Public finance imbalances that persisted for several decades reached a tipping point in 2022, resulting in many socio-economic stresses with unprecedented political ramifications. The government budget deficit is indicated as 10.2 percent in 2022 whereas 11.7 percent in 2021 as per the Central Bank Annual Report 2022. Effective institutions and systems of public financial management (PFM) play a critical role in implementing national policies concerning development, poverty reduction and managing economic crises in Sri Lanka. Good PFM is the linchpin that ties together available resources, delivery of services, and achievement of government policy objectives. If it is done well, PFM ensures that revenue is collected efficiently and used appropriately and sustainably.
The centrality of good PFM for effective global development has been acknowledged in many forums including United Nations commitments on financing for development and Sustainable Development Goals, and the Effective Institutions Platform. Public Expenditure and Financial Accountability (PEFA) program was initiated in 2001 by seven international development partners:
The European Commission, International Monetary Fund, the World Bank, and the governments of France, Norway, Switzerland, and the United Kingdom. Therefore, the purpose of this article is to suggest implementing the PEFA program in public sector entities in Sri Lanka to manage the budget deficit without merely increasing direct and indirect taxes leading to a huge burden to the public as a whole.
Purpose of a good PFM system
The purpose of a good PFM system is to ensure that the policies of governments are implemented as intended and achieve their objectives. An open and orderly PFM system is one of the enabling elements needed for desirable fiscal and budgetary outcomes:
• Aggregate fiscal discipline requires effective control of the total budget and management of fiscal risks.
• Strategic allocation of resources involves planning and executing the budget in line with government priorities aimed at achieving policy objectives.
• Efficient service delivery requires using budgeted revenues to achieve the best levels of public services within available resources.
PEFA identifies seven pillars of performance in an open and orderly PFM system that is essential to achieving these objectives. The seven pillars thereby define the key elements of a PFM system. They also reflect what is desirable and feasible to measure. The pillars are as follows:
I. Budget reliability.
The government budget is realistic and is implemented as intended. This is measured by comparing actual revenues and expenditures (the immediate results of the PFM system) with the original approved budget.
II. Transparency of public finances.
Information on PFM is comprehensive, consistent, and accessible to users. This is achieved through comprehensive budget classification, transparency of all government revenue and expenditure including intergovernmental transfers, published information on service delivery performance and ready access to fiscal and budget documentation.
III. Management of assets and liabilities.
Effective management of assets and liabilities ensures that public investments provide value for money, assets are recorded and managed, fiscal risks are identified, and debts and guarantees are prudently planned, approved, and monitored.
IV. Policy-based fiscal strategy and budgeting.
The fiscal strategy and the budget are prepared with due regard to government fiscal policies, strategic plans, and adequate macroeconomic and fiscal projections.
V. Predictability and control in budget execution.
The budget is implemented within a system of effective standards, processes, and internal controls, ensuring that resources are obtained and used as intended.
VI. Accounting and reporting.
Accurate and reliable records are maintained, and information is produced and disseminated at appropriate times to meet decision-making, management, and reporting needs.
VII. External scrutiny and audit.
Public finances are independently reviewed and there is external follow-up on the implementation of recommendations for improvement by the executive.
The PEFA framework includes a report that provides an overview of the PFM system and evidence-based measurement against 31 performance indicators. It also provides an assessment of the implications for overall system performance and desirable public financial management outcomes.
Foundation for reform planning
It provides a foundation for reform planning, dialogue on strategy and priorities, and progress monitoring. PEFA is a tool that helps governments achieve sustainable improvements in PFM practices by providing a means to measure and monitor performance against a set of indicators across the range of important public financial management institutions, systems, and processes. The PEFA methodology draws on international standards and good practices on crucial aspects of PFM, as identified by experienced practitioners. PEFA incorporates a PFM performance report for the subject government that presents evidence-based indicator scores and analyzes the results based on existing evidence. It emphasises a country-led approach to performance improvement and the alignment of stakeholders around common goals.
PEFA reports outline the economic environment faced by the public sector, examine the nature of policy-based strategy and planning, and analyze how budget decisions are implemented. PEFA assessments examine the controls used by governments to ensure that resources are obtained and used as intended. PEFA provides a framework for the assessment of transparency and accountability in terms of access to information, reporting and audit, and dialogue on PFM policies and actions. PEFA considers the institutions, laws, regulations, and standards used by governments in the PFM process. It also examines the results arising from the operation of PFM in key areas such as budget outturns, effectiveness of controls, and timeliness of reporting and audit. In conclusion, it is suggested to implement the PEFA program in public sector entities in Sri Lanka to manage the budget deficit replacing the strategy of merely increasing direct and indirect taxes leading to a huge burden to the public as a whole.
Reference:
Framework for Assessing Public Financial Management, PEFA-USA, 2019
– The writer is a Chartered Accountant and Senior Lecturer, Department of Accountancy, Faculty of Commerce and Management Studies, University of Kelaniya.
