Bhutan 2023


Purpose and management of the assessment

0.1. The RGoB has been implementing public financial management (PFM) reforms since 2017 under the PFM Reform Strategy 2017-2021. The Reform Strategy was a medium-term effort on part of the RGoB to strengthen areas such as financial management information systems (FMIS), accounting standards for the public and private sectors, procurement, internal controls, budget documents, parliamentary committees on budget and public accounts, and capacity building. The Reform Strategy was prepared based on the PEFA assessment conducted in 2016, which followed the first assessment in 2010. Several achievements have been made under the Reform Strategy, notably the launch of the electronic Public Expenditure Management System (e-PEMS), implementation of the electronic Government Procurement (e-GP) system, creation of Cluster Finance Services (CFS), notification of International Public Sector Accounting Standards (IPSAS), and inclusion of gender and climate aspects in the annual National Budget Report.

0.2. The purpose of the assessment is to provide the RGoB with a current diagnostic of its PFM performance and to measure progress since the previous PEFA PFM assessment (2016). This will facilitate the RGoB and development partners to identify key areas for further PFM strengthening. The results provide the RGoB and development partners with a basis for dialogue on the PFM reform activities as well as concrete inputs to develop a new multi-year PFM Reform Strategy and Action Plan for which development partners can provide implementation support.

0.3. The assessment, based on the 2016 methodology, was undertaken by the RGoB as a self-assessment with technical support from the World Bank. Based on guidance provided through materials and inputs from the PEFA Secretariat, designated RGoB teams prepared initial drafts of the 31 performance indicator (PI) write-ups, including with scores, which were discussed and agreed with the World Bank team, and thereafter presented to and validated at a workshop. The draft report was shared with the RGoB for review and confirmation, which was followed by a peer review and subsequent revisions, and finally subjected to the PEFA Secretariat’s PEFA CHECK process.

0.4. The assessment was co-financed by the PFM-Multi-Donor Fund (PFM-MDF) and the World Bank. The PFM-MDF is funded by the European Union (EU) and the Austrian Development Agency (ADA) and administered by the World Bank.

0.5. At the same time as the PFM assessment for 2022, a Climate Responsive Public Financial Management (CRPFM) assessment and a Gender Responsive Public Financial Management (GRPFM) assessment have also been undertaken as self-assessments with technical support from the World Bank, based on the respective PEFA frameworks. The CRPFM and GRPFM assessment reports are published as separate documents/volumes. The two assessments were likewise co-financed by the PFM-MDF and the World Bank .

Scope, coverage and timing

0.6. The assessment covered the central government-level, which comprises the RGoB’s ten ministries, autonomous agencies, constitutional bodies, and extra-budgetary units (EBUs). The 2022 PEFA assessment considers local governments (LGs) – Dzongkhags, Gewogs, and Thromdes – to be Sub-National Governments (SNGs), unlike the 2016 PEFA assessment, which treated LGs as deconcentrated units of the Central Government. In the 2022 PEFA assessment the LGs are assessed only for PI-7 and PI-10.2.

0.7. All 31 PIs of the 2016 PEFA framework were assessed as well as scored in the 2022 assessment. This is based on the coverage and time periods prescribed in the PEFA Secretariat’s 2018 Fieldguide. 5 The assessment cut-off date is 30 June 2022, and the last three fiscal years (FYs) covered are thus FYs 2019/20, 2020/21, and 2021/22. The measurement of performance change was done in the context of the 2016 assessment, which was likewise based on the 2016 PEFA framework.

0.8. The assessment work was formally launched with a RGoB workshop on 1 March 2022 and followed with a validation workshop on 18 November 2022. The final PEFA PFM assessment report shall be presented at a dissemination workshop later in 2023. While much of the documentation and information were provided by the MoF, the teams also consulted other stakeholders such as the Royal Audit Authority (RAA), in its function as the supreme audit institution, parliamentary representatives, and other line departments.

Impact of PFM on budgetary and fiscal outcomes

0.9. The assessment shows that – at the overall level – the RGoB’s PFM performance in 2022 averages a PI score close to “B”, which is comparable to 2016, and means that the RGoB’s PFM performance continues to be sound and in line with many elements of good international practices. The full set of PI- and dimension-level scores are shown in Table 0.1. 16 indicators scored “A” or “B”, which is high-level and sound performance, respectively; 9 indicators scored C or C+, which is basic level of PFM practices; and 6 indicators scored D or D+ indicating below basic performance. The latter areas relate to expenditure composition outcome, public investment management, fiscal strategy, medium-term expenditure budgeting, expenditure arrears, and payroll controls.

