Bhutan
Medium Term Expenditure
Framework Note
Prepared as a Part of the
Bhutan Public Expenditure Management
Workshop
August 16-20, 2004
1.
Introduction
As a part of ongoing efforts to strengthen public expenditure management, the Royal
Government of Bhutan (RGoB) seeks to implement rolling budgets and is exploring the
development of a Medium Term Expenditure Framework (MTEF). To this end, a delegation
from the RGoB visited the World Bank in August 2004 to participate in a workshop jointly
organized with Georgia State University, and this note is a key output of the workshop.
The initiative was part of a United Nations Development Program (UNDP) project, which
enabled RGoB officials to attend a three-week course on public budgeting at the Andrew Young
School of Policy Studies (AYSPS) of Georgia State University. The course involved two weeks
(August 2 – 14, 2004) on public budgeting and fiscal management at the AYSPS, followed by a
third week (August 16 – 20, 2004) at the World Bank, focused on generating a better
understanding of what would be involved, specifically in Bhutan, in preparing an MTEF. It
should be emphasized at the outset, that the existing budget processes in Bhutan (and MTEFs),
involve the joint effort of many RGoB staff from different departments and line agencies, while
the group participating in the workshop was small and stemmed from the Department of Budget
and Accounts, the Department of Planning (both of the Ministry of Finance (MoF)), and the
Ministry of Home and Cultural Affairs. Hence, a deeper discussion of the possibility of
preparing an MTEF in Bhutan would require wider participation, including, for example, the
Policy and Planning Division, emphasizing the macroeconomic framework, or the Department of
Revenue and Customs, generating revenue forecasts, or the Ministries of Education and Health,
linking policies, resources and means by sector.
This note describes the RGoB’s motivation for seeking budget reforms and the possible role of
an MTEF in helping the RGoB meet its PEM goals, as was discussed in some detail at the
workshop. The note is presented as follows: Section 2 highlights some key budget issues in
Bhutan and the RGoB’s wider budget reform effort. Section 3 provides a brief overview of
MTEFs. Section 4 discusses the first step towards developing an MTEF, the preparation of a
Medium Term Fiscal Framework (MTFF), and what this might look like in Bhutan, including: (i)
a macro-framework, helping underpin revenue estimation, (ii) a set of strategic fiscal objectives,
laying out fiscal policy over the medium term, and (iii) a resulting aggregate resource envelope,
moving away from needs to an availability based budget process. Section 5 provides a review of
expenditure prioritization, noting some differences between the existing five-year planning
approach and the MTEF approach. Section 6 discusses what can be expected by the line
ministries, and what is needed from the line ministries in order to effectively implement MTEFs.
Section 7 concludes by describing the key factors of successful MTEF efforts, and some possible
next steps in Bhutan.
2.
Budgeting Issues in Bhutan
The Ministry of Finance (MoF) constantly strives to improve the budget process in Bhutan. To
this end, the single volume Financial Manual of 1988 was revised and expanded into separate
manuals on budgeting, accounting, procurement, and revenue and property management, which
1
together comprise the Financial Rules and Regulations 2001 (FRR-2001). The revised budget
manual seeks to link the five-year plans more closely with the annual budget process through the
adoption of three-year rolling budgets. Although the RGoB has not yet been able to implement
rolling budgets, the step is viewed as central to helping the RGoB address several concerns,
including: (i) strengthening macro-fiscal sustainability, (ii) improving resource allocation, (iii)
ensuring an appropriate split between recurrent and capital expenditures, (iv) implementing the
RGoB’s decentralization plans, and (v) bolstering donor engagement.
2.1
Macro-fiscal Stability
In recent years, the fiscal deficit has been the equivalent of 5-10 percent of GDP, and in 2003/04
and the budget for 2004/05, the RGoB has been unable to meet its long held objective of
covering recurrent expenditures through domestic revenues. Domestic financing for the budget
deficit is raised through the use of overdraft facilities and the issuance of government bonds.
The Bank of Bhutan extends overdraft facilities to the government through the Ways and Means
account, and together with the Bhutan National Bank and the National Pension Provident Fund,
it purchases government bonds. This may be crowding out the private sector (by reducing the
availability of bank finance for private investments), and could eventually lead to inflation. In
addition, the RGoB is concerned about the attendant debt dynamics. Although most of the
growth in debt stocks is associated with the development of the Tala hydropower project, the
public debt rose from 41 percent of GDP in 2000 to about 74 percent of GDP in 2004. Moving
to multi-year budgets and setting long-term fiscal policy goals would help ensure continued
macro-stability in Bhutan.
