Attachment_J_6_-_Public_Financial_Management_Report__2017-2022.pdf

2017 - 2022

Acronyms

AC Audit Committee

ASYCUDA Automated System for Customs Data

CCS Commitment Control System

CMC Cash Management Committee

CSO Civil Society Organisation

CTA Central Treasury Account

DMFAS Debt Management and Financial Analysis System

EU European Union

FMC Financial management and control

FMIS Financial Management Information System

GDPT General Directorate of Property Tax

GFS Government Financial Statistics

IA Internal audit

IMF International Monetary Fund

INTOSAI International Organization of Supreme Audit Institutions

IPSAS International Public Sector Accounting Standards

LMAs Line Ministries and Agencies

MFU Macro-Fiscal Unit

MTEF Medium-Term Expenditure Framework

MTFF Medium-Term Fiscal Framework

NPA National Policy Agenda

OBL Organic Budget Law

PB Programme Budgeting

PEFA Public Expenditure and Financial Accountability

PFI Public Finance Institute

PFM Public Financial Management

PI Performance Indicator

PIP Public investment programme

PPL Public Procurement Law

RMS Revenue Management System

SAACB State Audit and Administrative Control Bureau

SAI Supreme Audit Institution

SC Steering Committee

TA Technical assistance

TSA Treasury Single Account

WB World Bank

Table of Contents Page No.

Section I: Executive Summary 3

Section II: Vision & Mission 5

Section III: General background on the sector and the current PFM Status.

Section IV: National Policy Agenda 2017-2022

(PFM sector).

Section V: Strategic Objectives 12

Section VI: Mechanisms of Achieving the Objectives 13

Section VII: Monitoring and Implementation

Framework

Section VIII: Proposed procedures covered by the strategic framework (2017- 2022).

Appendixes

Appendix I: Summary on PEFA previous

Assessments (2007 and 2013)

Appendix II: Fiscal Table - projections of (2017-

2022)

Appendix III: Analysis of Fiscal Situation (full year -

2016)

1) EXECUTIVE SUMMARY

This strategy aims at achieving a balance between the need for a structured systematic reform in Public Financial Management (PFM) and the need (for this strategy) to be framed as an achievable and realistic strategy within the framework of the Palestinian fiscal situation, taking into account all underlying facts and challenges therein. These challenges will be precisely defined and categorized, highlighting all achievable outputs and placing them on a well-defined timetable. This means that these challenges will be directly targeted by reform efforts as well. And for this sake, this strategy focuses on delivery, where specific priorities will be given most of the PFM sector attention, following up and resources. This includes maintaining an active diagnosing process of obstacles, and aims at taming local issues and difficulties in the way to those priorities. It also aims at creating new sustainable routine and environment that comply with the international best practices in the PFM field.

These Practices will be envisaged within the system’s routine and are set to be complied with PEFA new upgraded framework.

The chief purpose of this PFM strategy is to meet “social, fiscal and performance contracts”1 held with the Palestinian citizens and other internal and external stakeholders. For that reason, it was prepared with an active participation from all Palestinian PFM stakeholders, aiming at framing a strategy prepared after integrating policy agenda interventions, which were adopted in the National Policy Agenda (2017-2022) at the technical level, for PFM.

This has enhanced the Palestinian stakeholder’s ownership of this strategy and put its implementers on board from the beginning. It should be also noted that these efforts (of preparing this strategy) were accompanied by continuous consultations with the PFM international stakeholders.

This strategy is a living flexible document that aims at keeping track of obstacles that hinder the achievement of the desired objectives. This tracking process simply means that it is a dynamic strategy with clear targets accompanied with flexible steps towards achieving those objectives. The term dynamism here means the flexibility of timetables set for achieving the desired outputs. In addition, it means that these outputs can be turned into objectives per se if it was found (during the implementation and related ongoing follow-up process) that there are (policy or technical) prerequisites that must be accomplished to attain those outputs.

Fundamentally, it is an on-going gradual process that aims at continuously changing the timetable of priorities at the level of outputs to spot real obstacles and target them by the reform procedures. For example, a deadline defined for completing a certain output can be shifted from the second year in the strategy to the third year if it was discovered later that

1 Schick, A. (2011). Repairing the Budget Contract between Citizens and the State. OECD Journal on Budgeting, 11(3), 1-27.

there is a prerequisite (related to a less important output) that need to be achieved before reaching the main output.

This strategy discusses in both broader and detailed outlooks where various specific procedures will be outlined and described depth (with clear adopting to PEFA indictors and dimensions where it is possible). This will ensure that the reform efforts can be continued successfully towards enhancing the level of previous PEFA assessment.

More importantly, in order for this strategy to provide greater momentum to adopt all of the priorities contained therein, it proposes a management structure to oversee the implementation of the reform, and provide guidance when needed as well as keeping all stockholders informed on progress being made in achieving those objectives; this is vital to overcome any obstacles that may arise during the process. As such, this management structure will empower a PFM specialized team (Delivery team) dedicated to manage, facilitate and follow up the technical implementation processes of this PFM strategy.

This strategy covers 8 main sections and 3 appendixes as follows:

Section I: Executive Summary.

