THE MINISTRY OF FINANCE & THE OVERHAUL NEEDED TO PREPARE FOR OIL

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The Government is facing a significant challenge in preparing for the start of oil production

within possibly two to three years. While efforts are underway simultaneously across multiple fronts, there is a need for the Ministry of Finance (MOF) to be strengthened, especially since it will be tasked with leading the way in protecting Guyana’s oil wealth while ensuring transparency for how it is used.

The first area that needs attention would be the area of Public Financial Management (PFM). PFM refers to the set of laws, rules, systems and processes used by a country to mobilize revenue, allocate public funds and undertake public spending.

Guyana has achieved good progress in implementing PFM reforms, yielding improvements in the management of public finances. The major milestones include: (i) the approval of the 2017 budget before the start of the fiscal year; (ii) gradual implementation of program and results based budgeting; (iii) developing a medium-term perspective in the budget; (iv) publishing a comprehensive mid-year review of the budget; and (v) timely completion and publishing of audited annual financial statements.

However, sustaining the reform agenda has proved increasingly challenging with the limited capacity in the MOF and line agencies. With the recent discovery of petroleum, there is even more pressure to have strong PFM systems to be able to effectively manage the volatile and temporary petroleum revenues. Therefore, the PFM reforms are expected to further intensify.

As it relates to strong public investment management, this becomes even more important once the petroleum revenues will start coming in. Inevitably, there will be a pressure to spend faster

and more on developing the country’s infrastructure and inflows of petroleum revenues will give an impression of unlimited resources to invest. However, there should be a rigorous assessment of how fast investment could be scaled up without hitting supply bottlenecks and generating inefficiencies. If the public investment management process is weak, the investment will not be translated into better infrastructure and will not support the diversification of the economy and sustainable economic growth.

As it relates to a robust capital budget process, this is absent from the MOF and getting one takes considerable time. Project concept documents would generally be prepared two to three years before a project can be implemented and the detailed development process of a capital project will usually take at least one year to complete. Therefore, it would be a high priority for the MOF to start strengthening public investment management processes immediately to be able to complete the project proposals for major investment projects ahead of actual inflow of resource revenues.

Over the medium term, the MOF would have to lift the amount of analysis in the publicly available budget documents. Current budget documentation is extensive, but fragmented. The annex contains a number of tables that provide detailed information about spending, revenues and financing, but the documents include limited analytical information. There are also some inconsistencies in the treatment of budget cash flows between different tables in the budget documents. In some tables, for example, financing is listed as revenue and loan repayments as expenditure (see 2017 Budget Estimates, Volume 1 table 5-6

and 9), whereas other tables give a correct treatment of financing items. If left unchecked, this could severely affect the accountability for future oil wealth.

Moving to the multi-year perspective in planning and budgeting would become a requirement with oil and gas. As such, it would require improving the quality, coverage, and strategic direction of the document. It could have a more substantive analysis of macroeconomic development and future strategy and overall budget strategy and spending policy options, but also a fiscal risk analysis, including sensitivity analysis of the fiscal aggregates to key parameters (such as the oil price), a description of contingent liabilities and a debt sustainability analysis.

In the light of petroleum discovery, analytical comment on the key macroeconomic and fiscal challenges facing Guyana, for example, dealing with the impact of high and volatile oil prices on the economic and fiscal aggregates, becomes especially important. The draft Natural Resource Fund Law prescribes very comprehensive requirements for the documentation on the Natural Resource Fund that needs to be included in the annual budget documents. The MOF will need to start building capacity to be able to meet these demands.

Further to this, one must note that the structure of banking arrangements for government transactions have many features of a functional Treasury Single Account (TSA). A Consolidated Fund account held in the Bank of Guyana is largely acting like a TSA. In principle, all revenues contributing to the Consolidated Fund are credited to this account and all budgetary expenses are met from this account. However, bank accounts outside the TSA (authorized and unauthorized) for various purposes have prevented the MOF from having a

consolidated view of the government’s cash resources.

According to the FMAA (2003) line agencies need a prior approval of the MOF to open accounts in commercial banks. However, there is no formal register of bank accounts outside the BOG; the MOF does not receive routine information on the balances on these accounts and does not have access to these for the purposes of liquidity management. If there is to be increased accountability for the oil revenues to come, this would need to be improved.

Additionally, the government has 42 statutory authorities which are self-accounting. These bodies operate bank accounts mostly held at commercial banks. Many of these statutory authorities are not profit-motivated and rely exclusively on Government transfers from the budget. Only nine statutory authorities (SAs) do not receive transfers from the central Government. 20 SAs receive more than 90% of their revenues as a transfer from centralGovernment.

Taken as a whole, the aggregated amount of cash held can be relatively high and their cash balances are not available for consolidation with the TSA. The authorities should consider establishing a fully functional TSA. A functional treasury single account

and a capability to forecast cash flows reliably are essential building blocks of a modern cash management system. A TSA would provide timely information about government funds, minimizes financing costs and allows full control over budget allocations. A policy document/strategy specifying the future form of the TSA would help to develop a common understanding of the reforms and its implications. The strategy should aim at consolidating Government cash currently held outside the system. Given the likely resistance from those holding these accounts, the Accountant General’s Department (AGD) should develop prioritized actions focusing on accounts with significant balances that are risky from a control and transparency standpoint. Accounts of statutory authorities could be targeted in that order. This becomes highly important when the large petroleum revenues will start coming in, as the GRA, that will be a collecting agency for petroleum revenues, is a statutory authority and its accounts are held outside the government accounts.

A longer-term view of how the AGD would function has not been formulated by the MOF. The treasury should not be considered as just a department, but as a system. Ultimately, the treasury

should operate as the Government’s main control, information and funding system between the budget entities and the banking system. This wider view, or vision, of how the treasury system would operate to fulfill this role is presently lacking. For example, what is the correct division of labour between it and the Office of Budget, or between it and the banking system? More importantly, how will the division of labour be allocated between the AGD and the BOG regarding the Natural Resource Fund? For the next step in the treasury’s development, it would be essential to have such a longer-range view.

Currently, commitment control is not implemented. However, it is one of the most

important expenditure control features of a PFM system. When properly implemented, it should provide a tool to limit the incidence of fiscal slippages and avoid the buildup of arrears. Therefore, a commitment control system should be initiated, with ministries recording all commitments. As a commitment control module exists in freebalance, a full control system should be implemented to ensure that advance knowledge of authorized expenditures is available.

Article Categories:
Daily Updates · Economic Focus · Issue 33

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