MTEF Reform in Bangladesh Analysis

Chapter 1: Introduction

1.1 Background

This dissertation studies the MTEF (Medium Term Expenditure Framework) reform in Bangladesh. The MTEF was introduced in 4 ministries including Ministry of Education from 2005-06, named as MTBF (Medium Term Budgetary Framework). In the following year it included Ministry of Primary and Mass Education and Ministry of Health and Family Welfare. All other ministries will be brought under this framework in near future. The focus of this study is to explore the effect of introducing the MTEF in education and health budgets, explain the difference between the MTEF and traditional budgetary system in the formulation and execution of budget, analyze the effectiveness and efficiency of budgetary spending due to adopting the MTEF in the education and health sectors considering the three outcomes (maintaining fiscal discipline, promoting allocative Efficiency and enhancing operational efficiency) of public expenditure management (PEM) and finally to comment on whether improvements were achieved or not due to adopting the MTEF. This chapter outlines the relevancy of the study, the research questions to be answered in the subsequent chapters, methodology and analytical framework, limitations of the study and finally the presentation structure.

1.2 Rationale of the Study

The main objective of formulating a budget under the MTEF is to link the budgetary allocations with government’s policies, priorities. This is for ensuring efficient utilisation of limited public resources, which will enhance pro-poor growth and poverty reduction. One of the ‘policy priority triangles’ set out in country’s Poverty Reduction Strategy Paper (PRSP, 2005) is human development. So, Education and health sectors have been attached to top priority on investment by the Government.

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1 According to MTBF (2005-06, p-01), ‘The Medium Term Budgetary Framework (MTBF) is a new budgeting approach generally known as the Medium Term Expenditure Framework (MTEF)’. Here, no basic difference between MTEF and MTBF has been stated. So, the term ‘MTEF’ will be used ubiquitously in this dissertation except quoting the references where relevant.

These two sectors account for almost 20% of the total government expenditure each year in Bangladesh. The MTEF has been implemented in these two sectors since 2006 and many of the government policy objectives are linked with them. It is necessary to review the performance of the MTEF so that the output could be infused into ongoing works and corrective actions can be taken to planned activities accordingly. Thus, it seeks to investigate the impact of the MTEF on budgetary system of these two sectors.

1.3 Research Questions

For this paper, the research questions are:

1. To what extent MTEF led to changesa in the formulation and execution of education and health budgets?

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2. Has MTEF improved the effectivenessb and efficiencyc of budgetary expenditure on education and health?

a. Mainly three types of changes- institutional, process (procedure) and technical (technological).

b. Effectiveness is about how far does the activity (here MTEF) achieve its objective- and the objective itself is greater allocative efficiency.

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c. Efficiency here means at what cost was that result achieved, i.e. how many additional resources were used up in adopting MTEF (Here it means operational efficiency).

1.4 Broad Methodological Approach

The analysis is purely desk- based. Secondary information sourced from review of literatures on the MTEF of different countries and other related articles of OECD, IMF, World Bank. UNICEF, PEFA, ADB, UNDP comprising as assessment and analysis of available documents on the MTEF and related processes. To answer the research questions data of national budget from 2001t o 2010, documents on the MTEF from 2006 to 2010, monthly fiscal report from 2004 to 2008- Finance Division, Ministry of Finance (MoF), Bangladesh Economic Review 2003-2008, IRBD by CPD (Centre for Policy Dialogue) from 2004- 2010, Public Expenditure Review on health- 2007, Bangladesh Bureau of Statistics, Sector wise budgets from Ministry of Education, Ministry of Primary and Mass Education, Ministry of Health and Family Welfare are used. Data from national budgets, BER, MTBF and PER played the key role to answer the research questions. Information was collected from interviewing few relevant staff of the MoF and consulting published documents and databases available in the Internet. The analysis is both qualitative and quantitative depending on the availability of the relevant data.

1.4.1 Analytical Framework

1) To answer the first question regarding changes due to adopting MTEF in Bangladesh, three elements will be analyzed – institutional change, procedural change and technical change and this analysis will try to differentiate the qualitative changes took place due to adopting MTEF over the traditional budgeting system in relation to those three elements.

