Role of Medium-Term Budgetary Framework (MTBF) in achieving basic Public Financial Management (PFM) Objectives.

Abstract:

 1. I NTRODUCTION

In the passage of Public Financial Management (PFM) reformation process MTBF (Medium-Term Budgetary Framework) is a great milestone. This MTBF is a modern approach to Public Financial Management i.e. Public budget. Public budget, a financial statement of estimated receipts and expenditure for a period, is a significant instrument of overall financial management of a country. It is a financial plan of mobilizing and allocating financial resources for achieving fiscal targets of an economy. It is a financial document that reflects government’s annual plan-a statement of what a government wants to do in an annual time frame. Budget of a particular financial year is also a legal instrument since it is a bill passed in parliament and duly signed by the President of the Republic. Since 2004, the Government of Bangladesh introduced a new structure in budgetary mechanism which is completely a paradigm shift from traditional approach to output based modern approach. The new approach is then called as the Medium-Term Budgetary Framework (MTBF) and this MTBF system has been playing an important role in achieving the fundamental objectives of Public Financial Management (PFM).

1.1 Background of Public Finance Management (PFM) Reforms: The initial impetus for PFM reform can be dated back to 1989 and the findings and recommendations of the Committee on Reforms in Budgeting and Expenditure Control (CORBEC). The Committee, consisting of high-level representation, identified the following areas for improvement-

 · Improve the budgeting, accounting and expenditure control procedures;

· Introduce a new budget and accounts classification;

 · Establish a financial management information system;

 · Enhance accountability of the Principal Accounting officers;

 · Streamline accounting information and control system;

 · Improve the management of public debt, deficits, local currency loans, etc.;

 · Improve the links between the Revenue and Development budgets;

· Establish links between budget and macro-economic policy;

· Introduce modern budgeting techniques like Programme-based budgets;

· Develop professionalism in Ministry of Finance;

 · Improve the capacity of GoB officers in public financial management;

· Improve the training facilities for the officials in accounting and auditing;

· Automate budgeting and accounting;

· Rationalize the number of budget documents

 Subsequent to CORBEC two updates where undertaken by the Mubin Committee in 1998 and the Khan Committee in 2000. Despite this comprehensive starting point and the subsequent endorsements and activity to improve public financial management since then, many of these 1989 recommendations remain valid today. Several PFM reform projects have supported the reform agenda starting with the Reforms in Budget and Expenditure Control (RIBEC) and followed by the Financial Management Reform Program (FMRP). During the implementation of FMRP, the Government adopted a PFM Reform Strategy (2007-12) to take forward the ongoing agenda of reforms and broaden its remit to embrace the entire cycle of PFM. This led to the development of a comprehensive reform program: Strengthening Public Expenditure Management Program (SPEMP) which was a multi donor trust fund which provided grant financing for three discrete projects- the Deepening Medium Term Budgeting and Strengthening Financial Accountability project (DMTBF, also referred to as SPEMP-A), the Strengthening the Office of the Comptroller and Auditor General project (SPEMP-B) and Strengthening Parliamentary Oversight project (SPEMP-C). The total reform processes can be summarized in the following table.

