But sustainability and further reforms remain challenging
Bhutan became the fifth country in the world to be recognised by Public Expenditure and Financial Accountability (PEFA) framework for maintaining high standards of public financial management (PFM) system.
PEFA is a methodology for assessing a country’s public financial management performance while aspiring to reduce transaction costs and harmonising donors support among others.
However, the challenge, according to the finance secretary Nim Dorji is to sustain and further the reform efforts.
“Bhutan’s PFM is at a quite advanced level. But going forward, the government must place continued emphasis,” the World Bank country director, Qimiao Fan said.
To this effect, a multi-donor fund was established under the supervision of the World Bank. The European Union has contributed USD 3M and Austrian Development Cooperation has provided USD 1M. The grant agreement was signed on September 21 to help Bhutan manage public funds more effectively and improve the procurement and budgetary systems. In doing so, public service delivery and governance are expected to be enhanced.
Finance secretary Nim Dorji said the PFM in Bhutan has come a long way, from manual system to real time online system. Since the initial PEFA assessment in 2002, he said that Bhutan has made lot of reforms to ensure allocated resources are used efficiently.
One of the weak areas in the 2010 assessment, he said was weak legislative scrutiny of budget report. He said now the National Assembly Act is amended and a finance committee was formed. The committee delivers the second budget speech at least 10 days after the finance minister’s budget presentation. In the earlier practise, the budget was submitted in the morning and passed in the evening.
“We are confident that all the reforms lying ahead will receive our attention,” he said.
Qimiao Fan said that significant revenue from State enterprises and hydropower will continue to be critical for the economy and strong a PFM will go a long way in ensuring efficiency and transparency.
Given the role of state enterprises in the country, he said that the country should strengthen the oversight of state enterprises.
“In the medium term, the hydro revenue is expected to swell. But in the short term, Bhutan should maximise its access to external concessional financing to help short term fluctuations,” he said.
According to the performance report of the public financial management based on public expenditure and financial accountability, most of the variance in actual budget and projection is due to unreliable projection of donor grants.
It was also highlighted that the original budget, which is prepared on baseline scenario does not assume any policy changes. Fiscal discipline, the report stated is reduced by lack of public transparency in administrative classification in the budget and lack of economic appraisal of the project before inclusion in the budget.
There are many changes in the budget as programmes and priorities change. “Nevertheless, planning and budgeting are bottom-up and can be assumed to reflect the changing realities,” the report stated. “However, limited economic analysis of major projects (except some funded by donors) and the institutionalised preference of capital expenditure reduces allocative efficiency.”
It was also stated that capital expenditure prioritisation is often at the expense of operating and maintenance expenditure, resulting in low levels of productivity of existing assets.
The report also specified the need for internal audit units to focus on review and analysis of the system rather than primarily focussing on compliance.
The Royal Audit Authority (RAA) covers almost 90 percent of the government expenditure and all of the government revenue. However, the report stated that there is no regular payroll audits or procurement audits outside the general audits of the RAA.
Payroll management is one of the areas where serious internal weaknesses have been reported. It is recommended to integrate the payroll system with the performance evaluation management system (PEMS) of the Royal Civil Service Commission to enhance better monitoring and transparency.