24th September 2022, Skopje – “Yesterday is gone, tomorrow has not yet come. We have only today, let us begin”. I will begin this column with the profound phrase of our humanitarian Mother Therese, who left mark throughout history, and dedicate it to the sweeping reforms in public finances. I can say that we are already in an advanced stage of establishing the “smart” finances concept, which is based on a clear strategy, maintainability, accountability, reforms and transparency. In fact, SMART acronym (S-strategical, M-maintainable, A-accountable, R-reform oriented, T-transparent) reflects precisely that. Only a properly set public finances system can bring new investments, new jobs and better living standards for the citizens through a smart, sustainable and inclusive growth.
In order to ensure such system, we have commenced improving the legislation in several key areas, such as planning and budgeting, public procurement, public internal financial control and public debt management. Structure of the major public finances reform has been set. Significant part of the systemic laws has already been adopted, respective bylaws are being prepared and adopted, with their implementation to follow. New Organic Budget Law, introducing significant reforms in the budget processes, was adopted last week. Amendments to the Law on Financing Local Government Units, which provide for strengthening the fiscal decentralization by ensuring more funds for the municipalities, as well as greater accountability and transparency, was adopted about a month ago. Law on Public Internal Financial Control is pending parliamentary procedure, while all bylaws regarding the Public Procurement Law have already been adopted. The Government adopted the Tax System Reform Strategy in December 2020, with the Tax Reform Concept, which underwent broad consultations, being already prepared. In December 2020, the Government adopted the Action Plan on Implementing the Recommendations under the Public Investment Management Assessment (PIMA Action Plan), covering the activities which are to be implemented by 2024 inclusive. New laws on strengthening the institutional capacities of the institutions relevant in the field of public finances and state audit, i.e. Law on Public Revenue Office and Law on State Audit, undergo final preparations, and are aimed at strengthening their independence.
Reforms amid Crisis
In the past three years, economies worldwide, including our economy, faced were severely scared by the crises. On top of the measures the Government has implemented to mitigate the crisis impact (7 anti-crisis sets of measures since the onset of the pandemic), we have not ceased building a better public finances system, coupled with reform activities. All relevant international financial institutions have also recommended this, commending the Government’s commitment to work on the systemic reforms in exceptionally difficult times. Well-set public finances system can provide for faster recovery of the economy from the crisis, as well as ensuring sustainability of both the economic growth and the development. Therefore, answer to the question posed by some of the social stakeholders – whether the timing to implement public finances reform amid crisis is right, is that NOW is the best timing so as we can have a better FUTURE.
Public finances reform is aimed at longer-term and better planning of budget programs and budgets, sustainability and continuity in implementing the policies, more just model from the point of view of revenues, expenditures and the manner of financing, i.e. how the funds are collected in the Budget and how citizens’ money is spent, as well as monitoring and measuring the performance. SMART Finances concept focuses on re-orienting the traditional budgeting to performance-based budgeting and introducing multi-annual budget framework. One of the main pillars of public finances reform are transparency, accountability and allocating public funds where greater benefits are generated when prioritizing the optimal policies in support of both the citizens and the businesses, as well as introduction of both the “value for money” concept when creating the Budget and the so-called key performance indicators.
New Organic Budget Law Strengthens the Credibility of the Budget Planning Process
The reader can easily recognize, considering all the above mentioned, the crucial importance of the new Organic Budget Law for the introduction of the new public finances system. The Law, to my great delight, was adopted by the Parliament last week with a broad consensus. The Budget is an instrument to implement economic policies. There lies the significance of the new Organic Budget Law, which is quite complex due to the scope and the impact it has on the overall economic and social system. Previous legal solution was in force for almost two decades. Trends, directives, as well as IFIs’ recommendations, were all making reference to the need of a new legal solution to replace the former one. The new Law observes the good European practice and uses the benefits of the modern technology in support of strengthening the processes. It ensures a framework for pursuing sound, predictable and sustainable fiscal policy, as well as increased budget discipline and accountability.
Number of key changes are introduced under the new Organic Budget Law, which pertain to planning, managing and performance and execution of revenues and expenditures, as well as fiscal transparency and accountability. One of the key reforms envisaged under the Law is the medium-term projecting, i.e. medium-term budgeting and five-year fiscal strategy. The Law provides for strengthening the structure and the contents of the Budget and the management of public financial and non-financial assets, including publishing Registry of Public Entities. Setting fiscal rules and fiscal principles, as well as establishment of a Fiscal Council, which is to provide independent and professional analyses and opinions on macroeconomic and fiscal assumptions, the Fiscal Strategy, the Budget, the budget execution reports, the fiscal risks, etc., comprise significant part of the reform. To the end of increasing the Government’s accountability, statement on fiscal policy is introduced, which is to include guidelines for the fiscal strategy during the Government’s term. Moreover, by improving both the quality and the quantity of the reports, fiscal transparency will be enhanced. Integrated Financial Management Information System – IFMIS will ensure better planning and monitoring of budget revenue performance and budget expenditure execution.