Timeline of PFM reform activities

Year	Events
1989	Formation of Committee on Reform in Budgeting and Expenditure Control (CORBEC)
1993	CORBEC report was accepted by the Government
1995	Based on the recommendation of CORBEC, Reform in Budgeting and Expenditure Control Project (RIBEC) was launched. In addition to implementing specific suggestions on macroeconomic policy issues (including budget formulation), the RIBEC project worked on rules and regulation, introduction of new digital classification chart (13 digits) for budgeting and accounting and automation of government accounting in the Controller General of Accounts (CGA) Office
1998	Updates undertaken by Mubin Committee
2000	Updates undertaken by Khan Committee
2003	Financial Management Reform Programme (FMRP) was launched
2009	Financial Management Reform Programme (FMRP) was completed when the Government adopted a PFM Reform Strategy (2007-12) to take forward the ongoing agenda of reforms and broaden its remit to embrace the entire cycle of PFM. The FMRP was responsible for: Launching automated Integrated Budgeting and Accounting System (iBAS) for capturing every day transactions and accounting information of all government pay and account offices; Launching of Wide Area Network (WAN) linking 64 DCA and DAO offices and 49 CAO offices across the country for facilitating everyday accounting data transmission to CGA and Finance Division; Improved quality of Government Accounts; Introduction of automated import of debit & credit scroll data from banks performing treasury functions; and Examine and determine the CGA’s Training requirement.
	This led to the development of a comprehensive reform program: Strengthening Public Expenditure Management Program (SPEMP) which was a multi-donor trust fund providing grant financing for three discrete projects. The projects include the Deepening of Medium Term Budgetary Framework (DMTBF, also referred to as SPEMP-A) and the Strengthening of Financial Accountability Project, the Strengthening the Office of the Comptroller and Auditor General project (SPEMP-B) and Strengthening Parliamentary Oversight project (SPEMP-C). The new Budget and Accounting Classification System (BACS) was prepared under the Deepening of Medium Term Budgetary Framework (DMTBF) and the Strengthening of Financial Accountability Project. It was developed in parallel with another area under that Project the integrated Budget and Accounting System (iBAS++) design and development.
2014	The Deepening of Medium-Term Budgetary Framework (DMTBF) and the Strengthening of Financial Accountability Project ended
	However, the Government has continued to fund finalization and implementation of both the BACS and iBAS++ under Public Expenditure Management Strengthening Programme financed by Finance Division, Ministry of Finance.
2018	The government of Bangladesh implemented newly developed Budget and Accounting Classification System (BACS) along with the advanced version of Integrated Budget and Accounting system (iBAS++)

 

2.0 What is PFM?

 Public Financial Management (PFM) refers to the processes of collection, management and expenditure of public finances throughout an economy. The core objective of public financial management is to improve citizens' lives through better management of public money. Public Financial Management (PFM) is the way a government raises and uses funds for carrying out state functions, for example, law and order, education, health, social welfare, and infrastructure. Public Financial Management (PFM) is like a cycle that can be understood from the following diagram.

 

 

 

 

Macroeconomic  Stability & Fiscal Sustainability

2.1 What are the key PFM objectives in Bangladesh? The PFM Reform Strategy aspires to achieve the following objectives;

1.      Aggregate Fiscal Discipline

Overall Expenditure Control Coordination Council/ Ministry of Finance

2. Allocative Efficiency

Strategic Sectors (Inter-sectoral) Ceiling Setting Working Group/BMRC

Within Sectors (Intra-sectoral) Prioritization between Departments/Agencies (BMW/B/S, BMCs & BWGs)

Cost-Effective Results

3. Operational Efficiency

Goods & Services Delivery MT-SBP/MBF/PM/IC Ministries/Departments & Agencies

Policy-Priorities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Successful achievement of these objectives fulfils the following goals of Public Financial Management (PFM) and thus, the better the PFM systems are, the more transparent and accountable it makes the government in serving the people.

 Goal 1: Maintain aggregate fiscal discipline;

 Goal 2: Allocate resources consistent with Government priorities;

 Goal 3: Promote the efficient use of public resources and delivery of services;

 Goal 4: Promote accountability through external scrutiny and transparency of the budget;

 Goal 5: Enhance the enabling environment for improved PFM outcomes.

3.0 Concepts of Medium-Term Budgetary Framework (MTBF) and related Terms.

The medium Term Budgetary Framework (MTBF) is a multi-year approach of budgeting that ascertains medium term plans and targets for aggregate receipts and expenditures. The special features of MTBF are; first, it deliberately links expenditure plan to policy objectives of government (Ministry of Finance, 2005. p.01); second, it makes a reliable estimate of financial resources to be available for expenditure (Ministry of Finance, 2005. p.01); third, it allows a reasonable autonomy to line ministries and agencies to propose their budget by themselves and links organizational performance with budgetary allocation (Ministry of Finance, 2005. p.02). The MTBF approach distinguishes itself from traditional approach of budget by including upcoming financial year’s annual budget along with rolling estimate and projection of following two years. In Bangladesh, MTBF is the generic title of the approach of multi-year budgeting whereas some countries took the title MTEF (Medium-Term Expenditure) to denote the same. World Bank documents explained the whole process under incrementally demanding following three stages (World Bank, 2013 page 18)

