Malawi 2008

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Actual primary expenditure deviated from primary budget estimates by more than 5% in only one of the years considered: - 2004/2005: 5% - 2005/2006: 10% - 2006/2007: 2% (p. 30)

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Variance in expenditure composition exceeded overall deviation by more than 10% in two of the three years considered: - 2004/2005: 14% - 2005/2006: 6% - 2006/2007: 15% (p. 30)

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"Domestic revenue collection exceeded 97% in all three of the last three budget years: - 2004/2005: 178% - 2005/2006: 131% - 2006/2007: 185%. It would appear that the non-tax expenditure data includes expenditure emanating out of direct budget support while the revenue estimates are exclusive of direct budget support. If such an interpretation is given to the data, the results still exceed 97% for all three years considered. (p. 30)"

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At the present time even though there are identified areas where arrears continue to accrue, there are no mechanisms in place to monitor arrears. The Government has paid off (with the assistance of the securitization of some of the arrears) the 10.3 Billion MK established through a comprehensive audit in 2005, however since that time the continuing accrual of arrears has not been monitored. (p. 30)

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At the present time even though there are identified areas where arrears continue to accrue, there are no mechanisms in place to monitor arrears. (p. 30)

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The budget formulation and execution is based upon a functional, sub-functional, programme, sub-programme, economic and administrative classifications that are used both for budget formulation and execution. However, comparison with the COFOG standard indicates that the current use of programmes and sub-programmes ( which would be an equivalent of sub-functional classification in COFOG) will not allow mapping to produce consistent documentation with COFOG functions. (i.e. The mis-assignment of administrative heads to programmes and sub-programmes in a number of instances makes it unlikely that the programmes and sub-programmes can be mapped to COFOF sub- functions in a consistent way). (p. 31)

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"Budget documentation fulfils 6 benchmarks. Benchmarks fulfilled: - Macro-economic assumptions; - Fiscal deficit; - Deficit financing; - Debt stock; - Current year’s budget; - Summarised budget data for both revenue and expenditure. Benchmarks not fulfilled: - Financial Assets; - Prior year’s budget out-turn; - Explanation of budget implications of new policy initiatives. (p. 32)"

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"All revenues generated directly by the MDAs are transferred to the Consolidated Revenue Fund held with the Reserve Bank of Malawi (RBM). In 2006/2007 the RBM posted a loss of 1 Billion MK which was automatically funded by the Government through a promissory note mechanism that sits outside the budgetary process. As a ratio of total expenditure though this amount was less than 1%. However additional documentation provided by IMF (March 2007 Report) indicated that there is scarcity of information on the operation of the Treasury Funds, therefore there appear to be insufficient information to score. (p. 34)"

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Income/expenditure data of donor funded projects (loan funded) are submitted to the Ministry of Finance, the Ministry of Economic Planning and Development (Public Sector Investment Programme) as well as the corresponding Line Ministry to be included in fiscal reports. The Government of Malawi seek to exclude all projects that are managed outside Government systems from the budget, however other projects are included in other fiscal reports that are submitted to parliament. (p. 34)

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The central government transfers for recurrent expenditure of the Local Authorities are based upon the same budget procedures as for the Line Ministries and are transparent and subject to set procedures and rules. While the Sector Specific Grants, under the current transition arrangements, have their rule basis restricted by historical factors, the very high component (approximately 90%) of personnel emolument expenditure results in an overall effect of making over 90 % of the horizontal allocations transparent and rules based. (p. 36)

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Local Authorities are provided the budget ceilings along with the Line Ministries about three weeks before the completion of the budget process but not at the start of their detailed budget process. (p. 36)

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All Local Authorities provide monthly financial statements to the Ministry of Local Authorities. On an annual basis the Local Authorities submit final accounts that are included in the national appropriations accounts when they are presented to the National Audit Office (NAO). Further the National Local Government Finance Committee prepares and submits Local Authorities Budget Estimates to parliament within 11 to 12 months of the close of the fiscal year. The actual expenditure figures are not audited and given the current backlog of local authority audits this raises some question as to the accuracy of these reports. (p. 36)

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The 10 Key Commercial Statutory Bodies overseen by the Public Enterprise Reform Monitoring Unit (PERMU) submit fiscal reports to central government on a quarterly basis, as well as audited financial accounts annually which the PERMU consolidates the fiscal risk issues into a report and integrates into the Annual Economic Report for submission to parliament. However, it has not been established that these 10 public enterprises are the ‘all major AGAs/PEs’ which would warrant a higher score. (p. 38)

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Under the terms of the Local Government Act 1998 and the Public Finance Management Act 2003 Local Authorities cannot generate fiscal liabilities for the central government. It should be noted though that at this time no regular monitoring of the consolidated position of Local Authorities is carried. (p. 38)

