Reforming Public Financial Management in Uzbekistan

Sustained technical assistance has helped Uzbekistan make significant improvements in its public financial management.

Public financial management systems in Uzbekistan were weak at the beginning of its transition from a centrally planned economy. In 2002, an IMF Fiscal Affairs Department (FAD) mission to Uzbekistan concluded that its budget was not based on a consistent and realistic macroeconomic framework and was fragmented in many ways: there were numerous extrabudgetary funds, and the investment budget was prepared separately from the current budget; the classification system was not in compliance with international standards; budget documentation was not transparent and was not available to the public; a modern treasury organization did not exist; and fiscal reporting was perfunctory.

The Uzbekistan authorities committed themselves to a broad reform program in 2003, focused initially on budget execution and the establishment of a treasury. An FAD resident treasury advisor, financed by the JSA, assisted during the initial preparation phase in 2003–05, followed by peripatetic peripatetic expert visits until 2006. Beginning in November 2006, a JSA-funded FAD regional advisor was installed in Uzbekistan. The main areas of his work program included (1) assisting the Ministry of Finance in developing and implementing a comprehensive strategy for budget and treasury reform; (2) assisting with the progressive establishment of the treasury, including assistance on functionality issues with respect to the procurement and implementation of a Government Financial Management Information System (GFMIS); (3) assisting with the establishment of a treasury single account (TSA); and (4) assisting the Ministry of Finance on changes to existing budget/treasury-related laws and on new instructions.

This assistance provided by the JSA-funded advisor, in conjunction with supervision and inspection visits from FAD, has made a significant contribution to a sustained reform process in Uzbekistan. Progress in the treasury area has been significant and the authorities continue to be committed to an ambitious public financial management reform program. In particular, the Law on Treasury Execution of the State Budget came into force in January 2006 and a full set of treasury regulations has also been prepared. The Treasury was established on a pilot basis in 2005 and has been rolled out progressively since then throughout Uzbekistan. Closure of existing bank accounts toward a TSA is well advanced, with the next stage being the extension of Treasury coverage to extrabudgetary funds. A unified chart of accounts for the general government sector has been prepared. The procurement of the GFMIS has also begun.

More remains to be done and continued JSA-financed technical assistance will be important.

Despite progress in the treasury area, the authorities face several challenges to achieve their public financial management reform objectives. The fiscal framework still remains fragmented and the reforms of budget preparation and the appropriation system have somewhat lagged behind the reforms in the treasury area. The existing weak capacity could also adversely affect the timeframe and/or output envisaged under the authorities’ reform action plan, unless appropriate capacity building measures are undertaken. Reform of budget preparation is under way, with the introduction of a medium-term budget framework in its preliminary stage. As preparation for this and the new information system, a new budget classification has been approved, for introduction in the next budget cycle. The authorities also intend to introduce a comprehensive parliamentary appropriation system, which will rationalize and strengthen budgetary control.

During 2008, the JSA-funded advisory work will focus on further strengthening treasury functions; reforming the budget preparation process, including revamping the budget classification and budget system law as well as designing a new appropriation system; and reforming the accounting and fiscal reporting system, including a strategy for consolidated fiscal reporting. The advisor will also continue to assist with monitoring the implementation of the authorities’ public financial management reform action plan. Continued JSA financing will make a valuable contribution to the authorities’ ongoing reform efforts.

Support for Post-Conflict Financial Sector Reforms in Liberia

Liberia’s financial institutions and infrastructure were largely destroyed during 15 years of intermittent civil wars that ended with the signing of a Comprehensive Peace Agreement in August 2003. In between the wars and after the wars ended, the JSA played an important role in funding IMF technical assistance (TA) programs to restore the functioning of the monetary and financial system destroyed in these wars.

In 1999, the Central Bank of Liberia (CBL) emerged almost defunct and illiquid at the end of seven years of civil war; the payment system had reverted chiefly to cash; and the banking sector was largely insolvent. To address these weaknesses, the authorities, in the context of an IMF staff-monitored program, requested technical assistance from the Monetary and Capital Markets Department’s (MCM) predecessor departments. In this regard, between 1999 and 2000, several advisors funded with JSA grants worked with the authorities to rehabilitate the CBL and improve its operational capacity in research functions and accounting and auditing as well as banking supervision. They also provided advice on currency issuance.

The resurgence of intense hostilities during 2003 worsened a still-dire situation and erased some of the gains made through the technical assistance program. Already fragile commercial banks suffered from rising nonperforming loans, the CBL had negative capital with little scope to conduct monetary policy, foreign exchange operations that had been conducted on a discretionary and noncompetitive basis failed to smooth out substantial fluctuations in the exchange rate, and governance problems had emerged. However, despite the largely devastated physical infrastructure, some institutional capacity remained in a few key areas. In particular, the CBL did not need basic assistance, often required in most post-conflict countries, such as cash management, establishing a new currency, reintroducing central bank systems hurt by conflict, and restaffing.

