a. This report provides an assessment of the status of the public financial management (PFM) systems and processes of the Republic of Uzbekistan. The Report follows the Public Expenditure and Financial Accountability (PEFA) methodology and, as the first PEFA carried out in Uzbekistan, provides a baseline for future PEFA reports. The PEFA is a follow up to the Country Integrated Fiduciary Assessment (CIFA) that was completed in 2011, but no attempt has been made to monitor progress since not all PFM systems were covered by the CIFA.
b. Based on PEFA training materials, the Assessment Team conducted a two day training workshop for Government of Uzbekistan officials assigned to the PEFA exercise, to prepare them for participation in the assessment. This report was circulated for peer review in December 2012, and has benefited from comments from Government of Uzbekistan officials, development partners, peer reviewers, and by the PEFA Secretariat in Washington DC. This includes comments received from the Government and the team’s response to the comments.
Credibility of the budget
c. Indicators PI-1 to PI-4 reflect the extent to which the budget is realistic and implemented as intended. The budget has become a key vehicle for implementing government aggregate fiscal policy, and the approved budget is serving as a reliable guide to aggregate expenditure and revenue policy. Deviation of state budget’s primary expenditures from the approved budget was not significant during the period of 2008-20101 excluding 2008. Since 2008 was an outlier due to global crises, limited size of the changes suggests that the approved budget fully reflects government’s policy intentions. While the need for policy changes can occur at any time during the fiscal year, limited changes during the year suggest the budget process is being used as the planning and policy development process not only at the aggregate level but also at the level of spending composition. Expenditure arrears are minimal and those that do exist are well monitored by the government.
Comprehensiveness and transparency
d. This group of indicators (PI-5 to PI-10) reflects the extent to which instruments such as the budget and accounts of Government reflect the totality of public finances. It examines the extent to which any Government makes available information, in a suitable form, through which it can be held accountable for the way it manages resources. Poor scores indicate potential fiduciary risks due to the non-availability or fragmentation of information about public finances, reduced scope for Government to be held accountable by its own population and a lack of external checks and balances that transparency otherwise makes possible. Good scores point to low fiduciary risks.
e. In Uzbekistan, extra-budgetary funds have been significantly integrated with the Treasury system and budget, but not completely or codified in statute. All are fully reported on, though still represent a significant part of the budget, in particular the Fund for Reconstruction and Development (FRD). Local government financial operations are fully included in the budget. Transfers to municipalities and other units of local government are formula driven and internally transparent (in particular, to superior authorities) in law and in practice. Local Governments set their own budgets which are readily available for scrutiny.
f. The budget classification system is fully harmonized with the Chart of Accounts, and meets the UN COFOG standards. Also, the budget classification system does not support program classification and, as a result any program reporting that is undertaken requires extensive manual tabulation and compilation. Reporting on the budget is carried out at the level of economic, administrative and functional classification, according to GFS standards, and the budget documentation is relatively comprehensive, though lacks an explanation of the fiscal impact of policy changes. There is limited dissemination of information to the public at large, reflected by a D score for fiscal information provided to the public.
g. Indicators PI-11 and 12 reflect the extent to which budget allocations are made in a strategic context reflecting agreed policies and priorities and with due consideration to the longer term impact of decisions. Low scores would indicate risk of fiscal instability, weak prioritization and linkage to policy objectives. They would also suggest vulnerability to imbalances between types of expenditure and inefficient use of resources due to ’stopping and starting’ of projects and lack of complementarity between different categories of expenditure.
h. The budget calendar provides sufficient time for budget preparation and deliberation by the Cabinet of Ministers (COM) and Oliy Majlis (Parliament), although ministerial expenditure ceilings are not explicitly provided. Sector strategies are not developed as part of the budget process but rather elaborated in those sectors with donor involvement. The three year horizon for the budget reflects centrally managed planning rather than any linkage between investment and recurrent budgets. Comprehensive fiscal forecasts, if developed, are not disclosed. External debt is closely monitored, and at 8% of GDP (reflecting strong fiscal discipline) it is not of sufficient size to warrant concern.
