established yet a mechanism to audit the quality of this information.
II. Key Challenges
Adopting a new Budget classification (BC) and Chart of Accounts (CoA). A key issue being discussed currently by the authorities is how to make use of the new budget classification and chart of accounts manuals recently developed. The answer may seem obvious, but it is actually not that obvious when the existing financial and technical restrictions are taken into consideration. The ultimate objective of an updated BC and CoA is to allow the MoF to produce better information on a regular basis for fiscal control and fiscal management (and the evaluation of fiscal policy). In the Nicaraguan case, an additional objective should be to develop in-house the capacity to produce and analyze information in line with international standards and reduce the ministry’s dependency on information produced by the central bank. Currently, the authorities plan to produce fiscal and financial information via bridge tables that link the old and new classifications and not by using the new classification for preparing and executing the budget. The reason for adopting this strategy is that the costs and technical problems of rewriting the existent classification are high. On the other hand, it is not clear yet if the new classification and CoA will be incorporated in the newly planned financial management information system as the central accounting tools, or that they will be used to produce statistical information aligned with international standards through bridge tables as well. The latter may not be the optimal solution given that GFSM 2001 provides a much improved framework for fiscal analysis and for recording and producing fiscal and financial information than previous frameworks[6] (such as, for instance, those based on GFSM 1986). In addition, this option requires the establishment of a one-to-one relationship between the different concepts and categories of the two classifications, a task difficult to achieve and only guaranteed when the BC is completely integrated in the CoA. Not to take advantage of the planned adoption of a new SIGFA to adopt a modern classification and CoA might be a mistake.
Strengthening the SNIP and better integrating the PIP with the MTEF. The SNIP is administered by the Technical Secretariat of the Presidency (SETEC). Besides creating and maintaining an investment project data base, it has developed manuals for evaluating investment projects in different sectors, as well as instructions for proposing projects, and has helped in providing training on project evaluation for public officials. However, even though currently most investment projects are financed and evaluated by donors, most projects financed with internal resources are not evaluated. Therefore, it is important to develop internally the capacity for evaluation, in order to be able to support better the preparation of the investment program. In addition, Nicaragua should also take measures to face its dual budgeting problems. Even though coordination between SETEC, which prepares the investment budget and the MoF, which is in charge of the current expenditures budget, appears to be strong, the recurrent costs of investment projects are still not incorporated in the MTEF. The need to incorporate these costs is emphasized in the legislation. For instance, Art. 9 of Decree 61 of 2001 which created the SNIP states that SETEC should “ensure the consistency between the public investment and the current expenditure, and of the policies, plans and programs of the country, within a short, medium- and long-term framework”. The officials responsible for the MTEF are aware of this weakness, but measures to effectively address it have not been taken[7].
Consolidating the MTEF. Strengthening the MTEF will require measures that in most cases the authorities are already planning to implement[8]: i) moving to a sectoral approach, as mentioned above, which implies refining sectoral definitions and structures; ii) improving the definition and costing of programs; iii) consolidating SISEP; iv) better integrating the MTEF in the budget process, by incorporating the results information during the preparation of the budget; and, as mentioned above, v) including in the MTEF all the recurrent costs of investment projects. The absence of this information makes the MTEF a much less effective tool for improving the budget process.
Adequately recording the budget execution stages. As in many other Latin American countries, in most transactions two or three of the budget execution stages (commitment, accrual, payment) are recorded simultaneously, and generally when the payment is made (or the expenditure is accrued). This impedes assessing the magnitude of the accounts payable and of arrears, and to take measures to avoid the generation of arrears[9]. This occurs despite the fact that SIGFA allows the recording of all budget execution stages. The origin of the problem in Nicaragua lies in the use of “accrual (or verification) ceilings” (cuota de devengado) as the criteria for disbursing funds. There is no use of commitment controls and of payment limits (cuota de pagos) to control expenditures.
Obtaining timely information on budget execution by the decentralized entities. These entities are not connected to SIGFA, despite the fact that they many of them are in practice central government institutions; they implement government policies and are mostly or completely financed with budget resources. Currently the MoF collects information on budget execution of these entities on a quarterly basis through an application called SIGFA-Autónomo. As with TRANSMUNI, this application is not a transactional system (it does not operate on-line) but a template transmitted through the Web that cannot capture information on payables and arrears. In addition, the information obtained is only on expenditures, despite the fact that the application also allows the recording of revenues (which will be relatively easy to record, given that only a few entities have own-source revenues). The MoF should address these problems in order to be able to obtain complete information from these entities on a regular basis and be able to consolidate it with the rest of the Central Government.
