North Macedonia: Technical Assistance Report - Public Expenditure and Financial Accountability Performance Assessment

This PEFA assessment provides a snapshot of the country’s PFM system performance in order to support the government in defining PFM reform priorities. The previous assessment was conducted in 2015, therefore the current assessment follows after the recommended time period between the two assessments. Furthermore, the scope and objectives of the reforms initiated and implemented in the intervening period makes tracking the change in the PFM system needed and meaningful. The assessment was conducted by the International Monetary Fund and the World Bank, with the Ministry of Finance and other relevant country institutions being the primary beneficiaries of the assessment.

Abstract

This PEFA assessment provides a snapshot of the country’s PFM system performance in order to support the government in defining PFM reform priorities. The previous assessment was conducted in 2015, therefore the current assessment follows after the recommended time period between the two assessments. Furthermore, the scope and objectives of the reforms initiated and implemented in the intervening period makes tracking the change in the PFM system needed and meaningful. The assessment was conducted by the International Monetary Fund and the World Bank, with the Ministry of Finance and other relevant country institutions being the primary beneficiaries of the assessment.

1. PFM Context in North Macedonia

1.1 Financial overview

Central government sub-sector is made up of the budgetary central government, social security funds and extrabudgetary units. The budgetary central government of North Macedonia comprises 95 first level budgetary units with 310 subordinate or second level budget units (agencies, departments). In addition, the central government includes three social security funds, the Health Insurance Fund, the Employment Agency of the Republic of North Macedonia, and the Pension and Disability Fund. There are 10 extrabudgetary entities (regulatory and other agencies), plus 10 entities legally organized as public corporations but classified as central government extra-budgetary units (EBUs) according to GFSM 2014. Furthermore, there are 108 Health Institutions partly financed from the budget.

The remainder of the public sector is made up of the local government and public corporations sub-sectors. Sub-national government comprises 81 municipalities, with 585 subordinate units and 151 public corporations. The broader public sector includes non-financial and financial public corporations. While there is no definitive list of publicly owned corporations, there are 33 non-financial legally organized as public corporations at central level, including 10 institutional units which should be classified as central government EBUs according to GFSM 2014.3 The National Bank of the Republic of North Macedonia (NBRNM) is the country’s central bank. North Macedonia Bank for Development Promotion (NMBDP) is a legally constituted public enterprise that is classified as financial public corporation under GFSM 2014. –as well as the Securities and Exchange Commission, the Insurance Supervision Agency, and the Agency for Supervision of Fully Funded pension insurance. The institutional structure of Government in North Macedonia is presented in Table 1.1.

Table 1.1:

Structure of the public sector (number of entities)

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Source: Authorities, PEFA team analysis, FTE (2018)

Social Security Funds are classified as a sub-sector of central government.

Fiscal management

Fiscal balances had been improving before the COVID-19 crisis hit in 2020. The central government fiscal deficit had been declining, in terms of GDP, each year since 2014. This was largely due to under-execution of budgeted capital expenditure. In 2019 fiscal performance improved further, supported by the economic recovery and by recent revenue and expenditure measures (Table 1.2). However, in 2020 with the COVID crisis, revenues fell by 1 percent of GDP while spending on containment measures increased by 5.2 percent of GDP, resulting in an increased deficit to 8.4 percent of GDP. During this period, public debt rose to over 60 percent of GDP.

Table 1.2:

North Macedonia aggregate fiscal data, 2018, 2019 and 2020 (percent of GDP)

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Source: State Statistical Office, Ministry of Finance

The financial structure of the central government budget is given in table 1.3.

Table 1.3:

Financial structure of central government – 2020 actual (MKD millions)

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corresponding to budgetary central government (BCG)

as presented in the Final Account of the Budget of the RNM

Earmarked revenues collected by the BCG and transferred to SSFs have been eliminated.

The budgets of institutional units are presented and described in a number of ways. These terms are reflected in the subsequent sections of the assessment and defined in the Budget Law. The Budget of Republic of North Macedonia is the budget of budget users plus the budgets of the three social security funds. The basic or core budget is a subsection of the BCG budget representing tax and non-tax revenues and expenditures of BCG (excluding earmarked inflows: loans, grants and self-financing). The development budget includes the budget year and two outer year projections for capital programs and development related expenditures for budget users. Further details based on the legal definitions of budgets are presented in the table below.

Table 1.4:

Definitions of budget in the Budget Law and the PEFA assessment

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Source: Law on Budgets (Article 2), annotated by the PEFA assessment team

1.2 Institutional arrangements for PFM

Government sectoral policy and regulation at the national level is the responsibility of 16 line ministries subordinated to the Prime Minister. Policies are implemented and public services are delivered by agencies, services, secretariats and inspectorates (second-line budget users), accountable to the line ministries (first-line budget users). Strategic planning is coordinated by the General Secretariat of the Government, which oversees implementation of the government’s four-year Work ProgramWork Program and ministries’ and other state administrative bodies’ three-year strategic plans.

The PFM system in North Macedonia is relatively decentralized with the Ministry of Finance (MoF) taking a lead role in setting policies and procedures. This is done through issuance of rulebooks to set the framework for PFM at the budgetary central government level. The coordination functions for budget preparation, budget execution, and public internal control rest with the MoF. Budget users are responsible for delivering their financial plans (including capital budget) to the MoF within the ceilings provided in the fiscal strategy, executing their budgets within budget allocation levels, organizing their functions of internal audit and controls, and maintaining the auxiliary accounting records in line with the MoF rulebooks. The MoF, through its Public Revenue Office (PRO) and Customs Administration (CA), retains a central role for revenue policy and administration.

The lead role in public financial management is assigned to the MoF. This includes formulating and monitoring fiscal policy, preparation and implementation of the budget, public internal financial control, managing the internal and external public debt, integrating fiscal and monetary policies in the national economy in cooperation and coordination with the Central Bank and related institutions. The Ministry consists of several General Sectors as well as 6 agencies, including the CA, PRO, Public Procurement Bureau, Financial Administration Police, Financial Administration Intelligence, and Foreign Currency Inspectorate. The Strategic Planning Unit manages matters related to the medium-term planning of the policies of the Ministry and their harmonization with the budget and the Cabinet Department supports the Minister. The key PFM sectors of the Ministry are highlighted below and shown in figure 1.1.

Other entities beyond the Ministry of Finance and BUs play key roles in PFM. These include the General Secretariat which has a role in strategic planning and the selection and monitoring of public investment projects; the Public-Private Partnerships (PPP) unit of the Ministry of Economy that leads the development of related laws, maintains the register of PPPs, and has a role in evaluating feasibility studies; and the Secretariat for European Affairs, which manages the single project pipeline.

The independent State Audit Office (SAO) publishes an opinion on the core budget execution report and has a broad mandate. Its remit covers all public financial operations including the BCG budget, SSFs, budget spending units, local governments, public enterprises and other beneficiaries of public funds. The 2010 Law on State Audit provides for the independence of the audit office from the executive, including parliamentary appointment of the state auditor and deputy and approval for its budget. The Law on Budget requires the SAO to submit its annual report to the Parliament within six months of the end of the year.

Figure 1.1
Figure 1.1

Organogram of the Ministry of Finance

Citation: IMF Staff Country Reports 2022, 219; 10.5089/9798400216329.002.A001

  • Tax and Customs Policy Department drafts laws and bylaws and policies for taxation, fees and customs including harmonization of customs regulations in accordance with world and European standards, and analyzes and monitors free trade agreements and avoidance of double taxation and prevention of tax evasion.

  • Macroeconomic Policy Department prepares macroeconomic projections and policies underpinning the medium-term fiscal strategy; coordinates the preparation of the Economic Reform Program, as well as the economic and financial dialogue with the EU; prepares and publishes monthly and quarterly reports on economic developments, and a statistical overview.

  • Budgets and Funds Department develops the medium-term fiscal strategy and proposes allocation of funds for operating and capital investment expenditures at a detailed level, for submission to the Government. It develops laws and policies regulating the preparation, adoption and execution of the Budget. It provides opinions, information, reports on programs, and decisions related to the Budget and budget policy, and conducts analysis of budget revenues and expenditures and the impact of non-budget laws on budget policy. During budget execution, it approves redistributions and reallocations, and monitors and controls the payment of salaries to budgetary central government employees. It monitors the finances of local government units, public enterprises, and agencies.

  • Treasury Department maintains the register of budget users; manages accounts within the single treasury account (STA), prepares liquidity projections on the STA, manages MKD and foreign currency payments; monitors revenue collection of central and local government entities and distribution, keeps the budget accounting records in line with the chart of accounts, approves annual, quarterly and monthly financial plans of budget users; and prepares reports on the collection of revenues and other inflows and realization of expenditures and other outflows of the Budget. The Department operates and maintains the Treasury Information System (TrIS). It is organized with the central unit within the MoF and 17 regional offices.

  • Central Harmonization Department for public internal financial control (PIFC) coordinates and improves the system of public internal financial control through its three components: financial management and control, internal audit, and their harmonization. The mission of the Department is to build a system, in line with the requirements of the European Union acquis,4 which guarantees the reasonable use of public funds by applying the principles of decentralized management accountability and establishing a functionally independent internal audit.

  • Internal Audit Department organizes and performs internal audits in the Ministry of Finance in accordance with the legal regulations, international standards for professional execution of internal audit and the internal rules of the Ministry.

  • Financial Affairs Department is responsible for accounting and financial operations, budget coordination and budget control for the MoF. Its role includes accounting records, financial material operations, preparation and calculation of salaries, treasury operations, receipt, recording and issuance of office supplies, preparation of the draft budget of the Ministry, preparation of financial plans, proposals for redistribution of funds and proposal for amendments to the budget of the Ministry, and implementation of ex-ante and ex-post financial control.

  • Financial System Department prepares regulations for the banking system and non-banking financial institutions, capital market, insurance system, accounting system, auditing and payment operations, games of chance and gambling. It issues licenses for the organizers of games of chance and amusement games, financial companies and financial leasing companies. It manages the accounting and reporting framework for budget users and public corporations.

  • Department of Legal Affairs prepares opinions on laws, collective agreements, by-laws and other regulations, prepares responses to complaints and lawsuits related to acts that determine the rights and obligations of employees, proper handling of documents and archives, free access to information for the public, as well as planning and monitoring the public procurement in the Ministry of Finance. It includes the human resources unit.

  • Department for Second-Instance Administrative Procedure, Disputes and Claim Collection is in charge of resolutions of appeals relating to the pre-2015 tax and customs acts.

  • IT Department performs the activities related to related to the organization and development of the information system in the field of public finance and proposals for improvements.

  • International Financial Relations and Public Debt Management Department manages the public debt of North Macedonia, and issues guarantees with a view to minimizing risk and cost. It communicates and coordinates with international and bilateral financial institutions for preparation and implementation of projects financed with foreign loans and donations and concludes loan and guarantee agreements. It monitors the implementation of projects financed by foreign loans and donations and proposes remedial actions, as needed. The department works to maintain an efficient and liquid government securities market. It harmonizes legislation with EU laws and coordinates the fulfillment of the obligations arising from the national program for adoption of acquis and other strategic documents for European integration.

  • Department for Financial Inspection and Coordination for Combating Fraud against European Union (EU) Funds performs financial inspections in accordance with the Law on Financial Inspection in the Public Sector and works on the protection of financial interests of the EU through coordination of administrative and operational activities regarding the fight against fraud in relation to EU funds and effective cooperation with the European Anti-Fraud Office (OLAF).

  • Department for Central Financing and Contracting is responsible for sound financial management of projects financed by several IPA components for which it is the contracting authority responsible for tendering procedures. The tasks related to programming, technical implementation and monitoring of the implementation of the contracts are delegated to the competent beneficiaries.

  • Department for Asset Management for the Instrument for Pre-Accession Assistance manages the finances of pre-accession funds of the EU, opens and manages bank accounts, applies for funds from the European Commission (EC), approves transfer of funds received from the EC, financial reporting to the EC, and works directly with the National Authorization Office regarding the legality and regularity of transactions.

Table 1.4:

Assignment of key PFM functions and processes

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1.3 Legal and regulatory arrangements for PFM

The Constitution of the Republic of North Macedonia as the highest legal act provides fundamental principles of legality. The Constitution defines executive, legislative and judiciary power in North Macedonia. It stipulates responsibilities of the Government, Parliament, the President and courts. Parliament holds the legislative power and is mandated with adoption of the laws, including those regulating the PFM area. The executive power lies with the Government, whose institutions are responsible for implementing legislative provisions related to PFM.

The (Organic) Budget Law provides the overall legislative framework for key elements of the PFM system, with additional thematic laws and by-laws further regulating specific areas. The law includes provisions related formulation and execution of the annual budget. It also describes the process of medium-term budgeting, including preparation of the three-year Fiscal Strategy. The law prescribes the functioning of the STA as the core element of the public collections and payments system. It also includes provisions which regulate budgetary accounting and reporting. The law includes a section on fiscal discipline, including fiscal rules. There is a general mention of public internal financial control, public debt and public assets, which are further regulated by separate laws.

