Assessment purpose and management
The purpose of this Public Expenditure and Financial Accountability (PEFA) assessment is twofold:
- Establish a baseline for public financial management (PFM) performance, using the revised PEFA Framework that came into effect in early 2016. This contains many changes from the 2011 Framework, thus requiring a new baseline.
- Assess the change in PFM performance since the 2012 PEFA assessment according to 2016 PEFA framework guidelines on tracking performance change.
This PEFA assessment covers the budget function of the Central Government, which comprises the 50 Ministries, Departments, and Agencies (MDAs) of the Government of Ghana (GoG).
The time period covered for each of the 31 performance indicators (PIs) depends on the specification of the PI. For some PIs, the relevant time period is the situation at the time of the assessment, in this case, February–March 2018 (when the PEFA team was in the field). For other PIs, the relevant time period is the last completed fiscal year (FY) or the last three completed FYs. For some other PIs, the PEFA assessment took place shortly after the end of 2017, that is, before the data for actual revenues and expenditures during 2017 were available. Thus, for PIs 1–3 and 28–30, the relevant time period is 2016 or 2014–2016.
The assessment has been carried out by a team of consultants hired by the World Bank-financed Public Financial Management Reform Project (PFMRP). The team reported to the Director of the PFMRP Project, who himself reported to the Oversight Team established to oversee the project. As shown in Table 1.2, in Section 1, the Oversight Team was mainly comprised of senior management from the Ministry of Finance (MoF) and the Controller and Accountant General’s Department (CAGD), Ghana Audit Service (GAS), Ghana Revenue Authority (GRA), Bank of Ghana (BoG) as well as three donor partners who are members of the PFM Working Group.
The impact of PFM performance on aggregate fiscal discipline, the strategic allocation of resources and the efficiency of service delivery
First, it is appropriate to highlight the legal and institutional strengths of Ghana’s PFM system.
The 1992 Constitution outlines the fundamental legal framework for PFM. It guarantees independence of Parliament, the Judiciary, the Auditor General and his/her office, as well as independent government institutions such as Electoral Commission and the National Commission for Civic Education. The main strength of Ghana’s PFM system derives from its solid legal and institutional setting for PFM, accompanied by a skilled, dedicated, and well-led civil service. Ghana has been independent since 1957, and has been able to develop these strengths over the course of six decades. The structure is robust, the key PFM institutions mentioned above are the main institutional pillars that provide solid guidance and leadership to the MDAs that deliver the public goods and services that Ghana needs as a pre-requisite for socio-economic development. Ghana is a lower middle-income country, with strong PFM playing a major role in achieving this status. Many other African countries tend to look to Ghana as an example of how to effectively use PFM systems to support such successful development. In spite of these, the PFM system could be better than it is right now; this notwithstanding, its institutional strengths indicate that the wherewithal to strengthen PFM is definitely in place. However, the system has some inherent fiscal and fiduciary risk.
Nonetheless, Ghana’s PFM could be improved as some aspects of it pose a degree of fiscal and fiduciary risk, with adverse implications for aggregate fiscal discipline, the strategic allocation of resources and the efficiency of service delivery (the three budgetary outcomes). The Government of Ghana’s institutional strengths indicate that it has the wherewithal to implement the measures needed to reduce risk.
Aggregate fiscal discipline is essential to macro-economic stability, itself essential to the predictable provision of public goods and services to society. Aggregate fiscal discipline can be endangered by exogenous forces, such as falling global prices of commodities that Ghana exports, as happened during 2013-2017, and disruptions to the supply of crude oil to the main oil refinery. Such events may lead to falls in domestic revenues and increasing fiscal deficits. Borrowing to fund such deficits may further endanger macro-economic stability (increasing current account deficits, falling foreign exchange reserves, rising inflation).
Strong public financial management (PFM) can support the preserving of aggregate fiscal discipline, itself in support of macro-economic stability. Strong budget preparation, budget execution, revenue administration and accounting and reporting systems all support credible policy-oriented budgets that provide the public services that people want at a reasonable price. Public services are provided cost-effectively, indicating that the composition of public services is about right (strategic allocation of resources) and that the provision of services is cost-efficient (efficiency of service delivery).