2) The MTEF budgets of education and health will be assessed taking into account the three basic elements of PEM (Public Expenditure Management) – maintaining fiscal discipline, promoting allocative efficiency and enhancing operational efficiency (Schick, A, 1998) to get the answer of the second question concerning improvement in effectiveness and efficiency of budgetary spending after MTEF.

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Fiscal discipline, allocative efficiency and operational efficiency are interdependent (DFID, 2001). Allen Schick (1998, p. 2) argued that the lack of fiscal discipline leads to improper resource allocation and operates inefficiency. So, fiscal discipline promotes allocative and operational efficiency. MTEF sought to strengthen those three outcomes. Therefore, the effectiveness and efficiency of budgetary spending is improved when those three basic elements are achieved.

The following criteria/ principles will be analysed to reveal the experiences of attaining those three basic elements

Source: The above criteria in the table are generated on the basis of the literature of Schick, A (1998), World Bank (1998), DFID guidelines (2001)

1.4.1.1 Criteria setting

The aim is to find out some criteria that influences the three objectives of PEM as well as matches with the ‘MTEF objectives of Bangladesh’ (discussed in chapter- 3..) so that the impact of the MTEF can be assessed. The analytical framework is adapted and it is mainly based on the literature of ‘Schick, A (1998), A Contemporary Approach to Public Expenditure Management’, ‘World Bank (1998), Public Expenditure Management Handbook’, DFID guidelines (2001) and some other empirical evidences (discussed in chapter- 2).

Some other relevant criteria are not examined mainly due to data non- availability of appropriate data. For example, improvement in accountability and transparency relates to operational efficiency is not analysed due to data limitation and relevant information unavailability.

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A simple cross- section data is presented in tabular form where it is relevant in addressing the research questions.

1.6 Limitations

The MTEF is now at its earlier stage in Bangladesh and no formal review or comprehensive assessment has been made on this new budgetary process. Sufficient information is not available and current and reliable data are also unobtainable. So, there is much reliance on government budgetary documents that cannot always be testified by evidences from other sources.

1.7 Presentation Structure

Chapter 2 provides literature review on theoretical concept of MTEF, budgetary reforms followed both in developed and developing countries and assessments of the impact of the MTEF in those countries using the analytical framework specified for answering question two.

Chapter 3 illustrates MTEF reform in Bangladesh and analysis of the traditional budgetary process and MTEF in view of the changes took place due to adopting MTEF to get the answer of question 1.

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Chapter 4 focuses on the assessment of impact of MTEF on education budget to get the answer to question-2

Chapter 5 focuses on the assessment of impact of MTEF on health budget to get the answer to question-2

Chapter 6 presents the conclusion where all the research questions are summarized.

Chapter 2: Literature Review

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This chapter aims to explore various criteria/ principles that will be used to judge the performance of the MTEF in line with the three basic indicators of the public expenditure management (PEM). With this end in view, it provides literature review on theoretical concept of the MTEF, the theoretical explanation regarding the relationship between the MTEF and the public expenditure management (PEM). It also examines the empirical studies on the MTEF of different countries to reveal the different criteria/ conditions that were set to assess the role of the MTEF in promoting the efficiency and effectiveness of public expenditure. Finally it brings together some criteria that will be used to develop the analytical framework to assess the impact of the MTEF on education and health budget (the title of the dissertation) in Bangladesh.

2.1 The Theoretical Background

2.1.1 Concept of the MTEF

The MTEF (Medium Term Expenditure Framework) is defined as an approach ‘designed specially to link planning, which has a medium term outlook, with the annual budget, and, as a consequence, to link budgetary expenditure more systematically with socially desired outcomes’, (ADB, 2002, p-1). On the whole, MTEF integrated policy, planning and budgeting and allows expenditure to be ‘driven by policy priorities and disciplined by budget realities’ (World Bank, 1998). So, MTEF is a multiyear rolling expenditure under which a realistic projection of revenue receipts and expenditure is prepared over a three to five year period and spending priorities are set with reference to the Government’s policy objectives and thus it provides a clear foundation for the annual budget. Under the MTEF, over a three year period, first year estimate is considered as budget, two outer year’s estimates as indicative figures. In the following year, the MTEF rolls forward and a new forward estimate for another year is added. After necessary adjustment, the second year forward estimate is considered as budget as it becomes first year for the next MTEF.

