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Assessment of legal and institutional opportunities and barriers to the effective application of the Medium Term Expenditure Framework in Azerbaijan

25 Feb, 2020 1437

Prepared by Eurasia Extractive Industries Knowledge Hub Expert Group

Summary :

Implementation and outcomes of government programs and strategies usually require a long period of time, with the use of budgetary resources for more than a year. Therefore, annual budgets do not take into account the costs of the future and do not allow decision-makers to make sound strategic planning. This discrepancy between policy-making and implementation is addressed by the Medium-Term Expenditure Framework (MTEF).

The MTEF is a policy tool for medium-term (usually 3 years) budget planning and budgeting. It is a macro-level definition of the "top-down" resource envelope and "bottom-up" an estimate of the cost for current and mid-term budget policies. The legal explanation given to the MTEF in Azerbaijani legislation is the following: “as a strategic stage of budgeting it is the set of institutional measures aiming to harmonize the medium-term resource portfolio and national spending priorities for the budget and management of state budget revenues and expenditures.”

The implementation of the MTEF is important not only for long-term budget planning but also for ensuring fiscal discipline through budget allocations in line with the priorities of policies in different sectors.

Legal Opportunities for the Implementation of the MTEF in Azerbaijan:

• Strategic Roadmap on the National Economy of the Republic of Azerbaijan, approved by the Decree of the President on December 6, 2016. According to the document, one of the key priorities for achieving fiscal sustainability is the creation of a cost/investment discipline mechanism, and one of the most important mechanisms for maintaining this discipline is the application of the MTEF.

• "Medium-Term Expenditure Framework Rule" approved by Presidential Decree on August 24, 2018. In accordance with this from 2021 MTEF should begin with division of budget expenditures according to the sectors such as “Education”, “Agriculture” and “Environmental Protection”, and linked to the National Spending Priorities and mid-term spendings for those sections (for next year and for the next three years) should be defined. According to the regulation, the preparation of the MTEF will begin each year by February 15, and the process must be completed by June 15 and the President must approve the MTEF document, including the medium-term resource portfolio, medium-term budget policy, and national spending priorities.

• "Rules for the preparation of sectoral strategic plans of budget entities in the Republic of Azerbaijan" approved by the Decree of the Cabinet of Ministers on December 28, 2018. According to the document, a strategic plan is a document that outlines the goals of budget entities in the short and medium-term, defines measures necessary to achieve those goals, including sources of funding. The costs identified under the action plan for the implementation of each measure such as human capital, financial and material resources should be listed separately for each activity.

Prerequisites for Implementation of the MTEF in Azerbaijan:

  • Political support and determination;

  • Availability of sound macroeconomic policy and reliable forecasting;

  • Proper estimation of available resources for forecasting;

  • Determining the consistency between budget policy priorities and resources;

  • To create a more reliable and comprehensive database for the integration of information systems of the numerous ministries and entities involved in the process;

  • Providing effective communication within the government and the creation of space for constructive discussions on the formation of cost priorities;

  • Ensuring active participation of all stakeholders; Synchronization of reforms towards the application of the MTEF with program-based budgeting;

  • To broaden the scope of different budget expenditures under MTEF’s coverage;

  • Transparency, budget discipline, budgetary control, and institutional framework.

    Institutional Capacity for the Implementation of the MTEF in Azerbaijan:

  • The Ministry of Finance has been designated as a coordinating body for the preparation of the MTEF, and the Ministry is currently getting organized, with a separate structure established for this activity. In order to ensure the sustainability of reforms in this area adequate capacity of human resources within the Ministry with sound knowledge and skills in the implementation of the MTEF mechanism is required;

  • The Financial Stability Council works intensively on effective coordination of macroeconomic policies. The Council is an advisory body that combines monetary, fiscal and macroeconomic regulation structures and acts as a key authority in the government's decision making process on macroeconomic policies and regulation.

Institutional barriers to the implementation of the MTEF in Azerbaijan:

  • Poor forecasting capacity for macro-level definition of government's top-down resource envelope;

  • The limited experience of budget organizations in developing professional strategic plans for determining the size of current and mid-term budget resources from the bottom-up combined with the lack of capacity in the field;

  • Limitations of community participation mechanisms for determining the costs of urgent needs bottom-up;

  • Lack of effective programming experience to meet the requirements of an efficient budget system.

    Ways to overcome legal and institutional barriers to the implementation of the

    MTEF in Azerbaijan:

  • Budget needs should be assessed in an ascending manner and prioritization of expenditures should be reflected in the budget legislation;

  • The MTEF should address the entire budgetary system, including budgetary and extra-budgetary funds;

  • Relevant budgeting and investment budgeting should be ensured in budget planning and needs identification;

  • The cost of all programs must be determined in the medium term.

    Recommendations for the effective use of the MTEF in Azerbaijan

    Recommendations for the Parliament:

• The relevant budgetary regulations, such as the Budget System Act, should be amended to allow assessment of budgetary needs in an ascending manner and to include the mid-term framework for expenditure prioritization. Amendment to the point 7.1.8 of the article 7 of the Law on Public Participation, approved on Novem- ber 22, 2013, with the following edit: “to hold public discussion of the state’s budgetary plan, medium-term expenditure framework, and other legislations”; According to Article 18 of the Law on Public Participation, Public Hearing and Public Discussions of Draft Laws, the parliament is responsible for organization of public hearings and public discussions of draft laws. The parliament is expected to start fulfilling its obligations from 2020. According to Article 9.2 of the Law on Normative Legal Acts, any draft legal act, including budgetary law, can be brought to public and professional discussion by the decision of the parliament or regulatory body authorized to adopt regulatory legal acts.

Recommendations for the Cabinet of Ministers:

• The government's medium-term strategy document may be developed with the participation of civil society to identify the strategic objectives needed for the development of strategic plans for budget organizations. The following amendment to Article 4.5 of the Medium-Term Expenditure Framework, approved by the Presidential Decree of August 24, 2018, may be added: “Representatives of relevant entities and of civil society organizations are involved in the development of the forecasting for MTEF and overall preparation of MTEF”. The following can be added to the end of Article 5 of the “Strategic Plan Evaluation” of the “Rules for the preparation of sectoral strategic plans of budget organizations in the Republic of Azerbaijan” approved by the Decree of the Cabinet of Ministers on December 28, 2018: “civil society and independent experts may be invited to evaluate the implementation of the action plans stipulated in the plan. ”

Recommendations for the Ministry of Finance:

• The MTEF should cover the entire budgetary system, including extra-budgetary funds. The cost of all programs should be determined in the medium term. In the process of budget planning and needs assessment current budget and investment budget should be linked. Reforms on the MTEF should be pursued by the Ministry of Finance, which has a strong and extensive status as a responsible body. It is important that the organization has strong potential in three areas: (i) sound identification and efficient prediction of key parameters of the MTEF; (ii) professional evaluation of strategic plans and budget proposals; (iii) development and implementation of the results-based budget methodology. The establishment of a public council within the Ministry of Finance should begin as a consultative body as envisaged in the Law on Public Participation, approved on November 22, 2013. According to Article 12 of the Law on Public Participation, public hearings and discussions on the budget and MTEF should be initiated. Information on the state budget, summary budget, and MTEF should be placed not on the Ministry of Finance website, but on a separate budget portal, which may be called the Budget Information System.



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