After the hostilities ended in 2003, the government again sought technical assistance from MCM to restore the functioning of the monetary and financial system. For this purpose, between May 2004 and December 2005, several MCM-led TA expert visits provided advice in the areas of monetary operations, payment systems, foreign exchange operations, bank restructuring and supervision, and central bank administration. In 2006, long-term advisors, funded from JSA grants, were contracted to serve as chief administrator at the CBL and to provide advice on bank restructuring. The chief administrator served under the guidance of the Executive Governor, with binding co-signature authority for operational and financial matters. His mandate was broad and included strengthening the conduct of sound monetary policy, central bank operations, supervision and regulation of the banking sector, and ensuring independence of the CBL.

Although progress has been slow and not always smooth, the technical assistance has yielded important benefits. In particular, the CBL’s financial position has improved and its independence substantially strengthened. The expert on bank restructuring has delivered a manual on supervisory intervention, collaborated on general resolution and intervention strategies, and collaborated on specific plans for each insolvent bank. The basic framework for effective banking supervision is now in place and on-the-job training continues.

Significant challenges, however, remain and more is needed to strengthen internal controls of the CBL and the regulation and supervision of the Liberian banking institutions. There is also need to further strengthen appropriate and independent conduct of sound monetary policy, and to improve the functioning of financial markets and the contribution of the nonbanking sector to financial intermediation.

Harmonization of Monetary and Financial Statistics in Central America and the Dominican Republic

Prior to launching the Regional Project on Harmonization of Monetary and Financial Statistics (Project), the IMF Statistics Department provided extensive technical assistance to Central American countries, which led to a good understanding of the challenges facing the region in the area of monetary and financial statistics (MFS). The three main challenges were to (1) improve financial reporting systems to enhance macroeconomic analysis; (2) expand statistical coverage by incorporating depository corporations (for example, credit cooperatives and money market mutual funds), nondepository financial corporations (for example, pension funds and insurance corporations), and offshore banks; and (3) harmonize the definition of financial instruments, economic sectors, and valuation criteria to be consistent with other macroeconomic statistics (balance of payments, government finance, and national accounts) and among countries in the Central American region. The IMF Statistics Department was of the view that the available data were not conducive to the calculation of high-quality monetary, credit, and debt aggregates.

Against this background, the Project was launched in September 2006 to be implemented during a two-year period, and is financed by the JSA. The overall objective of the Project is to harmonize the MFS of the Central American countries (Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and Panama) and the Dominican Republic to facilitate comparison across countries and analysis at the regional level. Furthermore, the Project fosters implementation of international statistical standards, in particular, the IMF’s Monetary and Financial Statistics Manual (MFSM 2000). The governors of the central banks of Central American and the Dominican Republic—represented on the Central American Monetary Council (CAMC)—approved the terms of reference for the Project at the fifth regional conference on Central America, Panama, and the Dominican Republic (held June 29–30, 2006).

The IMF Statistics Department is responsible for managing the Project in coordination with the Executive Secretariat of the CAMC. Technical assistance to each country is delivered by an expert, with a total of about 20 visits planned to carry out the work. At the end of the first year of the project, all the countries in the region had harmonized systems in place for compiling MFS based on the standardized report forms (SRFs) for monetary data. Furthermore, the main users (policymakers at central banks) and compilers of MFS from participating countries worked together to define a set of Harmonized Monetary and Financial Statistics (HMFS) for the region, to be used for analysis and dissemination purposes. The HMFS comprise 38 analytical tables covering the most important topics in monetary analysis.

Defining the MFS compilation systems based on SRFs for monetary statistics paved the way for significant improvements in quality, although it also highlighted data source limitations in some countries. The full set of HMFS analytical tables constitutes a very useful tool for national analyses and comparisons between countries in the region. Furthermore, the HMFS contain areas not covered by the SRFs, such as detailed analysis of monetary aggregates, liquidity, and credit, and harmonized interest rates statistics.

The work plan for the second year of the Project, which ended in August 2008, can be summarized as follows: (1) continued improvement in the quality of the source data (primarily sectorization and coverage), (2) compilation of the HMFS, and (3) improvement in the intersectoral consistency of the MFS. Regarding the sectorization problem, Honduras, Nicaragua, Panama, and the Dominican Republic are sufficiently sectorized for MFS compilation purposes. El Salvador is improving its sectorization of securities issued by the central bank. Costa Rica and Guatemala are resolving significant data source constraints for compiling MFS in accordance with the MFSM 2000.