The Annual Budget Law determines planned revenue and expenditures and serves as the principal act for managing public finances in a given budget year and three-year development budget. The Annual Budget Law includes overall revenue and expenditures of the BCG, as well as for individual budget users. It presents budget expenditures in line with economic, functional, administrative and program classifications. Revenue is presented by source of funding. The law also includes information about the planned borrowing for the budget year, breakdown of state guarantees, and main projects financed by loans from international financial institutions and EU support to reforms through the Instrument for Pre-accession Assistance (IPA) funding. The annual budget law is adopted by the end of the year for the next year. Opportunities for public participation in the budget process are limited, as there are no legal provisions requiring public participation.

The Law on Final Accounts comprises the annual government financial statements and presents revenues received and expenditures for the year. Balance sheets are prepared by individual budget users, but are not consolidated at the level of BCG in the final account. The proposed Law on Final Accounts, together with the opinion of the State Audit Office, is by legislative provisions submitted to the Parliament by June 30 of the current year for the previous year.

Formulation and execution of the budget are further regulated through a set of by-laws. Relevant pieces of secondary legislation in these areas include the Rulebooks on (i) income classification, (ii) classification of expenditures, (iii) Chart of Accounts, and (iv) Content of Individual Accounts in the Chart of Accounts. These by-laws provide rules for budget classifications and budget line items.

Budgetary accounting and reporting are primarily regulated by the Law on Accountancy of the Budget and Budget Users. The law defines financial statements of the budget users as the statement of revenue and expenditure and the balance sheet. In line with Article 23, financial statements with the accompanying explanation represent the Final Accounts of the budget user. Additional by-laws regulate specific elements of accounting and reporting, such as the Rulebook on the Form and Content of the Balance Sheet and Revenue and Expenditure Statement and the Rulebook on Accounting of the Budget and Budget Users.

Revenue administration is subject to a comprehensive legal framework that specifies the roles and responsibilities of the revenue collecting entities and payers. The Public Revenue Office and Customs Administration are the principal revenue agencies which collected 91.6 percent of revenue in FY 2020. Separate legislation is in place for tax administration, customs administration, administrative procedures (general, tax and customs) and audit. There is dedicated legislation for all taxes and social security contributions. Besides the relevant legislation, important guidance in this area is provided by the Instruction for the manner of registration, allocation, refund and transfer of public revenues and the Instruction on the form and content of payment instruments for domestic transactions.

Separate legislation regulates the areas of external audit, public procurement, internal control and internal audit, public debt, and public assets management. The Law on SAO governs external audit within the public sector, and it includes provisions regarding the role of the SAO, its mandate and the scope, organization, and nature of audits. The Law on Public Debt defines provisions for new borrowing, institutional responsibilities and reporting and management of public debt. The Public Procurement Law (PPL) prescribes rules and requirements related to procurement within the public sector. Use, management, and disposal of public assets is affected by a broad spectrum of legislation with primary acts being the Law on Managing State Property and the Law on Use and Disposal of State-owned and Municipal-owned Assets. Primary legislation related to local self-governments comprises the Law on Local Government and the Law on Financing Local Self-Governments. The legislative framework relating to internal control and internal audit is described in the section below.

Other PFM-related medium-term planning documents

Strategies, programs and medium-term plans accompany legislation and describe objectives, priorities and measures for the PFM reform. The Fiscal Strategy, which covers a three-year period on a rolling basis, provides framework guidance for PFM, including medium-term fiscal targets. Additional strategies that define the PFM reform objectives include the strategies related to the State Audit Office, Public Debt Management, Tax System Reform and Public Revenue Office.

The Economic Reform Program (ERP) sets out the major structural reforms for a three-year period. The MoF is also coordinator of the annual ERP that contains a medium-term framework of the macroeconomic and fiscal policy, as well as a detailed overview of structural reforms. It is based on the fiscal strategy, the adopted annual budget, public debt management strategy and other relevant sectorial strategies, and is submitted to the European Commission (EC) after its adoption by the Government which is no later than January 31 each year.

Internal control framework

North Macedonia is reforming its system of public internal financial control (PIFC) in line with the EU accession priorities. In line with the country’s EU accession agenda, the objectives of PIFC are aimed at aligning management, control and internal auditing with internationally recognized principles, standards, and good practices. The reform is seen as an integral building block in the country’s ongoing effort to reform public administration and PFM. Developments in the period 2019-2021 were framed in the Government’s PIFC Policy Paper.

General internal control arrangements and requirements in North Macedonia are set out in the Public Internal Financial Control Law (last amended 2015) with supporting by-laws.5 The PIFC Law covers the three “pillars of PIFC”, namely: financial management and control (FMC), internal audit (IA) and a committed central harmonization unit at the MoF to steer the reform. Primary provisions of the Law are elaborated in a number of by-laws, methodologies, and manuals to support practical implementation.6 Legislation in areas such as policy development and coordination and civil service, outside of the PFM cycle but shaping the internal control landscape, are progressively being aligned with EU Administrative Space principles.

Coverage of the PIFC Law is comprehensive and its requirements encourage alignment to international standards. At the time of assessment, the provisions on FMC covered all revenues, expenditures, assets and liabilities of budget users, social insurance funds, and the sub-national government units (but did not extend to public corporations). FMC objectives as defined in the Law are formulated in line with international good practice requirements. They require sound compliance and value-for-money in operations, safeguarding of assets, and timely financial and non-financial reporting. Implementation of FMC is envisaged through five interrelated components based on the underlying framework of the Committee of the Sponsoring Organizations of the Treadway Commission (COSO).7 Provisions on internal audit (IA) cover a range of topics including auditors’ independence, their rights and responsibilities, and criteria for establishment of the IA units, among other things. The standards prescribed for internal auditors in the public sector are those from the International Professional Practices Framework (IPPF) issued by the Institute of Internal Auditors (IIA).

Responsibilities for management and internal control are clearly assigned under law. The head of each entity is required to set up, operate, monitor, evaluate and report on the functioning of the internal control system across the respective organization. Managers in the implementing organizations are explicitly required to manage the entrusted resources in a legally compliant, economical, efficient, and effective manner. Responsibilities of the entities’ financial affairs units in relation to the budget cycle are prescribed in detail, including in terms of segregation of duties. A decentralized system of functionally independent internal audit units is expected to provide assurance and consulting services on governance, internal control and risk management issues in individual organizations. In the MoF, the Central Harmonization Department (CHD) retains overall responsibility for formulation, coordination and monitoring of the public internal control framework policy (including legal and operational) as well as for provision of methodological guidance and capacity development.

The functioning of the internal control arrangements is monitored, reported and subject to external scrutiny. MoF’s CHD annual reports are used to monitor overall development and functioning of the internal control framework, based on self-reported replies on implementation of FMC and IA from individual organizations. The CHD is also charged with conducting quality reviews of internal controls in individual organizations. The MoF’s Financial Inspection Department provides ex-post verification of regularity (compliance) of financial transactions and compliance of specific public sector operations with the prevailing legislation. The SAO examines the functioning of the internal control framework in the course of its financial, compliance and performance audits.

1.4. PFM Reform Process

1.4.1 Approach to PFM reforms

The government’s current Public Financial Management Reform Program (PFMRP) covers the period 2018-2021. The PFMRP was developed after the 2015 PEFA assessment and is the main strategic and operational guidance for planned reforms in public finances with the view to improve efficiency and effectiveness of public spending. PFM improvements are continuously placed among the top government priorities. The PFMRP measures are also intended to support fulfillment of the requirements for the country’s EU accession process.8

The PFMRP covers seven priorities that correspond to the major PFM functions and is complemented by PFM sub-area strategies. PFMRP priorities include Improved Fiscal Framework, Revenue Mobilization, Planning and Budgeting, Budget Execution, Transparent Government Reporting, Internal Control, and External Control and Parliamentary Oversight. The priorities are broken down into measures, with annual action plans detailing the activities and sub-activities to be carried out. Monitoring and implementation is supported with a logical framework of qualitative and quantitative indicators to measure results against targets. In addition to the PFMRP, a number of PFM sub-area strategies are in place for horizontal functions (such as public internal financial control and taxation) and individual institutions (SAO, Customs Administration, Public Revenue Office). A new Public Procurement Strategy was being prepared during 2021. Most recently, in 2021 a complementary Action Plan was approved to address bottlenecks in the area of public investment management.

PFMRP is substantively informed through PFM diagnostic assessments in cooperation with development partners. In the period 2018-2020, the Government undertook a Fiscal Transparency Evaluation (FTE, 2018), Public Investment Management Assessment (PIMA, 2020), Tax Administration Diagnostic Assessment Tool (TADAT, 2021), and Tax DIAMOND (2020) assessment. OECD SIGMA monitoring assessment using the Principles of Public Administration (PPA) was conducted at the same time as this PEFA assessment. An independent view on some PFM functions is provided once every two years through the Open Budget Survey.

1.4.2 Recent and on-going reform actions

During the implementation of the current PFM Reform Program, progress has been achieved in number of areas, but many areas for improvement remain works in progress. In revenue mobilization, activities are in progress to improve collection of taxes, VAT refunds, automatic data exchange, modernization of the PRO and professional and ethical standards. On budget execution, a detailed technical specification was prepared with technical assistance support for a new integrated Financial Management Information System (FMIS) that will replace in current TrIS. In public procurement, the authorities continued the process of complementing primary legislation with supporting secondary legislation. New concession and Public-Private Partnership (PPP) legislation is under development, expected to be adopted in 2021. There is increased transparency in debt management by including information on financial performance of public corporations in the Fiscal Strategy. Arrears data are now published quarterly. The Government is improving alignment of its statistics with the ESA 2010. The SAO is continuing to develop its institutional capacity, including capacity for performance auditing. A number of these reforms have translated into improved PEFA scores (see tracking of performance change over time).

A number of other expected improvements are closely tied with the adoption of the new draft organic budget law (OBL). Many of the critical reforms hinge on passing of this legislation and the resulting set of by-laws that will have major impact on the processes assessed under the PEFA Framework. Planned reforms under the improved fiscal framework, planning and budgeting and transparent government reporting priorities will be particularly strengthened by the new draft OBL.

Institutional considerations (leadership, coordination, sustainability, and transparency)

PFM reforms are spearheaded by the MoF and carried out in coordination with other institutions. The main stakeholders in the PFM reform management and coordination framework are the PFM Council and the PFM Working Group (PFM WG). All relevant country PFM institutions are represented.9 Operational monitoring is assigned to priority coordinators and measure leaders (for individual measures within a priority area). PFMRP implementation is reported at least biannually to the Government by the PFM Working Group through the PFM Council. An updated Decision on the PFM WG composition and tasks (October 2021) provides the mandate for its members to develop the new PFM Strategy, coordinate its implementation, as well as to monitor, evaluate and report progress made. As of October 2021, civil society organizations (CSOs) and representatives of development partners are included as observers in the PFM WG.

Results of the PFMRP inform policy and technical assistance dialogues with the EU and other development partners. Implementation of the PFMRP is characterized by a high degree of transparency, with the main documents (program, action plan, reports, and policy dialogue conclusions) available publicly and without restrictions. Besides providing a synopsis of progress achieved across priorities, monitoring reports single out cross-cutting issues such as donor coordination and capacities (financial, IT and human) and interested parties, including CSOs, are invited to discuss the reported progress. Measures are reported as achieved/partially achieved/not achieved and accompanied with a forward-looking risk assessment for measures under implementation. To address capacity constraints, the government is expecting support from multiple technical assistance projects in the period 2021-2023.

The PFMRP is fully costed across pillars, measures, and activities. The 2021 Action Plan shows the PFM reforms are financed just over 50 percent from national sources of funds and the remainder through donor support. The financing gap is known and is addressed through proactive dialogue with the development partners.

2. Detailed analysis of PFM performance

Pillar One: Budget Reliability

What does Pillar I cover? Whether the government budget is realistic and is implemented as intended. This is measured by comparing actual revenues and expenditures (the immediate results of the PFM system) with the original approved budget.

Overall performance: key strengths and weaknesses

The annual budget can be considered as generally reliable, given that the deviations of both aggregate actual expenditures and revenue are low to moderate compared to the original budget. Deviation of total expenditures ranges from 91.8 percent in 2018, reducing to 102.8 percent in 2020. The variance in expenditure composition by economic category was however high - over 15 percent in two of the years assessed – 2018 and 2020. These deviations in economic categories were largely due to the under execution of the capital budget and overspending on the transfers and subsidies budget line. The contingency reserve was low, on average at 0.06 percent of the budgetary central government (BCG) expenditures.

Deviations in aggregate budget revenues was around 7 percent in 2018 and 2019, rising to slightly over 16 percent in 2020, largely due to the impact of COVID-19. Variance in revenue composition was high, tax and non-tax revenues were overestimated, while social security contributions were under-estimated.

PI-1. Aggregate Expenditure Outturn

This indicator measures the extent to which aggregate budget expenditure outturn reflects the amount originally approved, as defined in government budget documentation and fiscal reports. Coverage is BCG which includes central level Budget Users (BUs) and transfers to the three Social Security Funds (SSFs). The assessment is based on the budget and actual expenditure for the last three completed year 2018, 2019 and 2020. Detailed calculations are presented in Annex 5.

