Kosovo 2022

Executive summary

 

Purpose and management

The objective of the assessment is to provide a picture of the current situation in Kosovo’s PFM system. This will synthesise the progress and results of the successful reforms and those areas where further work is needed. This PEFA assessment also covers a Gender Responsive PFM assessment included in Annex VI. The assessment is financed by the European Union Office in Kosovo. It is included as part of the EU project “Technical Assistance to Support the Implementation of Public Financial Management Reforms in Kosovo.”

Scope, coverage, and timing

The scope of the assessment covers the PFM performance of the central government (including extra-budgetary units and public corporations) of Kosovo in the last three completed fiscal years of 2018, 2019 and 2020 with cut-off date is 31st December 2020.

Impact of PFM on budgetary and fiscal outcomes

The planning and performance of budget is generally done well the exception being the deviation in both administrative and economic classification due to under implementation in 2018 and the Covid pandemic in 2020. The reported lower execution was mainly in the category of capital investment projects. Delay in approval of the annual budget law in FY 2018 and FY 2019 resulted in less spending for capital investment financed by international financial institutions. The budgets for FY 2018 and FY 2019 were implemented as planned without any in-year revisions. FY 2020 was an exception when the budget was adjusted in mid-year mainly due to the budgetary responses needed to address the impact of the COVID-19 pandemic. 

The budget process is clear and with set rules and deadlines in place. Nonetheless, better planning of capital expenditure spending would result in more efficient use of resources and more accurate budget projections. Similarly, inaccurate budget projections may lead to fiscal risks stemming from underspending of capital expenditures. These may affect overall macroeconomic and fiscal projections as capital expenditure has a significant role in public investment and revenue projections. There are insignificant deviations for revenue outturn. In preparing its macro-fiscal analysis, the Government of Kosovo estimates a rate of under-performance for capital expenditure, nevertheless risks continue to be present.

In 2020, the economic situation in Kosovo changed due to COVID-19 pandemic. The impact on the economy and the measures taken by the Government of Kosovo have changed the fiscal projections for this year compared to the initial 2020 budget projections leading to a mid-year budget review. Furthermore, restrictive measure during 2020, limiting the activities of individuals and businesses led to lower consumption of goods that are subject to excise duties such as gasoline, alcohol, and tobacco. Therefore, the response to COVID-19 and the economic downturn in 2020, had a direct impact in the deviation between projections and actual revenues collected.

Transparency of public finances supports budget creditability. The budget classification system is consistent with international GFS/COFOG standards with majority of budget documentation provided to the public. Having all revenue and expenditure in the Single Treasury Account is essential for aggregate fiscal discipline. This ensures that all resources in financial reports are adequately managed and consistent with government policies and procedures. There is efficiency and effectiveness in resource allocation with financial transfers being rule based. However, the performance information for service delivery does not meet the international standards of recording, monitoring, and reporting.

Generally, the Government of Kosovo has electronic data management systems that produce accurate data processing, supervision and monitoring with appropriate authority level and control, coverage of most, if not all, budget users and easy access and transparency. The Treasury operations are supported by FreeBalance, the public investment operations are in PIP (Public Investment Programme) system, the public procurement electronic portal and tax revenue administration EDI system allows access to data and information.

Allocation of resources is supported by acceptable management of assets and liabilities. However, monitoring of these does not ensure that risks are adequately identified, hence relevant management of risk mitigation measures cannot be made. Public investments do not provide value-for-money and asset maintenance is not comprehensive nor covering all Government owned assets. The fiscal risks for the operations of public corporations are monitored and reported but later than international practice.

There are verifiable macroeconomic and fiscal projections to support the development of a predictable and sustainable fiscal strategy contributing to an aggregate fiscal discipline. The fiscal strategy is clear and alignment with fiscal targets supports budget policy decisions. The medium-term budgeting underpins aggregate fiscal discipline by establishing forward year estimates that provide the baseline for future budget ceilings and allocations but only for the next year Budget discipline and efficient allocation of resources is demonstrated by the Government providing information on revenues with a clear understanding of their rights and obligations as well as procedures in seeking redress. Control mechanisms are in place to enforce compliance against well-planned and implemented compliance improvement action plans. This contributes to additional collection of revenue that is to be distributed through allocation to budget users for services delivered to the public.

