Colombo Telegraph

Finance Ministry Annual Report 2013: Rich With Data But Poor In Statutory Compliance

By W.A Wijewardena –

Dr. W.A. Wijewardena

Comprehensive progress report of the Government by Ministry of Finance

The Ministry of Finance and Planning has issued its Annual Report for 2013 which it says has been published in terms of Section 13 of the Fiscal Management (Responsibility) Act No. 3 of 2003 (the report is available at: www.treasury.gov.lk).

The report is rich with data, information and analysis of the work which the present Government has done during 2009-13 rivalling the other report published on the economy, namely, the Annual Report of the Central Bank. Its presentation style using advanced graphical and pictorial methods is reader-friendly and, therefore, it can reach the ordinary laymen more effectively.

The report displays the evidence that it has been produced within a matter of two months by a dedicated team fully knowledgeable of the policies which the Government has taken in all areas of the country’s social, political and economic life. Assembling such a vast array of information and presenting them in time in published form as well as in e-book form in all the three languages are not a simple feat.

Alternatively, it could, therefore, be read as the Progress Report of the present Government rather than the Annual Report of a single Ministry. One might therefore wonder why the Ministry of Finance should take the initiative to write the Progress Report of the Government when there are 60 odd Government ministries including the office of the President. The justification may be that it is the Ministry of Finance that provides funding to all these ministries and therefore the work done by them could be legitimately claimed by it as its own work.

The Fiscal Management (Responsibility) Act has empowered the public

The Section of the Fiscal Management (Responsibility) Act under reference requires the Minister of Finance to release for the information of the public “a Final Budget Position Report” in respect of each year. Section 14 of the Act has laid down the objective of this report: “to provide updated information of the Government’s fiscal performance and thereby to enable the public to evaluate the Government’s fiscal performance as against its fiscal strategy as set out in its current Statement”.

A statement to clarify Government’s fiscal strategy

The Statement referred to in this Section is the one which the Government has to issue under Section 4 of the Act when the second reading of the Budget takes place in Parliament outlining its fiscal strategy for the forthcoming year. The objective of this Statement, in terms of Section 5 of the Act is “to increase the public awareness of the Government’s fiscal policy and to establish standards for evaluating the Government’s conduct of its fiscal strategy”.

This Statement is the preliminary public communication which the Minister of Finance has to issue under the Act. The Government has freedom to revise the statement at any time, but on each such occasion it should keep the public informed of the revisions effected to the statement.

Risk-assessment oriented 3-year estimate of Government’s fiscal performance

Then, there is another report which the Government is required to issue under Section 7 of the Act called a Budget Economic and Fiscal Position Report simultaneously with the issue of the Statement mentioned above. Section 8 of the Act outlines the objective of this Report: “to provide the information which will provide the basis for the evaluation of the Government’s fiscal performance as against its fiscal strategy” as set out in the preliminary statement referred to above. In terms of the Section 9 of the Act, this report should provide estimates made by the Government of the key macroeconomic and budgetary variables for the next three years. It should also provide the basis of making such estimates and a sensitivity analysis of the changes that might occur in the estimates as a result of the changes if any, in the assumptions used in making those estimates.

For instance, if the Government revenue has been estimated on the assumption of the expected economic growth in the next three years, the sensitivity analysis should present what will happen to the revenue estimates if the economic growth rates deviate from the assumed growth rates. In addition, this report should also contain a statement that has quantified the risks to the key economic and fiscal numbers as a result of contingent liabilities like guarantees and new expenditure programs that are not included in the budgetary provisions. Accordingly, this report as well as the Statement mentioned above forms the basis for evaluating the performance of the fiscal strategy of the Government in the report to be issued to the public under Section 13.

A mid-year report to update the information

The Final Budget Position Report relating to the Budgetary Position in the previous year should be followed by a Mid-year Budget Position Report to be issued to the public before the end of June, as per Section 10 of the Act, containing information relating to the first four months of the year. This Report is a comparison of the estimates and the actual numbers relating to the Government’s expenditure, revenue, cash-flow and borrowings. If the actual revenue and cash-flow are short of the estimated numbers or if the expenditure and borrowings have exceeded the estimates, the Act requires the Minister of Finance to give the reasons for such shortfalls or excesses as the case may be.