Predictability and control in budget execution
i. Indicators PI-13 to PI-21reflect the extent to which the budget is implemented in an orderly and predictable manner and the arrangements for the control and stewardship in the use of public funds.
j. Taxes imposed at the border are collected by the State Customs Committee and other taxes are administered by the State Tax Committee. Customs’ operations are effective in the transferring of funds to the Treasury Single Account, though the legal framework is disaggregated and access to information for businesses is lacking.
k. Tax administration uses modern software, which allows for audit selection based on defined risk assessment criteria. Information on tax liabilities and tax education are good, though customs information is poor. Tax arrears are relatively low, and a high proportion of existing arrears result from long drawn out bankruptcy proceedings. Nevertheless, overall tax administration is providing an effective vehicle for collecting revenue for funding public expenditure.
l. With the establishment of the Treasury function, a Treasury Single Account (TSA) system has been developed. The TSA is a system of domestic currency bank accounts controlled by the Treasury and applies to all expenditures (including extra-budgetary funds, apart from the significant funds held under the FRD) on the basis of the same coverage as commitment and payment controls, with the exception of accounts held for the military and internal affairs, FRD, and those funded by foreign grants and loans using both domestic and foreign currency bank accounts. m. Information on individual budget organization transactions is reliable and predictable under the management information system (MIS) which provides a common information pool across MOF and Treasury. Information includes budget organizations’ expenditure commitments on contracts, planned spending and actual payments. Spending ministries/budgetary organizations prepare their cost estimates (broken down into economic classification) and an annual cash flow utilization forecast, for their approved budgets, divided into monthly allocations. The cost estimates are submitted to the MOF who are responsible for registering in the expenditure control system as ceilings (or permits) for expenditure commitment, managed by the Treasury.
n. Budget organizations are gradually being granted on-line access to budget information pertaining to their unit; major state budget institutions have already been incorporated and local level institutions will be incorporated later.
o. Detailed cash flow forecasts are prepared by the Treasury (using a module of the Treasury software) based on revenue forecasts provided by the tax and customs authorities and budgetary forecasts prepared by the MOF and Treasury. Reports are prepared on a daily and monthly basis for internal use of the MOF. Quarterly reports have a broader distribution to the COM and the Oliy Majlis.
p. MOF maintains an internally developed database for monitoring external debt which addresses debt service, stock, operations and projections. Minor reconciliation differences do occur which are addressed on a timely basis. Until 2010 the Government’s explicit criteria and for total debt was that new borrowing should not exceed debt service. In 2010 in a response to the global financial crisis this criteria was relaxed and investment decisions are now approved by COM on a case by case basis, based on their strategic importance to the economy.
q. The treasury system provides tight centralised control of the activities of budgetary organizations. There is an adequate degree of integration and reconciliation between personnel and payroll data although the assessment noted some deficiencies in the audit trail, and evidence of managerial review. All budgetary organizations are subject to a payroll audit every two years by the Control and Revision Unit (CRU) as part of checks on the targeted use of budgetary resources. While somewhat fragmented there is a well established and comprehensive set of financial control rules and procedures covering all aspects of the budgetary cycle, and these seem to be well understood by staff in line ministries and budget institutions. The country has yet to develop a modern system of internal audit. CRU conducts inspections which focus on detecting violations, make recommendations for corrective actions and, levying penalties against budget organizations. None of their present activities focus on systemic issues or other activities which clearly adhere to international definitions of the role of internal audit.
Accounting, recording and reporting
r. Indicators PI-22 to PI-25 indicate the extent to which there are adequate records and information produced, maintained and disseminated to meet decision-making control, management and reporting requirements.
s. Adequate records and information are produced, maintained and disseminated to meet basic decision-making control, management and reporting purposes. The MOF prepares aggregated monthly and quarterly budget execution reports. The quarterly reports are submitted to the COM and Parliament on a timely basis. With the introduction of the Treasury system expenditures are covered both at the payments and commitment stage, and provide effective support to front-line service delivery units. t. The annual budget execution report is produced by the MOF and submitted to the COM by April 1 of the following year, and ready for audit. Annual audited financial report is then submitted to Oily Majlis by May 15 of the following year. Financial information is presented in a consistent and very detailed way, however reports do not contain the disclosures of accounting policies and other information (for example on contingent liabilities and full disclosures of financial assets and liabilities) required by international accounting standards.