Budget preparation cycle is expanded so as to provide more time for better planning and inclusiveness in the process of preparation by introducing mandatory public debate on the draft Budget, prior to the parliamentary procedure. Furthermore, Budget preparation process is aligned with the preparation of the three-year Economic Reform Program, which the European Commission assesses, followed by recommendations on future policies and reforms in the country. Hence, a strong link of our economic policies and reforms with the EU integration process is provided.
In brief, we have set a framework for pursuing sound, predictable and sustainable fiscal policy, as well as increased budget discipline and responsibility. Given the new legal solution, we expect for the fiscal policy to be focused on consolidation of public expenditures by gradually reducing the deficit level, as well as redesigning public expenditures through scaled-up investments in the field of infrastructure.
I dedicate this column to the novelties brought about with the new Organic Budget Law. Why do I consistently emphasize the importance of this Law? Because it sets most of the pillars in the smart finances concept, i.e. economic analysis and macroeconomic framework, Budget planning, integrated public finances and control.
Strengthening the Analytics and the Projections
Let me begin with the setting of the framework – analysis and projections. By strengthening the capacities for analysis, introducing new tools for macroeconomic forecasting and projections in the longer run, as well as a comprehensive fiscal risk assessment, both prudency of fiscal policies and accountability will be strengthened. Moreover, by introducing fiscal rules and establishing a Fiscal Council, sustainability of public finances will be enhanced through an independent assessment of the fiscal policy, the economic strategies and their implementation, as well as assessment of the baseline and macroeconomic and budget projections used when preparing strategic documents related to public finances.
Number of activities will be carried out as regards the availability of data on revenue analysis, preparation of reports in line with the best EU practice and strengthened modelling capacities. Furthermore, activities will be also undertaken pertaining to expanding the scope of the economic analyses and the risk impact assessment, developing new tools for macroeconomic forecasting (including the CGE model) and strengthening the capacities for fiscal risk assessment. By having the relevant institutions organizing training for the MoF’s employees, analyses of the trends in certain areas of the national economy, such as the labour market, the informal economy, productivity assessment and competitiveness of the economy, etc., will be improved. In addition, impact of certain economic policies, reforms or measures will also be assessed.
Fiscal Council – independent body, which will assess the fiscal policy
Fiscal Council will, to a great extent, impact the public finance sustainability growth, via independent assessment of the fiscal policies and the strategies, as well as the projections, while also supervising the implementation of fiscal rules, thus additionally increasing the fiscal transparency. As per the new Organic Budget Law, this independent body will be composed of three members proposed by the Macedonian Academy of Sciences and Arts and the National Bank, which will be elected by the Parliament. Members will be experts in the field of public finance, macroeconomics or economics. What is crucial about this body is its autonomy and independence in preparing opinions and analyses about the projections and the data in both the Budget and the Fiscal Strategy, as well as the other documents.
At present, with the conditions being created therefor, i.e. upon adopting the Organic Budget Law, activities have been initiated for the purpose of preparing the by-laws and other acts aimed at establishment of the Fiscal Council. In cooperation with the international financial institutions, best practices in the region and the EU will be analyzed, which will provide for establishment and operationalization of the Council.
Medium-Term Fiscal Strategy, including projections based on sectoral approach
By enhancing the analytical capacities, the foundations are set for the next and most important step – budget planning. New Organic Budget Law provides for longer-term planning and projecting, which will be more realistic and based upon previous performance. Strengthened medium-term framework is very significant aspect in this process, which will be made possible via the medium-term Fiscal Strategy based upon sectoral approach.
Fiscal Strategy will be the fundamental document, which will provide for predictable and sustainable fiscal policy. This medium-term document will contain a wide range of data about all levels of government and projections, as per the set strategic priorities and macroeconomic parameters. Furthermore, activities will commence, pertaining to projections based on sectoral approach on the basis of high-quality data and analyses, with wide range of data, including new tables and charts about the Central Budget and the local government budget, as well as data on projects financed with IPA funds. Comparative analysis of the projections with data from the previous Fiscal Strategy, as well as comparison with the projections of other domestic and international institutions, will also be made.