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"Information elements publicly available: - Annual budget documentation; - In-year budget execution reports. Information elements that are not publicly available: - Year-end financial statements; - External audit reports; - Contract awards; - Resources available to primary service units. (p. 39)"

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The budget process is clearly set out in a draft budget calendar introduced in the 2007/2008 budget year. In the years covered by the PEFA Assessment such a calendar was not pre-announced even though by tradition the key steps occurred around the same time of the year. On the basis of the ceilings provided by the Ministry of Finance and approved by a Cabinet, the Line Ministries have about 2 to 3 weeks to prepare their submissions. (p. 40)

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The Ministry of Finance issues comprehensive and clear budget circulars. The Budget ceilings have been approved by cabinet and issued to the line ministries after the budget circulars but prior to the completion of the line ministries budgets. (p. 40)

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While the government has submitted the budget just prior to the close of the fiscal year, the legislature has in the past three years always approved the budget within two months of the start of the new fiscal year. (p. 40)

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Three years functional forecasts are prepared which serve as sector ceilings for the integration of the Public Sector Investment Programme (PSIP) into the budget. Forecasts of fiscal aggregates are prepared for three years and agreed with the IMF and published and submitted as part of the documentation to Parliament. The forecasts are directly linked to subsequent budget ceilings. (p. 42)

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DSA for external and domestic debt is carried out annually by the Debt and Aid Division of the Ministry of Finance. They began in 2005/2006 and the team received DSA reports for both years. Under the Poverty Reduction and Growth Facility (PRGF), the IMF also carries out a debt sustainability analysis. (p. 42)

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Statements of sector strategies exist for several major sectors including the health, finance and education sectors. There are 5 thematic areas representing several sectors exceeding 25% of primary expenditure. (p. 42)

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Most of the important investment decisions are selected after analysis from the Ministry of Economic Planning and Development however the investment decisions still have some links to sector strategies. The recurrent cost implications are not directly taken into account. (p. 42)

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Existing legislation is clear for VAT, but others are not comprehensive and clear leading to uncertain tax liabilities in some cases. Some of the laws are obsolete and not in harmony with each other. Work is on-going to revise these laws to produce a tax procedure code. (p. 44)

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Comprehensive, user friendly and up-to date information is available for tax liabilities. Assessments based on tax audit and are always communicated clearly to tax payers. (p. 44)

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There are both internal and external processes for tax appeals. The Commissioner General has made recent changes and refers all cases of appeal to a technical committee for advice. It is too early to assess its effectiveness since only few cases come up and tax payers are still unsure about the fairness of the system. (p. 44)

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Domestic tax administration is supported by 3 systems run independently with no interface to exchange information electronically. There is a common taxpayer identification number (Tax Personal Identification Number or TPIN) but in built controls appear inadequate. (p. 45)

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The Malawi Revenue Authority (MRA) undertakes tax audit and fraud investigations. There was no evidence of a documented audit plan for tax audits. Risk assessment is used, but there was no evidence of clear risk criteria. (p. 45)

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Penalties exist, but taxpayers can get around them as they considered by the business community to be inconsistently applied and not effective. (p. 45)

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The average tax ration for the two most recent fiscal years was 70%. (p. 46)

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All tax receipts are paid to 3 commercial banks and transfers are made from their headquarters on daily basis to government accounts held at the Reserve Bank. (p. 46)

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Monthly reconciliations are carried out for revenue deposits made into the National and Standard banks by the Malawi Revenue Authority (MRA) and the amounts received by into the Consolidated Fund held at the Reserve Bank of Malawi (RBM) by the Ministry of Finance (Revenue Division). MRA have indicated that there is no complete reconciliation of tax assessments, collections and arrears. (p. 46)

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MDAs are provided with three-monthly expenditure forecasts (funding proposals) to serve as commitment ceilings. Actual funding releases are done on a monthly basis. (p. 47)

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All significant virements must be made subject to the approval of the Ministry of Finance Integrated Financial Management Information System (IFMIS) ensures a strict application of virement control. Most significant in-year adjustments are done through a supplementary budgetary budget process after a mid-year review even though emergency drought and subsidies stay outside of this arrangement. (p. 47)

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Annual cash flows are prepared by the Line Ministries and updated each quarter. (p. 47)

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Comprehensive records on domestic and external debt are compiled and are updated and reconciled on a monthly basis. Comprehensive statistical reports providing information on debt stocks, debt service and debt management operations are prepared by the Debt and Aid Management quarterly and the Reserve Bank of Malawi (RBM) on a monthly basis. (p. 49)

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The payments system utilizes the Consolidated Fund for all payments on Government expenditure (except for grant and loan funded project accounts). This facilitates a monitoring mechanism that reports and reconciles the account on a daily basis. All active project accounts are held in the Reserve Bank of Malawi (RBM) and withdrawals disbursed through the Credit Ceiling Authorization scheme. Balances are reconciled on a daily basis. (p. 49)