All the countries of the region compile SRFs for monetary statistics with adequate coverage to derive a Depository Corporations Survey (DCS), with the exception of Costa Rica and the Dominican Republic. DCS coverage is improving in El Salvador, Nicaragua, and the Dominican Republic with the incorporation of savings and loan cooperatives, although their importance relative to the remaining depository corporations (mainly banks) is low. Conversely, in the case of Costa Rica and the Dominican Republic, the lack of coverage in the DCS is more significant and therefore the incorporation of offshore banks and money market investment funds (Costa Rica only) in the DCS is a priority task.

The statistics harmonization followed by this project is a unique experience, comparable only to the efforts to achieve statistical harmonization in the European Union. Central America is the first region in the world to harmonize its MFS—in line with the experience of the European Central Bank, which the IMF Statistics Department regards as an example to follow in other regions—and sectoral statistics (especially fiscal statistics), as a means of supporting regional integration initiatives.

In the communiqué issued in June 2008 at the conclusion of their annual regional conference, the authorities of Central America, Panama, and the Dominican Republic expressed their appreciation for Japan’s support for this project as well as other TA projects in the region.¹

Support for Tax Legislation Reform in Asia and the Pacific

With the help of JSA financing, the IMF Legal Department (LEG) was able to engage in a number of important legal drafting technical assistance (TA) projects over the past year. One of these was a multicountry undertaking to assist countries in the Asia and Pacific region with tax law drafting. It involved work in Bangladesh, the Federated States of Micronesia, Mongolia, Nepal, Papua New Guinea, and Tonga. As can be seen from the description below, the scope of the work involved was substantial, and only a portion of it was financed by this particular project. Although resources under this project were exhausted in FY2008, in most cases related work financed by a subsequently approved JSA project (or by other resources) is expected to continue.

Tax law reform is a critical element in facilitating economic development and strengthening governance in the Asia and Pacific region. Governments in the region are interested in reforming their tax systems for various reasons. Some, like Mongolia and Nepal, are undergoing substantial economic and political transformation. Others need to modernize outdated and inefficient tax laws or provide a legal basis for introduction of new taxes such as the value-added tax (VAT). In all cases, tax legislation reform is a high priority for governments.

In most cases, the aim was to assist the authorities in the drafting of legislation that the authorities could then propose to their legislatures for enactment. In Bangladesh, the project financed work on drafting a new income tax law. This work is expected to take some time, in light of the complexity of existing laws and the need to adapt the new law to the policy and administration needs of the government. The project financed the initial work, which is expected to continue in the future. In Tonga, the assistance involved drafting new customs legislation, which was enacted in June 2007. This is the basic law for the collection of customs duty and other import duties, which is of key importance to an island country like Tonga. The new law both simplified the drafting of earlier legislation and adopted modern techniques, as appropriate for the administrative capacity of the customs authorities in Tonga.

In Papua New Guinea, the work under the project involved preparation of a new law on tax administration that would consolidate provisions from various laws, simplify drafting to make the law more understandable, and rationalize the rules to underpin modern tax administration processes. This draft is currently under consideration by the authorities.

The Federated States of Micronesia is considering a substantial reform of its taxation system, and to facilitate this effort, drafts have been produced of a VAT, net profit tax, revenue administration act, reforms to the salary and wages tax, and consequential amendments. This legislation is currently under discussion, and further work is being done by LEG to adjust the legislation, explain it, and make sure that it meets the needs of the authorities.

Mongolia amended its tax laws recently, and work under the project involved preparing guidance materials for the VAT, which are being used to implement the tax. Similarly, in Nepal, an income tax manual was produced to help the authorities in administering the income tax law. Amendments to the income tax law prepared in conjunction with the manual were enacted. The work in Nepal also involved preparation of a fiscal transparency law, which is under consideration.

This project has successfully contributed to the tax reform process. Further work in several of these countries is expected to continue in a follow-up project in the current fiscal year. By delivering TA to several countries that has contributed to strengthening their basic tax legislation, the project has achieved tangible and important results at a relatively low cost. The multicountry design of the project has allowed the flexible delivery of TA to meet the articulated needs of the authorities. LEG experts have visited the countries concerned to work intensively with local officials, thereby delivering TA in a manner that enhances capacity building. Given the lengthy timetables involved in preparation and enactment of tax legislation (often several years), the full results of work under the project in terms of enacted legislation cannot be assessed today, but the track record of similar work in the past suggests that it is likely that most of the legislation drafted will be enacted in due course. Importantly, this legislation was prepared in a collaborative way, which helps ensure ownership by the authorities and appropriateness to the legal system and the administrative capacity of the countries involved.

LEG will continue to follow up on the TA provided by this project as needed, to assist the authorities with interpreting and implementing the new laws. Such follow-up contact will help ensure the continued relevance of the TA and also will strengthen local capacity.