Interrelations Among PFM, Fiscal Policy and

Macroeconomic Policy
-Tarun Das, Macroeconomic Adviser, MOF.
Gambia
Formerly Economic Adviser, MOF, India

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 … Alice in Wonderland, Lewis B.
Carroll.

• “Would you tell me • “That depends a great deal

please, which way I on where you want to get
ought to go from here?” to,”
asked Alice. said the cat.
============= ===============
• “I don’t care much “Then it does not matter
where.,” which way you go,” said the
said Alice. cat.

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 Budget preparation without
LTFP/MTEF
• Eventually Alice realized that it matters a
great deal to know “where to go” and “how to
get there”.
• The same lesson is true for any Budget
Formulation.
• Budget Preparation without Medium Term
Macroeconomic Framework, Long Term Fiscal
Policy and Medium Term Expenditure
Framework faces the same problem as that of
‘Alice in Wonderland’.

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Contents of this presentation
1. Policies versus reforms
2. Objectives of economic reforms
3. Broad categories of policies
4. Stylized Policies and Reforms
5. Requisites for Success of Reforms
6. Concluding observations

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 1.1 What is policy or public
policy?
• Policy is defined as a “purposive course of
action followed by an agent or set of agents”
• with a focus on public policy with the
understanding that public policy is not
restricted to government.
• Public policy could be either “national public
policy” or “global public policy”.
• What makes policies public is not that they are
adopted and implemented by the government,
but that they affect the public interest.

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 1.2 What is a reform?
• Reform means “any fundamental change in the
existing policy or in the institutions”
• Institutions include laws, acts, regulations, rules and
organizations to implement policies”.
• Routine or marginal changes in institutions or policies
may not be called reforms. We need to have drastic,
basic and fundamental changes.
• However, reforms need not be revolutionary.
• Reforms formulation requires a critical analysis, review
and evaluation of the existing policies.
• This can be facilitated if there exists a research
department or a policy window in a Ministry.

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 2.1 Rationale and Purpose of Reforms
Reforms are designed and implemented to
(a) correct imbalances in Supply and Demand
for:
Output
Employment
Money supply
Foreign exchange reserves
Government finance, etc.
 (b) correct instability in the growth rate, prices,
interest rate and exchange rates etc.
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 2.2 Core objectives of reforms
 To enhance productivity, efficiency and
international competitiveness of different
sectors of the economy
 To achieve sustained growth with price
stability, fiscal sustainability, equity and
social justice, and
 To impart dynamism to the overall growth
process.

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 2.3 Desirable features of reforms
a) Must Gradual, Step by Step, Evolutionary, not guided
by a Big Bang Approach or Shock Therapy or
Revolutionary Ideology;
b) Must satisfy nationality constraint;
c) Must satisfy regional/ international commitments
(WTO, Environment, WB/IMF)
d) Agency constraint (ideology of present govt.)
e) General consensus by stakeholders
f) Reforms must have a “human face” (least sacrifice by
people in the transitional period).
g) No reforms can succeed unless we are able to make
the people march along with us.

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 3.1 Broad categories of policies
Macroeconomic
1.Fiscal policy
2.Monetary policy
3.Trade/Tariff policy
4.Financial policy
5.Wage & price policy
6.Policies to deal with
any component of the
NAS identity
Y = C+I+ST+X-M
Sectoral
1.Agriculture policy
2.Industrial policy
3.Energy policy
4.Transport policy
5.ICT policy
6.Banking policy
7.Education policy
8.S&T, R&D policy
9.Environment policy

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3.2 Macroeconomic Framework & policies
NATIONAL A/C & REAL SECTORS CENTRAL GOVERNMENT
National Accounts Revenues
• Grants
Private consumption Expenditures
General government consumption • • Current
• Capital
Private investment
General government investment Overall balance
Financing
Domestic financing (net)
• Exports of goods and nonfactor • Banking system
services Nonbanking sector
• Imports of goods and nonfactor • External financing (net)
services
MONEY & FINANCIAL SECTORS
EXTERNAL SECTOR Monetary Authorities
• Net foreign assets

Balance of Payments Net domestic assets:

• Net credit to central govt.
CURRENT ACCOUNT • Credit to banks
• Exports of goods and nonfactor Other items (net)
services • Reserve money
• Imports of goods and nonfactor
services
Factor services (net)
Transfers (net)
Official • Deposit Money Banks
Private • Net foreign assets
CAPITAL ACCOUNT
Direct investment • Banks' reserves
Medium/long-term capital (net) Net domestic assets:
Short-term capital (net) • Net credit to central govt.
Overall balance Credit to private sector
Change in net foreign assets Other items (net)

• Liabilities to monetary
Strong accounting relationships authorities
Accounting identities Private sector deposits
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 3.3 Broad Categories of IMF Policies
 Macro stabilization policies and structural
adjustment policies/ reforms .
 Macro Stabilization policies aim at reducing
macro economic imbalances by attacking
(reducing) demand.
 Structural adjustment policies aim at
increasing supply by improving efficiency &
productivity and ensuring fair allocation of
resources among various sectors.

