The main purpose of the 2021 PEFA assessment is to provide the government of Moldova with an objective, up-to-date diagnostic of the national-level public financial management performance based on the latest internationally recognized PEFA methodology. It assesses the quality of the Moldova public financial management (PFM) system and provides information as to the results achieved through PFM reforms undertaken since the 2015 PEFA assessment. More specifically, the assessment measures which processes and institutions contribute to the achievement of desirable budget outcomes, aggregate fiscal discipline, strategic allocation of resources, and efficient service delivery.
A Gender Responsive Public Financial Management (GRPFM) supplementary assessment was conducted concurrently with the national assessment. Its purpose was to collect information on the degree to which the country’s public financial management system addresses the government’s goals of acknowledging the different needs of men and women (and different subgroups of these categories) and promoting gender equality. The GRPFM report is included as Annex 7.
This assessment covers the central government. It includes the state budget (with foreign-financed projects), the state social insurance budget, and the compulsory health insurance budget (referred together by the government as Consolidated Central Budget). It also covers the Court of Accounts of Moldova (Supreme Audit Institution), the Parliamentary Standing Committee for Control of Public Finance, and the Standing Committee for Economy, Budget and Finance. It assesses the units which have revenues and expenditures outside the government reports and state enterprises in terms of relevant indicators.
Under the MoF’s coordination, the 2021 PEFA assessment was led by the World Bank with financing provided by the European Union, and in partnership with UN Women with financing from Sweden. The assessment covers the last three completed government fiscal years (equal to calendar years) of 2018, 2019 and 2020, and was performed from July 2021 – November 2021. With regard to the critical date for consideration of circumstances applying at the time of the assessment, which is relevant to other dimensions, the cut-off date in such cases was September 30, 2021. Because of the COVID-19 pandemic and the associated restrictions, the assessment was conducted virtually with online collection of the evidence rather than through in-country interviews; this fact affected the timeline and progress of the assessment.
The Ministry of Finance is leading implementation of PFM reforms based on the PFM Strategy. The current government’s Strategy for Development of Public Finance Management 2013-2022 (PFM Strategy 2013-2022) has formalized the government’s commitment to improve in a sustainable way the accountability and performance of public financial management systems. The adoption and enforcement of the law on Public Finance and Budgetary-Fiscal Accountability no. 181 of July 25, 2014, marked an important milestone in the promotion, modernization, and consolidation of the national public finance management system. The 2021 PEFA findings are expected to assist the government in assessing the outcomes and results of the implementation of the current strategy, and to inform the preparation of the new strategy and identify further reform areas. This assessment is also important in the context of the budget support operations financed by the development partners that use the country’s own systems to channel their resources and want to be cognizant of the country’s PFM performance.
The PFM system in Moldova has been gradually strengthened as a result of the reforms implemented by the government in its current PFM Strategy. Since the last PEFA assessment the government has demonstrated progress in ensuring budget transparency, expansion and strengthening fiscal discipline, as well as enhancement of annual and multiannual budgeting and budget classification thanks to introduction of a new GFS 2001 compliant Chart of Accounts. The Ministry of Finance has considerably improved revenue projections. Improvements were also noted in the internal audit function following adoption of an improved methodology and standards, and certification of internal auditors. The Ministry of Finance initiated the development of the national public sector accounting standards aligned with IPSAS and took steps to improve the legislative framework in the area of public procurement and e-procurement. In late 2017 the new law on the Court of Accounts was adopted in line with the best international practices that support the continuous consolidation of the Supreme Audit Institution. To enhance the parliamentary oversight and accountability of executive authorities in relation to the implementation of the audit recommendations issued by the Court of Accounts, a Standing Public Accounts Committee (Parliamentary Committee for Control of Public Finance) started its activity in 2019 also introducing public hearings of the reports of the Court of Accounts. Yet, the country’s fragile political situation with frequent changes in the government and the COVID-19 pandemic affected the PFM performance and the pace of PFM reforms in recent years.