Figure 2.1: Rolling Principle of the MTEF (Source: ODI, 2002, p- 5)

In many countries, the MTEF is implemented at two key levels, at the central government level which is referred to as the ‘top- down approach’ and at the spending agencies level, referred to as the ‘bottom- up approach’ (World Bank, 1998, p-40). In the ‘top- down approach’, Ministry of Finance identified the ‘resource envelops’ (which is referred to as the indicative expenditure ceiling) and allocate those to the line ministries in view of their relative need. In the ‘bottom- up approach, line ministries or sectoral agencies formulates and estimates the actual and projected costs of the spending programmes within the spending limit for the medium term by examining the sectoral objectives and activities (Houerou and Taliercio, 2002, p-2).

Table 2.1 Seven Stages of the MTEF

Source: Adapted;[PEM Handbook (World Bank, 1998a: 47-51) cited in N.Oyugi. L, (2008, p-3, 4)

and Houerou and Taliercio, (2002, p-3)]

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Annexure- 2

2.2 A General Overview of the Empirical Literature

Many developed countries like UK, Australia, New Zealand, Austria, Sweden, Germany, USA are practising multi- year budgeting. The MTEF of UK maintains a firm consistency in controlling public expenditure having ‘focused on outcomes and efficient service delivery’ (HM Treasury, 2007).

World Bank, DFID and other Aid agencies influenced many developing and transitional countries to initiate series of reforms (Wyane, 2005). The MTEF is introduced in more than 25 countries in Asia, Africa (e.g., Benin, Cameroon, Burkina Faso, Ghana, Malawi, Rwanda, South Africa, Tanzania, Uganda, Namibia, Kenya, Zambia) Latin America and Eastern Europe. In Asia, MTEF has already been introduced in Nepal, Pakistan and Bangladesh. Almost all the developing countries have 3 years MTEFs except Mozambique (6 years) and South Africa (4 years) (Houerou and Taliercio, 2002). Most of the countries integrated development and non- development expenditure in the MTEF except Guinea and Rwanda (only recurrent budget). In Kenya, Tanzania, South Africa, Uganda, civil society representatives participate in Sector Expenditure Frameworks (SEFs) preparing process (Houerou and Taliercio, 2002). Suriyaarachchi (2004) argued that Nepal has improved in development budget formulation and execution after introducing MTEF in Fiscal Year 2002-03. Assessments on the MTEF in many African countries are carried out considering the organizational change and procedural change rather than assessing the progress achieved through implementing the MTEF (Bird, A, 2003; Holmes and Evans, 2003; Jennes. G, 2003; Carlier. K, 2003; Short. J, 2003)

2.3 The MTEF and the public expenditure management (PEM)

ADB (2001) suggested that ‘Public expenditure management (PEM) is the latest approach that emphasizes on achieving the desired policy outcomes through public sector budgeting. PEM considered expenditure as an instrument to produce optimal output whereas conventional budgetary process sets focus on spending as an input’.

PEM emphasizes on three main outcomes in budgetary system. The objectives of PEM are to maintain fiscal discipline, to promote allocative efficiency and to enhance operational efficiency (World Bank, 1998a cited in DFID, 2001, p-8). Allen Schick (1998, p-2) describes three basic elements of PEM as follows:

1.

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Aggregate fiscal discipline

, which usually means that the public spending limit should not exceed the total revenue (spending in accordance with the affordability) and should be ‘sustainable over the medium-term and beyond’ (ibid, p-2).

2.

Allocative efficiency

, which refers to the condition that public spending, should be prudent. ‘Expenditure should be based on government priorities’ and it should be directed to the most beneficial programmes and activities that ultimately increase the effectiveness of the budgetary spending. It means that the allocation is better targeted shifting from ‘lesser to higher priorities and from less to more effective programs’ (ibid-2).

3. Operational efficiency

means getting the best value of public money. Quality of the public services should be reasonable and it should be given at the lowest possible cost (ADB, 2001, p-1).