As regards the upcoming period, medium-term fiscal projections will be based upon medium-term baseline scenario and new initiatives. Baseline scenario incorporates the fiscal projections, being in line with the common competences of the budget users, which are a result of the already approved multi-year commitments, contracts and on-going projects. The new initiatives generally pertain to new projects and new liabilities, significant changes in the time and financial framework of the projects, as well as changes in the legislation causing fiscal implications upon the Budget. This will provide for greater credibility of the projections, as well as increased accountability and transparency via the alternative scenario. Moreover, the activities, which are be launched, will be aimed at enhancing the medium-term projections at public enterprises and companies at central level.
Performance-based budgeting will provide for improving both the efficiency and the effectiveness of public expenditures. Performance-based budgeting aims to ensure that the key decision and policy makers will systematically take into account the results to be achieved by executing the expenditures, i.e. the best way to improve the expenditure policy making is by using the performance-related data. In order to attain this, the general objectives (policy-related), the specific objectives (related to certain programs), as well as the desired results, i.e. the indicators (related to the sub-programs) should be clearly defined. In addition, amounts spent for a specific purpose – input indicator, are also determined. This will provide for concise and transparent monitoring of the fund spent for a specific purpose, as well as the results based thereupon. Such manner of planning is expected to contribute to both fiscal consolidation, as one of the fiscal policy goals, and improved implementation of the capital projects.
Centralized Digital Platform on Public Finance Management – IFMIS
Integrated Financial Management Information System (IFMIS) is the final link in the chain, the goal of which is improved efficiency and increased transparency in public finance management by connecting the existing fragmented and disconnected systems to a single centralized digital platform. IFMIS will provide for setting up a multi-year budget framework, public investment management, automated monitoring of the liabilities, as well as fixed asset and debt management. IFMIS is in support of Government’s commitment to GovTech, i.e. incorporating state-of-the art technologies in the operations. During the IMF and WB Constituency, taking place in Sarajevo this year, financing of IFMIS implementation was the ongoing topic of discussion, all to the end of implementing the Law as soon as possible.
Building Capacities aimed at Implementing both the Legal Framework the Reforms
A lot has been achieved in a relatively short period, amid extremely turbulent times, however, great deal of work is still ahead of us. I would like to hereby stress that in order to enable full implementation of the budget reforms, it is necessary to strengthen the human capacities of both the Ministry of Finance and the budget users, by also including trainings, as well as via professional development for applying new methodologies, tools and processes when preparing the Budget and the medium-term projections.
Undoubtedly, for the purpose of successful implementation of the public finance reforms, modernization and reorganization of the administration, as well as strengthened institutional capacities appear to be necessary. This was actually one of the leading postulates when founding the European Union, as Jean Monnet than said, “Nothing is possible without men, but nothing lasts without institutions”. In other words, with no credible institutions in place, there are neither sustainable policies nor reforms. Being guided by this principle, in order for the above-mentioned reforms to be sustainable, a new systematization and digitalization of the processes in the Ministry of Finance was carried out, by introducing new organizational units aimed at strengthening the public finance management. Organizational changes imply improved budget planning and analyses, enhanced system for managing and projecting cash flows of the Treasury Department, establishing a new Asset Management Department at central level (financial and non-financial assets, including real estate), new Public Investment Management Department (in order to evaluate, monitor and improve the realization of public investments), new Unit on Concessions and Public Private Partnerships, as well as strengthening the Public Internal Financial Control Units and Public Sector Financial Inspection Units (in order to strengthen the financial control and the discipline). In addition, the tax policy area is strengthened, via its harmonization with the EU Directive and Regulations, while establishing Public Finance Academy as a separate organizational unit within the Ministry. For the purpose of strengthening the human capacities and increasing the efficiency of the processes and the operations of the Ministry, human resource management is to be enhanced, with the IT organizational setup being improved as well. Macroeconomic Policy Department will also undergo changes and improvements, which will be transformed into Economic Policy and Development Department, aimed at improving the economic modeling and projections, with the introduction of the chief economist position in the Ministry of Finance standing out as a novelty thereof. Strengthened institutional capacities, modernization and digitalization will also follow in the other bodies within the Ministry of Finance , i.e. the Public Revenue Office, the Customs Administration, the Public Revenue Office, the Financial Police Office, the Financial Intelligence Office, the State Foreign Exchange Inspectorate and the Property and Legal Affairs Office.
In addition to the reforms foreseen under the Organic Budget Law as the cornerstone thereof, other reforms are also pending, which should complete the process of creating the SMART finance system, which will be elaborated on in one of the following columns. Adoption of this systemic law is an outstanding success in designing improved public finance system, and the public should be well-informed thereabout. We will keep our enthusiasm, as well as remain committed to working hard further on, since by building a better system, we are also building a better life for our citizens.
Fatmir Besimi, Minister of Finance