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The systems for contracting loans and issuing guarantees are bound by transparent procedures set within the legal and regulatory framework. Loan level ceilings may be inferred from the Guidelines on External Debt Management but limits on total guarantees are not articulated. (p. 49)

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The personnel and payroll databases are directly integrated ensuring data consistency and providing for real time reconciliation. (p. 50)

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While the changes with respect to new hires and postings are performed on a monthly basis with only occasional requirements for retroactive adjustments, it is not clear that all terminations are updated monthly. In the cases of voluntary terminations officials report such adjustments occur within 3 months. (p. 50)

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The authority to change records in payroll and personnel records is highly restricted directly by software controls and distributed between the Department of Human Resource Management and Development (DHRMD), the Accountant General and the Line Ministry and results in an audit trail. (p. 50)

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Only partial pay roll audits have been taken by the Internal Audit and the National Audit Office (NAO) in the past three years. In addition the Department of Human Resource Management and Development (DHRMD) undertake personnel inspections. (p. 50)

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Data on public procurement shows that approximately 88% of contracts above the requisite threshold are awarded on the basis of open competition. However, the data sample does not distinguish between procurement under national procurement systems versus others, and so may not be representative of the awards made using national procurement systems. (p. 52)

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The justification for the use of procurement methods other than the open tender method remains weak due to ambiguity arising from emergencies due to dilatory behaviour. There are instances where the Director of Public Procurement may wave the requirement for Open Tender in the case of a national security threat without providing clear guidelines on what constitutes a national security threat. (p. 52)

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A process exits for submitting and addressing complaints, but appears to not yet be fully operational. (p. 52)

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The recently introduced Integrated Financial Management Information System (IFMIS) system has substantially increased the quality of transaction processing, commitment control and security of payments. For all entities integrated in IFMIS it is virtually impossible to make an unwarranted commitment or an unauthorised payment. (p. 53)

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The concept of management responsibility for internal control is firmly established and comprehensively outlined in the Public Financial Management Act. The controlling officers responsibilities are detailed in Section 10 in a way that leaves no doubt about where the responsibilities lies and the section also underlines all officer’s responsibility for internal control. However, there are doubts how much those rules have permeated the ministries at different levels. (p. 53)

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Evidence from Internal Audit and Auditor General shows that several errors or mistakes are made, indicating either ignorance or lack of applied rules on the operational level. The new follow-up system for internal and external audit, i.e. Audit Committees, might be able to raise the awareness once they are fully operational. (p. 53)

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Internal audit units have been created in nearly all ministries and professional international standards (Institute of Internal Auditors or IIA) are being implemented. Systemic issues are being increasingly observed. (p. 55)

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Reports are made as the audits are finished. They are distributed to the Controlling Officer in the Ministry, Treasury, the Central Internal Audit Unit, the Audit Committee, and to the Auditor General. The Director of the Central Internal Audit issues consolidated reports twice a year, of which one is the annual report. (p. 55)

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The Audit committee is the body that should move matters arising from the report further. As most of the Audit committees are not yet operational, actions and responses are still delayed. (p. 55)

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The Reserve Bank of Malawi (RBM) monitors and reconciles the Consolidated Fund account on a daily basis and so is in a position to determine the current status of bank balances for the entire Government on a next-day basis. The RBM submits bank statements to the Ministry of Finance within 15 days of the close of the month. While the signatories for grant and loan funded project accounts may not be Government officials, these accounts are managed under a similar scheme using Credit Ceiling Authorities. The placement of all project accounts (reported within the budget) with the RBM facilitates the reconciliation for all central government bank accounts on a monthly basis and within 15 days of the close of the month. (p. 56)

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Suspense accounts are monitored through the Integrated Financial Management Information System (IFMIS) and reconciled on an on-going basis. The accounts are cleared at the end of each year. (p. 56)

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There has been no comprehensive data collection on resources disbursed to service delivery units in the past three years. The current financial reporting systems do not indicate fund flows to the primary schools and primary health care clinics. (p. 56)

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The Monthly Expenditure Returns allow a direct comparison of budget implementation to the original budget at the budget head level and by economic classification. Only expenditures are covered, not commitments. Information included covers all of the budget estimates items, including Part1 (donor financed projects). (p. 57)

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Reports are prepared through the Integrated Financial Management Information System (IFMIS) by the Accountant General on a monthly and quarterly basis and submitted within 10 days of the close of the month. (p. 57)

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There are no material concerns regarding that accuracy. However, given that double entry book keeping is not adopted neither are bank balances reported to ensure reconciliation data accuracy cannot be assured. (p. 57)