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 3.4 These Policies Encompass
Macro Structural Reforms
• PFM Reforms
Stabilization • Governance Reforms
Policies • Legal Reforms
• Institutional reforms
• Fiscal policies • Financial sector reforms
• Monetary policies • Factor market reforms
- Land, Labor, Capital
• Tariff policy • External trade and
• Exchange rate investment reforms
• Reforms in agriculture,
policy industry & infrastructure
• Wage-income-price • Public sector reforms
• Social sector reforms
policies • Environment reforms

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3.5 Definition of Fiscal Policy
• Fiscal policy includes the taxation and
expenditure policies of the govt, which
are normally implemented by the MOF.
• The basic objective is to maintain
macroeconomic stability, to boost
savings, investment, employment and
growth.
• Other objective is to attain fairer
distribution of wealth and other social
goals through desirable tax structure
and expenditure allocation for different
sectors.

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3.6 Definition of Monetary Policy
• Monetary policy refers to the regulation of
money supply and interest & exchange rates.
• It is implemented by the Central Bank as the
regulator for the financial sectors and the
primary dealer of treasury bills.
• Since government borrowing is influenced by
fiscal policies, there is strong linkages between
monetary and fiscal policies.
• It may not be advisable for a Central Bank to
assume that they are completely independent
of the Ministry of Finance.

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 3.7 Macroeconomic Policy
• The thrust of the macroeconomic policy is
not only macroeconomic stability, but also
to attain inter-sectoral, inter-regional and
inter-generational equity.
• In addition to fiscal and monetary policies,
macroeconomic policies include many other
policies which are required to sustain high
economic growth with moderate inflation
and stability in interest and exchange rates.
• Macroeconomic policies also include poverty
alleviation and employment generation
programs.
• Above all they include policies to boost
savings and investment and to attain
balanced sectoral and regional growth.

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 3.8 PFM Reforms aim at upgrading
systems, methods, procedures and
institutions at every stage of budget
cycle
Strategic
Evaluation Planning
Budget
Preparation

Monitoring PFM
REFORMS

Budget
Execution
Auditing/ Accounting
Reporting

Output Budgeting Session-2 by Tarun Das 17

4.1 Exact Scope of Reforms
Depend on
a) Socio-economic-political context
b) Agency constraint- ideology of present govt.
c) How far have we progressed in reforms?
d) Where do we want to go?
e) How to prioritize, sequence these reforms with what
speed and intensity?
f) What are their likely impact on economic growth,
inflation, employment and poverty?
g) What is our role and capacity in the implementation of
these reforms?
There does not exist a universal and unique set of
reforms which holds good for all countries at all
times. Reforms cannot be blindly imported from
other countries and must be owned by a country.

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 4.2 Stylized Fiscal Policies and
a)
Reforms
Sector-neutral fiscal policies
b) Reduction/ rationalization of taxes and duties
c) Putting limits on fiscal deficit/ primary deficit
d) Medium Term Fiscal Policy
e) Widening tax base & enhancing tax buoyancy
f) Simplifying rules and procedures for taxes
g) Strengthening tax administration
h) Strict expenditure control
i) Effective cash management
j) Introduction of VAT
k) Introduction of Fringe Benefits Tax, Cash Transactions
Tax, Securities Transactions Tax, Service Tax,
Minimum Alternative Tax
l) Phasing out of tax holidays for SEZs

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 4.3 Stylized Monetary/ Financial
Policies
a) Introduction of inflation targeting.
b) Sector-neutral monetary policies
c) Developing capital, bond, debt markets
d) Introducing Basle norms for capital adequacy
ratio and non-performing assets
e) Modernization and liberalization of insurance,
pensions and provident funds
f) Market determined deposit, lending & TB yields
g) Liberalization on the entry of foreign banks
h) Abolition of directed lending by the govt.
i) Reforms and setting up regulatory bodies for
Insurance, Savings, Provident , Pension Funds
j) Introducing innovative financing schemes such as
BOT, BOOT, BOLT etc. for infrastructure

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 4.4 Industrial Policy
• Abolition of licenses and physical
restrictions on industry
• Corporatization or privatization of State
regulated monopolies of public utilities and
trade
• Setting up independent regulatory
authorities for key sectors
• Open door policy for foreign direct
investment and technology transfer
• Acts enacted on consumer rights, IPR,
independent regulatory authority
• Outdated Companies Act replaced by
Competition Act
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 4.5 External sector Policy
• Abolition of licenses and physical
restrictions on trade
• Foreign investment policy
• Import substitution policies replaced by
export promotion policies
• Sector-neutral tariff policies
• Abolition of foreign exchange control,
• Full convertibility of currency on current
account
• Almost full convertibility of capital
account for non-residents
• Market determined exchange rates
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 4.6 Other Macroeconomic
Policies
• Decentralization of planning,
• Sound institutional framework,
• Civil services reforms
• Liberalization of labor markets and
laws
• Land reforms
• National Environment Policy
• National Population Policy
• National Transport Policy
• National Energy Policy
• National Agriculture Policy
• National Education policy
• National Health Policy
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 4.7 Scope and Purpose of PFM
Reforms
• Enhance fiscal discipline and accountability,
• Strengthen operational systems and
methodology for budget preparation,
execution, accounting, auditing, reporting,
monitoring and evaluation
• Improve public finance management
systems
• Improve procurement systems for govt.
• Modernizing budget information system
• Review institutional and legal framework
and acts for public finance management
• Improve forecasting techniques for budget
planning and financial planning
• Improve techniques for asset/ debt/ aid/
project management.