Section II: Vision & Mission.

Section III: General background on the sector and the current situation.

Section IV: National policy and priorities as set out in the NPA and its relationship with the PFM sector.

Section V: Strategic Objectives.

Section VI: Mechanisms of Achieving the Objectives.

Section VII: Monitoring and Implementation Framework

Section VIII: Proposed Procedures (connected with indictors and standards) covered by the Strategic Framework (2017- 2022).

Appendixes:

Appendix I: Summary on PEFA previous Assessments (2007 and 2013)

Appendix II: Fiscal Table - projections of (2017-2022)

Appendix IV: Analysis of fiscal situation (full year - 2016) 2

2 Macro Fiscal Unit - MoFP

2) PFM STRATEGY: Vision, Mission

2-1 Vision

“Managing a PFM system that is complied with the Palestinians fiscal, performance and social contracts, and is resilient to local uncertainties with full recognition and alignment to the international best practices in the field.”

2-2 Mission

“An integrated legal and regulatory framework of PFM system; operates to collect public resources effectively and equitably, and to manage spending of these resources on programing based –budget in consistency with sectoral strategies and national policy agenda. Such a PFM system is transparently operated in a way that allow accountability and public oversight.”

3) General Background

This section will provide a general overview of the main of PFM themes, however in section 8 of this strategy, the proposed matrix will provide a specialized elaboration separately next to each PFM specialized area. This should give the user an easier way to compare, match and understand the PFM issue, its background, its best practices and the suggested reform with a specific timeline.

3-1 An Overview

This strategy is based on previous achievements and recommendations about PFM reforms, including reports issued by international and local institutions. These reports have been urging for the need to review the legal and regulatory framework that underpins the government’s PFM system.

Planning and budgeting are still largely based on revenue estimates, which seems to be not reliable enough to solely rely on. The disparity between the expenses contained in the budget and actual revenues leaded to an increase in the private sector arrears, public debt and arrears of pension fund. However, MoFP shows an improvement in containing the private sector arrears, and has dedicated systematic monthly transfers to the pension fund.

As such, the most important step to be taken is to enhance the planning and preparation processes of designing realistic budgets connected to a robust fiscal medium term framework. This mainly needs to prepare and enact a new organic budget law to replace the existing structure inherited from old legislations. Existing legislations on PFM should also be reformed into new OBL mainly to include provisions that detail penalties imposed when the law is breached or violated.

PFM system still needs a reform on the execution level of the Budget. This mainly related to the build and commit to a commitment control system. Although MoFP has made a preventative and precautionary decisions to control the accumulated arrears, including the decision of issuance the Promissory Notes in coordination with local banks and relevant organizations in the private sector – controlling arrears still needs the PFM sector to enhance and reform the commitment control. This includes all necessary regulatory changes in the procurement system and cash management. |Improving commitment control system will help in controlling both of the size of arrears and borrowing from banks.

The PFM system also needs to revise the current accounting and reporting practices until gradually become a full compliant with International Public Sector Accounting Standards

(IPSAS) and Government Financial Classification (GFS). Moreover, internal control systems used by Palestinian government institutions should be upgraded and strengthened not only to ensure compliance and suitability, but also to improve the effectiveness and efficiency of the PFM system. In parallel with these efforts, external audit carried out by

State Audit & Administrative Control Bureau could be enhanced more in order to harmonize its role, composition and work method with the standards set out by the International

Organization of Supreme Audit Institutions (INTOSAI).

As for the revenues, the main theme of enhancing and reforming revenue administration is to encourage the different departments and stakeholders to work together. This shall have a significant impact on expanding the tax base, promote compliance and reduce of arrears.

The process of uniting efforts to improve transparency, tax-payers obligations, tax-payers registration, tax imposition procedures and arrears collection effectiveness, were improved significantly over the past period. One of the uniting procedures for example is RMS which covers income tax and VAT, using a single taxpayer identification number. It is expected that RMS, ASYCUDA and trade transactions registration database of the

Ministry of National Economy be connected together by the mind of 2018.

Still there is much work accomplishing this field, which could be summarised as follows:

Improving transparency, taxpayers’ obligations and duties in terms of clarity and inclusiveness, taxpayers’ access to information of tax obligations and administrative procedures and making sure that effective tax appealing mechanisms are in place.

Improving the effectiveness of taxpayers’ registration procedures and tax imposition by imposing controls on the registration system and improving the effectiveness of the procedures of non-abidance by registration obligations and disclosure in addition to planning and monitoring tax review programs and investigating tax evasion and fraud.

Improving collection of accrued taxes by increasing the rate of levied taxes out of accrued taxes (percentage of accrued taxes collected during that year), the average of the last two fiscal years, the effectiveness of the revenues administration in transferring collected taxes to the treasury and the frequency of reconciliation of accounts among: tax assessment, collection, accruals records and treasury receipts.

Additional current challenges are the current laws, executive regulations and information technology systems which are not sufficient to achieve the vision of an integrated PFM systems. In addition to the political commitment, the achievement of this vision will depend on the integrity, efficiency and dedication of civil servants who take responsibility for various functions in main ministries, departments, agencies and institutions tasked with

PFM. Therefore, considerable efforts need to be exerted in developing capabilities and skills of the Palestinian government’s workforce through systematic and regular training sessions.