2.2
Resource Allocation
The RGoB does not have a systematic set of resource allocation criteria, nor does it have an
equalization method to apply in deciding budget ceilings. The RGoB currently resorts to
detailed budget reviews and makes provisions on a line-item basis. This method of resource
allocation to line ministries is cumbersome and time consuming, and the line ministries do not
have flexibility in utilizing their budget. Budget allocations are determined on an incremental
basis, undermining sectoral prioritization since most projects run for several of years. It should
also be noted that the capital budget is almost entirely donor funded, resulting in budget
allocations based on donor commitments. Moving to multi-year budgets would help strengthen
donor coordination and engagement.
2.3
Capital and Recurrent Expenditure
The RGoB has given high priority to capital expenditure, as it seeks to expand infrastructure and
access to public services. For example, capital expenditures in the health and education sectors
are to absorb about 50 percent of these sectoral budgets in the current fiscal year. As these
sectors typically require subsequent large recurrent expenditures in order to make full use of the
newly created assets, the current spending pattern raises questions about the sustainability of
ambitious government programs. As noted above, the RGoB is finding it difficult to meet its
objective of financing recurrent expenditures from domestic revenues, a trend that may intensify
2
in future. The RGoB anticipates that implementing rolling budgets will help ensure that the
recurrent cost implications of making public investments are duly considered.
2.4
Decentralization
Fiscal decentralization provides greater opportunities for establishing policy priorities and
planning through consultative budget formulation processes, and can improve the efficiency of
resource allocation. By virtue of their proximity, Dzongkhags have superior information on
local needs for public services and are better placed to respond. To effectively implement the
decentralization policy of the RGoB, the Dzongkhags will need sufficient authority to manage
district level budgets, and predictable inter-governmental transfers. Rolling budgets will be
helpful in this regard.
2.5
Donor Engagement
Donor assistance to Bhutan has increased dramatically over the past two decades, both in the
number of projects and the amount of funding, and donor financial and technical resources are
important to the successful implementation of national plans. As noted above, most donor
financing is used for investment projects, lasting several years. Multi-year budgeting will help
improve expenditure prioritization, mobilize donor support for some recurrent costs, strengthen
established ties, and help seek new areas of cooperation with potential new donors. Indeed, the
initiative for implementing rolling budgets came from the Department of Aid and Debt
Management (DADM) of the MoF to help mobilize external assistance.
3.
The MTEF Approach
As described in the World Bank’s Public Expenditure Management Handbook (1998, p. 46):1
An MTEF is a whole-of-government strategic policy and expenditure framework
within which ministers and line ministries are provided with greater
responsibility for resource allocation decisions and resource use. The key to a
successful MTEF is that institutional mechanisms assist and require relevant
decision makers to balance what is affordable in aggregate against the policy
priorities of the country. The MTEF consists of a top-down resource envelope, a
bottom-up estimation of the current and medium-term costs of existing policy
and, ultimately, the matching of these costs with available resources. The
matching of costs should normally occur in the context of the annual budget
process, which should focus on the need for policy change to reflect changing
macroeconomic conditions as well as changes in strategic priorities of the
government. Conservatively defining the medium-term aggregate resource
envelope should help change the psychology of budgeting from a "needs" to an
"availability" mentality as well as enhance the predictability of resource flows
and policy over the medium and short term.
1
Available at: http://www1.worldbank.org/publicsector/pe/handbooks.htm#english.
3
This process can be divided into several steps or stages, and the workshop presented the
preparation of an MTEF in five steps:
 Step 1. Macroeconomic and public sector envelopes.
 Step 2. High-level policy: aligning policies & objectives under resource constraints.
 Step 3. Linking policy, resources, and means by sector.
 Step 4. Reconciling resources with means.
 Step 5. Reconciling strategic policy and means.
These steps are described in greater detail in the workshop materials, the Handbook and
elsewhere, and will not be repeated here. Instead, the following sections describe the main
features of some of the first steps for the case of Bhutan.
4.
The First Step: Preparing a Medium Term Fiscal Framework
The first step noted above is typically referred to as a Medium Term Fiscal Framework (MTFF),
and is central to the subsequent development of a full MTEF linking policy objectives, means
and expenditures by sector. Preparing an MTFF involves establishing a macroeconomic
framework, estimating revenues, issuing a statement of strategic fiscal policy, and establishing a
budget envelope, all for the MTEF period (typically 3 years).