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 4.8 Stylized Public Finance
•
Reforms
Fiscal Responsibility and Budget Management
(Budget Honesty) Act
• Expenditure control and MTEF
• Medium Term Financial Planning
• Improved systems and methods for asset/ debt/
aid/ project management
• Setting up Contingent Liability Fund
• Upgrading inspection, internal/external audit
• Improving audit and accounting system
• Coordinating fiscal reforms at local govts
• Setting up Privatization Commission/ Dept.
• Setting up an independent Public Debt office
• Rationalization of user charges for public utilities,
public goods and services

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 4.9 Stylized Public Finance
Reforms
• Strategic Business Plans for Budgetary
Bodies
• Modernizing Budget preparation
• Introduction of Program Budgeting,
Performance Based Output Budgeting,
Zero Based Budgeting etc.
• Introduction of IFMIS
• Modernizing Accounting System
• Introduction of Accrual Accounting
• International best practices on auditing
• Introduction of performance auditing in
addition to financial compliance auditing
• Strengthening ICT for budget
preparation, implementation, monitoring,
review and performance evaluation
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 5.1 Prerequisites for Successful
Reforms
a) To break the nexus among vested interests
so that reforms can be implemented,
b) To reorient the role of public policies,
c) To change the mind-set of bureaucrats,
d) To redefine the role of government,
e) To develop fair and efficient markets,
f) To build up efficient institutions,
g) To involve all stakeholders in the process of
reforms from the very beginning

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 5.2 Reorientation of Public Policies
a) To create enabling environment for public-
private partnership
b) To link fiscal incentives to productivity
c) To create fiscal space for growth
d) To streamline public investment
e) To make development and growth inclusive,
f) To repair market failures
g) To strengthen structures and institutions
h) To put emphasis on consultations, flexibility,
decentralization, selectivity, outcomes, outputs,
implementation, monitoring, evaluation and co-
ordination of policies
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5.3 Redefining the role of Bureaucracy

There is need for a distinct change of

mind set of the government officials at
all levels from top to bottom:
a)From a controller to an enabler
b)From a supplier to a facilitator
c)From an operator to a policy maker
d)From a regulator to a trustee of social
equity and environmental sustainability

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 5.4 Redefining the role of govt.
a) Emphasis is on the so-called LPG- Liberalization,
Privatization and Globalization
b) Both well governed state and well functioning
markets are essential for high growth and
sustainability.
c) Government and free markets should
supplement and complement each other.
d) Good Governance requires strengthening independent
judiciary, Free Press, NGOs.
e) Government to withdraw from sectors where
private participation is more productive
f) But, scope of govt. to remain large in social
sectors and infrastructure.

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 5.5 Markets and Institutions
a) Efficient markets are essential for rapid and
successful economic development.
b) But the real markets are neither competitive
nor perfect. Government’s role is to correct
market imperfections and repair market
failures by strengthening institutions.
c) Institutions play an important role in
developing fair, competitive, inclusive,
efficient, and integrated markets.
d) Institutions are also essential for implementing
and evaluating public policies.

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 5.6 Role of Public
Institutions
Success of reforms requires solid public
institutions:
a) To protect property rights,
b) To regulate market agents,
c) To maintain macro-economic stability,
d) To ensure social equity and justice,
e) To provide social safety nets,
f) To resolve conflicts.
All these help in reducing transactions costs,
encourage work efforts, and provide
incentives for fair competition.
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 5.7 Building Efficient
Institutions
a) Institution building is diverse involving all
stakeholders viz. legislature, judiciary,
government, bureaucrats, policymakers,
corporate bodies and civil society.
b) It is an evolutionary and cumulative process,
and requires open mind by all stakeholders to
accept new ideas and innovations, to have
respect for each other and to reward merits.
c) Most of the institutions that support markets
need to be developed by the government for
regulating, stabilizing and legitimizing their
scope and functions.

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 5.8 Implications for Govt. Officials

a) Knowledge and ICT are now the most valuable

assets of a budgetary entity
b) Risk Management is an important task.
c) Other important tasks are forecasting,
modeling, monitoring and evaluation
d) Emphasis on decentralization, multi-
stakeholders’ consultation, risk sharing, joint
responsibility and accountability

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 6.1 Concluding Remarks
a) In recent years the Gambia has made
significant progress of reforms in fiscal and
financial sectors.
b) The proposed Public Finance Reforms are in
the right direction.
c) Carried to their logical ends, these reforms
would make the Gambia as one of the most
dynamic economies of Africa within next five
years.
d) All of us will have to play a distinct role in that
exciting process of reforms management.

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 Thank you
Have a Good Day

03/06/10 PFM-Tarun
Economic
Das-Economic
ReformsReforms 36