Training programs focusing on enhancing PFM should be supported by taking all necessary measures to change the current management culture. This would give more power to executive managers and add more strength to mechanisms in order to ensure accountability.

Currently, not all planned reforms can be pushed through or put in place because financial and human resources are inadequate. In addition, reaching an understanding on the need for these reforms may take time. Accordingly, these reforms will be adopted gradually during the duration of this reform plan, taking into consideration reform priorities.

3-2 Current Situation of PFM in Palestine:

3-3-1 Public Sector: Governance Assessment

3-3-1-1 The Assessment Issued by Ministry of Finance & Planning

PFM system adopted by the Palestinian government has improved substantially in recent years. The PEFA 2013 assessment set a basis for measuring progress, as the last similar assessment was done earlier in 2007. In spite of political and financial challenges that emerged during the intervention period, the Palestinian government was able to improve the overall performance of the PFM system and increase the capacity of the Ministry of Finance

& Planning. In this regard, significant improvements were introduced in some areas, top of which are the comprehensiveness and transparency of budget, financial controlling and auditing.

3-3-2 External Assessments

3-3-2-1 PEFA Assessment:

Results of the PEFA 2013 assessment were generally positive. The assessment proved that there is a progress achieved since the 2007 assessment in a number of areas within the scope of PFM. However, only 11 out of 29 assessed indicators showed signs of improvement. One indicator deteriorated and 11 indicators remained unchanged. The remaining four indicators have never been assessed. In particular, results of indicators related to arrears, predictability of funding and spending restraint were less satisfactory. Overall, the assessment clearly shows the urgent need to reform the PFM system

3-3-2-2 Reports Issued by The IMF:

Two main reports issued by the IMF regarding the PFM situation in Palestine:

1) Ttechnical Assistance Report On Public Financial Management Progress Review

December 2014

2) Public Financial Management Reform Agenda 2014-16

These reports show a necessity to maintain PFM reforms despite the efforts which have been achieved in some areas, however, these assessments and reports still valid to address some of the current the weaknesses identified therein. Main issues that have been identified are as follows:

• Lack of progress in framing a legal and regulatory framework that forms the basis for

PFM, especially the new Organic Budget Law.

• Still there is a need to adopt a plan for developing an MTEF and introduce procedures to formulate budget ceilings in order to manage the budget within realistically available resources;

• The need to progress in activating a commitment control System. This includes, a) fully implantation of the procurement law, B) enhance the cash planning management; c)

Establish a mechanism for releasing financing order based on the cash plans with effective mechanism for consultations and adjustment with revenue and budget managements.

• Reduce the backlog of pending and unaudited financial statements.

• Maintain the current momentum of reducing the accumulated arrears.

• The need to strengthen the legal basis of the tax enforcement.

3-3-2-3 Progress Report Issued by The European Union

The European Union made it clear that the Palestinian government needs to ensure accuracy and transparency in reports related to its financial operations accompanied with a regular and on time publication. This should include a complete audit and publication of 2011, 2012 and 2013 financial statements. Moreover, the European Union highlighted the importance of taking measures to strengthen the role of internal and external audit. It suggested that the

Palestinian Government issues a citizen budget to serve as a supplementary document with all budget documents. In compliance with this, Ministry of Finance & Planning and State

Audit & Administrative Control Bureau completed and published the 2011 and 2012 financial statements. The Ministry also issued the citizen’s budget supplementary document.

3-3-3 Analysing The Current Overall Fiscal And Financial Situation (For the year end 2016)3

On the Fiscal front, the Ministry of Finance and Planning maintained a strong Revenue growth till the end 2016.

On the other hand, Expenditures are growing slightly. Healthy Revenue Performance along with the Expenditures controls reflected a decline in the recurrent deficit at the end of the 3rd quarter of 2016 by 38.4%, compared to the parallel period of 2015.

Despite dwindling Donor Funded Budget support in the first nine months of 2016 which showed a decline of 17% compared to the parallel period of the previous year, which negatively affected the possibility of growth and budget deficit mitigation through funds and grants. (More details on the overall financial situation is highlighted in Appendix No. 3).

3-3 National Anti-Corruption Strategy (2015-2018)

The National Anti-Corruption Strategy consists of the following three main components:

• Protection

• Prosecution

• Raising Public Awareness

To this end, the Palestinian government will ensure that the legal and regulatory framework, which forms the basis of the PFM system, supports these objectives and improves the efficiency of the internal audit in its institutions. Furthermore, the Palestinian government will work on improving the transparency in budget planning, customization, management and audit as well as citizens' access to the relevant information. In this regard, considerable efforts will be exerted to build bridges of cooperation with civil society organizations in formulating, implementing and monitoring anti-corruption measures.