An assessment by the IMF in public investment management and an assessment by the WB in public procurement, carried out in 2019 and 2020, identified main strengths and weaknesses of the current legal framework and practices in these two areas of PFM. The assessments provided recommendations to the government and paved the way for further relevant reforms. The Court of Accounts has been undergoing peer review supported by the State Audit Office of Latvia and Turkish Court of Accounts. Lately, the MoF has commenced the ex-post and ex-ante analysis of the current PFM strategy
The following were assessed as areas for continued reforms and further improvements:
Management of public investments, public assets, and fiscal risks. While the current legislation requires mandatory audit of the state enterprises, it is not properly enforced. Public investment planning and execution is weak. The application of the PIM framework is limited to certain investments therefore coverage is insufficient.
Performance information and management. While performance plans are prepared and published together with actual performance, the use of performance information is merely a bureaucratic process since this information is not regularly reviewed and acted on.
Control in budget execution. The internal audit function requires consolidation by high-level authorities to rationalize the sizing of the internal audit units and to ensure effective implementation of quality assurance mechanisms. Transparency in contract implementation should be enhanced to allow central tracking of the status of public procurement contracts.
Accounting and reporting. Introduction of public sector accounting standards needs to be accelerated.
Impact of PFM on budgetary and fiscal outcomes
Aggregate Fiscal Discipline. In the last several years the development partners supported the country in maintaining a sufficient degree of aggregate financial discipline and debt sustainability. However, the unstable political situation, frequent cabinet reshuffles, and the COVID-19 pandemic crisis affected the execution of externally funded projects, which resulted in significant deviations from initial projections.
Budget documentation is comprehensive and transparent. While revenues are efficiently collected by the respective bodies, weaknesses in applying the risk-based approaches to enforcement undermine the fiscal discipline along with a large amount of unreported operations of self-governed units within the central government. The level of tax arrears is moderate, and this contributes to achievement of the planned levels of revenue. Control over commitments is effective and this prevents the budgetary units from entering into new commitments beyond the approved budget. The level of expenditure arrears is very low. Strong treasury controls ensure that the expenditures are incurred within the available budget allocations. Regular external public audits over three main budgets enhance fiscal discipline.
There are shortcomings in asset management, which prevent the government from having a complete picture of its assets and maximizing their value. While fiscal monitoring of state-owned enterprises is regularly performed, it is based on the unaudited information that is unreliable and, when coupled with poor governance, may hide some potential risks and result in an unexpected fiscal burden for the government. Debt and guarantee obligations are well managed and macroeconomic and fiscal forecasts are duly developed, of which supports fiscal discipline. The overall fiscal framework could be improved with more comprehensive analysis of the implications of policy changes.
Strategic Allocation of Resources. Budget documentation is transparent and comprehensive, and includes the performance information of the service delivery units. This fact facilitates the monitoring of the budgeted and executed strategic allocations and strengthens the government’s accountability for decisions taken. The medium strategic plans are costed for all line ministries and the budget estimates are linked with the plans that enables efficient allocation of resources. The management of public investments needs to be strengthened and life-cycle cost of public investment projects better factored in the budget documentation. The investments should also be subject to rigorous economic analysis to generate the best return. Although a clear budget calendar exists, the time allowed for the budgetary units to complete their detailed estimates and for the legislative branch to scrutinize the proposed budget could be not sufficient to meaningfully complete their inputs. A predictable revenue collection and flow of funds to the budgetary units ensures the implementation of strategic budget priorities.
Efficient service delivery. An overall reliable budget with moderate deviations in the aggregate expenditure and revenue outturn has been achieved during the assessment period and this reduces the risk of reallocation of service delivery programs to other expenditures, however attention should be paid to deviations in the composition of expenditures by economic classification with systematic underperformance in capital investments. Transparent and comprehensive budget adopted by the legislature and reliable budget execution facilitated appropriate monitoring of the expenditures for service delivery programs. The revenue administration bodies ensured collection of the revenues as planned and their timely availability for service delivery units. Predictability in resource allocation and cash management practices promoted by the Treasury made the resources available in a timely manner according to the established plans of the service delivery units.