Weaknesses in PFM tend to make it harder to adjust to adverse external situations, and, in themselves, may run the risk of undermining aggregate fiscal discipline, (fiscal risk), the strategic allocation of resources and efficient service delivery (fiduciary risk).
The Government of Ghana has been implementing PFM reform strategies since the early 2000s, but, nevertheless, weaknesses remain, as identified by this PEFA assessment, and all with adverse implications for the three budgetary outcomes. These are itemized as follows:
1) The financial situation of state-owned enterprises (SoEs)
PI-10 in Section 3 indicates considerable weaknesses in the financial situation of such enterprises. These pose a threat to the GoG budget because of their need for funding that ultimately becomes the obligation of GoG to cover (through explicit and implicit contingent liabilities). The GoG forgoes the revenues that they could earn if SoEs were not making losses, and which could be used to fund public service delivery. The large size of SoEs in relation to the economy mean that they do business with each other, the result being a chain of debts if one gets into financial trouble, the situation thereby becoming exacerbated.
The information available to GoG on the extent of these financial weaknesses seems that it is not as robust and timely that it should be, as noted under PI-10. MoF through its Debt Management Division monitors information on the loan guarantees extended to SoEs, but the accuracy of such information is open to question (PI-13). There is no single body that monitors the financial sitation of SoEs, though this situation may change through the State Enterprise Commission (SEC) having its watchdog role strengthened.
2) Revenue administration
Notwithstanding several years of reform, indications are that domestic revenue mobilization is not as strong as it could be. Robust compliance with tax obligations is still a challenge, the tax audit function is not as strong as it could be, and tax arrears are significant in size (low score for PI 19 on revenue administration). This is not just Ghana Revenue Authority’s fault: the inter-enterprize arrears situation of SoEs impacts on the size of revenues collected by GRA, which in turn impacts negatively on its ability to administer the taxation regime (as GRA’s funding is a specified percentage of tax revenue).
Strengthened revenue administration would bring in more revenues for GoG, which are then available for funding public services and reducing the need to borrow in order to fund such services. This supports all three of the key budgetary outcomes.
3) Expenditure commitment control
Expenditure commitments made outside the approved budget and not supported by cash will likely result in payments arrears. Although the Ghana Integrated Financial Management Information System (GIFMIS) is now more or less fully in place (its establishment started in 2012) and is supposed to guard against commitments being made, it still seems to be the case that commitments are made outside the system (low scores for PI-22 on arrears and for commitment control under PI-25.2).
4) Cash management
In-year execution of the budget still seems to be based on the amount of cash actually available to pay bills (‘cash rationing’). This leads to considerable unpredictability in budget execution. The main complaint of the four large MDAs met by the team was delays in receiving budget releases, and thus delays in receiving the funds needed to execute their approved budgets. Such practices have considerable negative impact on both the strategic allocation of resources (which may be far less optimum than planned) and on the efficiency of service delivery (low scores for PI-21).
This situation is partly a symptom of the unexpected demands on budgetary resources caused by the financial situation of SOEs and violations of the expenditure commitment control system. It also reflects the incomplete consolidation of cash balances that would enable all cash balances available to be used to help finance budget execution. Currently a sizeable amount is not consolidated as: (i) they represent the internally generated funds (IGF) retained by MDAs to finance specific expenditures and are kept in commercial bank accounts); (ii) funds kept by Statutory Funds (e.g. GETFund) and financed largely by transfers from GoG; and (iii) funds kept in donor project accounts held in commercial banks.
Establishment of a Treasury Single Account (TSA) would help alleviate this problem; establishment has begun. Of course, eliminating the retention of IGFs and tightening up on the flow of budgetary funds to Statutory Funds would help alleviate the issue, but this might raise political issues.
5) Extra-budgetary operations
As described under PI-6, there is a significant amount of non-transparency in the budgetary system in Ghana that can negatively impact on budgetary outcomes, particularly the strategic allocation of resources and efficient service delivery. Although the approved annual GoG budget is funded from all sources of funding and not just the Consolidated Fund (CF), information on budget implementation does not include expenditures financed by IGFs, donor project funds and Statutory Funds. About 20 percent of budgetary funds are spent in this non-transparent manner. PI-6 scores D.