3 The Macro Fiscal Unit - MoFP

4) The National Policy Agenda 2017 – 2022 (PFM sector)

The National Policy Agenda (2017 – 2022) is based on a range of priorities that covers all segments of the public sector. The national priority related to PFM sector is "Effective

Government". This national priority has two main concerns as follows:

4.1 Accountability and Transparency Enhancement. It Includes The Following Policy

Interventions:

4-1-1 Institutionalizing the public sector in order to show more commitment to the Code of Conduct and anti-corruption environment.

4-1-2 Enhancing transparency in the government, including the right to access to information.

4-1-3 Strengthening the role of supervisory, financial and administrative institutions.

4-1-4 Strengthening a performance and results-oriented public management, completing the integration of planning with the budget and shifting to Programme Budgeting.

4-1-5 Integrating social development in government policies, programs and budgets.

4.2 PFM Efficiency and Effectiveness.

4.2.1 Strengthening the PFM and ensuring financial sustainability.

4.2.2 Increasing revenue by focusing on broadening the tax base, improving collection mechanisms, mobilizing external support and rationalizing expenditures.

In order to implement these aforementioned policy interventions, the following procedures should be adopted:

Unifying all current legal and regulatory frameworks in a new Organic Budget Law to reflect the principles of modern PFM.

Developing a medium macroeconomics framework.

Tightening commitment control, adjusting multi-year commitments and improving

Financial Controlling System.

Preparing medium term budget in accordance with the updated new Organic Budget

Law.

Enhancing revenue collection and compliance to reduce evasion.

Establishing a government unit concerned with ensuring a more sustainable and integrated internal audit. This unit will require employing skilled and highly trained professionals.

Ensuring that the State Audit & Administrative Control Bureau’s governing law is in compliance with the international standards of INTOSAI.

Increasing the level of transparency, publishing accurate data punctually and improving accountability mechanisms.

Adopting a highly efficient system for public procurement. It should be linked to the computerized public finance system to insure transparency and integrity of public expenditures.

4.3 Conditions Of Effective Reform Process

In order for the PFM reform to succeed and achieve its objectives, the following conditions shall be met:

A. The PFM reform will be a part of this comprehensive strategy which is approved by all senior-level officials involved in the process.

B. Policies will be specifically determined at the macroeconomic level, including formal institutional arrangements and macroeconomic policy.

C. Political commitment will be demonstrated in support of the reform process at the highest level. In addition, the Ministry of Finance should be given the strongest possible political authority and planning to oversee PFM (meaning that it should be the number one ministry along with the Prime Minister's Office).

D. Key government institutions, including the State Audit & Administrative Control

Bureau, should be given all powers needed to work independently.

E. The reform process should be managed in a way that allows citizens, government officials, and CSOs and private sector be able to understand the rationale and motivations of the reforms.

F. The progress made should be measured and monitored in accordance with a number of predefined indicators and targets.

5) PFM Strategic Objectives (2017-2022)

PFM Strategy is based on the following Strategic Objectives:

Strategic Objective No. 1: Public expenditure complies with the sector strategies that are linked to medium term expenditure program budget

- 1st Theme: Public expenditure is well- planned and its budget is prepared in an effective and efficient integral manner.

- 2nd Theme: budget is executed as originally planned

Strategic Objective No. 2: Abiding by inclusive transparent accounting systems that operate in line with international standards and are connected with internal and external effective control and audit system.

- 1st theme: accounting, reports and data transparency

- 2nd Theme: Effective internal and external auditing and monitoring controls

Strategic Objective No. 3: Public revenues are collected effectively, efficiently and in a just manner

In Section 8 of this document, a set of necessary procedures required to achieve each of the aforementioned strategic objectives will be explained and clarified. These strategic objectives form the vision of PFM sector, as associated with the national polices agenda.

Proposed necessary procedures will introduce current achievements of each objective along with essential steps required to fully accomplish that objective.

Furthermore, it will also include details on expected accomplishments, responsible parties and risk factors that could hinder the completion of the procedure. Under each procedure, there will be a clarification on its link to PEFA Indicators, as appropriate. It is expected that the completion of related procedures will improve the outcome of PEFA Indicators.

Proposed suggestions submitted by partners and donors for each procedure will also be included, as appropriate. Projected costs should not be considered final because they are rough estimates. Accurate costs can only be estimated precisely after preparing a detailed proposal for each intervention.

6) Mechanisms required to achieve the strategic objectives

The vision and objectives embodied in this strategy will be applied by using a number of different means, namely: unification of legislative and regulatory frameworks that form the basis of the PFM, capacity building, re-engineering financial processes, changing the PFM culture in government institutions and improving IT support.

6-1 legislative changes

Many of the proposed reforms will require amendments to existing laws or enacting new legislations and related regulations. At the forefront of these amendments is consolidating and updating the legislative framework of the PFM System. This may involve enacting a new Organic Budget Law and amending several other laws and legislations. The State Audit

& Administrative Control Bureau’s legal framework will be improved to ensure compliance with the international standards and principles of INTOSAI. All measures will be taken –as necessary- to ensure the full application of existing laws.

6-2 Changes in the Culture and Processes of the Management

Transition from Input-based Budgeting to Output-based Budgeting (referred hereto as

Programme Budgeting) will require radical changes in a number of areas, particularly in the regulatory framework. It will also necessitate making new arrangements related to accountability, which will in turn require changes in management culture. This is because assessing managers will no longer depend only on the amount of money spent but also on the results, outputs and progress outcomes, or objectives relating to achievable programs.

