Good management of public finances is an essential element to ensure efficient and transparent use of public resources and maximize the impact of public policies. In an attempt to answer these questions, E&M heard from the Technical Assistance Coordinator of the International Monetary Fund (IMF) in Mozambique, Esther Palacio, who has been following these reforms for the last ten years, bringing international experience.
Esther focused on areas which have shown positive changes and highlighted encouraging progress, but stressed the need to consolidate and enhance the reforms in a context marked by the gradual transition of the economy towards the production of liquefied natural gas (LNG), the increase in fiscal risks and the decentralisation of provinces and districts.
From a historical perspective, which reforms have helped most to structure the management of public finances in Mozambique?
After independence in 1975, efforts focused on transforming the Mozambican public administration, which was largely based on rules and procedures of colonial origin, to adapt it to the new, more centralised national planning and management system. After the internal conflict in 1992, the country embarked on a gradual reform process, with substantial help from development partners, to modernise its public finance management and make it more transparent and efficient.
An Integrated System of Financial Administration (known by the name SISTAFE) was thus created to organise and regulate the processes of programming, management, execution, reporting and control of the public purse, which, with the implementation of the Single Treasury Account (CUT), enabled payments by the State to be processed with greater speed and transparency, directly into the bank accounts of the beneficiaries. It is also worth highlighting the creation of the Tax Authority, which resulted from the merger of the tax and customs areas in favour of integrated management to increase revenue collection, and the registration of taxpayers through a Unique Tax Identification Number (NUIT).
Focusing on the last ten years, what would you say are the main reforms that have had the greatest impact on the management of public finances and which have been supported by the IMF?
The first reform I would like to highlight has to do with the consolidation of SISTAFE and the effective change in management practices to make full use of it. This system already covers the main management areas and is available even in the most remote areas of the Country. Now, besides using it to process payments and produce reports, its use is being promoted to handle each phase of expenditure at the time it is incurred, which brings greater control and transparency, but also more predictability for managers to execute in an efficient way.
Let us now take a practical example of the impact: supplier arrears have been a constant problem because contracts were signed outside the system without a consolidation of the commitments made, and there was no information to anticipate cash requirements. These arrears ended up on the back burner, without management accountability, and had to be borne from the following year’s budget, inflating prices. With this new approach, suppliers receive proof of resources, the Treasury has visibility to prepare the necessary funds, and any arrears are recorded in the accounts. This is a complex and gradual reform involving virtually all areas of management, but the good news is that it is finally underway.
Rumour has it that technical assistance even extends to tax planning issues…
This is the second reform to highlight, as a result of a budget process that is better interconnected with public policies and more realistic. Now, the State Budget is based on a multi-year perspective and takes into account the various fiscal risks of the public sector. A Fiscal Risks Directorate has been created, which prepares reports that alert the Government of the future implications of making certain commitments.
For example, when approving a guarantee to support a public company, entering into a Public Private Partnership or deciding on an investment that will need high maintenance expenses. A fiscal risk statement is published annually which anticipates possible deviations in macro fiscal projections (for example, by a depreciation of the exchange rate or an increase in inflation), but also risks arising from public corporations, the banking sector and other decentralised management bodies. Identifying possible risks allows us to move from a state of recurrent emergency to designing a more realistic budget capable of reacting to situations of uncertainty. As in our own lives, this helps to prepare and develop contingency plans, where before we simply reacted without guidance to adverse situations.
And what was being done to strengthen the capacity to mobilise domestic revenue?
The third reform would group together the efforts to consolidate the tax and customs system implemented by the Revenue Authority, which has strengthened its leadership, management and strategic planning capacity with support from the IMF. The aim here is to facilitate voluntary compliance by taxpayers.
In view of the whole process of the hidden debts, how do these reforms help the country to avoid repeating the same mistakes?
All the reforms mentioned are of paramount importance here. The first one immensely diminishes the risks of expenditure taking place outside of a well-structured and transparent budget process. With electronic and real-time recording, the Government is in control of the commitments made and can restrict them to avoid the accumulation of arrears, and the auditors find it easier to detect possible cases of corruption, which discourages the execution of any expenditure which has not been properly budgeted. The second helps to detect systemic risks and strengthen the systems, rules and institutions involved in public finance management, going beyond central government. Rules for issuing public and guaranteed debt have been revised, with clearly defined limits and authorisation levels, and also the rules for setting up and managing public corporations. The third helps to reduce possible cases of corruption in revenue collection.
And I want to add, also, an important reform that happened in the part of the evaluation of investment projects that is anchored by the National Investment System
Investment System (SNIP). Now the project portfolio results from transparent selection processes based on analyses of sustainability and public interest, and only projects accepted in this portfolio are eligible to be integrated in the State Budget. The mere availability of funding no longer allows the manager to proceed in isolation.
What has been the IMF’s role in supporting these reforms and how does it collaborate with the other partners?
Technical assistance is one of the three main pillars of the support we give to our member countries and Mozambique has been one of the main beneficiaries worldwide. The IMF offers a reservoir of international knowledge and good practices in public management, which allows us to learn from other countries, but also to share our own experience.
Our role is essentially strategic and has helped the Government to identify and catalyse important reforms that we support with ad hoc technical missions, training and even resident experts. We have a particular focus on selecting reforms that are critical but, at the same time, feasible.
We look, for example, at whether they contribute to macro-fiscal stability, whether they have domestic support from the government, whether the sequence of implementation matches domestic capacities and whether they are well coordinated with other partners. Most of the time our contribution is not enough and we develop partnerships to help the Government deliver these reforms. This month, for example, we are signing a memorandum with the State Secretariat for Economic Affairs (SECO) in Switzerland to implement a three-year technical assistance project, mobilising about $3 million, representing the second largest technical assistance project of our tax department at headquarters, which allows us to continue the macro tax reforms initiated with support from the governments of Denmark and Belgium.
What has been the dynamics of these reforms over the years?
When my position was created some ten years ago, there was a great motivation for the reforms and a strong willingness to receive technical assistance. But as the reforms consolidated, the missions became more and more specific and intermittent, bringing less visible results. The absorptive capacity of the government was then questioned and a certain level of reform fatigue seemed to emerge. Perhaps there was a bit of an exacerbated confidence there that the near and prosperous future would not require such a marked reform effort.
With the emergence of hidden debts in 2016 and the consequent reduction in external financing of the budget, public managers saw public finance management as a key tool to maximise the use of the limited resources available. Reforms were accelerated in areas linked to debt and public investment management, fiscal governance and transparency, programming and performance budgeting, and fiscal risk management. The focus of the reforms, initially placed on the management of central government resources, has progressively embraced other areas of public sector financial management, including also public and majority-owned companies.
What are the main challenges for financial management reform going forward?
Mozambique is on the verge of becoming a major LNG producer. With the right policies, this resource can generate lasting gains and help reduce poverty substantially. The country is committed to the transparent management of future revenue flows from extractive activities and has already established a solid foundation for transparency in its legal framework, the fiscal regime for natural resource companies, and the integration of resource revenues into the budget.
However, the country still needs to strengthen, as soon as possible, the public institutions involved in the transparent management of gas resources, including the definition of a fiscal responsibility strategy with clear rules to protect the budget from the strong volatility in these revenues, and to manage the savings for the benefit of future generations. On the other hand, Mozambique is gradually moving ahead with fiscal decentralisation of provinces and districts. These new challenges require major adjustments to the current system, and should therefore be included in the national public finance management strategy, which is being reviewed and will guide the next stages of reform.
