Complete the TSA

14. The government has established a TSA in the MMA. It covers the core budget, all the budgetary inflows and outflows. However, a number of budget entities retain bank accounts outside the TSA. These include project funds of the donors and other accounts of the line agencies in the commercial banking system. Data on the amount of government money in the commercial banks shows that consolidation of these balances in the TSA would have either eliminated or minimized the need for government borrowing from the ways and means account in the MMA. A well-structured and functioning TSA is also essential for meaningful cash planning and management.

15. The MOFT in collaboration with the MMA should prepare a clear conceptual framework for the TSA. This should include:

• The structure of the TSA and its subaccounts;

• A specification of which bank accounts will be outside the TSA and the rationale for this;

• Full description of how the TSA will be operated;

• Procedures for reconciliation of the TSA with the government accounts;

• Determination of who in the MOF is authorized to operate this account and how this will be managed; and

• A detailed timetable for inclusion of different accounts and cash flows into the TSA and for closure of the related accounts in the commercial banks.

16. To facilitate the transition the MOFT should prepare and maintain a detailed list of all inflows (tax and nontax) that go into the TSA, and all outflows from the account. A list of all commercial bank accounts, updated in line with the integration of these accounts into the TSA, should also be prepared. If necessary, the MOFT should reissue instructions that no line agency can open and operate any commercial bank account without prior, written approval of the MOFT.

Complete the PAS project

17. This project is the main reform in payment and accounting systems, and is thus central to the production of fiscal information and data. The project is in the process of being rolled out to various line agencies (3 so far out of a total of 250 agencies). During discussions, it was indicated that it could be possible to complete the roll out of the PAS system to all line agencies by 2011.

18. The AG has indicated that there may be inadequate documentation or definition of the business processes underlying PAS. There have been many reviews of the implementation of the project, including by WB and IMF experts. However, the AG suggested that unless the underlying business processes are fully defined and adequately streamlined, the benefits from the new payment and accounting system may be at risk. It was also mentioned by the financial controller’s office (FCO) that financial regulations which regulate the payment and accounting systems have been revised but were not yet approved.

19. The mission is not in a position to verify to what extent the AG’s concerns are warranted. However, given the important role of the AG in ensuring the integrity of the PFM system and the financial accounts, it would seem reasonable to address the concerns of the AG, and review the business processes underlying the automated system. This could also be a good opportunity to finalize the detailed financial regulations.

20. The mission recommends the following actions:

• The MOFT (the FCO) should publish a Project Evaluation and Review Technique (PERT) chart for the project with specific outputs and benchmarks to be met in completion of the project. It should establish a committee of the main users, including some of the largest line agencies and the budget office of the MOF who should meet every month to monitor the project against the deliverables. These actions—preparation and publication of a PERT chart, with project deliverables dates, and the formation of a consulting user group should be completed before end-October. The assistance of the consulting team currently assisting the FCO in the roll out of PAS should be taken.

• The MOFT and the AG should agree a concrete deadline for finalizing the financial regulations. The review should verify that there is consistency between the functionality of the PAS system and the regulations. This review should be completed by end-November. Any further revisions of the regulations needed as a result of such a review should be completed by end-December. The finalized financial regulations should be issued and be implemented on January 1, 2010.

• The AG may also consider a performance audit of the project, mainly to address his concern regarding the underlying business processes. This audit should be completed no later than end-November so that any revisions to the project can be made before the year end. Any changes that need to be made are best made as soon as possible to avoid major cost. The mission would however suggest that only the most essential changes should be considered at this time. Unnecessary tinkering with the project that might carry unacceptable risks of project delay without commensurate gains should be avoided.

Advance the time table for the budget out-turn and fiscal reports

21. The FCO should present the budget out-turn data along with complete fiscal data cumulatively for the year up to end-November 2009 by the December 15, 2009. The mission was informed that it should be possible to prepare budget out-turn reports, using the PAS system, on a monthly and quarterly basis (cumulative figures) starting from end-November this year. These reports would however be limited to budgetary flows and would not include other flows such as loans and grants. The mission recommends that the data on these other flows be added to the basic budgetary out-turn report so that it provides complete and updated fiscal information already from the outset. This is important for the credibility of the reports and the integrity of the reporting process. The FCO should assign responsibility to a staff member, with suitable back up, for the preparation and presentation of monthly and quarterly data.