External scrutiny and audit
u. Indicators PI-26 to PI-28 address the arrangements for the scrutiny of public finances and follow up by the executive arm of government.
v. The Chamber of Accounts (COA) is the highest financial control body, and is the equivalent of a Supreme Audit Institution (SAI). By international standards COA has a modest staff (27) although this is augmented by the involvement of staff from the executive to support their inspection work. The approach relies on desk studies to identify unusual or suspicious activity with field visits focused on areas of concern within budget organizations. COA staff argued that this targeted approach results in full coverage of the budget. However the approach is not in accordance with international auditing standards. Uzbekistan’s current control/inspection framework places reliance on the extensive external financial control activities undertaken by CRU; a division of the MOF. The absence of a set of financial statements in accordance with internationally recognized accountings standards limits the work the COA can do however the audit of the annual budget execution report is completed and submitted to the Oliy Majlis on a timely basis. There is an effective process of handling audit findings, recommendations and follow up.
w. Parliament reviews budget proposals prepared by the government. These include the macroeconomic framework and the budget parameters; the government’s proposed spending priorities and the estimates of expenditures and revenues, but not a medium term fiscal framework or medium term priorities.
x. In accordance with the budget law the COA audits the execution of the State Budget within 35 days of receipt from the Government. Other reports of audit activities of the COA are not routinely made available to parliament although these are provided if the conclusions are regarded as of sufficient importance; and the COA submits a summary report of its activities shortly after the financial year end. Both Houses of Parliament actively investigate COA-identified problems. These may be problems identified by the COA in their annual budget law review or in their report on audits from their annual audit plan. They may create special investigative working groups, consisting of members of Parliamentary standing committees, auditors from the Chamber of Accounts and outside experts, who then visit selected oblasts and rayons where the auditor has found significant problems and made specific recommendations. There is follow up on all such visits to ensure that the auditor recommendations are implemented. The committees’ analyses of the annual budget execution report for the year appear to be thorough.
y. Indicators D1 – D3 show how well donors integrate their support into the Government’s budget process so that it reflects all available resources in a timely manner, as well as the extent donors use Government systems to manage their support. Poor scores indicate potential weakness in the Donor – Government dialogue and processes that reflect perceived fiduciary risk by donors. z. There is no budget support in the Uzbekistan loan portfolio. In recent years the government has introduced stringent reporting requirements for aid with the result that all aid to the government is now captured in the Government database. However, given the small percentage of the budget accounted for by aid, the Government has not, as yet, required aid to be scheduled according to the Government budget calendar. Donor reliance on government systems is minimal.
Aggregate fiscal discipline
aa. The Uzbekistan government exerts strong oversight on expenditure by budget units, particularly through the operation of the Single Treasury Account, resulting in strong aggregate fiscal discipline. Budget execution surpluses reflect the healthy state of the Uzbekistan economy and a cautious approach to revenue estimation. The inability of budget units to take out loans and strong control on arrears (under 0.4 percent of the budget), reflects these strong controls.
bb. Although the maintenance of fiscal discipline is regarded as essential, the overall monitoring of the fiscal position is hindered by the lack of explicit long term government strategic policies at sectoral and national level, and the lack of data available on the budget. While the systems for monitoring external debt are strong, the Government has relaxed the criteria for taking on new debt and there are currently no explicit limits for total debt and guarantees.
cc. With the introduction of the treasury system substantial progress has been achieved in integrating EBF operations fully into the budget and treasury systems. However, problems remain with the predictability and reporting of donor funds.
Strategic allocation of resources
dd. The top down elements of strategic planning are strong, whilst the bottom-up influence on the strategic allocation of resources extremely weak. As such, the control exerted by the centre on planning is almost total. The opportunity for budget units (ministries and below e.g. schools) to influence the planning and budget process is minimal within the technical realm. It is possible, however, that political considerations are taken into account at a local level. Budget credibility is strong in meeting the expenditure priorities as envisaged by the budget. All expenditures and revenue are included in the Budget and extra-budgetary funds are strictly controlled by the MOF. Reliable monthly, quarterly and annual budget execution reports are prepared in a timely manner.
ee. Availability of information on the proposed budget to the public provides little transparency (although there have been recent improvements) and scrutiny of the proposed budget by Parliament and its Committees is undermined by its lack of ability to vote on appropriations. Resources are allocated along central planning lines, with incremental increases resulting from inflation, demographic changes, investment decisions etc. Strategic plans are largely absent, though adherence to yearly decrees and resolutions from the centre is strong.