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1.1 Aggregate expenditure outturn

The data used for calculation of expenditure deviation originates from audited final accounts of the Budget of the Republic of North Macedonia for 2018 and for 2019, and unaudited reports for 2020. The absolute deviation of the actual budget expenditures versus the approved expenditure in the last three completed fiscal years (i.e., 2018, 2019 and 2020) was between 2.8 percent and 8.2 percent. This translates into budget outturn for those years in the range between 91.8 percent and 102.8 percent.

Table 1.1:

Total budget and actual expenditure (in MKD million)

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Source: Assessment team calculations based on the annual budget laws and final accounts

Since the variations in two of the three years covered by the assessment are between 90 and 110 percent, the rating for this dimension is B.

PI-2. Expenditure composition outturn

This indicator measures the extent to which reallocations between the main budget categories during execution have contributed to variance in expenditure composition. Coverage is BCG. The assessment period relates to the fiscal years 2018, 2019, and 2020. Data and calculations for this indicator are included in Annex 5.

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2.1. Expenditure composition outturn by function

This dimension measures the difference between the originally approved budget and end-of-year outturn in expenditure composition, by administrative or functional classification, during the last three years, excluding contingency items, and interest on debt.

The assessment of the expenditure composition outturn is done at the administrative level, based on the twenty main budgetary votes. The variance of expenditure composition outturn by budgetary votes was 9.6 percent in 2018, 8.7 percent in 2019 and 17.8 percent in 2020. The source of variation differed from one year to the other. In 2018, the main source of deviation was under-execution of the approved budget by Ministry of Transport and Communication (51.3 percent), Ministry of Finance, (47.3 percent), and Ministry of Agriculture, Forestry and Water Economy (42.3 percent). In 2019 and in 2020, the variance was largest for the administrative head of Government of Republic of North Macedonia, due to overspending against the approved budget, largely due to measures to mitigate the impact of COVID-19.

Since the variations in expenditure composition were less than 10 percent in two of the past three years, the score for this dimension is B.

2.2. Expenditure composition outturn by economic type

This dimension measures the difference between the original approved budget and end-of-year outturn in expenditure composition by economic classification during the last three years including interest on debt but excluding contingency items.

The variance in expenditure composition by economic classification was 16.7 percent in 2018, 11.3 percent in 2019 and 18.2 percent in 2020. The variance was less than 15 percent in only one of the years assessed. Significant under-execution of capital expenditure and over-execution of transfers and subsidies were the key contributors to relatively high variances for all three years.

As the variations in expenditure composition by economic classification in two of the past three years exceeded 15 percent, the rating for this dimension is D.

2.3. Expenditure from contingency reserves

This dimension measures the average amount of expenditure actually charged to a contingency vote over the last three years.

Under the Budget Law (Article 11), permanent and current budget reserves are considered for addressing the consequences from natural disasters and other unforeseen events, respectively. The appropriations in the permanent budget reserve cannot be reduced with reallocations during the year, but they can be increased. The total volume of reserve funds shall not exceed 3 percent of the total current expenditures of the budget. The funds from the reserves are allocated to specific purpose based on a government decision.

Aggregate amount of funds spent within the contingency reserve as a proportion of the total BCG expenditure in 2018, 2019 and 2020 was at the levels of 0.04, 0.05 and 0.1 percent, respectively, while the average in the last three completed fiscal years was 0.06 percent.

Since the level of actual expenditure charged to a contingency was on average less than 3 percent in the past three years, the rating for this dimension is A.

PI-3. Revenue outturn

This indicator measures the change in revenue between the original approved budget and end-of-year outturn. Coverage is BCG. As per PEFA guidance, the calculations include social security contributions.10 The assessment period relates to the fiscal years of 2018, 2019, and 2020. Data and calculations for this indicator are included in Annex 5.

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Macroeconomic forecasting is performed by the MoF Macroeconomic Policy Department while the MoF Budget and Funds Department is tasked with the creation of fiscal policy, public finance management and improvement of the budgetary process.

3.1. Aggregate revenue outturn

This dimension measures the extent to which revenue outturns deviate from the originally approved budget. Total actual revenue deviated from the revenue foreseen by the annual budget laws by 7.3 percent in 2018, 7.1 percent in 2019 and 16.1 percent in 2020. The largest contributors to the variance were tax revenues, social security contributions and non-tax revenues. Tax and non-tax revenues were overestimated while the social security contributions were underestimated. Due to COVID-19 the deviation in 2020 was significantly higher.

Table 3.1

BCG aggregate revenue deviation

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Source: Assessment team calculations based on the annual budget laws and final accounts

Since the actual revenue deviation in two out of the three past financial years was under 8 percent of total revenue, the rating for this dimension is C.

3.2. Revenue composition outturn

This dimension measures the variance in revenue composition over the past three years. The variance in revenue composition was 12.4 percent in 2018, 13.7 percent in 2019 and 17.1 percent in 2020. The sources of variance remain the same as in the previous dimension. Namely, estimates of income and profit tax together, VAT and excise and social security contributions contributed the most to the overall misalignment of actual values with those set by the budget law. Due to COVID-19 the deviation in 2020 was significantly higher.

Table 3.2.

BCG revenue composition variance

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Source: Assessment team calculations based on the annual budget laws and final accounts

Since the variance in revenue composition in two out of the past three years was lower than 15 percent, the rating for this dimension is C.

Pillar Two: Transparency of Public Finances

What does Pillar II measure? Whether information on public financial management is comprehensive, consistent, and accessible to users. This is achieved through comprehensive budget classification, transparency of all government revenue and expenditure including intergovernmental transfers, published information on service delivery performance and ready access to fiscal and budget documentation.

Overall performance: key strengths and weaknesses

The budget is presented using all relevant budget classifications: economic, functional, organizational and program classifications, and bridge tables are used to enable presentation of data in line with GFSM2014. The budget documents, however, lack some key features notably comparable current year budget data with the budget proposal and aggregate data for both current and previous years at the detailed level. While the latter is available for the economic classification, the analysis is not provided by program or functional classifications. Providing this key information would provide legislators with a clearer picture of the fiscal forecasts, budget proposals and outturns to support allocation decisions.

There is very good public access to fiscal information, with reports published on respective websites in a timely manner. The coverage of the budget however could be more comprehensive. While a substantial share of total central government activity is covered in financial reports, they do not capture the activities of regulatory agencies (including the Agency for Electronic Communication and 5 smaller entities), 6 regulatory agencies and 10 public corporations (PCs ) that should be classified as EBUs on the basis of international statistical standards (GFSM 2014), nor do they include the activities of the public health institutions’ self-financed activities and some donations excluded from the budget. Excluded from the budget are also revenue and expenditure from EU funds that are directly managed by the EU Delegation.11 Indirectly managed EU funds are included within the budget. The system of transfers to local self-government units is transparent, rule-based, and timely.

Although program budgeting has not yet been formally adopted and remains at a relatively early stage of implementation, information on programs is provided and planned performance is presented by most budget users. However the results framework is not uniform and the quality of information on service delivery varies from institution to institution, and there is no mechanism yet for comparing results against the plans. Details of resources received by service delivery are also inconsistent as the Health Insurance Fund publishes information on payments made to health institutions, but no information is available on resources received by schools. The SAO prepares and publishes several effectiveness and efficiency evaluations and the number of these are gradually increasing. To a much lesser extent, internal audit units have also started to undertake some evaluations.

PI-4. Budget classification

This indicator assesses the extent to which the government budget and accounts classification is consistent with international standards during all stages of the budget cycle including formulation, execution, and reporting. Indicator coverage is BCG and it assesses performance in 2020 as the last completed fiscal year.

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A common chart of accounts is used for budget preparation, budget execution and financial reporting. Administrative units (organizational classification), economic categories (economic classification), function/subfunction (functional classification), program classification and source of funds classification are used for budget formulation, execution, and reporting. The budget classifications are regulated by the Budget Law and the respective rulebooks (the Rulebook on Income Classification and the Rulebook on Classification of Expenditures).

4.1. Budget classification

This dimension measures whether the budget presentation, execution and reporting reflect the most important classifications, is reliable, and is consistently applied. The economic classification is defined by the two rulebooks (as mentioned above). A standard bridge table is used to map the economic classification to the classification used in the Government Finance Statistics Manual (GFSM 2014). The organizational classification is based upon several regulations, such as founding laws of individual institutions, and is defined with the annual budget. The programs within the program classification are also defined with annual budget. The functional classification directly follows the Classification of the Functions of Government (COFOG) determined by the United Nations. A detailed bridge table with fully documented methodology is used to derive the functional classification from a combination of the organizational and program classifications.

Budget formulation (the annual budget law and its adoption) is based on all the required classifications, i.e. (i) organizational classification, (ii) economic classification on a 3 digit level for presentation and approval, (iii) full functional classification (4 digit level), (iv) program classification and (v) source of funds classification,

Budget is executed through the STA and Treasury Information System (TrIS). STA, TrIS and centralized payment procedures allow for every transaction to be tracked by all classifications and reports to be generated against each classification during the year. For each transaction, a 24-digit account code is used, including: 10 digits dedicated for administrative classification, 5 digits for source of funds classification, 6 digits for the economic classification, 2 for the program classification and 1 digit is a control number. A detailed bridge table with documented methodology is used to derive the functional classification from a combination of the organizational and program classifications. Budget execution is monitored through the TrIS system.

Reporting is based on the classifications used for budget formulation. The annual Final Account report follows exactly the format of the adopted budget, i.e., it reports according to (i) organizational classification, (ii) economic classification, (iii) functional classification, (iv) program classification and (v) source of funds classification. In-year budget reports can also be produced in these formats.

Consistency of use of the classifications is supported by centralized IT systems for budget preparation (E-Budget) and budget execution Treasury Information System (TrIS).

The budget is classified by administrative, economic, and program classifications, and the functional classification is derived from the program and administrative classifications by a bridge table. The classification system allows transactions to be tracked throughout the budget’s formulation, execution, and reporting cycle according to all classifications enabling to produce consistent documentation comparable to GFS/COFOG standards. However, budget formulation is based only on the “Group” level of the GFS standard – 3 digits, hence the score B.

PI-5. Budget documentation

This indicator assesses the comprehensiveness of the information provided in the annual budget documentation prepared by the government. It includes a list of four basic and eight additional elements. Time period is the last budget submitted to the Parliament (2021 Budget) and the coverage is BCG.

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The budget documentation consists of five documents: the annual budget, the Fiscal Strategy, the revised Fiscal Strategy, the Debt Management Strategy, and the Final Account. The content and timing of the Fiscal Strategy and annual budget is regulated by the Budget Law and the Debt Management Strategy by the Public Debt Law. Both documents should be adopted by the Government by May 31st (see PI-15 and PI-13, respectively). Additionally, the Final Account for the previous year, to be submitted to the Parliament by June 30th (see PI-29), is considered as part of budget documentation.12 The preparation and adoption of the supplementary budget in a given year depends upon economic and political circumstances and there is no obligation nor predetermined time frame specified in the Budget Law. Hence it is not considered as part of budget documentation for assessment purposes.

5.1 Budget documentation

The budget documentation for the 2021 annual budget consists of:

  • The Fiscal Strategy of the Republic of North Macedonia for 2021-2023 (FS 2021-2023); adopted on July 28, 2020.

  • The Revised Fiscal Strategy of the Republic of North Macedonia for 2021-2023 (with prospects until 2025); adopted on December 10, 2020.

  • The Public Debt Management Strategy of the Republic of North Macedonia for 2021-2023 (with prospects until 2025) (PDMS 2021-2023); adopted on December 10, 202013.

  • The 2021 Budget Law Proposal; submitted to the Parliament on November 10, 2020 and adopted on December 20, 2020.

  • The Final Account for 2019; submitted to the Parliament on October 13, 2020.

The detailed structure of the annual Budget Law with several thousand budget lines according to different budget classifications makes systematic comparison of revenue and expenditure estimates of the budget proposal of the current year, and outturn of the previous year very difficult for decision makers since the information is not presented for comparison in the same document.

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The budget documentation fulfills five elements, including two of the four basic of the elements and three of the eight additional elements, and the dimension score is D.

PI-6. Central government operations outside financial reports

This indicator measures the extent to which government revenue and expenditure are reported outside central government financial reports. The assessment of this indicator is based on the latest information and reports available, which are related to the fiscal year 2019.

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North Macedonia’s public sector comprises of over 1,300 separate units of various legal forms. Figure 6.1 shows distribution of these by subsectors including the sources of extrabudgetary revenues and expenditures.

Figure 6.1:
Figure 6.1:

Distribution of public entities by subsectors including the sources of extrabudgetary revenues and expenditures

Citation: IMF Staff Country Reports 2022, 219; 10.5089/9798400216329.002.A001

Source: FTE, 2018 (2016 data), authorities and PEFA assessment team analyses

The Single Treasury Account (STA) system comprises a STA in the MoF and a separate STA in the Health Insurance Fund. Transactions of the other two SSFs are executed in the STA in the MoF. The coverage is comprehensive in the sense that all cash transactions of all budget users at all levels of government (except extrabudgetary operations) are conducted within the MoF STA. The accounting records which are consolidated to produce the annual Final Account, are based on the transactional data from the STA posted in the TrIS. The extrabudgetary entities (with exception of the public health institutions) are not part of the STA system. Own source revenues and grant funded expenditures of public health institutions are not included in STA, i.e. are extrabudgetary operations.