3.1 MTFF-Medium Term Fiscal Framework:

 It is an upstream macro-economic structure from where MTBF gets mid-term indications about its aggregate resource envelope. In Bangladesh it is called Medium Term Macroeconomic Framework (MTMF). Medium-Term Fiscal Framework (MTFF) is a tool for checking the consistency of assumptions or projections concerning GDP growth, tax-GDP ratio, fiscal deficit, foreign aids and borrowing possibility, balance of payments, exchange rate, inflation, credit growth and the share of the public and private savings and investments, etc. Under this top-down framework impact of associated risks and sustainability of flow of economic growth are being generally assessed.

3.2 MTBF-Medium Term Budgetary Framework:

 MTBF is a mechanism to reconcile actual resource demand of line-ministries (includes implementing agencies) with available resource envelope which has been ascertained on the basis of MTFF or MTMF (in Bangladesh it is called Medium Term Macroeconomic Framework). In MTBF phase, the line ministries and agencies are asked to prepare their current year’s budget with forthcoming two years projection along with estimated outputs and outcomes linking with strategic objectives of the organization. The main focus of this phase is to examine and confirm performance targets and required resource for attaining those targets.

3.3 MTPF- Medium Term Performance Framework:

 It the matured stage of mid-term budgetary framework where shift of focus from input to output has to be done (World Bank, 2013. p.19). It ensures measurement and evaluation of performance of the line ministries and implementing agencies. It does not encouraging only performance but ensures strategic linkage between input and output; measures performance of organizations and also facilitates to maintain efficiency in implementation of budget.

4.0 Linkage between MTBF & MTMF

In Bangladesh, Medium Term Budgetary Framework is generally influenced by another upstream macro-economic framework which is known to MTMF. Medium Term Macroeconomic Framework (MTMF) is an upstream macroeconomic structure from where MTBF gets indications on its resources envelope. MTMF is a tool for checking the consistency of assumptions or projections concerning economic growth, the fiscal deficit, the balance of payments, the exchange rate, inflation, credit growth, monetary development and the share of the public and private investments etc. (Finance Division. p.04) The main purpose of the MTMF is to assess the economic and fiscal sustainability in alternative macroeconomic policy scenarios and the impact of the risks associated with each of these scenarios. With regard to the MTBF it also provides a method to determine the Government's 'resource envelope' which will be applied in the preparation of budget estimates at Line Ministry level. Formulating and articulating statement of Medium Term Strategic Objectives (MTSO) of line ministries in terms of intended outcome to be achieved within the medium-term period is an important component of MTMF. The Medium Term Strategic Objectives (MTSO) must have linked and aligned to national development visions generally delineated in Perspective Plan (2010-2021) and Sixth Five-Year Plan (2010-2015)

4.1 MTBF Objectives

 The purpose of introduction of MTBF is to have a professional shift from traditional and rule-bound compliance-based budgetary process to performance-based budgetary process. Achieving desired level of fiscal efficiency through utilizing limited financial resources of the government is the main philosophy of MTBF. However, for better understanding of the philosophy of MTBF, the following objectives have been set out:

i. To institutionalize an systematic framework for managing annual budget extended to a period of medium-term (3 years with 2 years projections);

ii. To ensure allocation of government’s financial resources on the basis of strategic priorities of government;

iii. To empower line ministries through developing institutional and management capacity for preparing and managing their budgets effectively by themselves; and by this way ensure operational efficiency of implementing agencies;

iv. To ensure macroeconomic and fiscal stability of the economy through mobilizing, allocating and aligning financial resources of government around the articulated policy objectives.

