IFPRI-ESSP2 Conference October 22-24, 2009

1. ETHIOPIAN DEVELOPMENT
RESEARCH INSTITUTE
The impact of public finance management on
spending in agriculture in Ethiopia
Alemayehu Geda
Dawit Birhanu
ESSP – II Conference
October 22‐24, 2009
October 22 24 2009

2. Plan of Presentation
• Introduction
– Hypotheses
– Motivation and Approach
• Federal‐level planning
– Macro framework
Macro‐framework
– Sectoral planning at the federal level
• Local level planning
– PSNP and OFSP
– Other agricultural expenditures
Other agricultural expenditures
• Conclusions and Policy Implications
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3. Introduction
• The loose link between policies, planning and budgeting
impacts economic outcomes.
• The impact of the above nexus is discussed in:
– Andrews and Moon (2004), Alonso, Judge and Klugman
(2005), Booth, Christiansen, and Driscoll (2005)
• Little has been done in terms of understanding budget
Little has been done in terms of understanding budget
practices and procedures across the developing world
(especially in Ethiopia).
– The CABRI‐OECD‐AfDB collaborative initiative constitutes
h CA I O C Af ll b i i ii i i
the only prominent study on the topic
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4. Hypotheses
• Budget outlays are made based solely on indicative targets
Budget outlays are made based solely on indicative targets
that are set independently from each other
• Public Investment Programs (PIP) are made in accordance
Public Investment Programs (PIP) are made in accordance
with investment programs proposed by the respective
ministries, independently from one another
• Annual budgets are products of a brand of incremental
budgeting that depends largely on previous allocation
g g p g y p
decisions and hence little rigorous economic analysis
• Hence procedures may have ignored inter sectoral
Hence, procedures may have ignored inter‐sectoral
relationships and demand constraints as well as economic
feasibility
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5. Motivation and Approach
• Objective: To understand the implication of the budget planning
procedure for efficiency of public spending in agriculture.
• Qualitative approach for this study
– A forthcoming companion study provides quantitative estimates of
spending efficiency
• Methodology
– Comprehensive review of budget policy documents
• B d
Budget and investment program planning and preparation procedures
di l i d i d
• Expenditure performance, the capacity for monitoring and evaluation
– Focus group discussions
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6. Sample and Focus Group Discussions
• The approach we adopted to shed some light on planning,
budgetary practices and procedures in Ethiopia has three parts:
– Comprehensive discussions of budget and investment program
Comprehensive discussions of budget and investment program
planning and preparation procedures, and expenditure performance
and the capacity for monitoring and evaluation with the Ministry of
Finance and Economic Development (MoFED)
p ( )
– Similar discussions as above with the Ministry of Agriculture and Rural
Development (MoARD)
Development (MoARD)
– Woreda level focus discussions, in addition to the general provisions of
budget preparation, on specific cases of public investment programs
budget preparation on specific cases of public investment programs
by the two Ministries focusing on agriculture
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7. Federal Level Budget Formulation: A brief discussion
• Pre‐reform period budget formulation employed the incremental
budgeting system.
• The reform emphasizes long‐term development objectives.
• Centralized the budget formulation (merged planning and budget
Centralized the budget formulation (merged planning and budget
formulation)
• Four stages: planning, preparation, legislation, and implementation
Four stages: planning, preparation, legislation, and implementation
& control.
• Stakeholders: MoFED, NBE, MoARD, Council of Ministers, Office of
, , , ,
the Federal General Auditor
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8. Federal Level Planning Examined
• The Macro‐Economic Fiscal Framework (MEFF)
h i i l k( )
– Macro‐projections (real sector, monetary‐BoP)
– The Aggregate Resource Envelope (ARE)
• Domestic resource projections
– Real and nominal GDP growth
– Tax elasticity
Tax elasticity
– Import projections
– Exchange rate developments
– Inflation
– Anticipated tax and non tax revenue
• Foreign resource projections
– Development partners’ commitments
– Historical trends on disbursements
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9. Federal Level Planning Examined (cont.)