There is no formal register or list of public entities and the exact number of institutions varies based on the source, creating challenges to accurately assess the total size of extrabudgetary revenue and expenditure. Additionally, there are extrabudgetary operations, not included in the government’s financial reports, linked to self-financing activities and donations. The four main sources of extrabudgetary operations are (see also Table 6.1):

  • 6 regulatory agencies and 4 independent and other entities (central public sector entities which are not public enterprises (PEs)) which should be part of the BCG budget and budgetary procedures according to GFSM 2014.

  • 10 PEs which are classified as central government according to the GFSM statistical rules (e.g. Public Enterprise for State Roads (PESR)).

  • Revenue and expenditure of 108 public health institutions which originates from self-financing activities and donations.

  • Revenue and expenditure which originates from the European Union (EU) funds (under IPA II and IPA III)16 and are directly managed by the EU with only the co-financed portion shown in the budget.

Table 6.1:

Extrabudgetary CG revenues and expenditures and financial reports of EBUs (MKD millions)

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Source: Authorities, PEFA assessment team analysis and FTE, 2018.Regulatory agencies: Securities and Exchange Commission of the Republic of North Macedonia, Insurance Supervision Agency and the Agency for Supervision of Fully Funded Pension Insurance are public financial corporations.** The other three SOEs classified as central government units (FTE, 2018) are LLC "Elem turs", LLC EU Center for Vulnerability of Industrial and Vital Systems and Centre for Technology Transfer and Innovations – INNOFEIT, which are immaterial in terms of revenue and expenditure.
6.1. Expenditure outside financial reports

This dimension assesses the magnitude of expenditures incurred by budgetary and extrabudgetary units (including social security funds) that are not reported in the government’s financial reports.

Table 6.1 above provides quantitative information on estimated extrabudgetary expenditures.

Extrabudgetary expenditure not included in ex-ante and ex-post financial reports amounted to less than 10 percent of budgetary central government expenditure in 2020, resulting in a C score.

6.2. Revenue outside financial reports

This dimension assesses the magnitude of revenues received by budgetary and extrabudgetary units (including social security funds) that are not reported in the government’s financial reports.

Table 6.1 provides quantitative information on estimated extrabudgetary revenues.

Extrabudgetary revenue not included in ex-ante and ex-post financial reports amounted to more than 10 percent of budgetary central government revenue in 2020, resulting in dimension score D.

6.3. Financial reports of extrabudgetary units

This dimension assesses the extent to which ex-post financial reports of extrabudgetary units are provided to central government. The annual reports should be sufficiently detailed and timely to yield a full picture of government financial operations when combined with the financial reports for budgetary central government and SSFs.

The Budget Law regulates the semi-annual and annual reports on budget execution but not the annual reports of PEs or EBUs. These are regulated by the Law on Public Enterprises, and specific legal acts establishing individual entities, respectively. Out of nine regulatory agencies, seven report to the Parliament, while the remaining two report to the Government. All reports are scrutinized by the MoF. The MoF issues an opinion before the reports are adopted by the Parliament or Government.

About 22 percent (by value of expenditure) of financial reports are submitted to the government within six months and about 55 percent within nine months of the end of the financial year.

The majority of extrabudgetary units submit financial reports within nine months of the end of the financial year, resulting in dimension score C.

PI-7. Transfers to subnational governments

This indicator assesses the transparency and timeliness of transfers from central government to subnational governments with direct financial relationships to it. It considers (i) the basis for transfers from central government and ( i i ) whether subnational governments receive information on their allocations in time to facilitate budget planning. The time period assessed is the last completed fiscal year (2020).

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About 60 percent of the revenues of the 81 local government units (LGUs) in the Republic of North Macedonia take the form of grants from central government. About 2 percent of revenues are from external grants and the rest are LGUs’ own revenues from property taxes and other local charges (utility fees, fees for arranging construction on land, spatial and urban plans, mineral resources and other). The system for formula-based central government grants is prescribed in the Law on Financing of Local Self-Government Units and its secondary legislation.

The MoF issues guidance to LGUs about the amounts of government grants, and other factors to be taken into account in their preparation of the next year's budget, by the end of September each year, once the provision for grants to LGUs in the draft budget has been determined.

7.1. System for allocating transfers

This dimension assesses the extent to which transparent, rule-based systems are applied to budgeting and the actual allocation of conditional and unconditional transfers.

More than 90 percent on average of central government grants are distributed through a transparent, formulae-based system with clear objective factors (e.g., population, pupil numbers, surface area). In addition to their shares of block grants for education, culture and social protection, LGUs receive 4.5 per cent of the previous year's VAT revenue. LGUs' own revenues include 3 per cent of the current year's yield in their respective geographical area from personal income tax. The breakdown of LGU revenues is shown in Table 7.1 below.

Table 7.1:

Local government revenue summary (MKD millions)

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Source: Authorities

The allocation of over 90 per cent on average of central government grants to LGUs is based on a transparent and rule-based system, resulting in dimension score A.

7.2. Timeliness of information on transfers

This dimension assesses the timeliness of reliable information provided to subnational governments on their allocations from central government for the coming year.

The MoF issues guidance to LGUs in the Budget Circular which includes the amounts of government grants, and other factors to be taken into account in their preparation of the next year's budget, by the September 30th each year as required under Article 19 of the Budget Law. The adopted budget allocation is identical to the allocation indicated within the Budget Circular (see also Table 7.1 above). This deadline is respected. LGUs' budgets should be approved before the beginning of the year to which they relate, but LGUs are free in other respects to fix their own budget calendars (Law on Financing of Local Self Government Units, Articles 27 and 28).

LGUs receive guidance on prospective allocations and other factors to be taken into account in budget preparation by 30 September each year, resulting in dimension score A.

PI-8. Performance information for service delivery

This indicator examines the service delivery information in the executive’s budget proposal, its supporting documentation, and in year-end reports or performance audits or evaluations, as well as the extent to which information on resources received by service delivery units is collected and recorded. The time period covered is the fiscal year 2021 for dimension 8.1 and the fiscal year 2020 for dimension 8.2. For dimensions 8.3 and 8.4, the scope is the last three completed fiscal years, i.e. 2018-20. The coverage is CG.

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The dimensions under PI-8 are closely linked with the degree of implementation of program budgeting. North Macedonia has not formally adopted program, performance, or results-based budget systems but some elements of performance planning and program-based budgeting are in place. The legal framework explains the approach to strategic planning and requires budget users (BUs) to include the strategic priorities of the Government, as a summary of goals and initiatives, in their budgets through government programs and subprograms. Budget users are required to prepare three-year strategic plans covering programs and activities for realization of the strategic priorities of the Government, as well as the goals and the priorities of the budget user. The budget circular requires that the strategic plan is an integral part of the budget request, and it should contain quantified programs, activities, goals and priorities, harmonized with the budget request. A program classification is in place (see PI-4), providing the structure of codes for classifying programs and subprograms in budget planning, execution, and reporting.

8.1. Performance plans for service delivery

This dimension assesses the extent to which key performance indicators for the planned outputs and outcomes of programs or services that are financed through the budget are included in the executive’s budget proposal or related documentation, at the function, program, or entity level.

Although North Macedonia has not formally adopted program budgeting, the budget presents some information on programs in the budget documentation and information on planned performance is presented separately by line ministries. The sample of service delivery ministries reviewed in detail that was agreed and assessed include: Ministry of Health, Ministry of Transport and Connections, Ministry of Agriculture, Forestry and Water Economy, Ministry of Education and Science.

The annual Budget Law presents the expenditures for administrative units with a breakdown by programs. Budget documentation includes description of the programs of line ministries at the aggregate level with main qualitative objectives and input and output indicators. Input indicators are standard, reflecting operational costs and are included for all programs. Output indicators are sector specific and included only for some programs.

Ministries with service delivery responsibilities, included in the assessment sample, prepare and publish three-year strategic plans and annual operational plans containing programs and activities for implementing the strategic priorities of the Government, as well as the goals and priorities of the ministry for the same period.17 Strategic plans and annual operational plans contain information on programs as presented in the budget, their objectives, costs, expected results and success indicators which combine both outcome and output indicators.

In addition, the Health Insurance Fund, the Pension and Disability Fund and the PESR publish mid-term strategic plans and annual plans that include information on planned programs and projects, their goals and targets. Although the quality of information varies from institution to institution, it is estimated that the information is published annually on the activities to be performed under the policies or programs for the majority (greater than 50 percent but less than 75 percent) of ministries.

Since information is produced annually on activities to be performed and is published for the majority of ministries, the rating for this dimension is C.

8.2. Performance achieved for service delivery

This dimension examines the extent to which performance results for outputs and outcomes are presented either in annual budget documents, or separately by each ministry in the executive’s budget proposal or in an annual report or other public document, in a format comparable to the plans.

Under the annual Budget Execution Law, specified budget users have to prepare Programs for the use of funds from the Budget and submit them to the Government within 30 days from the day of publishing the Budget in the Official Gazette. Budget users prepare and submit to the MoF semi-annual and annual reports on the implementation of programs indicating whether the announced performance targets have been achieved. However, this information is not systematically aggregated and presented in a format that would allow for comparison of achieved results against the performance indicators of planned programs and allocated funding.

The ministries included in the assessment sample, as well as social security funds, publish annual reports on implementation of the annual action plan of the mid-term strategy with the information about results achieved under each program.

Although the results framework for performance is not uniform and the quality of information varies from institution to institution, the assessed sample of ministries that includes all major service delivery ministries, such as Ministry of Education, Ministry of Health, Ministry of Transport and Communication, annually publish the activities to be performed under their policies or programs.

Since the information is not presented in a format that would allow for comparing results achieved against the performance indicators of planned programs and allocated funding, the rating for this dimension is C.

8.3. Resources received by service delivery units

This dimension measures the extent to which information is available on the level of resources actually received by service delivery units of at least two large ministries (such as schools and primary health clinics) and the sources of those funds.

The Health Insurance Fund (HIF) of North Macedonia is responsible for collecting and allocating funds to healthcare providers for provided services within the mandatory health insurance. HIF performs and documents all payment made to 108 public and a number of private healthcare institutions, and compiles and publishes reports on actual financing of these institutions by funding sources (own revenues, subsidies).

No information was provided on the level of actual resources provided to schools in the education sector.

Since no information on the level of actual resources provided to schools is made available, the rating for this dimension is C.

8.4. Performance evaluation for service delivery

This dimension examines the extent to which the design of public services and the appropriateness, efficiency, and effectiveness of those services is assessed in a systematic way through program or performance evaluations, and whether these evaluations cover all or a material part of service delivery or if they are cross-functional and incorporate service delivery functions, including the performance audits undertaken by the government’s external auditor.

The State Audit Office (SAO) has a legal mandate to conduct performance audit, alongside financial and compliance audit, under the Law on State Audit. The law also defines the concept of performance audit as an assessment of the cost-effectiveness, efficiency, and effectiveness of the operation and use of funds in a defined area of activities or programs. A performance audit manual provides the methodology for conducting such audits. Performance audits are carried out according to the annual plan for audit. The SAO carried out 19 performance audits during the last three completed fiscal years, presented in Table 8.4 below.

Available performance audit reports focus on the efficiency and effectiveness of a specific function, policy or measure being implemented by BUs, not the specific institution. For example, in 2020, the Ministry of Education and Science was evaluated with regard to the effectiveness of its measures to deal with labor market risks, within the broader performance audit of 9 government agencies on the same topic; in 2019, it was evaluated with regard (i) to effectiveness of the realization of the higher education staff on the labor market as a part of broader performance evaluation covering 13 government agencies and public institutions, and (ii) to improving the conditions for sports for children from primary and secondary education, alongside the LGUs. The performance audits carried out in the last three years include reports focusing on assessing effectiveness of service delivery (e.g. Improving the conditions for sports for children from primary and secondary education - Project construction of gyms in primary and secondary schools) as well as reports which put more emphasis on assessing efficiency of government administrative functions and policies (e.g. Government planning - Effectiveness of government measures to deal with labor market risks and how to plan funds to overcome them). As reported by the SAO, average coverage of expenditures managed by the audited ministries (not disaggregated by service delivery programs) for the last 3 years is 14 percent.

Performance audits have been also undertaken by public sector internal auditors, but to a limited extent, due to internal capacity constraints. Only 4 of the 161 internal audits carried out in 2019 were performance audits (2.4 percent), as reported in the annual report on the functioning of the Public Internal Financial Control System.18

Table 8.4:

SAO performance audits published in FY 2018-2020

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Source: SAO website

Performance audits carried out comprise an average of 14 percent of total budget spending over the past three years. The number, institutional coverage and amount of expenditure covered by performance audits is less than required for a C score, and the rating for this dimension is therefore D.