4.1
Macro-framework
The development of a macro framework is a useful exercise in its own right, strengthening policy
and helping to foster development. It also underpins sound revenue forecasts, as many sources
of revenue depend heavily on particular factors. Revenues from customs depend on imports;
revenues from corporate and income taxes depend on GDP growth; and revenues from tourism
taxes depend on the number of tourist arrivals, among other factors. Hence, maintaining a model
of the Bhutanese economy that provides a macroeconomic framework and generates forecasts of
key variables like imports and tourist arrivals, is central to making revenue projections and
developing an MTEF.
For the purpose of discussion, a rudimentary macroeconomic framework was prepared in the
workshop (Table 1).
4
Table 1
Bhutan: PEM Workshop Exercise (August 2004)
Illustrative Medium-Term Macroeconomic Framework (2003/04-2006/07)
2001/02 2002/03 2003/04 2004/05 2005/06
Output and prices:
(in percent)
Nominal GDP at factor cost (millions of Nu)
Real GDP Growth
CPI (annual percent change)
2006/07
25733
6.5
3.2
29282
7.6
2.3
32,796
7.0
5.0
36,895
7.5
5.0
41,692
8.0
5.0
47,320
8.5
5.0
-5.5
-5.3
-10.7
-11.0
-6.0
-4.5
-1.8
-4.0
5
5
5
10
5
10
5
5
5
5
2,171.2
2,127.9
-2.0
1,978.4
-2.4
2298
8
2137
8
2482
8
2308
8
2681
8
2492
8
2895
8
2692
8
6087
10.9
8.5
7.6
339
18.4
6574
8
9.1
7
359.1
18.3
7100
8
10
7
400
20
7668
8
10
7
420
20
8281
8
11
7
440
20
Balance of payments (in percent of GDP):
Current account balance (incl. grants)
(In percent of GDP)
Export growth (percent)
Import growth (percent)
Memorandum items:
Sales of Chukha Hydropower
(percent change)
o/w exports
(percent change)
Revenue from electricity sales
Tourist arrivals
(percent change)
Tourist receipts ($ million)
(percent change)
Gross foreign reserves (millions of US$)
(In months of imports)
2,027.3
5490
7.9
316.6
20.2
After reviewing recent economic developments, estimates were made about what the next few
years might look like in Bhutan. Economic growth may accelerate from the 6-7 percent range in
the last few years to more than 8 percent for the remaining years of the Ninth Plan (the fiscal
years 2005/06 and 2006-07). This is predicated on faster private sector development, largely
related to tourism, and the coming on stream of the Tala hydropower plant. Following an
acceleration of growth in exports and imports in 2002/03, both are expected to expand by 5
percent or more in the coming years. The current account deficit was equivalent to 10.7 percent
of GDP in 2002/03, and is likely to remain at these levels before falling in the last two years of
the MTEF period (2005/06 and 2006/07). With monetary policy aimed at maintaining the
ngultrum-rupee parity, the expectation is that the rate of inflation as reflected by the consumer
price index will follow that of India, currently projected at 5 percent over the medium term,
taking due account of the deceleration in Bhutan of inflation to 1.3 percent in the year to
December 2003. Largely as a result of continued strong donor support, foreign reserves continue
to grow, and it is assumed that the RGoB will be able to maintain reserves at the equivalent of
about 20 months imports over the medium term.
4.2
Multi-year Revenue Projections
Indicators like those noted above, and others, form a central part of the revenue forecasting
exercise. It is worth noting that the existing revenue projections prepared by the Department of
5
Revenue and Customs of the MoF for the subsequent budget year have exhibited two positive
features: they have tended to be conservative and reasonably accurate. In order to implement an
MTEF, this exercise would need to be extended by two years to cover a three-year MTEF period.
Several revenue forecasting methodologies and their associated data requirements were
discussed as a part of the workshop, including macro-based modeling, micro simulation, monthly
tax receipts modeling, the input-output approach, and the aggregate national accounts approach.