0.10. The RGoB’s PFM performance vis-à-vis the three budgetary and fiscal outcomes is fairly supportive in achieving aggregate fiscal discipline and, more so, in ensuring strategic allocation of resources, and is strong in attaining efficient service delivery.

0.11. Aggregate fiscal discipline. The achievement of aggregate fiscal discipline is well[1]supported by aggregate expenditure out-turn and aggregate revenue out-turn being comparatively close to the budget plans, which indicates orderly budget execution and effective expenditure commitment controls. Operations outside the RGoB’s financial reports are limited, budget transparency is relatively high, management of financial assets is well[1]developed, and the MoF’s debt management procedures are effective. Furthermore, the Macroeconomic Framework Coordination Technical Committee (MFCTC) prepares three[1]year forecasts for selected macroeconomic indicators and forecasts of relevant fiscal indicators (although neither were published in the National Budget Report for FY 2022/23), internal controls of non-salary expenditure are effective, and quarterly budget performance reports are accurate. Some weaknesses in the RGoB’s PFM performance though adversely affect the achievement of fiscal discipline, including the absence of adequate monitoring of fiscal risks of public corporations (PCs) and LGs, shortcomings in public investment management, the lack of a mechanism for the MoF to prepare fiscal impact studies of all revenue and expenditure policy proposals, the proposed fiscal deficit target not being adhered to in preparing the FY 2022/23 budget, weaknesses in medium-term expenditure budgeting, and the absence of a system for monitoring expenditure arrears.

0.12. Strategic allocation of resources. The PFM system is moderately supportive in attaining allocative efficiency through planning and using budget resources in line with the RGoB’s priorities aimed at meeting policy objectives. The achievement of strategic allocation of resources is supported by several elements, including a robust budget classification system, availability of comprehensive information on public finances, the transparent and rules-based annual grant allocation system for LGs, the clear annual budget calendar which is adhered to, the well-functioning revenue administration performed by the MoF’s Department of Revenue and Customs (DRC), and the availability of reliable financial data to prepare the quarterly budget performance reports and the annual financial statements (AFS). Areas requiring strengthening to achieve allocative efficiency include addressing deficiencies in the public investment management procedures, the absence of annual as well as medium-term ministry-level ceilings for the FY 2022/23 budget formulation process, a lack of alignment between entity-level strategic plans and medium-term budgets, and the National Budget Report providing explanations for only some of the changes to expenditure estimates that occur between medium-term budgets.

0.13. During FY 2020-2022, the RGoB’s ability to execute the budget in line with original priorities was greatly challenged by the coronavirus disease 2019 (COVID-19) pandemic, which necessitated significant resources to be re-allocated in order to lessen the economic impact on individuals and businesses that followed from frequent lockdowns as well as international and domestic travel restrictions. This resulted in significant deviations in the composition of expenditures and revenues compared to the budget plans, and thus caused several low scores (PI-2.1, PI-2.2 and PI-3.2). However, despite the challenges, the RGoB was at the aggregate level able to maintain revenue and spending relatively close to the original budgets which indicates good institutional capacity.

0.14. Efficient service delivery. The PFM system is most supportive in realizing operational efficiency aimed at achieving the best levels of public services within available resources. The achievement of efficient service delivery is in particular supported by transfers to the LGs being based on transparent and rules-based criteria as well as information on the annual grants being available in a timely manner, the availability of performance xx information on plans for, resources available to, and the performance of service delivery units (SDUs), predictability on in-year resource availability, the relatively well-functioning procurement system, internal controls on non-salary expenditure being complied with, the well-performing internal audit function, and the financial, performance and compliance audits conducted by the RAA helping to identify inefficiencies in program implementation and service delivery. However, there are also a few weaknesses that may adversely affect achieving efficient service delivery such as absence of sound public investment management, medium-term budgets diverging from entity-level strategic plans, and a lack of integration of payroll and personnel records. Performance changes since the previous PEFA assessment in 2016