• Should bring together experts from MoFED, NBE, FRCA
• Bulk of the workload rests on MoFED
Bulk of the workload rests on MoFED
• Macro‐projections make use of trend regressions (pretty
much independently for sectors)
much independently for sectors)
• GDP forecasts are generated using lagged values of GDP
growth trends aligned with PASDEP targets.
growth trends aligned with PASDEP targets
• Does not systematically introduce predictability in pledged
funds
funds
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10. Federal Budget Formulation
• Indicative planning figures are developed based on the
Macro‐Economic Fiscal Framework
• Expenditure ceilings and guidelines
• Preparation of budget proposals by MoARD
• Appraisal by MoFED
• Federal budget drafting
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11. Federal Budget Formulation (cont.)
• MoFED does not compare impact and return across projects to
make budget decisions.
• Selection among projects is done independently of budget
formulation and bases on sector development programs and
PASDEP.
PASDEP
• The link between outcome and targets in PASDEP is weak
• Related to PASDEP is the Macro‐Economic Fiscal Framework and
hence the capacity to do that central framework
• Sector development programs are developed and managed by the
Federal Government.
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12. PASDEP and its Targets
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13. Budget Planning Process: Agriculture and Rural Development
• Policy documents note that Agriculture and Rural
Development is an overriding priority of the government
• ARD does not have a comprehensive sector program
– Capacity constraints limit planning
• Little attention is paid to the sector by the International
Little attention is paid to the sector by the International
Financial Establishment, unlike health (HSDP) or education
(ESDP)
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14. Budget planning process: ARD (cont.)
• Th f
The focus of ARD in PASDEP
f ARD i PASDEP
– Enhancing the productive capacity of smallholder farmers
– Promoting diversification
Promoting diversification
– Shifting to a market based system
– Ensuring food security at the household level and;
g y ;
– Strengthening emergency response and reducing
vulnerability
• Programs such as Food Security, Productive Safety Net,
Agricultural Extension, Small and Large Irrigation, Improved
Agricultural Extension Small and Large Irrigation Improved
seeds reflect the focus on strategies for immediate gains.
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15. The Food Security Programme: PSNP, OFSP and Resettlement
• Starting in 2005, the Productive Safety Nets Programme (PSNP)
has been implemented as part of a broader Food Security Program
1. Productive Safety Net Program (PSNP)
1 Productive Safety Net Program (PSNP)
• Labor intensive public works (PW) building productive
community assets
• Transfer payments in cash rather than food in some areas to
Transfer payments in cash rather than food in some areas to
encourage market development
• Direct Support (DS): unconditional transfers to labor‐scare
households including elderly and disabled
households including elderly and disabled
2. Other Food Security Programs (OFSP)
• Makes available packages of services such as: fertilizer, credit,
other inputs or assets
3. Resettlement to other locations with more productive land
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16. Food Security Program Budget Breakdown
Source: World Bank (2008), Ethiopia Agriculture and Rural
Development Public Expenditure Review, 1997/98 – 2005/06
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17. Agriculture and Rural Development Planning
• MoARD, in most cases does not apply standard economic and
financial analyses to make a selection among competing
projects.
j t
• There is a general, albeit questionable, assumption that the
benefit of some proposed project can be scrutinized without
utilizing standard techniques.
• Reliance on subjective assessment
• No attention to inter sectoral linkages
No attention to inter‐sectoral
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18. Agriculture and Rural Development Planning (cont.)
• MoARD has built up little in terms of the capacity to
systematically prioritize projects/programs.
–h h
haphazard prioritization systems
d i iti ti t
• Lack of unifying technical methodology in prioritizing has
meant production and productivity enhancing
projects/programs are slightly more favored than others.
• MoARD does not compare notes with others (Ministries,
NGOs) and hence does little to minimize redundancy and
duplication of efforts
duplication of efforts
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19. Agriculture and Rural Development Planning: Findings
from Focus Groups
• M ARD’ programming offices’ general focus appears to be
MoARD’s i ffi ’ lf b
designing day‐to‐day work plans and, give insufficient
attention to projects design.
• In the less likely event that these units have come up with
involved project plans, their contents have been broadly
involved project plans their contents have been broadly
unoriginal, and with extensive similarities with better
designed project plans.