As in the case of all other reports, the objective of this Mid-year Report, according to Section 11 of the Act, is also to “provide updated information of the Government’s fiscal performance and to thereby enable the public to evaluate the Government’s fiscal performance as against the fiscal strategy” as set out in its current Statement, namely, the one issued along with the Budget for the year.

“The public is the king” in a democracy

Thus, there are four ‘public information reports’ which the Minister of Finance has to submit to the public to facilitate them to evaluate the budgetary performance of the Government: Preliminary Statement, estimates for the next three years, Mid-year Fiscal Position Report covering the first four months of the year and Final Fiscal Position Report relating to the previous year.

An important requirement in all these reports as stipulated in the Act has been to give the estimates of key budgetary and macroeconomic numbers and analyse the reasons for any departure of the actual numbers from the estimates. The public in turn is required to evaluate them which in a democracy will serve as continuous public pressure exercised on the use of public funds by a government.

Without proper controls, public monies are not safe in others’ hands  

The need for such public pressure has arisen in democracies due to three reasons. One is the Principal-Agent Problem, an endemic problem discussed in economics where politicians and bureaucrats as agents do not act in the best interest of their principals, the public. The second is the poor fiduciary risk management by those who manage the public purse. These two issues were discussed in a previous My View in this series under the title “Sri Lanka has to do a lot to improve its Fiduciary Risk Management

The third is the inadequacy of the existing constitutional provisions for ensuring good behaviour by a government in the handling of public’s monies, namely, Parliamentary approvals, Office of the Auditor General and Parliamentary Committees inquiring into the government’s financial track-record, etc.

The widely held view is that in a majority-party run government system all these institutions could be manipulated for the benefit of the government party in power and therefore, as an independent check on it, the public should also be empowered to exercise direct control on the use of the monies belonging to them.

Managing fiduciary risks is society’s responsibility

Both politicians and bureaucrats handle the monies belonging to the public. Hence, they have a fiduciary obligation to handle that money with the same caution, care and diligence as when they handle their own monies. However, because of the presence of the Principal-Agent Problem, a situation might arise where such monies are handled irresponsibly leading to waste, losses, cost-overruns or improper use.

Even when there are no wastes, losses, cost-overruns or improper use, such monies may have been just spent without creating the impact they have to generate in society.

For instance, an expenditure program in a university may produce graduates without improving scholarship in society that leads to creativity, inventions or innovations.

Such failures generate fiduciary risks and it is the duty of society to introduce measures to manage them properly.

Kautilya’s wisdom on failure to meet fiduciary obligations

But fiduciary risk is not a new problem and has been present in societies from time immemorial. For instance, during Kautilya’s time in the 4th century BCE India, fiduciary risk was so wide-spread that Kautilya had to advise his king that effective action should be taken to eliminate it since “a person handling king’s treasures cannot resist the temptation to misappropriate them just like a person with honey at the tip of his tongue cannot resist the temptation to taste a little bit”. He further said that the king cannot see it happening just like one cannot say whether a fish in water is drinking it or not.

His prescription for the malady was of three kinds: introducing effective checks, balances, controls and audits in public finances, employing spies to detect those who cause fiduciary risks stealthily and punishing them severely, even at the level of imposing death sentence. He even recommended that the Treasury officials who cause losses to the king’s Treasury knowingly should be whipped in public as an example to others. The king in Kautilya’s time had the command over all the resources. But in today’s democratic societies, that king is the general public that has command over them. Hence, it is the monies belonging to them that would be wasted by politicians and bureaucrats by failing to fulfil their fiduciary obligations.

Proper disclosure is the remedy for improper handling of public monies

Modern societies cannot implement all the recommendations made by Kautilya. But an effective check on the possibility of creating fiduciary risks in society can be introduced by getting the Government to disclose fully the matters relating to handling its fiscal affairs. This was the objective of enacting the Fiscal Management (Responsibility) Act in 2003 and it broadly conforms to the first recommendation of Kautilya as outlined above.

Accordingly, the Government is required to disclose its fiscal affairs fully to facilitate the public to evaluate them properly. Such public evaluations are expected to impose an indirect control over the misbehaviour on the part of any government or its officials. Hence, by enacting the Fiscal Management (Responsibility) Act, Sri Lanka has sought to empower the public who normally has no say on the affairs of governments whose businesses are carried out through the majority rule of the elected representatives.

