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World Bank: Lebanon's public finances still lack transparency

19 July 2010

BEIRUT: A World Bank assessment of public financial management (PFM) in Lebanon indicated that progress on reforms has been slow and challenging, and that reform programs have been repeatedly interrupted by political unrest, as reported by Lebanon This Week, the economic publication of the Byblos Bank Group.

The assessment covered the credibility of the budget; comprehensiveness and transparency; policy-based budgeting; predictability and control in budget execution; accounting, recording and reporting; and external scrutiny and audit.

It said that the most successful PFM reforms have been in tax administration, especially the introduction of the value added tax. But progress on the expenditures side has been more limited, although some reforms were introduced in the 2005-2007 period despite the impact of the protracted political stalemate that also paralyzed legislative activity. It noted that reforms were at the center of proposals, draft laws, or pilot projects in the key areas of budget coverage, credibility, preparation and debt management, but were not approved or fully implemented.

It added that The Paris III reforms program incorporated reforms to elements of the PFM system, mainly targeted towards consolidating the budget. But it noted that, even though the Paris III reforms were endorsed by the government, most of them have not been implemented due to the difficult political environment.

In terms of budget credibility, the World Bank indicated that macroeconomic assumptions are not used when writing the budget, and the Ministry of Finance does not have a formal unit dedicated to the development of a macroeconomic framework. As a result, the budget process does not set budget envelopes for line ministries based on macroeconomic perspectives or sectoral objectives. In addition, budgets are prepared from the bottom up, with no consideration of multi-year planning and sustainability. The assessment noted that this approach results in a high degree of uncertainty in the budget process and is at odds with much-needed fiscal efficiency and discipline.

In terms of comprehensiveness and transparency, the World Bank noted that a fundamental weakness in Lebanon’s PFM is the insufficient budget coverage and transparency. It said the budget excludes foreign financed projects, and a number of activities are included as an annex to the budget document but fall outside the reported budget and are not fully disclosed to Parliament when disbursed.

It noted that the Finance Ministry has recently started to expand the coverage of the budget to include foreign financed investment, as it drafted a budget law in 2007 allowing for the integration of the largest extra-budgetary entities such as the Council for Development & Reconstruction and the Higher Relief Council.

However, it did not include the extra-budgetary expenditures of other large entities such as the National Social Security Fund or the Independent Municipal Fund. In addition, the draft law does not address the issue of incomplete reporting to Parliament on the 55 state-owned enterprises, especially that their financial situation has major implications for the country‘s fiscal position.

Regarding policy-based budgeting, the assessment noted that the budget does not realistically represent policy priorities, as a full medium-term expenditures framework (MTEF) is still lacking. It added that what the government refers to as an MTEF is only an aggregate fiscal framework communicated in the budget circular, while an MTEF usually provides the link between the budget and government policy by translating the cost of sectoral strategies into budget allocations with spending limits, revenue forecasts and fiscal targets. It noted, however, that a pilot MTEF is being implemented at the Ministry of Education and is introducing performance and results-oriented budgeting. It added that weak flow of information between the Finance Ministry and the various implementing bodies, along with an inadequate level of consistency of data on the budget, undermine efforts to make the budget a useful and credible tool for policy implementation.

In terms of predictability and control in controlling the budget, the World Bank declared that spending by extra-budgetary entities and state-owned enterprises further undermines budget control, as these bodies operate outside the regular budget process and their spending is therefore not overseen by the the Finance Ministry. It said that any overspending by these entities negatively impacts the rest of budget spending both directly and indirectly by crowding out resources for projects already outlined in the budget. It added that the practice of off-budget Treasury advances increases the high degree of unpredictability, leading to large differences between actual expenditure and budgeted amounts. In addition, the ministry continues to rely heavily on money carried over from previous budget, against the principle of annual budgeting and undermining budget execution.

More positively, the World Bank said reporting on the budget has improved, as the Finance Ministry provides annual and quarterly financial data, monthly statistical reports, and annual economic and fiscal reports. The revenue agencies also post relevant tax and customs information on policies, practices and statistics on their websites. Additionally, the annual budget report includes a section on aggregate debt levels. But budget execution reports are not timely as they are submitted to Parliament two years after the fiscal year, falling short of international best practices of six to nine months from the end of the year. – The Daily Star

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