In order to achieve this fundamental change, it is expected that processes in the Ministries, Departments and Agencies will be considerably re-engineered. Although it is unlikely that these changes will take place within the period covered in the reform strategy, all priority steps therein must be taken. The relevant follow-up will be included in the framework of internal controls.

6-3 Improving Financial Management Information System:

Financial Management Information System will be updated, when needed, in order to ensure that all of its advantages are fully utilized, including funds control, commitments

(pledges), procurement and asset management. These upgrades will be availed to all

Financial Management Information System users. The increase in use will lead to providing reliable financial information for planning and reporting. The use of electronic signatures and transfers will reduce documents substantially, as the Budget Unit plays a key role in facilitating the Programme Budgeting

6-4 Capacity Building

For the effective implementation of all reforms proposed by this strategy, a significant investment in upgrading employees’ skills and capabilities will be critically needed. To that end, capacity building will be done in a number of different ways, including training workshops, computer training, work rotation and counselling. Facilities of the Palestinian

Public Finance Institute (PPFI) will be fully utilized for this goal. Support provided by development partners will be essential to the success of this important component of the strategy.

6-4-1 Support the PPFI efforts to meet the capacity building needs in the PFM sector.

A well supported PPFI will increase the opportunity to support the implementation process of this PFM strategy through Building the capacity of public servants in PFM fields in general and areas where weakness could be diagnosed. For this reason, the Institute has prepared capacity building plan (2017 – 2019) which focus on the following three objectives:

Strategic objective 1: To develop and improve the capabilities (skills, knowledge and attributes) of the new and existing staff of the PFM sector; enabling them to deliver on their duties efficiently and effectively.

Strategic objective 2: To support PFM policy reforms.

Strategic objective/enabler 3: To develop and maintain the capacity of PFI to deliver high quality development and training services to its constituencies based on international practices.

The implementation of these strategic objectives should be set to be consistent with This

PFM strategy procedures, indictors and standards. As such, PFI Strategy will conduct some minor changes to meet the requirement of this strategy.

6-4-2 Encouraging excellence by providing a bonus for exceptional performances

Employees with performance appraisal exceeding expectations should be recognized and rewarded by the management for their excellence. In this regard, granting certifications throughout the year and/or granting financial incentives based on performance appraisals may constitute a source of encouragement to employees

7) The Monitoring and Implementation Framework

The monitoring and implementation framework will operate at two levels: (i) the oversight is provided by a PFM Strategic Steering Committee, with responsibility for directing and monitoring PFM reform activities; and (ii) this will be backed by a PFM Technical unit that will serve as the Official Coordinator. The roles and functions of a PFM Reform Steering

Committee could be as follows:

Clarify the overall vision, goal, strategy and action plan of the PFM strategy;

Monitor implementation of the action plan against targets and indicators in order to determine the impact and success;

Provide guidance to the implementation;

Resolve any coordination issues arising between Stakeholders;

Facilitate the policy dialogue with Development Partners;

Review and approve PFM Program and annual action plans within the PFM strategy;

Update and brief the Minister of Finance and Planning on progress of PFM strategy;

Receive and review progress reports from PFM strategy Technical Committees;

Monitor reform progress and take action on the quarterly and annual progress reports;

Decide on major institutional, legal, investment or conceptual questions related to the PFM strategy;

Organize Annual Joint PFM Reviews to discuss progress in PFM and approve the next PFM Annual Action Plan;

Perform anything in furthering the PFM strategy objectives.

8) Main components and procedures necessary to achieve strategic objectives

First strategic objective: Public expenditure complies with the sector strategies that are linked to medium term expenditure program budget.

First Theme: Public expenditures are planned and its budget is prepared in an effective and efficient approach.

Interventions of the National Policies Agenda linked to this theme of 1st strategic objective:

- Enhance results and performance-based management; continue integration of planning and budgeting, and shifting to program budgeting.

- Enhance public finance management and ensure financial sustainability.

A. Sustainable fiscal framework & policy-based Financial strategy and budget

Basic information

Planning and budgeting are largely based on revenue estimates, which seem to be optimistic with respect to revenue from the donor community. The donors are among the reasons for such optimism. The disparity between the expenses contained in the budget and actual revenues leaded to an increase in the private sector arrears, public debt and arrears of pension fund. To avoid such risks

Planning and budgeting process should adopt the following procedures:

Procedures Duration

Procedure 1.1 Enhance the Medium-Term Fiscal Framework (MTEF)

Responsibility: Macro-Fiscal Unit and the Strategic Management Group

Jan 2017 – June 2018

Indicator: Adopting and implementing the technical assistance recommendations as detailed in FAD-

IMF report issued in December (2016) and mainly to:

Jan – July 2018

S ta n d a r d s

Establish an Internal Revenue Analysis Committee. Jan 2018 – March 2018

This committee shall Improve communications and coordination between the key stakeholders within the MOFP involved in revenue Forecasting.