22. At the same time, the FCO should, in consultation with MMA, design a system to reconcile this data with data maintained by the MMA. The template and the methodology for this reconciliation should be prepared by the end-October 2009. The cumulative budget out-turn data up to end-November should be reconciled with the MMA using the reconciliation template and methodology developed during October. Both the FCO and the MMA should identify two staff each from their offices to develop the system for reconciliation of the budget data. The team should document this methodology (with two or three hypothetical examples) for such reconciliation and train suitable number of staff both within the FCO and the MMA to use the system. Active help from the consultants currently assisting the FCO with the roll out of the PAS system should be taken in this task. The budget reports to be presented by the 15^th of the month following the month of operation should be based on reconciled data.

Prepare a plan for timely preparation of annual financial statements

23. The annual financial statements are critical elements of credible budget reporting and the deadlines must be enforced firmly, under penalty for noncompliance if necessary. Under the law on public finance 2006, the FCO is required to finalize the annual financial statements (AFS) and submit these to the AG for audit within three months of the end of the fiscal year, that is by end-March. The AG is to complete the audit within two months or by end-May for presentation of the AFS to the Majlis.

24. Even though the PAS system is not yet rolled out, the mission understands that this should not cause serious problems in the preparation of AFS. The FCO should prepare a plan for completing the AFS on time, with the assistance of the consulting team involved in PAS roll out, and submit this plan to the AG and the minister.

25. The “carryover” period of one month for payments that can be made from the previous year’s budget by the line agencies makes the timely completion of the accounts more complicated. This was even worse in the past, when the carryover period was longer, and in practice seemed to be almost open-ended.

26. One solution would be to eliminate the complementary period completely. This would create some practical challenges in the transition year, and necessitate some procedural changes. However, this would greatly facilitate the timely completion of the accounts, effectively remove the scope for manipulation and eliminate much of the uncertainty regarding the validity of the reported budget figures.

27. If it is deemed impossible to eliminate the practice completely in the short term, the MOFT should require prior notification of the line ministries’ plans to make payments during the carryover period. The FCO should issue instructions to the line agencies and ask them to provide itemized information on all payments—with amounts and names of payees—that they plan. Any payment not mentioned in the forecast should be charged against the following year’s budget (FY 2010). Provisional accounts can be prepared using the forecast numbers for the carryover period and revised later for adjustment which should be minor.

Prepare a comprehensive framework for assessment and management of fiscal risks

29. The Maldives are subject to a number of significant fiscal risks. These are risks that undermine the credibility of the budget and the sustainability of fiscal policies, and have been clearly demonstrated by the negative fiscal developments over the last years. Important fiscal risks include the failure to mobilize donor financing, cost overruns in government projects, over-spending on wages and other staff-related expenditure, uncertain costs of political decisions (such as the decision to decentralize government in seven regions), calls on government guarantees, changes in the terms of commercial borrowings, and exogenous shocks to the economy.

30. The government should develop a comprehensive framework for assessing, monitoring and managing these fiscal risks. This framework should identify the key risks and the possible outcomes, and include strategies to mitigate the consequences when negative outcomes occur. Correlations between different types of risks should also be identified. There appears to be little capacity at this stage to prepare a systematic risk assessment and management strategy, and the authorities will probably require considerable technical assistance in this task. Consideration could be given to involving the MMA in this work, since it seems to have greater resources than the MOFT.

31. Some countries have found that a fiscal responsibility law or similar instrument can play a useful role in managing fiscal risks. The government has requested assistance from the IMF in preparing such a law. The specific design of such laws varies greatly across countries. Many laws provide a commitment to specific fiscal rules, for instance related to the size of the deficit, government borrowing or other fiscal aggregates. The law may also include directions for how to initiate changes in the fiscal stance if fiscal risks materialize. The laws will often have extensive provisions for monitoring and reporting of fiscal data. The laws facilitate agreements between the executive and the parliament on how to handle fiscal risks and negative developments, and in some cases constrain the two sides in how to formulate fiscal policies, for instance by requiring that all proposals for expenditure increases must be matched by commensurate reductions in other areas or revenue increases.

Strengthen cash planning and cash management

32. The completion of the TSA and the roll-out of the PAS system will significantly contribute to improved cash planning and management. These capacities are particularly important in the current difficult fiscal situation. Realistic cash planning and tight management of available cash resources will be critically important for successful completion of the IMF-supported program. As the capacity is developed, effective coordination and integration with debt management will also become very important.