According to Fjeldstad et al. (2004 p.2) cited in N.Oyugi. L, (2008, p- 2),

The objectives of MTEF are

:

• to maintain ‘aggregate fiscal discipline’
• to promote ‘resource allocation to strategic priorities’ (allocative efficiency)
• to enhance ‘efficient and effective use of resources’ (operational efficiency)

It suggests that there is a close connection between MTEF and PEM objectives.

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2.3.1The MTEF and improvement in effectiveness and efficiency of

budgetary expenditure

ADB suggested that ‘the MTEF is one mechanism through which a PEM system can be operationalzed’ (2001- issue- 2, p-4). So, the improvement in effectiveness and efficiency of budgetary expenditure depends on to what extent the MTEF is sought to strengthen the PEM objectives.

Fiscal discipline, allocative efficiency and operational efficiency are ‘interdependent’ (DFID, 2001). Allen Schick (1998, p. 2) argued that the lack of fiscal discipline leads to improper resource allocation and operational inefficiency. So, fiscal discipline can promote both allocative and operational efficiency.

Fiscal discipline is maintained when implementation of budget ensures that actual expenditure does not exceed the spending limit and even when the increase in spending (% as a share of GDP) is consistent with the increase in revenue each year (Schick, A, 1998, p. 12, 67). So, two criteria- conformity with the spending limit and consistency in the trend of sectoral expenditure influence fiscal discipline.

Allocative efficiency means the ability of the government to distribute resources considering the effectiveness of public programmes in accordance with its strategic objectives or policy planning. It is the capacity to reallocate resources from old to new priorities and from less to more effective programmes. Delegation of major allocative responsibility to sectoral ministries also promotes allocative efficiency (ibid, p. 17, 90). So, four criteria- change in sectoral allocation, strategic resource allocationlinked to policy planning, spending in priority areas/ programmes anddevolution of allocative responsibilities to line ministries influence allocative efficiency.

MTEF offers greater predictability of fund since it establishes ‘baseline budgets for the upcoming years’ (while one year budget cannot) and thus improves operational efficiency (ADB, 2001- issue- 2, p-4). World Bank (1998) argues that predictability of funds (assurance to spending agencies as to when and where the resources will be available) is one of the major factors that influence operational efficiency (p- 28). Operational efficiency put emphasis on output and outcomes rather than input (Schick, A, 1998, p. 21). So, two criteria- greater predictability of public funds and progress in achieving output targets influence operational efficiency.

2.3.2 Evidence from Cross-country Studies

This is to explore what criteria/ characteristics are set out by different countries to assess the impact of MTEF with respect to three levels of PEM outcomes. However, most of the studies are found to use one or more of the following criteria.

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Reducing fiscal deficit

Since the adoption of the MTEF, Malawi reduced its fiscal deficit from 15% of GDP to 5% in the 1998/ 1999 budgetary- year and a further reduction to 4% in 1999/ 2000. So, it achieved some progress in reducing fiscal deficit (Anipe et al., 1999, p. 15).

Adequate information availability

In Cambodia, the MTEF was introduced in two ministries (education and health) and while preparing the sectoral expenditure for 2003-2005, health ministry had inadequate information regarding user fees and other payments, which in turn prevented from making a realistic estimation (Dom et al., 2003, p. 30).

Above two criteria are concerned with aggregate fiscal discipline.

Strategic resource allocation linked to policy, planning

In case of Ghana, the MTEF was adopted in 1999; the resources were allocated in line with government development policy documents, e.g. ‘Ghana Vision 2020′ (Anipa et al., 1999, p-21). The MTEF in Uganda achieved a considerable success in integrating the PEAP (‘Poverty Eradication Action Plan’) within the Budgetary process and expenditure planning is carried out considering PEAP at the central and local government levels (Bird A, 2003).

Change in sectoral allocation

In Uganda, actual spending increased from 19.8% of total expenditure to 26.9% in 1998/99 (Bevan and Palomba, 2000, p. 18). In Benin, budgetary allocations had increased significantly to the ‘priority sector’ since 1998. Recurrent budget for education was 27.4% of the total expenditure in 1998 and it increased to 39.5% in 2001 and capital budget was 4.5% of the total expenditure in 1998 and that increased enormously to 40.7%. Allocations towards the health budget have increased from 1.4 percent of GDP in 1998 to 2.3 percent of GDP in 2001 (Carlier K, 2003, p. 23-24).

