PI-22. EXPENDITURE ARREARS
ABOUT THE INDICATOR
This indicator measures the extent to which there is a stock of arrears , and the extent to which a systemic problem in this regard is being addressed and brought under control. It contains the following two dimensions and uses the M1 (WL) method for aggregating dimension scores:
- Dimension 22.1. Stock of expenditure arrears
- Dimension 22.2. Expenditure arrears monitoring
IMPACT ON BUDGETARY OUTCOMES
Arrears can cause increased costs to government: creditors may adjust prices to compensate for late payment; or delayed supply of inputs may affect service delivery. A large volume of arrears may indicate a number of different problems, such as inadequate commitment controls, cash rationing, nadequate budgeting for contracts, under-budgeting of specific items, and lack of information.
Arrears can have a significant impact on fiscal discipline because they constitute a failure in
controlling commitments and making payments when obligations are due. If arrears are allowed to occur and grow, they can place a burden on future budgets to meet the unauthorized or excessive obligations of the past. Arrears can also indicate an unintended expansion of expenditures that could distort the allocation of resources. They can be an indication that more resources are needed to achieve the service levels expected, levels that cannot be attained without incurring unauthorized additional expenditures. Arrears can also be an indication that cash is not being provided to meet obligations when needed, implying that cash allocation arrangements are not fully effective.
INDICATOR MEASUREMENT GUIDANCE
22:1. Arrears are overdue debts, liabilities, or obligations. They constitute a form of nontransparent financing. Expenditure payment arrears are
expenditure obligations that have been incurred by government, for which payment to the employee, retiree, supplier, contractor or loan creditor is overdue.
22:2. Government payment deadlines are usually established in contractual obligations such as procurement or contractual grant agreements, or in debt service or other legal obligations such as payroll, pension, welfare payments, or noncontractual grants.
An unpaid claim or obligation becomes an arrear when it has not been paid at the date stipulated in the contract or in the corresponding law or financial regulation. Even inadmissible or incomplete payment claims can become arrears if the beneficiaries are not notified of the defect before the payment deadline is met.
22:3. Assessors should confirm that the government’s data recording and reporting system analyzes payments, legal and contractual payment deadlines, and invoices, including suspensions and rejections, so that arrears can be and are calculated.
22:4. Delays in payments or transfers between government entities are not covered by this indicator.
Dimension 22.1. Stock of expenditure arrears
DIMENSION MEASUREMENT GUIDANCE
22.1:1. This dimension assesses the extent to which there is a stock of arrears . The stock is preferably identified at the end of the fiscal year and compared to total expenditure for the considered fiscal year.
Assessors should comment on any recent change in the stock over the period under consideration. The PEFA report narrative for this dimension should mention any known significant stocks of arrears within central government units outside BCG and any significant stocks of unprocessed VAT refunds or extensive delays in payment of those obligations, even though none of them is included in the stock to be assessed for scoring.
22.1:2. The PEFA report narrative should explain how expenditure arrears are defined and through what means this definition has legal status (e.g., legislation, tender documents, contracts, court decisions)
PEFA Handbook Volume 1: The PEFA Assessment Process – Planning, Managing and Using PEFA