0.15. The 2022 PEFA assessment identified performance changes since the 2016 assessment (which was also based on the 2016 PEFA framework and hence directly comparable). There have been a number of changes in the PFM performance from 2016 to 2022. This shows at the level of individual PIs, where the scores for 9 PIs performance improved and for 9 PIs performance was maintained, i.e. performance either improved or maintained for 18 out of 30 PIs. 6 The scores for 12 PIs decreased. The changes at the PI-level overall resulted in a slight decrease in the number of high scores (“A”, “B+” and “B”) and more low scores (“C”, “D” and “D+”) in 2022 as compared to 2016, while the number of mid[1]level PI scores (“C+”) decreased. The latter shows improvement in 3 PIs (to “B” or “B+” for PI-6, PI-18 and PI-26) and decline in 3 PIs (to D+ for PI-2, PI-11 and PI-16) with 2 maintaining performance (PI-28 and PI-29). In other words, the RGoB’s PFM performance continues to be concentrated around elements that either fully or partially meet good international practices. At the same time, there are elements at a basic/below basic level.

0.16. At the pillar-level, there have been notable changes. The performance of three pillars – ‘Transparency of public finances’, ‘Predictability and control in budget execution’, and ‘Accounting and reporting’ – has improved. This is a result of improved financial reporting by EBUs, increased performance information for service delivery, better public access to fiscal information, more frequent revenue account reconciliation, strengthened internal audit, more frequent advance account reconciliation, and more timely preparation and submission of the AFS. However, the performance of four pillars – ‘Budget reliability’, ‘Policy-based fiscal strategy and budgeting’, ‘Management of assets and liabilities’, and ‘External scrutiny and audit’ – has decreased since 2016. The reason for the decline is a mix of factors within and outside RGoB, and include: (i) The COVID-19 pandemic necessitated changes to spending plans and hindered activities; (ii) The MoF did not include fiscal forecasts and medium-term expenditure estimates for outer years in the National Budget Report for FY 2022/23 (FY 2022/23 is the last year of the 12th FYP and projections for the first years of the 13th FYP were not available till the conclusion of the assessment); and, (iii) The PEFA Secretariat’s Fieldguide (2018), which was not available at the time of the 2016 assessment, provides more granular scoring guidance (e.g., for PI-11, PI-12 and PI-16), which means that lower scores in 2022 (than in 2016) reflect more exact diagnostics rather than lower performance. Also, the fact that LGs in 2022, unlike in 2016, are treated as a separate level of Government, hence PI-7 and PI-10.2 have been scored in 2022, also explains some of the changes in scores.

0.17. The overall trajectory of improvement in performance remains positive as the scores of the indicators PI-23, PI-29 and PI-30 are expected to be improved in view of the recent reforms.

PFM reform agenda.

0.18. The RGoB’s PFM reform activities have since 2010 applied the findings of PEFA assessments as the basis for developing reform strategies and action plans. The MoF’s Policy and Planning Division (PPD) spearheads the reform strategy. The PFM Reform Strategy 2017-2021, emanating from the 2016 PEFA assessment, was developed based on a ‘basics first’ principle to ensure adequate sequencing of reform activities, including by firstly putting in place controls to ensure a minimal level of financial compliance, secondly establishing mechanisms to improve fiscal stability and sustainability, and thirdly introducing systems to promote efficiency and effectiveness in service delivery. The Strategy also noted the need to establish and upgrade adequate IT systems in PFM.

0.19. Recent and on-going PFM reform activities include the:

revenue area, e.g. developing the Bhutan Integrated Taxation System (BITS), introducing the Bhutan Integrated Revenue Management System (BIRMS), strengthening revenue mobilization, supporting key economic sectors, introducing a value-based Property Tax Act, and enhancing customs management;

expenditure area, e.g. assessing the planning and budgeting system, initiating public investment management reforms, reviewing the traditional FYP structure versus a multi[1]year rolling budget, updating the budget classification, improving procurement management, and rolling out the e-PEMS strengthening payroll controls, commitment control system; and,

financing area, e.g., conceptualizing a Public Financing Policy as well as consolidating grant mobilization.

0.20. The RGoB at highest level is committed to PFM reform. It is led by the PFM[1]Governance Group (PFM-GG), which is chaired by the Finance Secretary. The PFM-GG, supported by the MoF’s PPD, manages and coordinates PFM reform across the Government. The RGoB has systematically built its staff capacity. The 2022 PEFA assessment will inform the areas for the RGoB to develop the next medium-term PFM reform strategy for addressing the weaknesses and gaps identified.