Budget credibility is enhanced by predictable and controlled budget implementation ensuring that revenue is collected, and resources are allocated and used as intended by government and approved by the legislature. Resources are available for effective management of public investment programmes. There are strong and rigorously applied procedures for recording and reporting revenue collections, consolidating revenues collected, and reconciling all revenue accounts.

Resources are allocated as intended by having reliable information available to budgetary organisation on ceilings for expenditure commitment allowing them to plan their commitments in advance. This predictability of available funds for commitment facilitates planning of activities and procurement of inputs for effective service delivery in implementation of plans. Reliable service delivery is also supported by a transparent procurement system focused on competitive tender procedures. The procurement information is fully available to the public and reliable being audited annually by the National Audit Office. The legal framework has been consistently improving, stipulating clear and appropriate procedures, accountability, and controls.

Resources are allocated as intended and through KFMIS they are controlled and used only for the authorized and committed purposes. Established internal control procedures contribute to effective internal control system. There are some concerns regarding data accuracy with regard to misclassification of expenditure, but this does not undermine the financial data integrity. All budget data in the STA are presented in the annual financial statements. They are complete, timely, and consistent with IPSAS cash basis accounting principles and standards.

Lastly, oversight arrangements for external audit and legislative scrutiny of audit reports are effective and generally reliable and control efficient use of government resources. The extensive external audit function is essential and ensures accountability of the Government. There is transparency in the use of public funds thus contributing to achieve budget outcomes and giving all stakeholders an accurate picture of financial results.

Performance changes

The performance has changed in those that scored lower and higher and they constitute 43 percent, the remaining 57 percent show no change in performance and score.

Aggregate fiscal discipline has both improved and deteriorated but generally there is no improvement in the overall budget credibility and budget execution processes with the exception of the variance in economic classification that appears to be the only area scoring lower than in 2015. Most other aspects of the budget outcome have either improved or remained the same. The revenue projections improved and resulted in better revenue aggregate outturn. The efficiency of payroll control also improved through having monthly reconciliations between payroll and HR database in time for salary payment and immaterial retroactive adjustments. Effectiveness of internal control has improved through expanded coverage of internal audit and application of international standards.

The strategic allocation of resources has not significantly improved because it did not benefit from the deployment of strategic multiyear-year programming tools as well as macro-budget forecasts in the previous assessment, which is a new area of assessment in the PEFA 2016 PEFA Framework. The observable changes identified are: (a) improvement in performance in the effectiveness of tax revenue coverage due to implementation of electronic registration system; and (b) improved control functions of both revenue collecting entities in deployment of compliance improvement plans.

Efficient use of resources for service delivery is observed in performance of public services that are better managed, monitored, and controlled. This is mainly achieved due to the improvements in the access to all key procurement information that is now made available to the public through the e-procurement portal and the general use of competitive procurement methods.

PFM reform agenda

The PFM reform agenda in Kosovo is guided by the 2016-2020 PFM Reform Strategy. This strategy is implemented using annual Action Plans. The Action Plans describe the activities for the four pillars and twelve priorities in the PFM Reform Strategy. To measure progress, a total of twenty-three indicators have been developed. All indicators have a baseline year (2016) and targets for 2018 and 2020. The Government plans to have a new PFM Reform Strategy (for 2022-2026) adopted by the end of 2021. The PFM Reform Coordination Group will take the lead for its preparation, supported by the EU-funded technical assistance project tasked with supporting PFM reforms in Kosovo. The preliminary findings from this 2021 PEFA will have a significant influence in identifying the priorities for the 2022-2026 PFM Reform Strategy.