Under the 2016 Public Financial Management Act (2016), this situation will improve, as the reporting on budget execution will cover all sources of funding.
6) Budget preparation
The procedures for preparing annual budgets are well-established (PI-17), but they don’t guarantee that the approved budgets will truly meet the needs of society. There seems to be no mechanism for ensuring the cost effectiveness of proposed spending. Ineffective and inefficient spending may be carried forward for year after year, as there appears not be a mechanism for weeding this out, for example, through spending reviews outside the budget preparation cycle. One issue is that annual Budget Guidelines are issued by MoF to MDAs without the prior scrutiny of the Cabinet, a political body that might want more say in what goes into the Guidelines.
The lack of predictability in the annual budget complicates the development of a medium term perspective on budgeting. Obtainng an annual perspective is even difficult.
As a basis for estahlishing a medium term perspective, the preparation of forward spending estimates (FSEs) would be useful for these project expenditures over the medium term on the basis of current policies and the current levels of service currently being delivered. They would include the future recurrent costs implied by capital expenditures that have already been committed to. They would also provide a mechanism for eliminating spending that would not be needed over the medium term. They would also form the basis on which ‘new’ spending could be identified.
7) Public investment management
Studies conducted by World Bank and IMF indicate the potential waste of resources posed by large investment projects being approved and executed in a non-rigorous manner (D score for PI-11). A project has been established in MoF to address this situation, but progress in implementing the project has been slow.
8) Payroll, procurement and payments systems
Weaknesses in these systems can pose major fiscal and fiduciary risk, but significant progress has been made in recent years in strengthening these systems. PIs 23, 24 and PI-25.3 all demonstrate strengthened robustness, the result in part of strengthened IT systems.
In response to the adverse macro-economic situation confronting Ghana during 2013-2016 due to the globall falls in commodity prices, the GoG entered into a financial support arrangement with the International Monetary Fund (IMF) through the Extended Credit Facility (ECF). To receive this support, the GoG implemented a number of fiscal tightening measures (for both revenues and expenditures), as well as some structural reforms that would strengthen PFM systems. Such reforms relate to the weaknesses mentioned above. Progress in implementing the reforms has been moderate, though there was some slippage during 2016.
The new Government that came to power in early 2017 appeared determined to take the measures needed to ensure fiscal sustainability and to fully implement the structural reforms agreed to through the ECF. The latest ECF review (fifth and sixth) posted on IMF’s website (in early May 2018) was positive in its assessment of the GoG’s ability to meet the fiscal targets agreed to with the IMF. However, it pointed to the strong need to ensure that the requisite structural reforms are actually implemented.
Changes in PFM performance since the 2012 PEFA Assessment
Table 2 summarises changes in PFM performance since the 2012 assessment. The changes are assessed by applying the 2011 PEFA Framework to the situation at the time of the 2018 PEFA Framework. Due to the many differences between the 2011 and 2016 Frameworks, comparability issues arise if the 2016 Framework is used to assess performance changes. The PEFA Guidance Note on conducting repeat PEFA assessments thus stipulates that the same Framework should be used when assessing performance change.
Section 4.4 goes into more detail on changes in PFM performance and the implications of their impact on aggregate fiscal discipline, strategic allocation of resources and efficient service delivery
The table indicates that some strengthening of PFM performance has taken place since the 2012 assessment, helped by the establishment of GIFMIS soon after the 2012 assessment. The main areas of strengthening are:
- PI-4 on payments arrears. The monitoring of arrears has improved, which should help GoG to take more effective action to guard against the arrears being incurred in the first place. Significantly sized arrears risks damageing the credibility of the budget and impact negatively on all the three budget outcomes.
- PI-9: Monitoring of the financial situation of MMDAs. MMDAs potentially pose significant fiscal risk for GoG and thereby impact negatively on budget outcomes. Strengthened knowledge of the financial situation of MMDAs would help GoG to identify financial problems of MMDAs ahead of time and to help MMDAs to plan and implement mitigative actions. Strengthening of the monitoring of fiscal risk posed by SoEs remains, however, a major challenge.