Future dialogue in this area should focus on the existing methodology used by the Department of
Revenue and Customs, and possible areas where the process could be improved. For the purpose
of discussion, the workshop looked at budget data for 2003/04, which show that about 80 percent
of total revenues and grants are raised from four categories: grants (46.1%), dividends (14.7%),
the business profits tax (11.9%), and the Bhutan sales tax (6.7%). Grants from abroad have
shown some volatility in recent years, especially as a result of the large fall in budget support
from India in 2002/03 (since resumed), and forecasting this dominant category will be
challenging. Revenues from dividends reflect the exports of hydropower to India from Chukha,
which have grown substantially (Table 2).
Month
Jan
Feb
Mar
Apr
May
June
July
Aug
Sept
Oct
Nov
Dec
Total
Total
38.0
24.8
21.7
87.8
174.4
298.4
336.6
336.8
312.3
304.1
156.1
84.2
2175.1
2001
Export Internal
24.7
13.2
12.8
12.1
8.9
12.8
75.8
12.0
162.0
12.4
287.0
11.4
326.1
10.5
326.9
9.8
300.4
11.9
291.6
12.5
146.8
9.3
71.9
12.3
2034.9
140.2
Table 2
Sales of Chukha Hydropower Corporation
(Millions of Ngultrum)
2002
2003
Total Export Internal
Total Export Internal
47.9
33.4
14.5
44.3
30.3
14.0
33.4
20.7
12.7
33.0
20.0
13.0
35.1
21.6
13.5
35.8
21.9
13.9
76.5
64.1
12.4
122.5
109.8
12.7
157.4
144.6
12.8
129.0
116.2
12.8
290.8
279.2
11.6
271.9
260.7
11.1
361.1
349.8
11.2
355.1
343.0
12.1
341.5
329.9
11.6
359.2
347.5
11.7
324.2
313.0
11.2
347.2
335.7
11.5
269.6
257.5
12.1
337.9
325.8
12.1
123.8
111.5
12.3
197.6
185.3
12.3
71.2
57.8
13.4
103.8
89.8
14.0
2132.6 1983.1
149.5 2337.3 2186.0
151.3
Total
64.7
42.4
63.2
170.3
2004
Export Internal
50.2
14.5
28.8
13.6
49.4
13.8
128.3
42.0
Revenues from the business profits tax and the Bhutan sales tax will depend strongly on the
buoyancy of economic activity, with forecasts drawing upon projections of GDP and perhaps
some of the key sectors, like construction and transportation. Although the tourism sector has
yet to return to the levels seen prior to the 9/11 terrorist attacks, revenue from tourism comprises
about 6 percent of total revenues and grants, and is an area with strong potential (Table 3).
6
Period
Jan
Feb
Mar
Apr
May
June
July
Aug
Sept
Oct
Nov
Dec
Total
2000
Number of Revenue
Tourists
(US$, millions)
65
0.1
223
0.2
1066
1.3
995
1.4
415
0.6
187
0.2
162
0.2
307
0.3
683
1.0
2247
3.7
996
1.5
213
0.2
7559
10.5
FY Total
(% change)
First 11 months of FY
(% change)
Table 3
Bhutan Tourism
2001
2002
2003
2004
Number of Revenue
Number of Revenue
Number of Revenue
Number of Revenue
Tourists
(US$, millions) Tourists
(US$, millions) Tourists
(US$, millions) Tourists
(US$, millions)
185
0.2
55
0.1
192
0.2
89
0.1
355
0.4
269
0.2
98
0.1
358
0.4
553
0.8
862
1.1
654
0.8
831
1.1
1632
2.3
683
1.1
1215
1.8
1304
2.0
276
0.4
296
0.4
397
0.5
448
0.6
146
0.1
79
0.1
176
0.2
129
0.1
114
0.1
112
0.1
252
0.2
213
0.2
198
0.2
868
1.5
760
1.2
612
0.9
1308
2.1
1474
2.4
1456
2.2
517
0.8
643
0.9
862
1.1
172
0.2
151
0.1
289
0.3
6393
9.2
5599
8.0
6261
8.3
1278
1.5
7755
11.1
7609
11.0
5490
-29.2
5411
-28.9
7.9
-28.8
7.8
-29.1
6087
10.9
5911
9.2
8.5
7.6
8.3
6.4
6559
11.0
8.9
7.7
Implementing an MTFF would require preparing forecasts of some of these key indicators for the
MTFF period, typically 3 years (as noted above). Such projections would also be important to
studying the implications of policy choices, such as the recent lowering of the personal income
tax in mid-2004.