PI-9. Public access to fiscal information

This indicator assesses the comprehensiveness of fiscal information available to the public based on specified elements of information to which public access is considered critical. The time period is 2020 which is the last completed fiscal year and the coverage is BCG.

The assessment includes five basic elements of fiscal information that are considered the most important to enable the public to understand the fiscal position and four additional elements that are considered to be good practice.

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9.1. Public access to fiscal information
Table 9.1:

Public access to fiscal information in 2020

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Since all the elements are published within the required timeframe, the rating for this dimension is A.

Pillar Three: Management of Assets and Liabilities

What does the pillar cover? That effective management of assets and liabilities ensures that public investments provide value for money, assets are recorded, and managed, fiscal risks are identified, and debts and guarantees are prudently planned, approved and monitored.

Overall performance: key strengths and weaknesses

Fiscal risk reporting is variable in its quality, with good reporting of contingent liabilities relating to guarantees and the financial sector, but no disclosure of risks related to PPP contracts. There is oversight of the PE sector, however this is focused on the companies’ income statements with little analysis of balance sheet risks, beyond reporting of arrears and PE debt. Similarly, there is no consolidated report on the financial position of local governments, and while the local government units prepare and submit annual financial reports within three months of end of the fiscal years, the reports are not audited nor analyzed from a risk perspective.

Public investment management is immature in North Macedonia with no national guidelines or standards for project appraisal of proposed investment projects, except projects financed externally. When it comes to project selection and prioritization, while there is a central entity for prioritization of major projects, there are no standard criteria focusing on economic efficiency and productivity to support the selection of the most effective investment projects.

Records of major categories of financial and non-financial assets are decentralized and thus fragmented. Fragmentation is especially pronounced for non-financial assets, with issues reported over the accuracy of inventories and asset record keeping in individual institutions. While the information on assets is available, it is not consolidated across budgetary central government (see also pillar VI). Work is continuing on identifying non-financial assets in preparation for financial reporting on accruals basis, but consistent rules have not yet been specified for asset valuations. Only aggregate information on asset disposal is available centrally while detailed information on disposal is too decentralized to allow for meaningful analysis that could impact fiscal decision-making.

In terms of debt management, recent technical assistance reports identify improvements with respect to: (1) amendments to the public debt management law; (2) functionalities of the debt IT system; (3) development of the domestic debt market; (4) development of a debt management strategy; and (5) development of a framework for loan guarantees and on-lending. These improvements, as evidenced by assessment findings, build upon already “extensive disclosure of public debt and explicit guarantees, accompanied by sound frameworks for their management” (IMF FTE 2018). While recording and reporting of debt and guarantees demonstrate strong overall performance, assessment findings suggest reconciliation practices could be more frequent.

PI-10. Fiscal risk reporting

This indicator measures the extent to which fiscal risks to central government are reported. Fiscal risks can arise from adverse macroeconomic situations, financial positions of subnational governments or public corporations, and contingent liabilities from the central government’s own programs and activities, including extra-budgetary units. They can also arise from other implicit and external risks such as market failure and natural disasters. The scope on all dimensions is the most recent fiscal year (2020). The coverage is central government public corporations for 10.1, subnational governments for 10.2, and central government for 10.3.

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Fiscal risks are monitored by three entities, all within the MoF: the Unit for Public Enterprises and Agencies (UPEA) and the Unit for Budgets of Local Self-Government Units (UBLSU) within the MoF Budgets and Funds Department; and the Unit for Policy for Public Debt Management and Risk Analysis within the International Financial Relations and Public Debt Management Department. Their work is guided by the Budget Law, the Law on Public Enterprises, the Law on Local Self-Government Units, the Public Debt Law, and the Law on Accounting for the Budget and Budget Users. The three units report their opinions on the level of risk to the Government through separate channels.

Financial statements prepared by public enterprises (PEs), municipalities, and central government are the primary means for reporting financial positions that may constitute fiscal risks to the state. All three types of entities are required to prepare financial statements. The required content of financial statements is given in the Law on Commercial Companies20 and the Law on Accountancy of the Budget and Budget Users. Outside of financial statements, dedicated procedures are in place to collect information on budget execution, debt, and arrears.

Publication of PE financial statements is required by law through two channels. First, financial statements must be submitted to the Central Registry, which makes the statements available to the public for a fee, and to BUs free of charge. Second, entities are required to publish financial statements independent of the Central Registry. Details of legal requirements, and compliance with those requirements, for PEs and municipalities are given below under dimensions 10.1 and 10.2 respectively.

The major recent reform in fiscal risk has been the introduction of fiscal rules, which is ongoing and applies to BCG and LGUs. Substantial reforms are contemplated soon, embodied in a new law dedicated to public-private partnerships (PPPs) and the new draft OBL. These laws will expand information gathered, clarify roles and responsibilities, and specify reporting covering most risks identified in this Indicator.

10.1. Monitoring of public corporations

This dimension assesses the extent to which information on the financial performance and associated fiscal risks of the central government’s PEs is available through audited annual financial statements. It also assesses the extent to which the central government publishes a consolidated report on the financial performance of PEs annually.

The UPEA monitors 29 entities, consisting of 21 companies registered under the Law on Public Enterprises, and 8 joint stock companies registered under the Law on Commercial Companies and for which the Government is majority owner.21 There is no formal list or register of PEs. Some of the 29 PEs do not meet the definition of PCs given in the GFSM 2014.22 For example, the Public Enterprise for State Roads (PESR) carries out a public mandate and is supported primarily by state revenue and from state guaranteed loans. In total, there are 10 institutional units in total which the 2018 FTE classified as EBUs under GFS which have been assessed under dimension 6.3 on financial reports of EBUs. Since they are registered as PEs under the national legislation they formally constitute fiscal risk as per dimension 10.1 criteria but are excluded in the scoring of the dimension as per PEFA Secretariat guidance.

Audited annual financial statements of PEs must be submitted to founders for approval. This is required by both laws under which PEs are incorporated. The Government is generally the founder for centrally-owned PEs, but, in some instances, Parliament is the founder. In both cases, the UPEA is requested to analyze the statement and provide an opinion to the founder. PE annual financial statements are typically audited by private auditors. PEs use International Financial Reporting Standards (IFRS) when preparing their financial statements. The quality of audits and accounting standard provides predictable information for analysis by the UPEA.

For the purpose of the PEFA, the date of publication is distinguished between (i) when the financial statement is made available to the founder, which provides an opportunity to assess fiscal risk, and (ii) when the financial statement is accessible to the public at large, which enables independent assessment of fiscal risk.

Regarding the first meaning of publication, the date when audited financial statement is received by central government is reported by UPEA, as shown in Table 10.1. For statements covering 2020 (received in 2021, the most recent year for which reporting information is available), of the 29 PEs, 13, 10 and 6 were received within 6 months, 9 months, or not received within 9 months,23 respectively.

Table 10.1:

Financial reports of public corporations monitored by UPEA for 2020 (last completed year)*

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Source: Ministry of Finance* relative to total of 33 non-financial public corporations identified in public sector overview table 1.1 not monitored by UPEA.** Expenditure figures from statutory financial statements*** scoring of the dimension as per PEFA Secretariat guidance

The usefulness of timely audited financial statements to assess fiscal risks is also determined by the quality of data and the quality of analysis. While the purpose of focusing on audited financial statements is to ensure high quality and comparable data, the UPEA report does not identify if it defines expenditures in a way differently from audited financial statements. For example, 2020 expenditures reported by UPEA for PESR are not clearly aligned with those reported in the 2020 audited financial statement.24 The UPEA analysis focuses on changes in financial position from the prior year, and material changes in actual revenue and expenditure compared to the PE’s annual budget.25 There are no internal guidelines for UPEA to assess risk when analyzing the financial statements, nor a template for reporting its opinion to the founder. The UPEA typically has one week to submit its opinion to the founder from the date of receiving a financial statement.

By law, financial statements are to be published by PEs after approval by the founder. Auditors routinely confirm compliance with legal requirements. For 2019 financial statements, 27 of 29 PEs published audited financial statements. In addition, PEs are required to submit financial statements to the Central Registry by March 31 of each year. To meet this deadline, financial statements are not always audited. In 2021 (for financial statements covering 2020), the Central Registry reported that all but two PE financial statements were submitted to it within the deadline.

Some consolidated information on PEs is provided annually in the Fiscal Strategy. This includes a list of PEs monitored, along with income statement information for each PE for the prior year and latest available budget. There is not a comparable list by PE of balance sheet risks. Summary data on PE arrears and debt are published. However, these risks are presented by type of risk incurred by all types of entities, not all risks grouped by PEs. For example, the total of arrears for all PEs is provided in the same Fiscal Strategy table as arrears incurred by central government BUs and municipalities. Similarly, information on PE debt, guaranteed and non-guaranteed, is provided in the Public Debt Strategy 2021-23. This style of presentation makes it difficult to understand the sum of risks presented by PEs. PE arrears and debt (guaranteed and non-guaranteed) are 1.6 and 9.2 percent of GDP, respectively, as of September 2020.26

Most public corporations submit audited financial reports within 9 months of the end of the fiscal year which qualifies for score C. Excluding the institutional units assessed under dimension 6.3, the majority of the remaining PCs report within 9 months, resulting in dimension score D.

10.2. Monitoring of subnational governments

This dimension assesses the extent to which information on financial performance, including the central government’s potential exposure to fiscal risks, is available through the audited annual financial statements of subnational governments. It also assesses whether the central government publishes a consolidated report on the financial performance of the subnational governments annually.

While municipalities are required to prepare annual financial reports, they are not required to have them audited.27 The SAO has authority to audit local governments but does so selectively based on a risk assessment. SAO performs all types of audits of the LSG (financial, compliance and also performance audits in which financial aspects are one of the risk areas covered); private audit firms are not used for this purpose. Annual financial reports are released only after approval by the respective Municipal Council, which has a deadline of March 15 each year to do so. Municipal Councils have a strong incentive to submit their reports on time because failure to do so by March 15 is a reason for dissolution of the Council.28 Municipal Councils must approve the annual financial statement in open meetings, and with a formal decision.

In 2020 for the 2019 fiscal year, all municipalities submitted their annual financial reports within nine months of the end of 2020.

  • Municipalities are required to submit annual financial reports to MoF by March 31. The UBLSU summarizes the data in an annex to the BCG annual Final Account, which should be completed by March 31. In 2021 (when reporting on 2020), all municipalities provided information to MoF for MoF to complete the annex on time.

  • Municipalities are required to submit annual financial reports to the Central Registry by February 28, if reporting is on paper, or by March 15, if the reporting is electronic. In 2021, three reports were submitted past the legal deadline but were reported before nine months had elapsed

A consolidated report on the financial position of municipalities is not prepared. The UBLSU does not analyze the annual financial reports submitted by municipalities for fiscal risks. The compilation of budget execution data, attached to the BCG financial statement, does not achieve the aim of highlighting fiscal risks. Information on arrears incurred by, and the total debt of, municipalities is provided annually in the Fiscal Strategy. The stock ofmunicipal arrears and debt outstanding is 0.6 and 0.8 percent of GDP, respectively, as of September 2020.

All subnational governments submit unaudited financial reports annually within 9 months of the close of the fiscal year, published on the individual municipality webpages, but the reports are not audited, the rating for this dimension is C.

10.3. Contingent liabilities and other fiscal risks

This dimension assesses monitoring and reporting of the central government’s explicit contingent liabilities from its own programs and projects, including those of EBUs. Contingent liabilities are obligations that do not arise unless a particular, discrete event occurs. For the purposes of this analysis, significant contingent liabilities are those with potential cost in excess of 0.5 percent of total central government budget expenditures and for which an additional appropriation by Parliament would be required. In the case of North Macedonia, these are shown in Table 10.2.

Table 10.2:

Significant contingent liabilities and reporting on them

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Source: Government reports, PEFA team meetings, and IMF staff estimates

Two other potential contingent liabilities did not meet the definition of significant contingent liabilities for the purpose of this dimension but warrant noting. Legal cases are typically paid by the involved BU by reallocating funds among economic class items within its existing budget and thus have no impact on fiscal policy. However, this approach potentially leads to disruption of the BU’s ability to meet the service priorities assigned to it. There is not a consolidated list of pending legal cases and their cost; actual payments made are reported in annual budget execution reports. Contingent liabilities relating to natural disasters, epidemics, and environmental catastrophes are covered, at least in part, by the Permanent Reserve Fund.31 Because it is planned, and budgeted, it does not constitute a fiscal risk up to the value of the Fund. However, funds can be added to the Fund during the year if needed. See PI 2.3 for a discussion of the Fund and actual expenditures in the last three completed years (2018, 2019, and 2020).

Based on data shown in Table 10.2, most contingent liabilities are quantified by central government entities in financial reports. In other words, guaranteed public debt and net exposure to the financial sector are reported officially and represent 84 percent of the total significant contingent liabilities.

Three risks have been subject to recent developments:

  • Total public debt: the definition of total public debt was revised in 2019 to include non-guaranteed debt of public enterprises established by the state or municipalities and majority-owned joint stock companies. In effect, this acknowledges an implicit guarantee of PE regular debt.

