EXECUTIVE SUMMARY

Rationale and purpose

The main purpose of the 2022 PEFA assessment is to provide the Government of Moldova with an objective, up-to-date diagnostic of the subnational-level public financial management performance based on the latest internationally recognized PEFA methodology. 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.

Under the MoF’s coordination, the 2022 PEFA assessment was led by the World Bank with financing provided by the European Union. The assessment covers the last three completed government fiscal years 2018, 2019 and 2020, and was performed from November 2021 – May 2022. Because of the COVID-19 pandemic and the associated restrictions, the assessment was conducted virtually with online collection of the evidence rather than in-person 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 its commitment to sustainably improve the accountability and performance of public financial management systems in all levels of the government. 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 2022 PEFA findings are expected to complement the conclusions of the PEFA assessment for the central government that would inform the preparation of the new strategy and identify further reform areas. This PEFA assessment is also important in the context of the local technical assistance projects implemented by the development partners that use the country’s own systems to channel their resources; the partners would like to be appraised of the PFM performance at the subnational level.

Since its independence Moldova has made a significant effort in the field of decentralization. Among those efforts stand the full ratification of the European Charter of Local Self-Government of July 16, 1997, a comprehensive change of the domestic legal order aimed at the inception of an autonomous local level of government, territorial reforms at different stages, devolution of competencies to local authorities, and a degree of mild fiscal decentralization, etc. The concept and policies of the decentralization policy meet the experiences of the European countries and comply with the aspiration for European integration and the bilateral agreements between Moldova and the European Union, but the implementation does not really meet expectations because public administration reform has only been partially implemented so far.

Although there is legal support for the decentralization reform, it remains a highly political and sensitive topic with many controversies. The challenges facing the decentralization reform in Moldova currently include financial decentralization, patrimonial decentralization, and local administration capacity. Local budgets highly depend on the state budget transfers. In the past few years, the transfers from the Government have been steadily increasing and this increase is linked to the Consumer Price Index (CPI) adjustment and to the payroll policies. From the analysis of the budget data, it can be observed that the actual execution figures are higher for the transfers which implies that during the year the local authorities must adjust the initially approved amounts of transfers. The reason is that throughout the year the local authorities have additional allocations approved for their projects from the centralized funds administered by some line ministries (such as National Ecologic Fund, Energy Efficiency Fund, National Regional Development Fund, etc.) as well as other allocations approved by the Government for specific objectives (for instance, provision of one-off compensation for health workers infected with COVID-19, roll-out of activities related to the country reintegration, etc.) . At the same time, it should be noted that the value of transfers is not directly proportional to the number of competencies assigned to the local authority by the administrative decentralization law. This could mean that more expenses are necessary to fulfill the competencies assigned for the local authority level II, and that the revenues received in the local budget from their own fees and taxes are not sufficient.

Main strengths and weaknesses of the PFM systems

Strengths. The Ungheni rayon has an impressive array of information regarding the finances of budgetary subnational government. The government wide Chart of Accounts, which underpins budget preparation, execution, and reporting, is comprehensive and consistent with Government Finance Statistics (GFS) standards. Citizens are able to access the rayon council web page where the rayon finance division publishes PowerPoint presentations with summarized and accessible explanation of the key elements of the budget. In 2020 all rayon council meetings were available to the public, including the budget hearings. Information on performance plans and achievements in service delivery outputs and outcomes across the rayon sectors is very good reflecting a program budget system in place. All revenues are paid into the Treasury account and allocated to the rayon’s sub-account. A revenue report is prepared for management purposes. Monthly cash forecasts are prepared with daily cash flow updates and consolidated on a monthly basis. Spending units can commit funds up to the value of their annual budget allocations in line with their expenditure plans during the year. There are good internal controls on salary and non-salary expenditure with effective commitment controls and compliance with payment rules and procedures. There is good segregation of duties with clear responsibilities. The rayon council did follow up on the audit findings.

Weaknesses. The budget is presented for the up-coming year only. The rayon lacks a basic debt management strategy. The internal audit function in the rayon is staffed only with one internal auditor, while the regulatory framework envisages at least two staff units. The effective coverage of internal audit is less than 10 per cent of expenditure even though planned audits and ad hoc audits are performed. Internal audit activities are primarily focused on compliance. The standards used in preparing annual financial reports are not disclosed. There is no mandatory submission of accounts for external audit at the rayon level so financial statements are not routinely submitted to the Court of Accounts.

Impact of PFM performance on budgetary and fiscal outcomes

Aggregate Fiscal Discipline. Aggregate fiscal discipline is achieved due to control over spending during budget execution, as well as relatively realistic revenue forecasts. Transfers from the central government cover almost all of the rayon expenditure and the assured predictability of the transfers has been essential in maintaining fiscal discipline. The planned budget, on an aggregate basis, is not normally circumvented using virement and supplementary budgets even in the context of policies to mitigate the impact of COVID. Treasury operations and cash management enables expenditures to be managed within the available resources. Control of contractual commitments is effective and has removed expenditure arrears. The limited internal audit function, financial inspection, and possibility of external audit enhance fiscal discipline.

Strategic Allocation of Resources. The Chart of Accounts caters to a multi-dimensional analysis of expenditure. The focus on just an annual rather than a medium-term perspective in expenditure budgeting aligned to the possible programmatic budget process ensures a narrow focus. While performance indicators are specified, independent assessment and evaluation of performance achievement are generally missing and have relied on evaluation reviews supported by Moldova’s development partners.

Efficient Use of Resources for Service Delivery. The strength in the procurement process is good and the rayon has managed its database well. The high level of contracts based on competitive bidding positively affects efficiency in service delivery. The strength of payroll systems, particularly with the integration of payroll and personnel systems, means that staff is effectively used. The strengths in the accountability mechanisms make financial compliance inspections and external audits (when undertaken) effective as counter checks on inefficient use of resources (including personnel). However limited internal audit means that in-year system assessments do not contribute as much as they could. The annual production of consolidated annual financial statements ensures the timely impact of audits when the rayon is selected for audit. The monthly budget execution reports also ensure that there is well-timed assessment of resource usage relating to the planned budget. Publishing of performance targets and outcomes supports the efficient use of resources in service delivery units; these are consistently measured but would be enhanced with a medium-term expenditure perspective.

Performance changes since the previous assessment

This is the baseline assessment for the Ungheni tier II territorial administrative unit.