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The Ministry of Finance prepares consolidated final accounts annually. Consolidated government accounts are prepared with revenue and expenditure information as well as a table of financial assets and liabilities. However, the financial statements do not include any expenditure arrears or tax arrears. (p. 58)

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The last Annual Financial Statement was submitted was submitted 4 months after the fiscal year. (p. 58)

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The Generally Accepted Accounting Principles (GAAP) standard is applied for preparing financial statements on consistent basis from one year to the next. The GAAP not adapted to national accounting standards, so there are disclosure of some accounting policies. (p. 58)

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From available information, it seems that the external financial audit of Central Government has a coverage of about 50%. Performance Audit is not yet implemented and International Auditing Standards have just started to be implemented. The Auditor General’s full independence when it comes to control over own resources is still missing. (p. 60)

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The last Annual Audit Report submitted to the National Assembly was for the fiscal year 2003/2004. Thereafter no report has been submitted since the sudden death of the Auditor General in 2006 left the post vacant. No new Auditor General, who can sign the reports, had yet been appointed at the time for the evaluation. The report for 2004/2005 is already drafted and 2005/2006 report is almost finalised and once a new Auditor General is appointed, this problem will be solved and the reporting will be resumed. However, even earlier the National Audit Office (NAO) has been late with is statutory reporting depending partly on late submission of the annual accounts to NAO. (p. 60)

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Until now the National Audit Office (NAO)'s reporting does not seem to trigger much response before the issues turns up in the Public Accounts Committee (PAC) hearings. The NAO is doing some follow up of its audits when it returns to the same audit subject again A new organisation for audit follow-up in the Government has been decided (2006) and started to be implemented by the Government. Audit Committees will be implemented in all ministries, tasked with analysing and acting on all audit reports, both from external audit and internal audit, and also on PAC reports. This new organisation has so far been implemented only in 12 ministries but will probably add much structure and substance to the audit follow-up once the Audit Committees are fully functioning. So far the feedback from the Audit Committees has been limited. (p. 60)

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The scope of the Parliaments assessment covers the whole budget as it is laid before them. (p. 61)

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In Malawi, the rules dealing with the parliament’s approval of the annual budget are set out in the Constitution, The Public Finance Management Act and in the Standing Orders of the National Assembly. The Budget and Finance Committee, which is established by the constitution, is the committee in the Assembly that is especially tasked with the examination of the annual budget. Also, there are some backroom discussions and negotiations, whereby the Parliament wields influence to facilitate the budget process and bring it to conclusion. (p. 61)

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The Budget Documents has to be submitted to the Parliament not later than 1st of April of each year. After the budget is laid before the Parliament it has, according to the Chair of Budget and Finance committee, about 40 days to work with the budget. The Standing Orders says that the budget debate shall last for a period of not less than 21 calendar days. (p. 61)

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There are clear rules for in-year amendments, spelled out in the Constitution (Section 177), and these rules are normally respected. (p. 61)

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The Public Accounts Committee (PAC) is currently working on the Annual Audit report from 2003/2004. The breakdown in reporting from the NAO, due to the fact that there is no Auditor General, will stall this accountability process in the parliament for an indefinite time. The very long time lapse from the already delayed audit reports until the recommendations are issued seriously undermines the value and usefulness of its work. (p. 62)

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According to evidence, hearings take place, and involve all Ministries. However, judging on the aging of the information being discussed, its overall usefulness becomes questionable. (p. 62)

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The Public Accounts Committee (PAC) is issuing reports with observations and recommendations after its scrutinizing of the Annual Audit reports. In the Government the Secretary to Treasury is tasked with the responsibility to follow up on the PAC report by issuing a Treasury minute to all Ministries, which has only happened once. With a time span of several years from the National Audit Office (NAO) observations until scrutinizing in PAC and the following Treasury measures, the follow-up has not been effective. (p. 62)

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The scoring is based only on the two years, 2005/2006 and 2006/2007 where reliable data was available. For 2006/2007 the predictability of budget support has actually been stronger and predictability has improved considerably. No scoring is done on this dimension. (p. 64)

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Information is lacking or is incomplete for 2004/2005 and 2005/2006. For 2006/2007 information is complete and delays are insignificant. (p. 64)

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For 2006/2007 eight out of fifteen development partners met all of Government of Malawi requirements for provision of data. However the remainder failed to meet at least one of the requirements. These requirements are not only submission of data but also completeness of data and consistency with Government budget classification. (p. 64)

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Donors has provided quarterly reports but is now required to report monthly, as a consequence of IMF ?s requirement on Government reporting. (p. 64)

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The development partners administer about 66% of their support through Government systems according to figures compiled by Debt and Aid Department. The figure is likely to be too high depending on inconsistent criteria. (p. 64)