1. Afghanistan’s Public Financial Management (PFM) systems have significantly improved since the reconstruction efforts commenced in the year 2002. Afghanistan has transitioned from a state of emergency arrangements to a largely disciplined PFM system. The major achievements include establishing the legal, institutional and operational framework for PFM and ancillary functions, and introducing the modern budget tools and automated payments. These improvements have gradually strengthened confidence in PFM, leading to the increased use of national systems by the Development Partners (DP).
2. The Government and the DPs use PEFA assessments to monitor the outcomes of Afghanistan’s PFM reforms. High-level PFM benchmarks were established in the Tokyo Mutual Accountability Framework (TMAF, 2012). Most recently, the Government outlined the PFM reforms in the Fiscal Performance Improvement Program (FPIP, 2016). This PEFA Assessment has been completed as a joint Government and DP initiative to inform relevant stakeholders on the extent to which national PFM systems and practices support the achievement of the fiscal and budgetary outcomes.
3. The coverage of the PEFA assessment is central government fiscal operations, extra budgetary units and state-owned enterprises. This includes centralized accounting entities, namely line ministries and other central government agencies for which budget is approved by the national legislature and expenditure is processed through the Afghanistan Financial Management Information System (AFMIS). Public enterprises and extrabudgetary units are covered to the extent of financial reporting and allocations from the national budget.
4. The assessment was carried out as a joint government and donors’ initiative. Key development partners engaged with GoIRA in supporting the PFM reforms collaborated in the review. The World Bank administered the review and a Steering Committee comprising of the key stakeholders in GoIRA provided oversight of the assessment. A comprehensive quality assurance mechanism was put in place comprising the sector specialists at the World Bank and the external peer reviewers that included the PEFA Secretariat, DFID and EU delegation.
5. This PEFA assessment covers the period of FY 1393 to FY 1395 (2014-2016). Afghanistan’s Fiscal Year (FY) runs from December 22 to December 21. The PEFA review period covered FY 1393 (ending December 21, 2014), FY1394 (ending December 21, 2015), and FY1395 (ending December 20, 2016, leap year). Data and information of FY1396 (2017) was used for some dimensions requiring the review of the last FY.
6. The current PEFA assessment illustrates the persistence of PFM challenges. Significant issues are identified throughout the PFM cycle, including low budget credibility, imperfect disclosure of public finances, poor asset and liability management, anomalies in budget execution, low standard of financial reporting, and lack of audit independence. However, there are noteworthy bright spots of high performance, such as macroeconomic and fiscal forecasting, and procurement management.
7. Several scores have declined since the last assessment, however, the PEFA methodology and context have also changed. The new PEFA Framework published in 2016, upgraded the methodology and scoring criteria and has been strictly applied. Contextual challenges included Presidential Elections in 2014 and subsequent delays in the Cabinet formation. The security transition in 2014 and provincial security issues impeding budget execution in some cases. The withdrawal of a significant number of technical advisors in 2015 created capacity gaps, particularly in the Line Ministries (LMs). At the same time, significant DP resources have been shifted on-budget in both the security and non-security sectors.
Impact of PFM performance on budgetary and fiscal outcomes
8. The results of the current PEFA assessment are presented to explain how the PFM performance in Afghanistan has influenced the three fiscal and budgetary outcomes – aggregate fiscal discipline, strategic allocation of resources and the efficiency in service delivery
i. Aggregate Fiscal Discipline
9. Afghanistan has displayed ability to control expenditure to prevent unexpected deficits but the low predictability of donor resources impact fiscal discipline. Execution of the budget for the domestic revenue is robust. However, there are major problems below the aggregate budget level and with the predictability of the flow of donor resources. This undermined the overall credibility of the budget as evidenced in the high expenditure deviations. A large proportion of expenditure is through donor financed and executed projects, over which the government has little control. The lack of timely availability of indicative planning figures, the weaknesses in budget execution and the lack of effective monitoring of the extra budgetary units and corporations also negatively influenced fiscal discipline.
10. Weak budget expenditure execution is the result of poor project selection and uninformed budget allocation decisions. The lack of a robust public investment management framework impacts fiscal discipline and lowers the productivity of development expenditures. Projects are selected in the development budget without due-diligence for cost implications and development impacts, as political imperatives take precedence. Failure to integrate procurement planning in the budget process has also led to arbitrary budget allocations and the resultant expenditure deviations.
11. Although the prescribed internal control framework is reasonably detailed, compliance is varied.
The auditors have reported issues of non-compliance with the prescribed controls related to segregation of duties, lack of audit trail, management override and nonadjustment of advances. Internal auditors have been recruited and guidelines and toolkits have been developed. The focus of internal audit is largely on financial compliance. Internal audit is not yet risk-based and does not address system strengthening and quality assurance. The weak capacity limits effective control environment.
12. The control systems for payroll are insufficient and represent a major weakness for a significant proportion of expenditure. Personnel management practices are uneven. In some agencies, records are manually managed while in others there are IT systems. However, there is no underlying IT architecture that supports integration with central systems. In effect, there is no HRMIS linking personnel records to the payroll system. As a result, the integrity of payroll data is undermined and third-party verification is challenging. Data cleaning, introduction of an integrated HRMIS and payroll audits are critical to improving payroll management.