Strengthening the monitoring of investment spending. The monitoring tool being developed could be converted in a managerial tool that should also record information from investment projects’ managers on the reasons for delay in execution and on strategies for reducing those delays. This measure will improve accountability and could result in improvements in investment execution.
Monitoring municipal finances and consolidating information on the public sector. A necessary improvement in the existing mechanism for collecting and consolidating fiscal information on municipalities will be to request from them, and particularly from the largest municipalities, information on arrears. Also, consolidating the information on a monthly and quarterly basis instead of annually will facilitate fiscal control of the general government finances.[10] Stronger incentives to provide this information on a timely way should be introduced, as well as a mechanism to audit information quality.
Modernizing the technological platform of the financial management information system. SIGFA is presently a not fully integrated information system and does not operate well on the Internet. The various data-bases are decentralized, causing numerous consistency problems and difficulties in accounting reconciliation. The authorities are committed to modernizing the technological platform of SIGFA and modifying its conceptual design (but they have not yet decided to adopt new accounting tools for the new system, as mentioned above). A joint technical assistance (TA) mission with FAD, the World Bank and the IADB took place in June, 2008 in order to guarantee a unified approach among the three institutions on the recommended modernization of SIGFA. The mission presented to the authorities four basic options: i) in-house development of the new system; ii) purchase of an off-the-shelf solution; iii) contracting a firm to develop the system; and iv) transferring an existing system and adapting it to the country’s characteristics. The mission recommended visiting some countries that have successfully implemented a modern system, including Ecuador, whose new system was transferred from another country, Guatemala, and Honduras, a country that recently modernized its system with World Bank support. This recommendation was followed by the authorities. A new joint mission (WB-IADB-FAD) was conducted in May, 2009, which again recommended the replacement of SIGFA with a completely integrated and Web-based system[11] and also proposed some short-term PFM reforms that can be introduced until the new system has been developed. The WB and the IADB offered to finance the modernization of SIGFA, a project that has attracted the interest of other donors as well (Denmark, Sweden). A workshop was held in June, 2009 to discuss the conceptual model of the new information system. The authorities decided to develop the system “in-house”, on the basis of a limited assessment of the cost-effectiveness of this solution—a solution similar to the one taken by all other Latin American countries. [12]
Strengthening treasury and debt management. There are still important weaknesses in treasury management; and the debt management function has still to be almost fully developed[13]. Even though a Treasury Single Account (TSA) -Caja Única del Tesoro- was created at the central bank, its coverage is limited, reducing its effectiveness. The resources from the decentralized and autonomous institutions, which should really be considered central government institutions, are not included; it is important to stress that their inclusion would neither decrease management autonomy of these institutions or their ability to make commitments in accordance with their budgets. The own-source revenues of the government entities are not included in the TSA either. Clarification on the deposit of loan proceeds is also important, because currently only internal public debt resources are required to be deposited in the TSA. Also the government transfers some funds to checking accounts of central government institutions that are held by commercial banks; the key characteristic of these accounts is that disbursements are automatically replenished by additional transfers of cash from the TSA as expenditures are made by the institution (internationally they are known as “imprest accounts”). These accounts (termed Fondos Rotativos or revolving funds), which amount to 5 percent of nonsalary general budget, circumvent the TSA principle to disburse funds only when payment to the supplier is required and should be eliminated (arts. 111 y 112, Law 550). Electronic payments are a viable option and should be generalized. Currently the Civil Service Directorate writes checks drawn on the payroll account of the TSA; these checks should be written by the Treasury, until electronic payments are adopted. Finally, a cash planning system is still in a pilot phase (a cash program application has been developed but the capacity to use it has to be developed) and a Cash Committee should be formally established to support and oversee treasury decisions.
Reducing the accumulated delay in producing financial statements. Even though there has been much progress in cleaning up the backlog of financial statements for the period 2002-2007, which are expected to be published only in February 2010, a larger effort should be made to publish financial statements earlier in general. Also, even though there has been important progress in developing an inventory of central government mobile assets, it is not clear when this activity will be finalized; and efforts should be directed to develop an inventory of fixed assets as well (land, buildings, etc.). This last activity is being supported in other Latin American countries by the IADB.