The procurement process is generally well functioning, though the procurement information captured by the databases and the partial public access could be improved. The high level of contracts based on competitive bidding affects the efficiency in service delivery positively.
There is a strong legislative framework for enabling internal audit, but half of the internal audit units in the central government are not operational, mostly because of the lack of qualified personnel. There was weak parliamentary scrutiny of the audit reports produced by the Court of Accounts and their recommendations, however this has been improved with the establishment of a specialized Standing Committee for Control of Public Finance. While the performance plans and the performance achieved of the budgetary units is published, external evaluation of the performance information is almost missing. If done regularly and in an unbiased way, such analysis helps to measure whether the actual performance is as expected, to determine if any corrective measures are to be taken, to identify any alternative ways of service delivery to reduce the costs and ultimately to improve the quality of public services. The Court of Accounts has a mandate to carry out independent performance evaluations but due to its human capacity constraints the number of performance audits is limited. The CoA has an insufficient number of staff to perform all responsibilities and duties prescribed by new law no. 260/2017. Also, there are concerns about poor definition and inconsistency in budget programme/ sub-programmes structure and classification.
Performance changes since previous assessment
Previous PEFA assessments were carried out using the 2011 PEFA methodology, while this 2021 PEFA assessment was guided by the 2016 PEFA methodology. Annex 4 provides a detailed comparison and explanations of changes since the previous assessment. It shows that the main performance improvements achieved under three main fiscal and budgetary outcomes are as follows.
Fiscal Discipline. Budget approval is done before the beginning of the next year. In-year budget reports are comprehensive and are regularly produced and published. Despite political disruptions and the impact of the pandemic the government managed overall to keep effective control of the budget, reduce tax arrears, regularly assess the fiscal risks, and preserve public debt sustainability.
Strategic Allocation of Resources. The public has access to comprehensive budget information produced by the government. The reliability of information on expenditure ceilings has increased. Integration of payroll and personnel information is ensured through a more comprehensive IT system that provides a complete audit trial. Timely budget approval by the legislature is ensured. All key fiscal information is published. The effectiveness of tax appeals and effectiveness of compliance measures in tax collection has increased.
Efficient use of resources for service delivery. Payroll controls have been enhanced through comprehensive and regular payroll audits conducted by the Financial Inspection and Court of Accounts. Internal controls on non-salary expenditures have been strengthened by the Treasury through its new IT budget execution systems. An independent procurement complaints agency has been created and it is fully functional. Management’s response to internal audit recommendations has become more effective.
PFM reform agenda
The Ministry of Finance, together with the EU Delegation, is working on further development of the e-procurement system in the country to ensure that it becomes fully aligned with the Public Procurement Law and, by extension, with the applicable EU Directives. The Public Property Agency is working on developing a comprehensive and reliable asset register that is very important in the context of the national public sector accounting standards being devised by the Ministry of Finance in part related to recognition and accounting of public assets. The Ministry of Finance continues to strengthen the capacity of the public internal auditors through on-job and formal training activities, external evaluation of internal audit activity, and implementation of information systems in order to automate some PIFC processes. The Ministry of Finance also intends to implement in all budgetary authorities and institutions a unified budgetary accounting system for better integration with FMIS, enhanced controls and data integrity, and reduction of IT costs for the budget. Starting with the FY2022 budget, the Ministry of Finance integrated a gender perspective into the Budget Call Circulars and MoF order no. 209 on the approval of the “Methodological set on elaboration, approval, and modification of the budget.” The line ministries and agencies for the first time prepared annual monitoring reports of public investments (for FY2020) in 2021. Based on those reports, the MoF is going to develop a consolidated report for 2020 and submit it to the Court of Accounts.