 

 

5.0 Importance of implementing MTBF in Bangladesh

 The traditional budget mechanism was highly centralized and almost all budgetary decisions were taken by Finance Division. Under the traditional system, the line ministry used to place only the annual financial requirements on the basis of incremental practice. They have very limited chance to take fruitful budgetary decisions rather they were frequently asked for under-appropriation of last year’s allocation. The traditional budget had no scope to link financial allocation with strategic priorities of the government. Rather it was confined into performing only annual activities of ministries and agencies with piecemeal type of decision. Like other 109 economies (World Bank, 2013) of the world Bangladesh introduced MTBF in 2004 and piloted the process for FY 2005-2006 in four ministries successfully. From the FY2011-12 MTBF has already been rolled out to all ministries and agencies of Bangladesh. The MTBF has definitely helped to achieve the objectives of Public Financial Management (PFM) which is the ultimate goal of a welfare economy like Bangladesh.

5.1 MTBF and Fiscal Efficiency

The medium Term Budgetary Framework is expected to enhance three types of fiscal efficiency like fiscal discipline, allocative efficiency and operational efficiency. A detailed discussion on this issue has done below:

5.2 Aggregate Fiscal Discipline

 The tool of ensuring fiscal discipline under MTBF is Medium Term Macroeconomic Framework. A working Group comprising officials from Planning Commission, Economic Relation Division, Bureau of Statistics, National Board of Revenue (NBR), Bangladesh Bank, and other concerned officials from selective organizations prepares a draft Medium Term Macroeconomic Framework and place it before the Honorable Minister of Finance for his approval. For ensuring fiscal discipline the ‘working group’ checks and forecasts GDP growth, pattern of public sector investment, trend of revenue income, size of budget deficit, borrowing sources etc. and then Finance Division determines ministry-wise probable resource ceiling for medium term. The expenditure ceiling for line ministries are revised on the basis of three factors;

1. Total expenditure limit as projected in macro-economic framework;

2. Articulated strategic goals (vision, mission and objectives) and medium term targets as set out for particular ministry in Five Year’s Development  Plan of the country; and

3. Funding requirement of running projects and programs of line ministries.

 

 

5.3 Allocative efficiency

Allocative efficiency looks after the volatility of composition of public spending. When spending decisions and resource allocations are taken on the basis of strategic priorities with a long-term focus then volatility in composition of spending would likely to be lessened (World Bank, 2013). In allocating process of financial resource, the ministry is asked to formulate their strategic goals and priorities on the basis of Five Year’s Development Plan and accordingly articulate outcome indicators for the period of medium Term. Consequently, the line ministry is further asked to align and adjust resource envelope in order to obtain estimated outcome targets. In this way MTBF checks the following issues of inefficiency which were in exist in traditional budgetary process:

 Checks allocation to non-prioritized areas;

 Checks block allocation which is not defined;

 Reduce discretion to allocate piecemeal basis; and finally

 Minimize uncertainty of allocation streams for a medium term

5.4  Increasing Operational Efficiency

  i. Operational efficiency is the issue which dealing with activity level which is being managed in agency level. The focus of operational efficiency is generating output according to KPI standard through managing operations of the organization.

The rule is ‘maximize output with minimum of resource’.

ii. Under the MTBF, three factors of performance are considered seriously for ensuring Value for Money (VFM). Those are EEE - Economy, Efficiency, and Effectiveness.

 For ensuring "Economy" the focus is to be given on minimizing cost of inputs for maximizing outputs. For ensuring "Efficiency" the focus is to be given on maximizing output-input ratio by producing maximum output using as minimum

of resource as possible. "Effectiveness" ensures that the outputs being delivered are essentials for achieving strategic objectives of the organization;

iii. For ensuring ‘effectiveness’ a  set of measurable key performance indicators(KPIs) has to be identified in implementing agency linking strategic priorities articulated in Five Year’s Development Plan and in ministry’s medium-term outcome targets.

iv. Policy is being linked to resource allocation and resource allocation is being linked to performance criteria.

v. As a follow-up mechanism, the government already started ‘entity accounting’ and ‘entity auditing’. It is a radical shift from traditional accounting and auditing practice to performance-based accounting and auditing.

vi. Under the process of MTBF, parliamentary oversight is being enhanced & sharpened.