  • PPPs: since July 2020, the government has been drafting a new law dedicated to PPPs (a separate law on concessions is under consideration). The draft law has been released publicly. The new law will clarify measures of risk and reporting of them for proposed and ongoing PPPs.

  • Guarantees: A credit guarantee scheme (CGS) is under active consideration to support small and medium-sized enterprises (SMEs) and the export sector for the purpose of mitigating the impacts of the Covid-19 pandemic. The legal character and operational design of the CGS, and thus the nature and size of risks, have not been finalized. If it becomes operational, it is prudent that a system of risk monitoring and reporting to the MoF be established.

While two of the three contingent liabilities noted in Table 10.2 are reported by specialized units, there is no single report that compiles all significant risks. The Fiscal Strategy includes a section on Fiscal Risks and Sensitivity Analysis, with a focus on factors that may cause deviations from the medium-term macroeconomic and fiscal projections underlying the fiscal policy adopted by the Government. The factors that form the basis for separate scenarios are lower economic growth, lower tax revenues by 5 percent, and lower execution of capital expenditures by 25 percent. Beginning in 2020, a fourth scenario was added to reflect the fiscal impact of the budget paying all outstanding loan guarantees.

The draft new OBL includes provisions creating a Fiscal Council, under Parliament, that will monitor fiscal risks and the probability of impacting the budget and the Fiscal Strategy. Presumably, this analysis will be published and thus could be characterized as a fiscal risk statement.

Because two of three significant contingent liabilities are quantified and reported, representing over 75 percent in value, but there is not a consolidated report including all significant contingent liabilities, the rating for this dimension is B.

PI-11. Public investment management

This indicator assesses the economic appraisal, selection, costing, and monitoring of public investment projects by the government, with emphasis on the largest and most significant projects. The assessment is based on 2020, as the latest completed fiscal year and covers CG.

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North Macedonia’s public investment management (PIM) system is characterized as decentralized. This conclusion is reached for the following reasons:

External sources of funding account for a large share of the capital budget. Sources, such as the EU and World Bank, typically impose their own appraisal, selection, costing, and monitoring requirements. For 2019, 2020, and 2021, external sources of funds accounted for 30, 38, and 37 percent, respectively, of the capital budget.32

Central institutions defer to the technical expertise of BUs. There are no central standards for the appraisal, selection, or costing of projects. That said, the General Secretariat of the Government strives to ensure that the development budget includes projects that adhere to the priorities stated in the Government 4-year plan. It also oversees a system to monitor implementation of development projects, primarily to identify and remove obstacles to implementation.

The coverage of the budget with regard to capital projects is mixed. Projects implemented by BUs, even if funded from external loans and grants, are included in the budget (except EU IPA funded projects). Projects implemented by PEs and through PPPs are not included in the budget. For example, the Public Enterprise for State Roads (PESR), which was created in 2013, budgeted MKD 16.0 billion in 2021,33 which was equal to 67 percent of the total capital spending authorized in the 2021 BCG budget. The PESR is not subject to the annual budget process, and its expenditures are not included in public official data on public investment even though it is funded primarily by earmarked public revenue and state guaranteed loans.34

No project of budget users in the 2020 budget meets the criteria of major project stated in the PEFA Framework.35 There are 3 projects under implementation by the PESR these are highlighted in Table 1.1 below and are all externally financed.

Table 11.1:

List of major investment projects – PESR (MKD)

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Source: Public Enterprise for State Roads website.

The MoF plans significant revisions to the PIM framework. These are stated in the PIM Action Plan adopted by the Government in December 2020, and are reflected in the draft OBL. The IMF conducted a Public Investment Management Assessment (PIMA) in January 2020. The reforms seek to address many of the weaknesses identified in the decentralized nature of PIM, including by setting standards for appraisal, costing, and selection, and increasing the role of the MoF in applying those standards and monitoring project implementation.

11.1. Economic analysis of investment projects

This dimension assesses the extent to which robust appraisal methods, based on economic analysis, are used to conduct feasibility or prefeasibility studies for major investment projects on the basis of an analysis of its economic, financial, and other effects; whether the results of the analyses are published; and whether the analyses are reviewed by an entity other than the sponsoring entity.

In North Macedonia, there is no legal framework providing policies, standards, or procedures across BUs for appraisal of major investment projects, the publication of the analyses, or review of the analyses by an independent expert or entity.

Externally funded major projects, including those implemented by PESR are subject to rigorous standards and procedures of the external funding entity imposed by the external funding entities. The details of these standards and procedures vary. Most external funding entities require appraisal by independent experts, and publication of the appraisal.

For domestically funded projects, BUs develop their own appraisal criteria. BUs often employ engineers from universities and private firms to assist in the development of preliminary engineering designs and feasibility studies. The MoTC certifies engineers who are qualified to perform such work, who then can be used by other ministries. In such cases, BUs rely on the professional competence of the expert. Project appraisals are typically not published.

For projects implemented through structured financing instruments, such as PPPs, no guidelines currently exist for economic analysis of projects. A new PPP law, currently being drafted, will likely address this issue.

Since there are no national guidelines, and appraisals based on economic analyses are conducted for some major projects (those funded from external sources), the score for this dimension is C.

11.2. Investment project selection

This dimension assesses the extent to which the project selection process prioritizes investment projects against clearly defined criteria to ensure that selected projects are aligned with government priorities. Rigorous and transparent arrangements for the selection of investment projects aim to strengthen the efficiency and productivity of public investment. The degree to which a project is “mature”, or the completeness of project description and analysis, is not considered a selection criterion for the purpose of this dimension.

There are no published standard criteria for project selection. For externally funded projects, selection criteria are established by the external funding entity. That said, the Single Project Pipeline (SPP),36 coordinated by the Secretariat for European Affairs and covering all externally funded projects, uses selection criteria published under the “Support to Western Balkans Infrastructure Investment Projects in the period 2014-2020” project. There are three main criteria, supplemented by sector specific criteria: (i) compliance with plans and legal framework (4 sub-criteria); (ii) impact indicators (2 sub-criteria); and (iii) maturity indicators (4 sub-criteria). For domestically funded projects, selection criteria are established by each BU independently, some of whom follow the SPP selection criteria (e.g. MoTC). The PPP unit in the Ministry of Economy has not adopted standard selection criteria for PPPs.

Prioritization of projects for inclusion in the budget is determined most directly by the General Secretariat of the Government. The focus of the prioritization is compliance with the Government 4-year Work Program, and is communicated through the 3-year strategic plan prepared by each BU in parallel with the budget (see PI-8 and PI-16.3 for a more detailed explanation of the planning system). There are three important shortcomings of the planning system for this purpose of this dimension. First, many priorities in the Government 4-year Work Program were not subjected to technical analysis to promote efficiency and productivity. Second, since the Government 4-year Work Program is not detailed at the project level, there is substantial room for interpretation when selecting projects on the basis of the plan. Third, the General Secretariat does not assess the technical qualities, feasibility, and costing of a proposed project as part of its annual review.

Since major projects are prioritized by a central entity but not on the basis of measurable criteria for selection that are rigorous and focus on economic efficiency and productivity, the score for this dimension is D.

11.3. Investment project costing

This dimension evaluates whether the budget documentation includes medium-term projections of investment projects on a full-cost basis and whether the budget process for capital and recurrent spending is fully integrated.

In North Macedonia, the budget shows the capital cost of a project, broken down by each year covered by the medium-term, along with a remainder if the project is implemented over more than three years.37 Revisions to multiyear projects cost estimates from one budget year to the next are not identified in budget documentation.

Definition of what should be included in the capital costs of a project is not stated in law or rule. It is generally understood that construction costs are included in capital costs, but there is ambiguity on other related costs. For example, should the costs of feasibility studies and preliminary design be included in the capital costs, or the costs of furniture or equipment specific to its intended purpose, such as a school or clinic. Project documents often include such costs even if they are not included in the project appropriation. A project document in this context refers to the detailed project file that accumulates documents when developing, justifying, or describing a project.

For externally funded projects, costing methods are established by the funding entity; for domestically funded projects, costing methods are established by each BU independently. As noted in PI-11.1, BUs rely on the professional judgment of engineers to apply cost estimates for the design and construction phase of the project, based on site, preliminary design, time, and materials. Treatment of major component of a project’s costs that could be included when estimating and budgeting for the total capital costs is shown in Table 11.1.

Table 11.3:

Treatment of major project capital costs in project documents and the budget

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Source: PEFA assessment team, based on input from authorities

Recurrent costs associated with major projects are sometimes identified in project documents but not in the budget. For externally funded projects, operating and maintenance costs may be estimated, but such estimates will vary based on standards of the external funding entity. For projects carried out by BUs, and not funded externally, operating and maintenance costs are typically not part of the project cost estimates. Since capital costs of a major project are included in each year of the medium-term budget, but recurrent costs of the project are not included in budget documents, the score for this dimension is C.

11.4. Investment project monitoring

This dimension assesses the extent to which prudent project monitoring and reporting arrangements are in place to ensure value for money and fiduciary integrity. The monitoring system should maintain records on both physical and financial progress, including estimates of work in progress, and produce periodic project monitoring reports.

Standards or rules governing project monitoring and reporting vary based on funding source. There is no legal framework for monitoring project implementation. For externally funded projects, there is a high level of compliance with the funding entity’s standards and procedures due to oversight by the funding entity, but the standards will vary by funding entity. For domestically funded projects, there are no standards, and there is no central oversight entity.

There are several aspects by which project monitoring should be evaluated: (i) if monitoring is by individual project or across all projects being implemented; (ii) if monitoring covers physical and financial progress; and (iii) if implementation information collected is published.

Each of these three aspects of monitoring is influenced by the institutional arrangements for monitoring.

  • Individual project monitoring: the physical and financial progress of each major project is monitored by a PIU or a project implementation committee. For an externally funded project, detailed progress reports on physical and financial progress are prepared as required by the funding entity, which are sometimes published. For domestically funded projects, the nature of progress reports is determined by each BU independently, which are not published. PIUs retain implementation records; project implementation committees retain some records, such as minutes of meetings, while otherwise using regular administrative systems applicable to BUs, such as the treasury.

  • Monitoring groups of projects:

    • Budget reports: financial progress of project implementation is reported within the year through budget execution reports, and at the end of the year through annual budget execution reports. These reports are published. However, reporting is made according to the structure of the appropriation, which may group individual projects so that the progress of individual projects cannot be discerned.

    • Government monitoring: a BCG-wide system of monitoring is managed by the General Secretariat of the Government. Every six months for major projects, and every 12 months for smaller projects, progress reports covering physical and financial progress are submitted to the General Secretariat by implementing BUs. The information is submitted through the e-Government system, which is accessible by major BUs and the MoF. The Government reviews the reports and comments received through the e-Government system, and issues decisions to remove obstacles to implementation. The decisions of Government are published, but not the progress reports.

Since the total cost and physical progress of major investment projects are monitored by the implementing government unit, but there are no standard procedures for project implementation and published annual reports address financial implementation status only, the score for this dimension is C.

PI-12. Public asset management

This indicator assesses the management and monitoring of government assets and the transparency of asset disposal. Coverage is the CG on dimension 12.1, BCG on dimension 12.2 and both CG and BCG on dimension 12.3. The indicator scope is 2020, the last completed fiscal year.

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Categories of financial and non-financial assets considered in this indicator are those prescribed in the Government’s Rulebook on the Chartx of Accounts (2011). Financial assets of the government are managed in line with the applicable legislation for the respective category while the management of non-financial assets is subject to a complex legal framework illustrated in the table below for the different categories of non-financial assets.

Table 12.1:

Overview of relevant legislation for management of non-financial assets

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Source: PEFA assessment team, based on input from authorities

SAO has issued an emphasis of matter on setting up of the legal basis for recording of state assets and their presentation in the financial reports (2019 Audit Report). Other available diagnostic reports note that there is still no specific, [single] government entity responsible for managing the government’s asset portfolio as a whole. (CEF 2020)

12.1. Financial asset monitoring

This dimension assesses the nature of financial asset monitoring, which is critical to effectively managing the key financial exposures and risks to overall fiscal management. The main categories of financial assets for the Government include cash and cash equivalents, equity in public corporations, and receivables and loans given. Information on Government financial assets in the form of equity and shares in public corporations is available from published financial statements of public corporations prepared in line with the International Financial Reporting Standards (IFRS). Records of receivables and loans given are held in the auxiliary ledgers managed by individual central government institutions in line with the prevailing legislation and reported on their individual balance sheets issued in line with the national accounting policies. While individual reports are published, information on performance of the two portfolios are not consolidated (see PI-10 and PI-29, respectively). National accounting policies require assets to be recognized at acquisition cost.

Finally, the National Bank of the Republic of North Macedonia’s (NBRNM) holdings in monetary gold and other foreign currency reserves are reported in its published annual financial statements prepared in line with the International Financial Reporting Standards (IFRS) and audited by an independent external auditor. The statements also provide narrative on performance of the main categories of financial assets within the notes to the financial statements.39 In line with the PEFA methodology, these are not considered for assessment under this dimension and the information is not reflected in the scoring.