• The capacity of sector ministries, including MoARD, in linking
budgets with physical outcomes, at the end of every fiscal
year, is negligible, while MoFED, itself, lacks the capacity to do
an involved project appraisal.
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20. Local Level Planning: PSNP and OFSP
• A series of local administrative structures – “Food Security Task
Forces” ‐ have been established to assist in the selection of public
works projects, to liaise with programme staff, to keep records,
p j , p g , p ,
monitor implementation and identify households who should
receive benefits
• There has been a relatively high level of beneficiary involvement in
the PSNP; between 20 and 30 percent of households report being
involved in the selection of public works activities.
• Between 85 and 90 percent of households perceive that their
community has benefitted from the construction or rehabilitation
of roads, schools and soil and water conservation
,
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21. Local Level Planning for Other Programs:
Findings from Focus Groups
• Capacity constraints are more severe at smaller units of
administration (Woreda, Kebele).
( , )
• With hundreds of Woreda units dispersed across the country,
neither MoFED, nor regional finance and agricultural bureaus
neither MoFED nor regional finance and agricultural bureaus
are equipped with the capacity to appraise, monitor or
evaluate projects handled at the Woreda level
• Woreda planning units claim “the capacity of MoFED to
scrutinize the execution of projects and its push for efficient
utilization of financial resources is withered”.
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22. Local Level Planning for Other Programs:
Findings from Focus Groups (cont.)
• Little attention paid for need assessment at Woreda level (reflect
national priority even if not fit woreda needs/ incentive skewed to
budget good performers)
• Even in a best‐performing Woreda unit, both contemporaneous and
inter‐temporal linkages were missing.
• Concerns of detractors cannot be readily dismissed (political
considerations…)
• Excessive expectations on weredas performance without the
necessary accompanying resources.
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23. Conclusions
• The merging of MoF and MEDaC may have led to long‐
terms policy issues being sidelined.
• The discussions justify the need to internalize inter‐sector
linkages.
• Wider participation of stakeholders in the budget
formulation process is essential (particularly by NBE, FRCA)
• Curbing delays in reporting, building the system of
monitoring and evaluation will be instrumental in
tabulating physical outcomes
t b l ti h i l t
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24. Conclusions (2)
• High staff turn‐over calls for an appropriate incentive scheme or
employing staff as consultants
• Restructuring planning and programming offices at line ministries
by creating capacity.
– Mechanisms of prioritization, linkages and coordination
– Linking 5, 3 and 1 year plans technically/measurably [Annual‐MEFF‐
PASDEP.]
• Weak relationship between federal ministries and regional Woreda
Weak relationship between federal ministries and regional, Woreda
level bureaus.
– Especially in Agriculture
– M&E is based on report of reporting agency
M&E is based on report of reporting agency
– Rule of thumb is the rule not the exception in Sector/Agr/ Plan
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25. Conclusions (3)
• What needs to be done
– Improving the process of formulation of MEFF
Improving the process of formulation of MEFF
– Improving inter‐sectoral linkages and appropriate planning
and budgeting at line ministries:
– Improving the link between capital and recurrent
Improving the link between capital and recurrent
expenditure as well as long term (PASDEP) and medium
term plans (MEFF):
– Promoting participation and Aligning Incentives
Promoting participation and Aligning Incentives
– Focusing on performance and sequencing reforms
– Improving problems in Stretching resources as well as
down‐top Planning, as well as delays in reporting
down top Planning as well as delays in reporting
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26. Conclusions: What Needs to be Done (cont.)
• Strong relation between MOFED and MoARD on:
• Lack of skilled experts and high staff turnover in both.
• Weak relationship between MoFED and MoARD on technical level
level,
• Weak relationship between Federal ministries and the regional
bureaus and down to the Woreda level.
• Not enough attention is given to planning and programming
sections at ministerial levels.
• Poor quality information/data and time concept in budget
preparation and
and.
• Poor accountability
• Urgent need to build capacity at MoARD and MoFED
Urgent need to build capacity at MoARD and MoFED
• Need technical experts (collaborative MA/MSc)
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27. THANK YOU
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