For the purpose of discussion, some illustrative projections of the central government budget
were made as a part of the workshop (Table 4). These are based on the indicators forecasted in
the macroeconomic framework above (Table 1), assuming 7.5 percent GDP growth in the current
fiscal year, accelerating to over 8 percent in 2005/06,and 2006/07. Both the revenues from
Chukha Hydro Power Corporation (CHPC) and tourist arrivals are projected to grow at 8 percent
over the MTFF period. The projections show some fall in grants, as Tala comes on stream,
leaving overall revenues and grants slightly lower at around 30 percent of GDP (IMF format).
7
Table 4
Bhutan: PEM Workshop Exercise (August 2004)
Illustrative Central Government Budget (2003/04-2006/07) (IMF Format)
2003/04
Rev.
Est.
2004/05 2005/06 2006/07
Bgt.
Est.
Proj.
Proj.
(as a percentage of GDP)
Revenue and grants
Domestic revenue
Of which: Tax revenue
Grants
31.7
18.4
10.0
13.3
30.8
18.5
9.9
11.5
29.7
17.1
10.0
12.6
29.0
17.5
10.0
10.2
Expenditure and net lending
Current expenditure
Capital expenditure and net lending
35.8
16.6
19.2
35.8
15.8
18.9
35.2
16.0
20.3
33.6
14.7
15.3
Current balance (excluding grants)
1.8
2.7
1.2
2.8
Overall balance (including grants)
-4.1
-5.0
-5.4
-4.6
4.1
1.9
5.0
2.6
5.4
3.0
4.6
2.5
2.2
2.4
2.4
2.1
Financing
External financing
Disbursements
Repayments
Domestic financing
4.3 Statement of Strategic Fiscal Policy Objectives
Establishing an overall budget envelop requires a government commitment to a clear set of
strategic fiscal policy goals. This could involve targeting the current deficit (excluding grants),
the overall deficit (including grants), or the level of debt stocks, all expressed as percentages of
GDP (shaded in Table 5).
8
Table 5
Bhutan: PEM Workshop Exercise (August 2004)
Illustrative Medium-Term Fiscal Framework (2003/04-2006/07)
Central Government Budget Summary
2000/01
2001/02
Outcome
Outcome
Particulars
Revenue & Grants
Domestic Revenue
Grants
From India
From Others
Expenditure and net lending
Total Expenditure
Current expenditure
Capital expenditure
Net lending
Current Balance (excluding grants)
Overall Balance (including grants)
Memorandum Items
Total government debt (percent of GDP)
Foreign debt (percent of GDP)
External debt service (percent of exports)
Nominal GDP at factor cost (mn. Ngultrum)
39.0
22.1
16.5
9.9
4.5
49.6
47.5
19.7
27.9
2.0
2.4
-11.1
32.7
21.3
12.9
5.3
6.0
39.6
39.3
18.1
21.2
0.3
3.1
-5.4
48.7
4.6
22549
54.7
5.0
25733
2002/03 2003/04 2004/05 2005/06
Rev.
Rev.
Bgt.
Est.
Est.
Est.
Proj.
(as a percentage of GDP)
36.3
35.6
34.6
?
17.5
19.3
21.3
?
11.3
14.0
13.3
?
4.5
7.0
8.3
?
5.9
6.6
5.0
?
37.4
37.7
40.3
?
37.2
37.3
40.0
?
16.6
17.5
18.2
?
20.6
19.9
21.8
?
0.3
0.3
0.3
?
0.9
1.9
3.1
?
-8.7
-4.3
-5.7
?
62.6
9.6
29282
74.7
69.5
10.4
31884
?
?
?
32814
?
?
?
?
2006/07
Proj.
?
?
?
?
?
?
?
?
?
?
?
?
?
?
?
?
The RGoB outlined several broad fiscal objectives in the Poverty Reduction Strategy Paper
(completed in July 2004):
 Limit government expenditure to less than 40 percent of GDP.
 Reduce the overall budget deficit to no more than 4 – 5 percent of GDP.
 Devote about 55 percent of total spending to capital expenditure, financed through
external assistance, largely grants.
 Finance recurrent expenditures from domestic revenues.
The chosen fiscal path needs to be consistent with the RGoB’s desired macroeconomic path
(inflation, external accounts, available finance), and with the RGoB’s overall strategic policy
goals, such as the size of government as a share of GDP, given that fostering private sector led
growth is a stated pillar of the Ninth Plan.