While records of the major categories of financial assets are maintained, information on their performance is too fragmented to be considered useful for analysis and the score for the dimension is C.

12.2. Nonfinancial asset monitoring

This dimension assesses the features of nonfinancial asset monitoring, including their identification and usage. At the MoF, the Property and Affairs Administration is the main organizational units with responsibilities over privatization and lease of state-owned land as well as expropriation. It however does not maintain any centralized records of the underlying assets. The State Cadaster Office records immovable property (land and buildings) owned by the state. Earlier external diagnostics reported concerns over timeliness of reported changes to source data in the cadaster. Some government institutions maintain partial registries for some main categories of assets, such as Ministry of Economy on mineral resources. Registries of movable property in state ownership are yet to be developed, pending completion of the ongoing legislative changes.40

Currently, records of the book values of non-financial assets are maintained in the accounting records of each budget user and presented in their individual balance sheets. Accounting recognition of value of assets is historic cost, consolidated at the level of first-level budget users but not for the budget as a whole (see PI-29 for details), with depreciation as value adjustment recorded through accounts 900/029. Valuation of non-financial assets follows the provisions of the Rulebook on Accounting for the Budget and Budget Users which regulates recognition, depreciation, and revaluation.

A register of mineral rights in the Ministry of Economy is internal to the Ministry and captures values of mineral resources and the percentage of their exploitation. Illustrative gaps in information needed to effectively monitor non-financial assets include the need to improve and upgrade the information systems in the Ministry of Environment and Physical Planning (water rights) and Ministry of Transport and Communications (disposal of land for construction).41 In other instances, the SAO has reported issues with the accuracy of inventories and asset record keeping in individual institutions in the past.

There are issues reported with timeliness of information recorded in the cadaster, the only comprehensive centralized registry of immovable property, while other comprehensive asset registries are yet to be established so the score for the dimension is D.

12.3. Transparency of asset disposal

This dimension assesses whether the procedures for transfer and disposal of assets are established through legislation, regulation, or approved procedures. As illustrated in Table 12.1 above, regulations and rules are in place for disposal of movable and immovable assets. In case of sale, individual institutions propose the underlying decision to the Government, and the sale can proceed based on Government enactment. For sale and lease, announcements are published in daily newspapers ahead of electronic auctioning42 which is open to all interested parties who submit the required information and bank guarantee (20 percent of the value of the bid). Bidding is carried out through an electronic platform and a contract is signed with the most favorable bidder. Each budget user (BU) reports on the sales individually. In line with the Law, all operations related to disposal, including the initial valuation, are to be carried out by a commission established within each BU. Minutes are prepared recording the details of the transactions. Direct negotiations are also foreseen but limited to exceptional cases, primarily involving matters of public interest.

Transfer of immovable property may entail transfer of the “right to use” and the “right to own” between BUs and has to be approved through a Decision of the Government. Subsequently, BUs regulate the arrangement through a contract. Changes in the cadaster are made on the basis of the information contained in the Government decisions. In case of transfer of movable property, individual BUs carry out the transfer procedures without notifying the MoF Property Affairs Administration. In interviews with the PEFA team, the SAO highlighted a limited number of findings where the disposal of assets was not accompanied with reliable supporting documentation on transfers and associated receipts.

Ultimately, in addition to highly decentralized information on disposal of individual assets from transactions involving movable and immovable property, accounting information on the aggregated value of disposals of assets is reported in the in-year budget execution reports and the annual Final Account. This information, however, does not include the specific original purchase cost and disposal value.

Available information on asset disposal is highly decentralized and the information in the budget execution report limited to aggregate values, without reference at least to the original purchase cost and disposal value, so the score for this dimension is D.

PI-13. Debt management

This indicator assesses the management of domestic and foreign debt and guarantees. It seeks to identify whether satisfactory management practices, records, and controls are in place to ensure efficient and effective arrangements. Indicator coverage is CG and the time period assessed is at the time of assessment for 13.1 and 13.3, and last completed fiscal year (2020) for 13.2.

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The main parameters for public debt management are set out in the Public Debt Law, last amended 2019 to extend the coverage and monitoring of the public debt.43 The law sets out the objectives of the public debt management policy, to be attained by defining short- and medium-term limits of specific debt portfolio indicators:

  • financing the needs of the government with the lowest cost possible, in the medium and the long run, with sustainable level of risk;

  • identifying, monitoring and managing the risks which the public debt portfolio is susceptible to; and

  • developing and maintaining an efficient domestic financial market.

Government is charged with concluding loan agreements on behalf of the Republic of North Macedonia, while the Minister of Finance is the signatory for those agreements on behalf of the Government. The Parliament approves the total amount of borrowing under the financing part of the annual budget law. The Public Debt Law authorizes the MoF to undertake virtually all borrowing on behalf of the Government. Borrowing by the municipalities (Article 4) and borrowing of SOEs (Article 6) that is not backed by a sovereign guarantee requires MoF consent.

Within the MoF, the International Financial Relations and Public Debt Management Department (IFRDMD) is organized into front, middle and back office and manages the following processes relevant for the dimensions assessed below:

  • proposes the source and the structure of borrowing for budget deficit financing;

  • undertakes activities related to regular servicing of government debt;

  • monitors the timely servicing of public debt by public debt issuers;

  • undertakes measures for collection of claims from public debt issuers on behalf of which payment was made upon called-up guarantee, i.e. loan agreement;

  • undertakes measures in relation to the public debt limit;

  • prepares the Annual Report on Public Debt Management;

  • prepares and publishes the Calendar of Planned Issues of Government Securities for the current year;

  • organizes and issues government securities on behalf of the Republic of North Macedonia;

  • records the issuance of government securities and creates conditions for development of the secondary market;

  • monitors the balance of the STA and manages the investment of excess of funds thereon;

  • monitors the balance of foreign currency accounts of the state opened and kept with the NBRNM and manages the excess funds on the account of the MoF;

  • concludes agreements for exercising the competences laid down under the Public Debt Law;

  • participates in the borrowing procedure of public debt issuers except in a case when the debt is not guaranteed by the state and,

  • gives recommendations to public debt issuers regarding the borrowing terms and conditions in cases of financing projects which require borrowing.44

Beyond loans, the Public Debt Law (Article 18) authorizes the MoF for issuance of short-term and long-term government securities. Those may be denominated in domestic currency, with or without foreign exchange clause, or in foreign currency and are issued on both the domestic and the international capital markets. The interface between debt and cash management is described in PI-21.

Current provisions of the Public Debt Law also set out the requirement for preparation and implementation of a three-year Public Debt Management Strategy (PDMS), including prospects for additional two years.45 In the period 2018-2020, the medium-term debt management policy and the annual borrowing limits were reviewed and adopted by the Government as part of the Fiscal Strategy and the annual budget documentation. Under the current rules, the MoF proposes and the Government adopts the PDMS by May 31 in the current year at the latest.

13.1. Recording and reporting of debt and guarantees

This dimension assesses the integrity and comprehensiveness of domestic, foreign, and guaranteed debt recording and reporting. MoF’s competences for keeping the public debt registry and registry of issued sovereign guarantees are regulated in Article 11 of the Public Debt Law. In line with Article 19 of the same Law, information on holders of government securities is available from the registry managed by the Securities Depositary. Records on public debt in the form of loans, guarantees and government securities are maintained in the bespoke Debt Management Information System (DMIS) that was introduced in 2008 and most recently upgraded in 2020 with a debt projections module and additional reporting functionalities.

The MoF manages the Public Debt Registry and Registry of Issued Sovereign Guarantees. Public debt issuers (other than municipalities) are required to submit monthly information on changes of the stock and any new borrowing relative to the last report (Article 26). Template M1, prescribed by the MoF, also captures the information on whether the debt is guaranteed. Municipalities report the change in stock and new borrowing (including information on any issued guarantees) that cover their debt and debt of public enterprises established by the municipality in quarterly intervals, 30 days after the end of the quarter. The data is registered in the DMIS by the IFRDMD without delays and is considered up to date. DMIS was being audited by the SAO at the time of the assessment but there are no earlier audit findings related to accuracy and completeness of debt records.

Formal reconciliation with creditors is carried out in quarterly and monthly intervals. In practice, each payment advice issued by the Government’s creditors (major international financial institutions) provides information on the credit balance. When processing the invoice and preparing the payment order, internal procedures require the IFRDMD staff to reconcile the outstanding amounts with the figures in the DMIS and address any discrepancies. Other major creditors, such as the World Bank and the European Investment Bank, provide the MoF with access to their internal websites (client connection), which contain real-time data on all credit lines with the specific lender. The reconciliation with these creditors is done monthly.

The MoF publishes general government and total public debt statistics and a discussion on debt trends on a quarterly basis. A comprehensive management and statistical Annual Report on Public Debt Management Report which covers the features of the debt portfolio, as well as debt management measures undertaken in the course of the reporting year is also produced.46 The annual report is submitted to the Parliament by 30 June.47

Even though the central records are updated regularly and comprehensive statistical and management reports are publicly available, the quarterly frequency of reconciliations with most creditors results in score B.

13.2. Approval of debt and guarantees

This dimension assesses the arrangements for the approval and control of the government’s contracting of loans and issuing of guarantees. As per the Public Debt Law, the MoF has exclusive competence for domestic and external public debt operations. These cover debt of (i) central government, including social insurance funds and (ii) sovereign-guaranteed subnational governments and public enterprises and state-owned joint stock companies. Domestic debt issues are likewise managed exclusively by MoF. The provisions in primary legislation are operationalized in secondary legislation which includes the Manual on information collected monthly from debt issuers (2006), Rulebook on Government Securities (last updated 2009), and, more recently, Credit Risk Manual (2020).

Borrowing procedures and requirements for loan agreements are spelled out in the Public Debt Law (Article 16). Sovereign guarantees may be issued (Article 21) for projects in compliance with the strategic documents of the Government with available co-financing resources. The MoF assesses the creditworthiness of the public debt issuers in line with the Credit Risk Manual but creditworthiness requirements may be waived in cases of projects “determined as strategic”. The Public Debt Law does not specify which criteria are to be met for the project to be considered “strategic.”

Approval for non-guaranteed borrowing of PEs and LGUs is provided by their governing bodies (supervisory boards and municipal assemblies, respectively) but still requires MoF consent. To gain MoF consent, valid for the calendar year, these public debt issuers are required to submit the decision on borrowing and a request form for borrowing.48 Terms and conditions for on-lending of funds to public debt issuers under the loan are regulated in on-lending agreements between the MoF and the beneficiary of the on-lending.49

Annual borrowing, as presented in the financing section in the annual Budget Law, is approved by the Government and the Parliament and the total level of borrowing must stay within the limits indicated in the Fiscal Strategy.

The MoF is, de facto, the single responsible debt management entity which undertakes borrowing operations in line with documented rules and procedures and within the Government- and parliament-approved limits, so the score for the dimension is A.

13.3. Debt management strategy

This dimension assesses whether the government has prepared a debt management strategy with the long-term objective of contracting debt with robust cost-risk trade-offs. The Public Debt Management Strategy (PDMS) sets out the amount of public debt for the period 2021-2023 (with prospects until 2025), the maximum amount of net borrowing in the first year covered by the Strategy, the maximum amount of newly issued sovereign guarantees in the first year covered by the Strategy, as well as the government debt structure.50 The Strategy contains cost/risk indicators, including financing/rollover risks, foreign-currency risks, and interest-rate risks.

The PDMS is developed by the MoF with inputs from several MoF departments. In practice, the fiscal assumptions are updated with the revised macro and fiscal data available in Q3 of the current year. For financial years 2018, 2019, and 2020 this update was carried out and published within the debt management sections of the Fiscal Strategy documents for the respective periods.

Outturns against the PDMS targets (i.e. debt targets in the FS up to 2020) are reported annually in the Annual Debt Management Report. Reports include an overview of newly concluded loans of the CG and municipalities and the guarantees issued. The MoF reported the realization against the short- and medium-term limits for the public debt management policy in all of the annual reports for the period 2017-2019. Public debt was reported as within the set thresholds in each of the three years, implying that the MoF managed the public debt in line with the authorizations by the Government and the annual plan outlined in the Budget Law and consistent with the PDMS.

As a current, comprehensive DMS is in place and its execution against the debt management objectives publicly reported, including on target ranges for various indicators, the score for the dimension is A.

Pillar Four: Policy Based Fiscal Strategy and Budgeting

What does the pillar cover? The fiscal strategy and the budget are prepared with due regard to government fiscal policies, strategic plans, and adequate macroeconomic and fiscal projections.

Overall performance: key strengths and weaknesses

Macroeconomic forecasts for the budget year and the two following years are prepared and presented annually and updated once each year. While forecasts of most key macroeconomic indicators are presented in the Fiscal Strategy and the Government’s Economic Reform Program, they are presented to Parliament for information and are not reviewed independently nor are differences in assumptions provided in the previous year’s fiscal strategy and budget explained. In years where there is a supplementary budget however, explanations are provided in the revised Fiscal Strategy.