33. Meaningful cash planning must be based on realistic budgeting, for both revenue projections and expenditure forecasts. The efforts to prepare more realistic budgets, for instance through more comprehensive medium-term fiscal frameworks, will also be critical for the quality of cash planning and management.

34. There are two major aspects of cash planning and management: forecasting of cash flows and decisions on cash allocation to manage the fluctuations in the cash flows. The Fund has assigned a peripatetic expert to assist the government in these areas:

• The authorities should prepare a cash forecasting model during the first visit of the expert, and start training the staff from the FCO in using the model to prepare cash forecasts annually, quarterly, and monthly on a rolling basis.

• Cash allocation decisions may have impacts on budget priorities. Cash shortages and cash rationing may entail different treatment of different budget areas, and may effectively undermine the overall composition of spending. For this reason, the budget department should be consulted when cash allocations are likely to deviate significantly from the cash requirements of the line ministries for a given time period. If it is necessary to adjust budget priorities, this should be done through explicit political decisions, not as a result of ad hoc cash rationing

Strengthen debt management

35. The WB is planning a detailed assessment of government debt management in the Maldives, based on the DMPA methodology. This assessment, which is scheduled for October 2009, will provide the basis for a comprehensive debt management strategy and an action plan for strengthening capacity in this area. Strengthening of debt management is important to enable the government to finance its budget deficits in the short term and ensure the sustainability of fiscal policies in the longer term.

Create a comprehensive database of public employees and fast-track new payroll system

36. The authorities’ strategy for fiscal consolidation is anchored in expenditure reduction, which in turn is led by reduction in the payroll. Hence, it is important to ensure that the authorities have complete and accurate information about public employment and the public sector wage bill:

• The WB is assisting the authorities in establishing a complete database of public employees and their remunerations. The civil service commission maintains a record of regular civil servants, but their database omits other important groups of public employees. There is also incomplete information about the total remuneration that these employees receive.

• The updated public employee database will be included in the payroll module of the PAS. The expert team working on rolling out the PAS could be asked to provide a timeframe, with precise deliverables, for fast tracking the payroll module and various tasks which are pre-requisites for the roll-out.

Medium-term budget frameworks

38. The MOFT took an important, first step towards a more medium-term oriented budget system in 2009. The 2009-11 budget estimates were based on a medium-term fiscal outlook, and provided indicative allocations of future spending. However, given the current fiscal situation and the many weaknesses in the PFM system, these indicative allocations have very limited credibility.

39. There is significant scope for gradually strengthening the quality of the medium-term budget estimates over time. The preparation of the medium-term fiscal framework and the related spending estimates requires reliable financial information. Successful rollout of the PAS system will enhance the availability of reliable and timely budget data.

Internal audit (IA) function in all budget entities within the government

40. In 2002, the ADB supported the preparation of a “strategic management plan establishing an internal audit function” within the government. However, the assessment of internal audit in the PEFA report has been rated as a D plus, noting that “internal audit function has hardly developed in the Maldives.”

41. Establishment of effective, modern internal audit is an advanced and very demanding reform. In the mission’s view, this should not be a high priority in the Maldives at the moment. Given the many other, more fundamental weaknesses in PFM, it is also highly unlikely that attempts to establish internal audit would be effective.

42. In the longer term, a basic internal audit function could be a useful instrument to support internal control and financial management functions in government. Functioning internal audit would also support the work of the AG, and help clarify the relative roles and responsibilities of the government and the AG, helping to strengthen ownership of PFM reforms and the integrity of the systems.

43. As a first step, the MOFT could establish a nucleus of an internal audit function, for instance with two competent staff. Their task would be to engage in basic internal audit activities on a very selective basis, to gain experience for the development of a more substantive internal audit function over time. For this to work, the staff would need to be fairly experienced, and they should not be reallocated to carry out regular financial management functions for the MOFT. The internal audit function should report to the minister of the permanent secretary of the MOFT and should not be a part of any department. The development of internal audit should be closely coordinated with the AG.

Moving to a program structure in the budget

44. The PAS system has the capacity to prepare the budget in a program structure and to provide outturn reports accordingly. However, before that can be done, the government has to determine the structure and substructure of various programs. This should not be a priority in the near term, but could prove useful once the more pressing weaknesses in PFM have been addressed.

45. At that stage, the mission suggests that an expert group, comprising the budget department and representatives of major service providing departments, such as health and education, should be constituted to determine the structure of the programs. The group will need the support of a permanent staff in the MOF. It would also require significant technical assistance from external agencies with experience in transitioning to program budgeting.