4.4
Completing an MTFF
Finally, in order to move away from needs based budgeting to an availability based budgeting
process, an MTFF table, like Table 5 above, needs to be prepared. Following the projection of
revenues (underpinned by a sound macroeconomic framework), and a statement of strategic
fiscal policy objectives, the overall expenditure envelope can be determined. For example, if
total revenues and grants are forecast to be the equivalent to 34 percent of GDP in 2005/06, and
the RGoB aims to limit the overall deficit to below 5 percent of GDP, then total spending must
be kept below 39 percent of GDP. Alternatively, other indicators may become the binding
constraint, such as goals for limiting the growth in debt stocks, or specifying the source of
financing, domestic or foreign. Ultimately, the credibility of the MTFF depends critically on the
9
degree of commitment to specific targets, as reflected in the changes in spending or other
contingency plans that would be pursued in the event of a shortfall in revenues. This
commitment is central to the effectiveness of establishing a top-down spending envelope for
sectoral ministries. If commitment at the highest levels of government is weak, then the overall
spending limits (the budget envelope) will also be weak. If commitment is strong, such that
policy corrections are swiftly implemented when some revenues fail to materialize as expected,
then the strategic fiscal policy goals of the MTFF gain credibility, and the MTFF can be an
effective tool in managing the spending demands at different levels of government. A credible
MTFF is critical to developing a sound MTEF.
5.
Expenditure Prioritization
Once an MTFF has been prepared, the subsequent steps of an MTEF aim to provide a linking
framework that drives expenditures by policy priorities, disciplined by budget realities. Within a
top-down resource envelope given by the MoF, the line ministries would need to submit bottomup expenditure estimates, reflecting sectoral policies and activities, and emphasizing the
optimization of intra-sectoral allocations.
The workshop discussed several expenditure prioritization paradigms, and noted some key
differences between stylized MTEFs and the current 5-year planning process in Bhutan. In the
Ninth Plan, planners articulated the development strategy based on 4 goals, and called for sector
plans to achieve these goals. Although the process in Bhutan is highly participatory, planners
effectively set priorities by determining relative sector outlays, and annual budgets are to be
guided by plan outlays and content. Indeed, the Ninth Plan allocates about 28 percent of
spending to the social sectors (largely pro-poor spending to improve access to health and
education services), while agriculture and roads are provided with 11 percent each, followed by
energy with 9 percent allocation. Allocations are also made to reach decentralization objectives,
with 75 percent, 21 percent, and 4 percent of spending being channeled through the Center, the
Dzongkhags (Districts), and the Gewogs (Blocks), respectively. Agency project units are to keep
the direction of the budget in line with the Ninth Plan. In addition, the Ninth Plan appears to be
organized by sector, rather than ministerial/agency portfolio (essential for locating managerial
responsibility), and is driven largely by development needs, rather than resource availability.
The MTEF approach is typically somewhat different. The budget ministry (MoF) has no formal
view on spending priorities, focusing instead on fiscal aggregates like total revenues,
expenditures, and the strategic fiscal policy goals of the overall deficit and the evolution of
public debt. Line ministries are given resources to fund existing policy, and have the flexibility
to reallocate within their ministry to achieve agreed outputs or outcomes. The decision on how
to allocate the “headroom” (the gap between existing policy allocations and total expenditures) is
made collectively by the cabinet. It is worth noting, however, that in practice, MTEFs in many
developing country are more top-down. The RGoB may wish to review some of these features
of expenditure prioritization under an MTEF.
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6.
The View from the Line Ministries
As noted above, the preparation of an MTEF requires strong participation from the sectors/line
ministries, reconciling differing perspectives between the line ministries and the MoF. In many
countries, weak implementation, poor service delivery, weak client orientation, a lack of
accountability, and the like, lead to dissatisfaction both at the MoF and the concerned ministry.
From the line ministries’ perspective, there can also be an array of problems: budgets are
allocated incrementally based on bargaining, rather than needs; funding is inadequate; funds flow
is unpredictable; procurement is difficult; ministries lack control over programs; accountability
for results is weak. An MTEF could help address such issues, some of which are manifest in
Bhutan. While MTEFs typically bring some advantages for line ministries, however, they also
involve some additional responsibilities.
6.1
What Should Line Ministries Expect From An MTEF?
The main benefits to line ministries from the adoption of an MTEF are greater budget
predictability, more freedom/authority to formulate sector programs and set priorities, increased
flexibility in fund management, and stronger accountability for program delivery. Ideally, an
MTEF would eventually move to program budgeting or block allocations, which line ministries
would prioritize, allocate, and manage - all to deliver contracted outputs/outcomes for which
they are accountable. Reaching this point, however, will require perseverance and effort over the
medium term.