Greater responsibility to line ministries

The MTEF in Ghana promoted allocative efficiency as line ministries enjoying ‘greater responsibility for allocating resources to priority activities’ which ensures effective and efficient use of limited resources (Anipa et al., 1999, p- 7).

Improvement in budgetary classification

The MTEF in Malawi promotes allocative efficiency as it improved in budgetary classification by adopting activity- based budgeting that reviews the on- going programmes and creates sub- programmes to specify the activities (ibid, p. 12-25).

From the above analysis it is evident that three criteria- strategic resource allocation linked to policy planning, change in sectoral allocation, improvement in budgetary classification are relevant to allocative efficiency and greater responsibility to line ministries is concerned with both allocative and operational efficiency (discussed in section 2.1.3).

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Fund predictability

In Malawi, the allocation for health sector was 20.7% of the total development budget for the 1996/1997 fiscal year, but the actual release was only 3.6% of the development expenditure (Oxford Policy Management, 2000, p. 4).

Reducing the deviation between budget and actual spending

In case of Tanzania, from 1995 to 1998, the average BDI (Budget Deviation Index) was equal to 33% before introducing the MTEF and after the MTEF since 1999, it was reduced to 25% (Houerou and Taliercio, 2002, p. 21).

Improvement in accountability and transparency

In Namibia, MTEF has improved transparency as the framework explains inputs required for all programmes and expected outcomes. It also increased accountability because public has the access to the information regarding government priorities set in the medium term framework (N Oyugi L, 2008, p-12).

The above two criteria are relevant to operational efficiency as discussed earlier.

2.4 Findings

The country assessments of the MTEF indicate that all types of criteria/ conditions were not used by any single country to assess the impact of the MTEF. From the above analysis, the following key criteria/ principles can be brought together which appear to be important to examine the MTEF outcomes at three levels- fiscal discipline, allocative and operational efficiency.

In the next chapter, the changes due to adopting the MTEF in the education and health budget will be examined.

Asian development bank institute, 2005

http://www.adbi.org/files/2005.09.05.cpp.budget.classification.pdf

Chapter 3: Changes due to the MTEF in Bangladesh

This chapter addresses the first research question of Chapter- 1 which refers to the changes took place because of the MTEF introduced in the education and health budget. For this, it focuses on the budgetary reforms in Bangladesh. Experiences with the introduction of the MTEF are discussed and finally the changes due to adopting the MTEF (the traditional versus the MTEF) have been analysed.

3.1 Why the MTEF in Bangladesh

Before the MTEF, budgets were prepared by making arbitrary incremental changes to the preceding year’s allocation. No strategic planning was present in budgetary process, non- development and development budgets were prepared separately and emphasis was laid on input rather than output (BCAS-2006/09, p. 53). Therefore, to enhance the credibility of the budget, to face the strategies set out in the PRSP with the macroeconomic framework and to ‘create a more disciplined, dynamic, efficient and modern public financial management system’ (MTBF-05/06, p. i), the MTEF was introduced.

3.2 Budgetary reforms and the MTEF in Bangladesh

Bangladesh is a densely populated developing country which has a less public spending as a share of GDP (Socio- economic indicators are shown in

Appendix- 1

). For the effective and efficient use of scant resources, important reforms have been carried out in public financial management since 1990s. According to World Bank, ‘Bangladesh re-emerged as a democracy, successfully restarted reforms on critical fronts while ensuring sound macroeconomic and fiscal management’ (BCAS, 2006/09, p-9). A committee on Reforms in budgeting and Expenditure Control (CORBEC) was formed in March 1990 and this committee identified a number of problems including budgeting procedure, budget classification, budget presentation, separate non- development (recurrent) and development (investment) budgets preparation, emphasis laid on the inputs rather than outputs, etc. It was also difficult to identify the flow of funds as non- development and development budgets used separate classification systems and that was not computerized. To implement the recommendation of CORBEC, RIBEC (Reform in Budgeting and Expenditure Control) was formed with the financial support from the DFID (Department for International Development). A detailed operational unit wise and economic code wise classification chart was prepared and published, financial rules and reporting systems were upgraded and large number of Government officials were trained through the RIBEC from Ph

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