13. The lack of requisite data in the budget documents hinders performance evaluation. The performance indicators for the budget (recurrent and development) are not linked to the annual budget allocations. Consequently, performance reviews cannot be carried out with respect to what and how much was achieved against the budgetary allocations. The legislative oversight process is weak and comprehensive procedures for legislative scrutiny have not been defined.
ii. Strategic allocation of resources
14. The ANPDF defines high-level policy priorities, but these are not reliably translated into expenditures through the budget. Development of coherent sector strategies for ANPDF implementation has been uneven. Some sector strategies remain to be developed (e.g. infrastructure development), while the implementation of sector strategies in the social sectors has been mixed, largely owing to the lack of required financing and uninformed budget allocation decisions.
15. Limited adoption of modern budgeting practices undermines allocative efficiency. The budget allocation mechanism is largely incremental, while the budget estimation for the recurrent and development budgets is fragmented, and thus impedes the linkages between the selected programs and policy priorities. The lack of indicative planning figures during budget preparation cycles does not provide a medium-term perspective, and thus compels the LMs to follow a randomized and incremental budgeting system.
16. To achieve value for money in public investments, better data and analysis is required while instituting a robust PIM is vital for strategic resource allocations. The absence of adequate project-related information at the planning stage undermines implementation and results in time and cost overruns. The sustainability of national programs should be considered in the context of current and projected revenues. Without data and systems, effective liability management and transparency of public investments is limited. The current PIM framework has inadequacies on the entire PIM cycle—project preparation, project appraisal, execution and monitoring and evaluation. With project proposals not passing through a systematic filtering and gate-keeping process, and with the lack of complete project information for closer monitoring and evaluation, the allocative efficiency of development budget becomes significantly impaired. Large resources have been set aside for poorly-prepared and underperforming projects that have not been processed under a PIM regime. The remaining limited fiscal space has often led to token budget allocations to better performing projects.
iii. Efficient use of resources for service delivery
17. Lack of performance information hinders operational efficiency in public service delivery. The budget documents lack the required performance information; the Chart of Accounts does not facilitate information availability to the service delivery units; and there are no performance plans for service delivery. Consequently, the performance orientation of the entire budget formulation and execution process is undermined. The service delivery units have virtually no role in budget planning and execution.
18. Centralized powers and processes are aimed to achieve value for money but impedes efficiency. The strengthening of public procurement has improved transparency and procurements are made on competitive prices. However, the centralized processing and approval of large procurements add time to award contracts. Although over 70 percent of the total budget is allocated to recurrent budget, the lack of delegated commitment authority has created spending rigidities, hampering innovations in service delivery. Over the last three fiscal years, approximately half of the development budget remained unspent. Prevailing optimism in budget planning, procedural complexities in budget execution, lack of integrated systems and implementation capacity have hindered budget utilization and impacted service delivery efficiency and effectiveness. Comparison with last PEFA assessment (2013)
19. While the revisions in the PEFA Framework (2016) provides for a deeper analysis, it hinders a direct comparison with the prior reviews. The current assessment provides results based on the 2016 framework. It also presents performance rating changes since the 2013 PEFA assessment using the prior PEFA framework (2011).
20. The comparator offers results between the prior (2013) and the current PEFA, however the results have to be viewed with a perspective. The statistical results show the rating for 64 percent of the indicators remained the same, 11 percent displayed improvements while 25 percent showed decline. However, it is vital to consider the over optimism and the need for corrections in the PEFA 2013, for an objective comparison. There was notable performance improvement in revenue planning, public procurement, external audit follow-up and legislative scrutiny of audit reports. The fragmented and deficient payroll system, potential fiscal risks stemming from lack of oversight of the SOEs and SOCs remain significant challenges with unchanged performance ratings. The scores for aggregate expenditure outturn and monitoring of arrears declined in comparison to 2013 assessment.
PFM reform agenda
21. PFM reform has been a priority of the National Unity Government. The reform agenda was informed by the diagnosis of the functionality of the PFM system in developing a program of reforms to better use the budget as a tool for development. The assessment highlighted key challenges in the current PFM system, including fragmented and the pitfalls of incremental budgeting, weakness of budget and policy links to development priorities, weak procurement practices, and inadequate internal controls.
22. Recent reforms have generally addressed key PFM priorities and have skewed emphasis on budget formulation. The recent emphasis on revenue reforms has reflected the urgent need to raise domestic revenues in the context the 2014 transition and the prospect of declining international aid support. Similarly, a focus on strengthening procurement processes and addressing corruption were vital to improve the integrity of the PFM system and to provide donors with sufficient confidence to continue using country systems. The current emphasis on budget formulation is not balanced by measures to improve budget execution. There is a need for greater consideration of budget execution realities, especially at the level of service-delivery units, where payroll and procurement delays continue to impede service delivery, and budget execution for projects remains poor.
23. The breadth and ambition of reforms included in the FPIP requires greater selectivity and prioritization. FPIP targets are informed by achieving high scores against international benchmark indicators throughout the PFM cycle, including those measured through the PEFA framework. Achievement of current aspirational PEFA targets would enable Afghanistan to out-perform many comparable country groups in PEFA scores. While establishing clear aspirational goals may serve an important purpose, it also poses a risk that high levels of ambition in all areas may prevent careful and explicit identification of the highest priorities for improved macroeconomic management and service delivery. Establishing clear relative priorities among many PFM reform agenda is vital for ensuring that scarce capacity and resources are put to their best use.