6.2
What is Needed from Line Ministries in Order to Implement an Effective MTEF?
Implementing an MTEF would entail more explicit or new line ministry responsibilities. These
include:
 Living within funding constraints or sector ceilings.
 Setting sector goals, strategy and policies to achieve agreed national development goals.
 Reviewing all sector programs, projects and activities.
 Reorienting from focusing on inputs to emphasizing the delivery of agreed outputs and
services.
 Aligning sector programs and activities accordingly, and prioritizing all activities.
 Preparing estimates of expenditure needs for three years and updating them annually
(“rolling” multi-year budgets).
 Undertaking “costing” of goals, as practicable.
These elements can be challenging, and some of them, like costing, may not be an immediate
priority and can be undertaken later. The RGoB may wish to consult on some of these aspects
across the government to ensure sufficient support from the line ministries, if an MTEF is to be
implemented effectively.
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Section 7: Conclusions and Next Steps
International experience with MTEFs shows that they do not solve all budget problems, and that
effective implementation requires sustained effort over several years. They can be useful
processes for catalyzing budget reform, however, and significantly improve public expenditure
management. As noted in the Public Expenditure Management Handbook (1998, p. 54):
Success hinges on a variety of factors, which include:
 political commitment and endorsement at the highest level to make
and abide by the difficult decisions involved in the restructuring of
expenditures (Some ministries may need to scale back their
activities so that more resources can be directed to higher priority
sectors.);
 strong management of donors to ensure that they operate within the
framework of the MTEF;
 willingness to subject policy decisions with financial implications,
made outside the budget process, to the discipline of the MTEF;
 understanding of, and commitment to, the difficult decisions at the
sector ministry level;
 commitment at all levels to abide by the budget decision so that new
expenditure decisions are not introduced during budget
implementation that would require reallocation of resources (These
new decisions mean that the priorities set when the budget is
approved by Parliament are often overturned.);
 improvements in expenditure control so that the decisions are not
undermined by over-expenditures and reallocation of funds during
budget implementation;
 improved macroeconomic management and revenue collection so
that revenue shortfalls do not necessitate adjustments to the budget
estimates;
 briefings of politicians and senior management during
implementation;
 improvements to expenditure reporting on results;
 development of a computerized accounting system.
As noted by the delegation from Bhutan in the concluding session of the workshop on next steps,
the RGoB faces three options: (a) continue with the present system, (b) seek relatively small
improvements in the current system, or (c) pursue an MTEF. Option (b) would likely focus on
forecasting and budgeting techniques, identifying areas where improvements might be made, but
not substantially altering the budget process. Option (c) would entail greater effort, involving
sensitizing the rest of the RGoB about MTEFs, studying the MTEF process and other
intermediate steps in greater detail, strengthening forecasting and analytical capacity, improving
coordination and information sharing, assessing broader capacity needs, reviewing institutional
and procedural arrangements, and analyzing the financial implications.
One possible set of steps under option (c) that was discussed at the workshop includes:
 Seeking to complement the Ninth Plan with an MTEF.
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




Developing an MTFF focused on budget aggregates, based on projected resource
availability and the chosen fiscal strategy.
Dividing the MTFF into portfolio envelopes, initially top down, which would
(i)
provide sufficient finance to cover existing commitments,
(ii)
shape the MTEF portfolio frame to reflect political priorities,
(iii)
seek to program aid flows through dialogue with donors.
Regarding the Ninth Plan as an articulation of sector policies and strategies, which feed
into an MTEF, as a ‘clearing house” for the annual budget.
Paying more attention to the recurrent side of the budget by estimating how the total costs
of policies/programs will evolve over the Ninth Plan period – and adjust as needed.
Holding back a planning contingency of 5-10% of the budget, as part of the MTEF.
The August 2004 workshop held at the World Bank sought to help the RGoB make progress
towards its PEM goals by generating a better sense of what would be involved in implementing
an MTEF. The workshop emphasized that MTEFs are not a panacea and would need strong
participation from across the government, including the line ministries. The MoF may wish to
consult with other parts of the RGoB and study the MTEF and other options for budget reform
further, and as an output from the workshop, it is hoped that this note will contribute to the
dialogue.
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