Empowered public is poor with economic and financial literacy

The Act under reference has spoken at length on ‘creating public awareness facilitating them to evaluate’ the Government’s fiscal performance. Hence, it is a two way dialogue which the Act has precipitated between the Minister of Finance representing the Government on one side and the public at large on the other. But such a dialogue becomes fruitless if the public has a poor economic and financial literacy with no ability to read the reports issued by the Minister of Finance and make a meaningful evaluation. Then, it becomes just a one-way dialogue: the Minister issues reports in terms of the provisions of the Act and the illiterate public just ignores them. Hence, the task of evaluating the reports issued by the Minister of Finance devolves on institutions – universities, independent research organisations and civil society groups of concerned citizens – and the free media which have to generate a debate in society.

The Minister of Finance in particular and the Government in general stand to benefit by creating an environment conducive for such free debate since it is those free debates that issue ‘red-lights’ to an incumbent government about the reception of the public to its policy programs. If the opportunity to have a free debate is suppressed, the result is catastrophic to a government as has been shown by the results of the recent elections in neighbouring India. At that stage, it will be too late for an incumbent government to amend its ways to change the course to move in the right direction.

The Act requires the Minister to compare actual numbers with estimates

The Annual Report of the Ministry of Finance is rich with information but poor in complying with the requirements of the Fiscal Management (Responsibility) Act. Section 15 of the Act requires the Minister to issue the following statements, as a minimum, to the public in the report under reference:
a. A statement of the estimated and actual expenditure for that year;
b. A statement of the estimated and actual revenue for that year;
c. A statement of the estimated and actual cash-flows for that year;
d. A statement of the estimated and actual borrowings for that year.

The same Section requires that the Report should contain an analysis of the reasons for the excesses or the shortfalls in the actual numbers from the estimated numbers. The objective of these statements is to facilitate the public or the institutions referred to above on behalf of the public with poor economic and financial literacy to evaluate the fiscal performance of the government. But such statements have not been presented explicitly in the Annual Report under reference.

No statement on cost increases

For instance, the expenditure approved by Parliament in the original budget amounted to Rs. 2,567 billion (p 464). However, this expenditure has not been sufficient during the year and there have been supplementary provisions made increasing the total budgetary provisions to Rs. 2,603 billion. But, the actual expenditure has been short of this amount by Rs. 191 billion. In terms of the Fiscal Management (Responsibility) Act, a statement should be prepared comparing the two sets of numbers and reasons for making such supplementary provisions and the underutilisation of the budget since the underutilisation amounts to curtailing some of the expenditure programs approved by Parliament. While the actual expenses have been given in the detailed tables, there has not been a comparison of the actual numbers with the estimates.

Narrow recording of external public debt needs clarification

The recording of the external public debt is also short of the international standards. What has been reported in the Annual Report is only those borrowed by the central government. From an accounting sense, this treatment is correct since it is the only liability which the central government has to meet. However, a meaningful evaluation of the liability of the government requires one to take into account not only what has been borrowed by the central government but also those institutions functioning under its purview.

Accordingly, the Manual on Effective Debt Management of the UN Economic Commission for Asia and the Pacific which has codified the best international practice has laid down that the proper public external debt should also contain those borrowed by the Central Bank, state owned commercial and other financial institutions, state owned entities and even the private sector borrowings effected on guarantees issued by the government (p 12).

In addition, external debt includes all the debt owed to foreigners irrespective of whether they are recorded in foreign currency or local currency (p 11). This wide external public debt definition helps a country to assess the risks involved in its external borrowing and conforms to the requirement of reporting on the impact of the contingent liabilities on fiscal management as required under Section 9 of the Act. Hence, it would have been more meaningful had the Annual Report of the Ministry of Finance which has been issued in terms of Section 13 of the Fiscal Management (Responsibility) Act clarified this position.

Need for rectifying deficiencies in future reports

As mentioned before, the report is rich with information, data, analysis and detailing of the expenditure programs of the Government even to a minute scale. It definitely provides a wealth of information on the outputs produced by the Government’s expenditure programs funded by the Ministry of Finance. However, it lacks an analysis of the impact of such expenditure programs which is evaluated today in terms of the international best practice known as ‘Management for Development Results’ or MfDR. Hence, the public to which it is issued in terms of the Act has no way for making a meaningful evaluation of the fiscal performance of the Government. It is also poor in statutory compliance. It is hoped that in future annual reports of the Ministry, these deficiencies are rectified.

*W.A. Wijewardena, a former Deputy Governor of the Central Bank of Sri Lanka, could be reached at waw1949@gmail.com

 

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