Continuous Process

This committee shall strengthen the timeliness and reliability of this analysis and reporting. Continuous Process

Indicator: Macroeconomic forecasts (Linked with PEFA indictor No. 14.1)

Responsibility: Macro-Fiscal Unit

S ta n d a r d s Provide clear forecasts for the macroeconomic indicators that can be examined. Quarterly and yearly Reports

The forecasts shall be attached to the budget documents submitted to the PLC. Jan 2017 To (be continued to the subsequent years)

The forecasts shall be updated once a year at least. Jan 2017 To (be continued to the subsequent years)

The forecast must cover the budget year and two subsequent years. Jan 2017 To (be continued to the subsequent years)

Indicator: Fiscal forecasts (PI-14.2) -

S ta n d a r d s

Provide forecasts for the key economic indicators of the previous year, budget year and two subsequent years. The forecasts shall include revenues classified by type, total expenditure, and fiscal deficit.

Jan 2017 To (be continued to the subsequent years)

The forecasts and their assumptions, as well as explanation of the main disparities in forecasts compared to previous budget year, shall be submitted with the budget documents.

Jan 2017 To (be subsequent years)

Indicator: Analysis of alternative fiscal scenarios (PI-14.3) -

S ta n d a r d s Prepare and publish more than one scenario of fiscal forecasts, based on alternative macroeconomic forecasts, with the key forecasts. These fiscal forecast scenarios, incorporating an analysis of debt sustainability, are prepared by the GDB, in conjunction with the MFU, for presentation to the Strategic

Management Group and for subsequent inclusion (together with underlying assumptions) in budget documentation submitted to Cabinet.

Jan 2017 To (be continued to the subsequent years)

Indicator: The fiscal impact of the new policy proposals (PI-15.1) -

S ta n d a r d s

Prepare fiscal impact expectations of all proposals leading to policy change in revenues or expenditure

(including for major investment projects) and targets for the fiscal deficit of the budget year and two subsequent years, and to be presented to the Strategic Management Group so as to submit by the Cabinet to the PLC.

June 2017 - Dec

2017. And to be continued for the subsequent years.

This fiscal strategy includes forecasts for revenues based on revenue policy, and targets for the fiscal deficit and for aggregate expenditure.

June 2017 - Dec

2017. And to be continued for the subsequent years.

The fiscal strategy includes forecasts for revenues based on revenue policy, targets for the fiscal deficit and for aggregate expenditure, plus targets for changes in the stock of financial assets and liabilities

Jan 2018- Dec

2019, And to be continued for the subsequent years.

Indicator: Adopt fiscal strategy (PI-15.2) Jan 2018- Dec 2019

S ta n d a r d

MoFP and its PFM partners shall prepare and publish fiscal strategy that includes specific objectives and indicators and linked to timetable. The strategy shall consider the budget year and two subsequent Jan 2019- Dec

2019, And to be

B. Preparing of Budget

Basic information

It is difficult to provide accurate revenue expectations. This contributes to lack of accurate expectation of supposed maximum total expenditure, which the budget used to build on. The difficulty is mainly attributed to Israeli arbitrary punitive decisions and to the drop in donors’ budget support. Additionally, budget is prepared in accordance with the “bottom-up approach.” The strategic plans of LMAs do not constitute base for determining their maximum expenditure limits. This exaggerates expenditure requirements to exceed the affordable. The top-down and bottom-up approach must be adopted to define the maximum level of total expenditure, through medium term fiscal framework and maximum levels of ministries’’ spending, which are allotted using basic estimates. The maximum level of total expenditure and maximum levels of total ministries’ spending helps define the available fiscal space, if any.

Though the medium term fiscal framework is prepared at the start of budget cycle, it shall not be possible to enhance it on the basis of maximum levels of total expenditure in light of lack of maximum individual expenditure levels for LMAs. The preparation of the medium term expenditure framework on the basis of the medium term fiscal framework shall improve score

C of the previous framework (PI-12) years. It will be prepared by the GDB, in conjunction with the MFU, for presentation to the Strategic

Management Group and for subsequent presentation to Cabinet.

continued for the subsequent years.

Indicator: Monitor fiscal outputs (PI-15.3) Jan 2018- Dec 2019 S ta n d a r d s

Prepare monitoring reports of the implementation of the fiscal strategy, the extent of diversion from the specified indicators. The reports must establish alternative plans to bring implementation back on track.

These will be prepared by the GDB, in conjunction with the MFU, for presentation to the Strategic

Management Group and for subsequent presentation to Cabinet.

Jan 2019 to Dec

Publish the implementation Report (on the Fiscal Strategy Progress) with Annual budget.

Jan 2020 –June

Procedures Duration

Procedur e 1.2

Designing of a comprehensive draft of new Organic Budget Law

Responsibility: General Directorate of Budget, Strategic Management Group

Background: The existing PFM legislative framework needs to be more harmonious and consistent. Presently, legislations do not support applying a number of proposed important modifications to budget planning, execution, accountability, reporting, and supervision. These are required to be reviewed in an integrated Budget Law. This may provide consistent base for PFM, consistency with sound relevant international practices, and most importantly facilitating implementation of necessary reforms. This will also lead to enhancing efforts to preparing policy-based budget, budget execution forecast, accountability, control, recording and auditing accounts.