ff. The legislature’s review covers fiscal policies and strategic allocation of resources for one year; however budget documents lack a medium term fiscal framework. Operational efficiency
gg. The PFM reform program has achieved much in the area of budgetary controls (in particular with respect to the Single Treasury Account). However, much remains to be done to increase the operational efficiency of Uzbekistan public spending through improvements in the PFM system, particularly the bottom up elements of planning. Further work is needed to develop a medium term approach to budgeting which includes costed sectoral strategies and clear strategic priorities that can be used in decision making. The Government is gradually introducing computerized accounting systems in ministries, department and agencies (MDAs) which will improve the comprehensiveness of information for monitoring and decision making purposes, as well as improving their ability to assess the effective use of resources. A coherent and comprehensive internal control framework needs to be established that goes beyond simply ensuring the legality of transactions. At the same time an effective internal audit function needs to be established throughout the Government. Uzbekistan has made some improvements in procurement practice however the country lacks a codified procurement law which is the starting point for improving procurement practices and open competition. The country also lacks an independent oversight body that can improve the availability of basic procurement data, and provide an institutional focus for improving the country’s public procurement practices.
hh. International Public Sector Accounting Standards (IPSAS) compatible accounting standards and a simplified presentation of information need to be introduced to make the GFS 2001 compliant information more intelligible. The working methods of the COA need to keep pace with these accounting and reporting developments and training needs to be provided in modern audit approaches to risk and performance. Financial audit and legislative scrutiny of performance are not possible in the absence of complete set of financial statements, and any adequate review of effectiveness by the COA.
C. Prospects for Reform Planning and Implementation
ii. The Government initiated a Public Financial Management (PFM) reform in 2000 and has undertaken comprehensive fiscal reforms since then. The Parliament approved the Budget System Law (BSL) in December 2000, providing a legal basis for budget management. The law sets out the process of preparation of annual budgets by the national and sub national governments. It also lays down the parliamentary authority for setting public debt limits and provisions for giving state guarantees. The Government’s current PFM reform is anchored in the 2007-18 Strategic PFM Plan developed within the framework of the ADB-financed Public Financial Management Reform Project. The Strategic Plan includes a strategy for the implementation of accrual-based accounting, adopting more international standards for accounting, the acquisition of a new Government Financial Management Information System (GFMIS) and greater transparency in financial reporting. It is worth noting that the current PFM Strategy does not address key accountability functions of internal and external audit that could be developed in order to build on the momentum achieved from implementing the Treasury system.
jj. Overall, reforms across the PFM system have proceeded gradually and progressively. The government has made good progress in implementing a GFS 2001-compliant classification and coding system, creation of a dedicated Treasury unit within the Ministry of Finance, the establishment of a TSA, consolidation of extra-budgetary funds and extra-budgetary special accounts of budget entities into the TSA, and the implementation of interim financial management information systems in advance of the implementation of a full Government Financial Management Information System (GFMIS). The Tax Code has also been updated and consolidated though customs legislation still awaits similar consolidation. The next stage of the reform process is to start the gradual development of a set of accounting standards based on IPSAS.
kk. In the area of procurement the Government recently established an electronic procurement system to ensure that all public procurements from USD 300 to USD 100,000 are carried out exclusively by auctions through the Commodities Exchange, and established a unit within CRU charged with ex-post reviews of public procurements which are suspected of prior arrangements, and other fraudulent and corrupt practices. A new law of public procurement is being developed to address deficiencies in the current fragmented legal framework. Reforms related to transparency of information have not progressed as yet, though government websites are publishing an increasing amount of information, as witnessed by the website of the tax Committee and the recent publication of summary budget execution data on the MOF website.
ll. The government’s development partners have not been particularly co-ordinated. With the development of the Government’s PFM Strategy this has begun to change and there is now some momentum for donors active in PFM to coordinate their efforts and present a unified approach to PFM reforms in the country, although this has not translated into abiding by the planned pace of reforms which are several years behind schedule.
Access to Information
mm. Whilst the Government Team participated fully in the PEFA assessment process it should be noted that assessment team’s access to information in Uzbekistan was restricted due to the government’s security concerns, particularly in the Budget Department of the MOF. Much information gathered was not available in the public domain. As a result, information provided was often delivered in hard copy to the assessment team, the accuracy of which could not be verified by triangulating the information on MOF reporting systems2