6.0 Approaches for Linking Strategy and Resource

 MTBF in Bangladesh has devised two phases in budget formulation process for establishing an effective linkage between government policies and strategic priorities with resource allocation.

 

 6.1 The Strategic Phase:

 Under the Budget Call Circular-1 the line ministries outlines strategic objectives in terms of outcome, output and KPIs on the basis of indicative resource ceiling. The line ministries are suggested to formulate and articulate their mission statements and submit it to Finance Ministry. In order to formulate a valid and consistent vision and mission statement, the line ministry must have to go with a rigorous exercise on perspective plan, 5 year plan, own mandate and policy priorities, etc. The respective subordinate organizations under line ministries are also asked to formulate and articulate their own mission, medium-term objectives and activities aligning goals of own ministry.

6.2 The Budget Estimation Phase:

 Under the Budget Call Circular-2, the line ministry works out an exercise on detailed allocation of resources within the resource ceiling. In this respect, the line ministries are advised to place resource demand against outcome targets and KPIs articulated in BCC-1 document.

6.3 Institutional Arrangement for Implementing Budget under MTBF

Other than constitutional provision, there was no legal and institutional framework for management of public fund in Bangladesh. In pursuance of Financial Management Reform Program (FMRP), the government enacted ‘The Public Money and Budget Management Act 2009’ for ensuring efficient management of public fund and effective implementation of budget. The other objectives of ‘The Public Money and Budget Management Act 2009’ are to ensure transparency and accountability, to maintain fiscal stability, to manage deficit and public borrowings prudently etc. The Act narrates necessary support structures and guide lines for smooth functioning of these structures. The Act also delineates two important committees in line ministry level for formulating, implementing and monitoring of budgetary process:

 Budget Management Committees (BMCs) and Budget Working Groups (BWG) established in all ministries and divisions and their subordinate departments.  Budget Management Committees (BWGs) of the line ministries, in consultation with the BWGs of sub-ordinate offices, prepare Ministry Budget Framework linking strategic priorities of policies to resource allocation and linking resource allocation to key performance indicators (KPIs), and submit it to the Budget Management Committees (BMCs) for approval.  After approval of the BMCs the Budget Frameworks of the line ministries are sent to Finance Division and Planning Commission.

 

6.4 MTBF and Empirical Evidence of Better Fiscal Efficiency

 As a part of World Bank study (2012) on worldwide MTEF adoptions during 1990-2008 found significant improvement of fiscal discipline as well as allocative efficiency. On a panel of 181 countries, the study also revealed a positive and significant improvement in technical efficiency (operational efficiency). Another World Bank study report concluded the following findings about the performance of MTBF across the 110 countries of the world:

i . MTEF adoption has significant positive effect on fiscal discipline (Grigoli p.47);

ii. Fiscal balance improved in countries that implemented MTEF than in those that did not (Grigoli p.47);

iii. The marginal impact of MTPF (compared to an MTBF) is considerably larger (p.47);

iv. MTEF adoption also has a payoff in terms of allocative efficiency (Grigoli p.49);

v. Total expenditure volatility found declined and showed stronger moving to an MTBF and then to an MTPF (Grigoli p.49);

vi. The quality of budgeting has changed in terms of fiscal performance (Grigoli et al.p.50); and finally

vii. The most common claim about MTEF is that it made budget more strategic, increased the recognition of resource constraints, fostered cooperation between agencies, and improved fiscal discipline (Grigoli  p.52).