June 2018 –

Dec 2021

Indicator: Draft a comprehensive organic budget law ready for endorsement. -

S ta n d a r d s

Review and assess the support that current framework provides to planned PFM reforms. June 2017 –

Dec 2018

Review relevant sound international practices. June 2017 –

Dec 2018

Define and review the required changes according to M&E of PFM strategy 2017-22. June 2018 –

Dec 2020

LMAs submit their inputs Jan 2021- June

Procedur e 1.3

Institutionalization of the preparation, formulation, and reporting processes.

of medium term budgeting, Responsibility: General Directorate of Budget

Background: Defining the basic expenditure of LMAs is important to ensuring developing the medium term expenditure framework (MTEF). The basic expenditure means those necessary for LMAs to continue with the tasks that are modified on the basis of defined changes –increase in beneficiaries … etc. excluding new policies.

Indicator: Budget formulation, execution and reporting adopt admin administrative, economic, and program classifications. Where the economic classifications are consistent with all levels of GFS classification. And the budget programs are linked with to the sub-function level of COFOG Classification. (PI-4.1)

Jan 2018 to

June 2022

S ta n d a r d s

Economic classifications is consistent with GFS at 4 digits for revenues and 3 digits for expenditure, and otherwise disaggregate (for both) to 6-digit level.

Jan 2018 to Dec

Preparing a work plan to identify and tackle instances of misclassifications. This includes reclassifying some codes, provide transparency in the labels of all codes, remove redundant codes, add new codes when necessity arise)

June 2017 to

Dec 2018

Implement the classification work plan (bring the work plan into implementation by revising the economic classification at 5-digit level for revenues and at 4- digit level for expenditures.)

Jan 2019 to

June Dec 2020

Budget formulation, execution and reporting adopt program classification in consistency with the sub-function level of COFOG classification.

Jan 2018 to Dec

Administrative, Economic and program classifications are consistent with annual budget (current, Capital and project) Process

Budget classification is consistent with chart of accounts (Procedures and formats for budget execution to be recorded by program and output, this should ultimately lead that these outputs will be introduced to the Budget execution model FMIS)

Jan 2019 - 2021

Indicator: Budget preparation (PI-17)

S ta n d a r d s

Calendar of medium term budget preparation is prepared and complied with.

Budget Calendar for 2018 setting out the process for preparation and approval of the 2019-2021 Budget - got approved by the Minister of Finance and Planning for publication on the Ministry website before the start of the fiscal year (2018)

Jan 2017 to

Dec 2018

Cabinet submits annual budget to the PLC two months at least before start of fiscal year (on or before Nov

1st.

The Budget Circular (Parts 1 and 2) contains detailed budget preparation instructions, schedules and deadlines (consistent with those in the Budget Calendar) and Medium Term Ministry Budget Preparation

Ceilings approved by the Cabinet and is issued to ministries on or before July 1st. (2018)

Jan 2017 to

June 2018) e 1.4

Developing a more detailed forecast on medium-term expenditures (future estimates) – (2017-2019 & 2020-

2022)

Responsibility: General Directorate of Budget

Background: The maximum levels of actual expenditure of LMAs, which are based on the basic estimates, and include changes of measurements that agree with the maximum level of total expenditure, allow for preparing the medium term expenditure framework and defining any available fiscal space for new policies.

Indicator: Medium term expenditure framework Preparation (P-16)

Responsibility: General Directorate of Budget n d a r d s Estimates of Medium-term expenditures (PI-16.1)

- Prepare procedures to guide the ministries on how to prepare medium term expenditures estimates by program and 2-digit economic classification in the ministry budget requests. (2017).

- Annual Budget book is redesigned accordingly to include the medium term expenditures estimates by program and 2-digit economic classification (2018).

- MoFP submits a medium term expenditures estimates by program and 2-digit economic classification to the

Cabinet.

In 2019 (Jan

2017 to Dec

2018)

Ceilings of Medium-term expenditure (PI-16.2)

- Medium Term Total Budget Preparation Ceilings and Medium Term Ministry Budget Preparation Ceilings are presented to Cabinet and incorporated in Budget Circular Part 2 for distribution to ministries on or before July 1st. (2017)

In 2017 (Jan

2017 to Dec

2017)

Alignment of Medium-term budgets with sectoral strategies (PI-16.3)

Costs of these strategies should be designed in alignment with the prepared medium term ministries` budget.

In 2019

(June 2017 To

Dec 2018)

Medium-term budgets are consistent with outruns of the previous Medium term Frameworks (PI-16.4)

- Guideline to explain variances between the current and previous medium term budgets. This needs to conduct a comparison between Budget Preparation Ceilings by ministry for Years 1 and 2 as set in in the current year and Budget Preparation Ceilings by ministry for Years 2 and 3 as set in the previous years. This explanation will be annexed within the Budget Circular Part 2.