Improving the organization of the Ministry of Finance. The MoF still needs some additional organizational changes to better develop some of its key functions. By request of the authorities, a FAD technical assistance mission provided recommendations in November of 2007 to support the institutional strengthening of the MoF. The mission recommended numerous organizational improvements, including the creation of a Directorate for Tax Policy, merging some General Directorates (DGs) such as DG Investment (which should be transferred from SETEC) with DG Budget and DG Accounting with DG Treasury; and transferring some non-essential functions out of the ministry (Property Intendencia). It also recommended continuing the efforts to place essential staff on permanent payroll as well as some key consultants. On the restructuring of the MoF the reform process has been relatively slow, but some important measures have been taken. The authorities recently created a Tax Policy Directorate and also a Department for Fiscal Statistics and have included some employees in the permanent payroll. However, they are facing financial restrictions to staffing these new units.
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[1] The plan also reflects comments and recommendations formulated by the World Bank, the IADB and the IMF’s Fiscal Affairs Department (FAD).
[2] Currently there is a significant delay in the publication of financial statements of the public sector, due to the fact that the account reconciliation process has taken time and a critical decision on the recording of some privatization transactions is still being discussed. On the other hand, the current financial management information system (SIGFA) does not allow “automatic accounting;” its modernization should guarantee that the production of financial statements is greatly enhanced.
[3] Developing an MTEF through a pilot process is not the best option, because one of its main objectives is to help allocate resources among all sectors and programs, and this needs a comprehensive approach. However, Nicaragua didn’t have the resources to develop an MTEF covering all the entities since the beginning and the overall and sectoral ceilings have been always taken into account when developing the pilots. Another limitation to the present MTEF is the dependence on a high proportion of external financing for projects, a relatively unstable source of funds, which is an obstacle for developing a credible and effective MTEF. Therefore, moving completely to budget support financing and guaranteeing it for the medium term will make this tool more effective.
[4] USAID helped in 2005 with the design of the methodology and during 2006-2008 SECO (Switzerland) provided training and technical assistance. The personnel of the MoF working on the MTEF has been funded by the Netherlands (during 2005 and part of 2006), the World Bank (part of 2006), and the IADB (2008 and 2009, through PRODEV).
[5] The monitoring of the program outputs is mandated by Law 550 (arts. 62 and 65, among others) .
[6] GFSM 2001 is accrual based and provides a framework to guarantee consistency between flows and stocks, two important improvements with respect to GFSM 1986.
[7] The information on recurrent costs should be provided to the MoF by the Public Investment Directorate of the Planning Secretariat of the Presidency, the unit in charge of proposing the PIP, which should collect it from all ministries. Apparently, although the submission of this information by the ministries is obligatory, the obligation has not been enforced yet.
[8] Nicaragua is an active participant in the COSEFIN Working Group for implementation of MTEFs in Central American countries, Panama and the Dominican Republic, a group that is supported by FAD.
[9] Even though in many transactions (such as the payment of salaries or pensions) the three stages concur, there could be occasions where the government cannot pay the salaries (or make other regular payments) on time, but if the budget execution stages are recorded simultaneously, it will be impossible to identify these problems.
[10] Producing fiscal information on the consolidated non-financial public sector (NFPS) on a monthly basis will be the ideal situation (or at least on the general government). This implies that the norms should be modified to obligate the decentralized and autonomous institutions (entidades descentralizadas por funciones y otros organos autonomos), the territorial entities (entidades descentralizadas territoriales) and the universities to provide information on budget execution on a monthly basis and not on a quarterly basis (as arts. 78, 83 and 88 of Law 550 establishes) and with no delay (the Law gives them one month for submitting the information). It also implies that a methodology for consolidation should be developed.
[11] The mission proposed a Web-based system, which will completely integrate the financial and administrative activities (and therefore, with almost no interfaces). The new system envisaged is equivalent to the ERM systems used in the private sector. The system’s architecture will be “service oriented”, reflecting the most recent technological developments.
[12] There are only a few cases of municipalities in Latin America that bought their system in the market. Although comparing the cost effectiveness of off-the-shelf and in-house developed system is not an easy task, some off-the-shelf systems may cost less and/or be rolled out in a shorter period than in-house systems.
[13] The Credit Directorate has developed a debt policy document (with WB support), but this has not yet been implemented. Also, the Directorate is adopting a modern organizational structure, with front, middle and back offices.
Despite capacity constraints, including a limited number of staff fully familiar with modern financial management techniques, the Ministry of Finance (MoF) of Nicaragua has continued since 2005 to roll out wide-ranging public financial management (PFM) reforms. These reforms have resulted in a gradual improvement of the country’s PFM practices. The existence of a number of “champions” for reform within the MoF, including the Minister himself. and other high level officials, mostly explains this progress. Even though important challenges remain, if political reform ownership is sustained, and training widely provided, additional significant improvements are to be expected in the next few years. 