- Payroll control (PI-23). Strengthening is underway, though not yet reflected in the scoring, through: (i) the introduction of the HRMIS, which makes possible the linking of the establishment list, kept by the Office of the Civil Service, with IPPD (PI-23 (i); (ii) more timely updating of payroll records; and (iii) the E-SLV, which helps strengthen internal control (PI-23 (ii). Weak payroll controls pose both fiscal risk (threat to aggregate fiscal discipline) and fiduciary risk (wasteful spending on wages and salaries detracting from efficient and effective service delivery.
- Procurement systems (PI-19). More procurement taking place on a competitive basis and more procurement information available to the public, thus strengthening transparency. This impacts positively on the efficiency of service delivery and reduces the fiduciary risk of wasteful spending to the efficiency of service delivery. Expenditure commitment controls and compliance with controls (PI-20 (i) and (iii)) have strengthened, helped by the establishment of GIFMIS. Fiduciary risk to the efficiency of service delivery is diminishing as a result.
- Resources received by primary service delivery units (PI-23): The advent of GIFMIS appears to have considerably strengthened the transparency of the receipts by service delivery units –those in the health sector in particular. This has lowered the fiduciary risk of wastefulness in the use of resources, thereby increasing the efficiency of service delivery.
The main ‘problem’ areas still outstanding are: (i) the extent of unreported extra-budgetary operations (ii) inadequate monitoring of the financial operations of State-Owned Enterprises (SoE), linked to the apparent non-transparency of loan guarantees provided to them by GoG; and (iii) revenue administration. The relevant indicators are PIs 7, 9, 13-15, 17, and 28 (directly) and 1, 2, 24, 25, and 29 (indirectly); the un-reported extrabudgetary operations impact on the transparency of in-year budget execution reports and annual financial statements). Weaknesses in these areas pose both fiscal and fiduciary risk, thus potentially impacting negatively on all three budget outcomes.
Overview of GoG’s PFM Reform Strategy
The most recent PFM Reform Strategy (PFMRS) was established in 2015. Implementation would occur under a PFMRP in the form of a World Bank-financed project. Government ownership of the PFMRP would be is important for its success. Accordingly, the Ministry of Finance, under the leadership of the Minister, was responsible for the overarching strategic coordination and oversight of the project. Various institutional and implementation arrangements were made to to support the PFMRP. The PFMR Secretariat was established as a separate office as part of the World Bank project. Under the oversight of its Director, the PEFA team used the office’s conference room as a base for operations.
Implementation appears to have been a success so far. The successful establishment of PFM-related computer systems, such as GIFMIS, has been crucial for the implementing of reforms. The GIFMIS itself was located in the offices of the PFMR Secretariat. Although different from the common experience of such IT systems coming under the office of the Accountant General (e.g. Kenya), its location in the PFMR Secretariat facilitated the procurement operations associated with GIFMIS. GIFMIS has so far played a pivotal role in strengthening PFM reform.
The PFMRS recently came to the end of its life. This PEFA report is helping to inform the preparation of the next strategy.
The analysis in this PEFA report implies that GoG should basically continue with the strategy it is already implementing, with enhanced focus on the PFM weaknesses that have major negative impact on the three budget outomes and thus significant fiscal and fiduciary risk. The obvious areas are State Owned Enterprise reform, revenue administration, continuing the roll out of the Treasury Single Account, ensuring that GIFMIS and the IT-based payroll control systems function well. All these would help to improve the predictability and credibility of the annuall budget and thus enable an efficient and reliable budget execution process.
In planning any changes to its PFM Reform Strategy, the MoF, other key PFM-related institutions (e.g. GRA) and key line mnisters should undertake a prioritsation exercise in planning its reform activities. Such an exercise should take into account institutional capacity and human resource constraints and identify logical sequencing issues: what needs to be done first in order to enable something else. The more bindng the constraints, the greater the extent of prioritization needed.
What should not be done is to prepare a strategy that identifies what needs to be done to increase the score for a PEFA dimension. A number of PFM Reform Strategies attempt to do this, without taking into account capacity constraints and prioritisaton/sequencing issues. They come out with detailed PFM reform Action Plans that try to address all issues, the result being limited successs in achieving meaningful PFM reform.