In 2019

(Jan 2017 to

Dec 2018) e 1.5

Developing and enforcing budgeting procedures to determine, assess, chose the public investment projects

Responsibility: The general directorate of the budget / International Relations and Projects

Background: Public investment program projects should be consistent with sectoral strategies, and should be feasible against funds availability. And then it will be possible to submit a list of projects ranked by priority to the cabinet, for them to choose projects that would incorporated within the budget. This needs to institutionalize a comprehensive system linked to the Budget Preparation’s procedures manual, related to (development) project management to cover the entire project cycle, starting from the proposal submission mechanism to costing, funding, implementation, and evaluation.

Some work should be carried out concerning the organization of public and development programs management, linked to other sectoral strategies. It should be noted here also that those sectoral strategies are still weak in terms of the ability to clarify the running costs that will be incurred on investment projects, which increases the size of the financial risk. As the previous indicator (PI-12) (dimension-iii), which tackles the existence of an integrated plan for the investment aspect (development funding), has scored C.

deepening the integration of the public investment program in the budget process and the medium term expenditure framework, will ensure that these impacts resulting from recurrent costs of investment projects are taken into consideration during the decision making process, in addition to including them to the framework. The dimension

(iv) of the same indicator-which tackles linking between capital and running estimates- has scored (D).

Therefore, it is essential to develop a comprehensive data base for the development projects, in order to start avoiding this gap.

Indicator: good governance of Public Investment Management. (PI-11)

Jan 2017- 2022

(And to be continued to the subsequent years) ta n d a r d s

Design of the State of Palestine Project Cycle Management System - approved by the Minister of Finance.

This implies of preparing national Procedures manual to select and implement development projects.

Jan 2017 to Dec

Institutional Arrangements for Project Approvals in operation. This means a Technical Committee for

Project Approvals within GDB of MoFP in operation from 2017 until the end of 2019

Technical Committee for Project Approval within MoFP with other stakeholders co-opted in operation

Jan 2019- Dec

(And to be continued to the subsequent years)

Project Cycle Management System Business Process Procedures for Identification of Projects made operational in Budget Circular Parts 1 and 2

Jan 2017- Dec be continued to the subsequent years)

All SoPG-funded projects & SoP-donor funded projects & donor-funded projects in Ministry Medium Term

Budget Requests are approved by the relevant Project Approval Committee.

Jan 2017 to

Dec 2017 (And to be continued to the subsequent years)

All remaining donor-funded projects recorded in the DARP System are reviewed by the relevant Project

Approval Committee and linked to a budget program

2017 (And to be subsequent years)

Project Cycle Management System Business Process Procedures for Preparation and Appraisal of Projects made operational in Budget Circular Parts 1 and 2 continuous

All SoPG-funded projects & SoP-donor funded projects & donor-funded projects in Year 1 of Ministry

Medium Term Budget Requests are approved by the relevant Project Approval Committee

Project Cycle Management System Business Process Procedures for Implementation of Projects (Expenditure and Output delivery monitoring) made operational in Budget Circular Parts 1 and 2

Jan 2018 to Dec

Project Cycle Management System Business Process Procedures for Evaluation of Projects made operational

Jan 2021 To

Dec 2021

Financial reporting in operation for SoP-funded projects & Joint SoP-Donor funded projects

Financial and output delivery performance reporting in operation for SoP-funded projects & Joint SoP-

Donor funded projects

Jan 2019 to Dec

Financial reporting in operation for Donor-funded projects recorded in the Chart of Accounts Jan 2018 to Dec

Financial and output delivery performance `reporting in operation for Donor-funded projects recorded in the

Chart of Accounts

Jan 2019 to Dec

C. Program Based -Budgeting

The government has come a long way in the process of preparing and implementing the Program Budgeting, where executing program budgeting will lead to assessing public services’ effectiveness according to certain outputs, in addition the efficient use of resources in the implementation of programs, rather than simply adjust their inputs

Also moving forward in the implementation of program budgeting will provide a logical framework for the management and decision-making processes, and will build the basis for accountability and transparency of the government’s implementation of programs. This requires to gradually delegate powers at the program level, and will negatively affect the positive results expected from launching program budgeting, if inappropriate restrictions are imposed to the use of program allocations.

For example, all budget items, related to administration (administrative line items), can be merged, except for wages and salaries, within one item under running costs (single running costs), which would provide program managers with greater flexibility in the use of those funds.

Public expenditure and financial accountability assessment framework does not particularly refer to program budgeting.

Previous Performance indicator (PI-5), which related to budget classification is the most suitable for this purpose.

Performance, under this indicator from classification D of the year 2007 to classification B in 2013, has improved. As the general directorate of budget are seeking to achieve the result (A).

Procedures Duration

Procedure

1.6

Introducing organization structural changes in order to enforce the implementation of program budgeting.

Responsibility: The General Directorate of Budget

Annually

Indicator: Issuance of an annual report on how coherent functions formations’ table is with the budget programs, whereas the report should include:

Annually n d a r d s The report includes specified recommendations with the necessary changes, in addition to implementing previous recommendations.

Annually

In the follow-up report on implementing the recommendations that are not implemented, obstacles for implementation are pointed out.

Annually

Procedure

1.7

Prepare new budget adjusted –Programs for MoFP and SAACB in consistent with this PFM Strategy.

Res…