In a draft review paper jointly prepared by ERD of Finance Ministry of Bangladesh and ESCAP (2010), it is found that fiscal performance has significantly improved over the period of 2006 to 2012.  The report concluded that despite the effect of global economic slowdown and natural calamities like flood, cyclone and Sidre Bangladesh has successfully managed its steady growth, revenue income, budget deficit, public and private investment, etc. The empirical evidence suggest that MTBF is instrumental in achieving main objectives of budget mechanism specifically for obtaining aggregate fiscal discipline (Brumby, et al.p.234). MTBF also have significant contribution in improving budget allocation in a prudent way which ensures value for money (Brumby, et al. p.234). There is a clear evidence of improving fiscal discipline and operational efficiency while adopting MTBF by many economies of the world.

7.0 Criticism

Though the implementation of MTBF helps to achieve a significant level of efficiency and fiscal discipline but at the end of the day, MTBF approach is not beyond criticism. MTBF is also regarded as incremental. So, this approach has also failed to solve the limitations of incrementalism rather it is seen as institutionalization of incrementalism in the name of MTBF or MTEF (UNESCO, 2009). Moreover, while reviewing Budget Framework, it has been observed that in some cases, guidelines and directions that were provided to line ministries (in the Budget Circular 1) in terms of sectoral strategies, policies and priorities were not properly reflected in line ministries' Budget Framework. The MBF must demonstrate consistency with the strategic goals, policies and priorities that have been identified in 6^th Five Year Plan and/or ministry relevant sectoral policies and also establishes an effective link between government's strategic goals, policies and priorities with budget allocations. It was also observed that the concept of linking sectoral strategies, policies and priorities with expenditure allocation was not clear to the line ministries. Under these circumstances, with the aim of removing the weaknesses of the Budget Framework and to achieve PFM objectives (namely aggregate fiscal discipline, allocative efficiency and operational efficiency), the capacity of the officials of the Finance Division, relevant ministries and the Planning Commission must be developed. The institutional mechanism under MTBF must be made functional and sustained.

8.0 Conclusion: 

Medium Term Budget Framework (MTBF) approach is one of the reformation initiatives of the Government in managing Public finance and this system has already been rolled out to all ministries/divisions. One of the key objectives of the MTBF was facilitating introduction of a system for measuring results from the resources allocated. After the introduction of MTBF performance indicators for ministries/divisions as well as the subordinate departments/agencies have been developed. Ministry-level performance indicators are intended to measure outcome or higher level outputs. On the other hand, Department/Agency-level indicators have been designed to measure outputs. Under the MTBF system every year all ministries/divisions prepare/update Ministry Budget Frameworks (MBFs). In addition to the budget estimates and projections MBFs contain Mission Statement, Major Functions, Strategic Objectives (SOs), Impact of SOs on poverty reduction and women’s advancement, Climate change impacts, Priority spending areas, Key Performance Indicators (Outcome Indicators) of the relevant Ministry, and Output Indicators of the department/agencies which reflect the objectives of PFM. The MTBF approach is major part of PFM reformation and the purpose of MTBF is linked with the overall goals and objectives of Public Financial Management. Therefore it can be said that MTBF plays an important role in achieving the basic objectives of Public Financial Management (PFM)

 

 

 

 

 

 

 9.0 Reference:

1.      Bird, Andrew (2003), A Review of Experience in Implementing Medium Term Expenditure Frameworks in a PRSP Context: A Synthesis of Eight Country Studies

2.      Mokoro Ltd. ODI- the Africa Policy Department of the Department for InternationalDevelopment (DFID) U.K. in collaboration with the European Commission DG Dev Brumby, James and Hemming, Richard (2013).

3.       Medium-Term Expenditure Frameworks, Finance Division, Ministry of Finance, Bangladesh.

4.      The International Handbook of Public Financial Management. Palgrave MaCmillan, 175 Fifth Avenue, NY 10010.

5.      https://www.academia.edu/24229797/MEDIUM_TERM_BUDGETARY_FRAMEWORK_FOR_FISCAL_EFFICIENCY_A_CONCEPTUAL_ANALYSIS_OF_BANGLADESH_CASE

6.      Public Financial Management (PFM) Reform Strategy 2016-2021, finance division, ministry of Finance Bangladesh.

7.      How Bangladesh Manages its Public Money, Finance Division, Ministry of Finance.