The Fiscal Strategy is prepared annually and covers a three-year period on a rolling basis, with an additional two years in the 2021 Fiscal Strategy. The Fiscal Strategy includes time-bound and quantified fiscal goals and targets. However, reporting on the progress of implementation of the Fiscal Strategy and explanations of deviations from its objectives and targets are weak.

Expenditure estimates are presented for the budget year and two following fiscal years in line with economic and administrative classifications. Expenditure ceilings are presented in the Fiscal Strategy and set at the level of direct budget users. However, for the 2021-23 Fiscal Strategy due to COVID-19, budget users were not issued ceilings prior to the budget circular, and therefore not approved by government before issuance. Under procedures established by the General Secretariat of the Government, strategic plans are prepared in parallel with budget preparation so as to ensure alignment between plans and budgets, but in practice costed plans are prepared by a majority, not most, ministries. Deviations of medium-term expenditure estimates from previous years’ initial or amended estimates for the same year are not explained in budget documents.

There is a clear budget calendar prescribed by the Budget Law which allows budget users at least six weeks to complete their detailed estimates meaningfully and this is respected. However, the ceilings provided to budget users do not cover the total expenditures for which they are responsible, since grant and “self-financed” expenditures are excluded from the ceilings. The law requires that budget proposals are submitted to the Parliament by November 15 of the preceding year, while this is respected it does not allow the required 2 months for parliamentary scrutiny of the budget proposal.

Parliamentary review of the government’s proposed budget is broad in its scope, and the budget has been approved before the start of the fiscal year in each of the last three years. There are clear procedures for reviewing budget proposals, and the procedures are approved in advance of the hearings and adhered to, including internal organizational arrangements. However there has been no public consultation during the process in recent years. During execution of the budget, clear rules exist for in-year budget adjustments by the executive, which set strict limits on the extent and nature of amendments, and are adhered to in all instances in the past three fiscal years.

PI-14. Macroeconomic and fiscal forecasting

This indicator measures the ability of the country to develop robust macroeconomic and fiscal forecasts, which are crucial to developing a sustainable fiscal strategy and ensuring greater predictability of budget allocations. It also assesses the government’s capacity to estimate the fiscal impact of potential changes in economic circumstances. The scope is last three years on all dimensions and coverage is whole of the economy on dimension 14.1 and the CG on dimensions 14.2 and 14.3.

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The Budget Law envisages preparing macroeconomic projections as a basis for the preparation of the Fiscal Strategy. The Fiscal Strategy consists of basic macroeconomic assumptions and guidelines for drafting the budget, and assessment of the amount of revenues, expenditures, and financing of the budget for a medium-term period of three years. The budget includes the basic macroeconomic projections for the budget year and the general part of the budget contains the total revenues and other inflows, the total expenditures and other outflows for the fiscal year, as well as the global projections of revenues, inflows, expenditures and outflows for the next two years.

In case of revision of the macroeconomic indicators, at the proposal of the MoF, the Government of the Republic of North Macedonia corrects the budget policy and changes the maximum determined amounts of approved funds per budget users of the BCG budget and the SSFs.

The MoF coordinates and also contributes to the preparation of the annual Economic Reform Program (ERP) that contains a medium-term framework of the macroeconomic and fiscal policy, as well as a detailed overview of structural reforms.

14.1. Macroeconomic forecasts

This dimension assesses the extent to which comprehensive medium-term macroeconomic forecasts and underlying assumptions are prepared for informing the fiscal and budget planning processes and are submitted to the legislature as part of the annual budget process.

The macroeconomic forecasts are prepared by the MoF Macroeconomic Department for the purpose of informing the fiscal and budget-planning processes. The macroeconomic forecasts are not reviewed by an entity other than the Macroeconomic Department. The projections are part of the Fiscal Strategy that is approved by the Government no later than 31 May and afterwards it is submitted to the Parliament only for information purposes.

The forecasts cover the budget year and two following years. The macroeconomic projections published in the latest fiscal strategy broaden the scope to a five-year medium-term framework, from 2021 to 2025. The macroeconomic forecasts are updated at least once a year, and if there is a revision of the macroeconomic indicators, at the proposal of the MoF, the Government of the Republic of North Macedonia corrects the budget policy.

The key macroeconomic forecasts consist of the main economic indicators including real GDP growth-including projections for demand components, the average inflation rate, the nominal growth of exports and imports of goods, the current account balance as a percent of GDP, the nominal growth of net wages, the average unemployment rate and the average employment rate. To be consistent with PI-5 element 6, the key macroeconomic forecasts should include interest rates, which are not explicitly elaborated in the budget documents.

The macroeconomic forecasts are also presented in the ERP. The ERP consist of macro projections for a medium term of three years, with an exception with the latest ERP (2021-2023 (2025)), which covers medium-term framework of five years. The ERP document is a comprehensive document covering more categories of projections or expectations including GDP, labor market, sources of growth, potential growth and production gap, inflation, monetary and exchange rate policies, bank deposit and loan forecast, external sector, debt, balance of payments, and the financial sector.

Since the forecast of the key macroeconomic indicators that is prepared and included in the Fiscal Strategy covering the budget year and the two following years excludes interest rates, the score for this dimension is D.

14.2. Fiscal forecasts

This dimension assesses whether the government has prepared a fiscal forecast for the budget year and the two following fiscal years based on updated macroeconomic projections and that reflects government-approved expenditure and revenue policy settings.

Based on the macro projections, the MoF Budget and Funds Department prepares the fiscal forecasts. The Fiscal Strategy includes fiscal forecasts covering the budget year and two following fiscal years while the Budget includes fiscal forecasts only for the budget year.

The fiscal forecast framework, as part of the Fiscal Strategy, includes the executed budget of the last completed fiscal year, the current year’s Budget and the forecasts for the budget year and for the two following years, with an exception of the last fiscal strategy (2021-2025) that enlarges the scope of the forecasts to five years. The policy strategy and medium-term fiscal objectives are also part of the ERP. This document also includes a detailed overview of the medium-term structural reforms concerning the energy and transport sector, agriculture sector, business environment and reduction of the informal economy, innovation and digital transformation, economic integration reforms, education and skills, and social protection and inclusion. There is also an estimated costing of the reforms and the planned funding, including the budgetary impact.

The fiscal forecasts in the Fiscal Strategy are broken down by the economic classification including revenues, expenditures, and the budget balance. The revenues consist of the main types: tax revenues, contributions, non-tax revenues, capital revenues and donations, while the expenditures consist of the current expenditures by type and capital expenditures. Additionally, Appendix 1 of the Fiscal Strategy gives medium-term expenditure estimates by administrative classification.

The Budget proposal contains projections broken down by administrative and functional classification for the budget year, and economic classifications for the budget year and the next two years. The regular Budget proposal incorporates a comparison between last year's budget and the budget year's projections broken down by the economic classification and provides a brief explanation of the policy changes and decisions that affect the projections. However, the explanations dо not include a detailed or quantitative presentation of the impact of new reforms and policies on revenues and expenditures or actions to address the deviation. In case of a supplementary budget, the budget document includes a more detailed explanation comparing the projections from the initially approved budget with the revised one and the reasons for the changes.

Since the MoF prepares a forecast of the main fiscal indicators, but the underlying assumptions and the differences from the projections provided in the previous year’s budget are not explained and published as a part of the annual budget process, the score for this dimension is C.

14.3. Macro-fiscal sensitivity analysis

This dimension assesses the capacity of governments to develop and publish alternative fiscal scenarios based on plausible unexpected changes in macroeconomic conditions or other external risk factors that have a potential impact on revenue, expenditure, and debt.

For the first time an overview of the results of the sensitivity analysis based on alternative macroeconomic assumptions was provided in the Fiscal Strategy 2019-2021 covering four main risks for the fiscal policy in the medium term: risk of reduced economic growth, lower collection of tax revenues by 5 percent, lower realization of capital expenditures, and servicing of liabilities based on issued guarantees with funds from the Budget. The results of this analysis are presented as an average for the entire analyzed period, and a detailed overview by years is not provided. This analysis is only presented in the original Strategy and not in the revised version of the document.

As part of the Fiscal Strategies (2018-2020; 2019-2021; 2020-2022) a scenario-analysis for managing the debt portfolio of the Republic of North Macedonia was also provided. The risks were defined as debt re-financing risk, market risk, including interest rate risk and exchange rate risk, risk associated with the contingent liabilities, and operational risk.

The macro-fiscal sensitivity analyses in the Fiscal Strategy are prepared in collaboration between the MoF’s Budget and Funds Department, Macroeconomic Policy Department, and IFRPDM.

The ERP document contains a separate chapter (3.3) discussing two alternative scenarios for sensitivity analysis, assuming slower growth of foreign demand during the forecasting period and risk of weaker contribution of domestic demand to economic growth, amid lower realization of infrastructure projects and execution of capital expenditures, as well as weaker impact from the support to the enterprises’ investment activity. Additionally, the ERP has a separate chapter (4.7) on sensitivity analysis including sensitivity of budget deficit and debt.

As the fiscal forecast scenarios based on unexpected changes in macroeconomic conditions or other external risks are being published starting from the Fiscal Strategy 2019-2021 and the requirements for scoring this dimension should take into account the last three completed years (2018-2019-2020), the score for this dimension is B.

PI-15. Fiscal strategy

This indicator provides an analysis of the capacity to develop and implement a clear fiscal strategy. It also measures the ability to develop and assess the fiscal impact of revenue and expenditure policy proposals that support the achievement of the government’s fiscal goals. The coverage is CG, with the scope 2018-2020 on dimension 15.2 and 2020 on dimensions 15.2 and 15.3.

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The content and timing of the Fiscal Strategy is regulated by the Budget Law. The Fiscal Strategy is prepared by the MoF for a medium-term period of three years and contains the fiscal policy objectives and determines the amounts for the main categories of estimated revenues and approved funds for the period. The Fiscal Strategy should be adopted by the Government of the Republic of North Macedonia no later than May 31 of the current fiscal year. Following the law, this document consists of the basic economic assumptions and guidelines for preparation of the draft budget, an estimate for the amount of revenues, expenditures and the financing of the budget for the current fiscal year and the medium term of three years and other necessary data.

The budget execution reports are published on the website of the MoF monthly. The Minister of Finance is required to submit a semiannual execution report to the Government no later than July 31 as well as an updated report on the macroeconomic indicators and projected revenues and expenditures for the budget year.

15.1. Fiscal impact of policy proposals

This dimension assesses the capacity of government to estimate the fiscal impact of revenue and expenditure policy proposals during budget preparation. As part of the Fiscal Strategy, the Ministry of Finance prepares forecasts of the revenues and expenditures for the budget year and the two following years. In addition to the forecasts, а brief explanation is provided for the policy changes that are planned for the next period that can have a fiscal impact on the revenues or expenditures (e.g., reforms in the pension system, in the area of expenditures for salaries and allowances, tax reforms, etc.).

The changes in the policy proposals are not explained in detail and the fiscal impact is not quantified. It is noted that all changes or reforms that are foreseen in the upcoming period, are incorporated in the fiscal projections of revenues and expenditures according to the economic classification that cover the budget year and the next two fiscal years.

The ERP document includes detailed overview of structural reforms and the planned funding broken down by categories, which suggests the possible impact on the budget.

Since there are brief explanations of the proposed changes in revenues and expenditures, but they do not cover the next two fiscal years, and are not all quantified, the score for this dimension is D.

15.2. Fiscal strategy adoption

This dimension assesses the extent to which government prepares a fiscal strategy that sets out fiscal objectives for at least the budget year and two following years. Based on the macroeconomic forecasts and in accordance with the current Budget Law, the MoF Budget and Funds Department prepares a Fiscal Strategy for a medium-term period of three years, which proposes the objectives of the fiscal policy. Based on the Fiscal Strategy, the MoF proposes to the Government maximum amounts of approved funds for the next three fiscal years broken down by budget users of the BCG and the SSFs. The Organic Budget Law does not require that the Fiscal Strategy is submitted to the Parliament, however in practice it is submitted and forms part of the budget documents.

In case of revision of the macroeconomic indicators, at the proposal of the MoF, the Government adjusts the budget policy and a revised Fiscal Strategy may be prepared.

The Fiscal Strategy is published and contains the basic macroeconomic assumptions and guidelines for preparing the Budget, assessment of the amount of revenues, expenditures and financing of the budget for the budget year and the following two years, and a short overview of the policy changes or reforms that might have an impact on the revenues and expenditures.

Starting with the Fiscal Strategy 2019-2022 the results from the analyses on sensitivity of budget deficit and level of general government debt to the possible effects of the four main identified risks is provided as a separate chapter. Additionally, as discussed under PI-14, with amendments to the Law on Public Debt in 2019, the public debt management policy, which was initially a part of the fiscal strategy, is now prepared as a separate document. For the first time in the Fiscal Strategy 2020-2022, a detailed comparative analysis with the revised strategy 2019-2022 is provided. This kind of analysis was not presented in the previous strategies and is also not presented in the original (2021-2023) or the revised fiscal strategy (2021-2025).

Since the fiscal strategy for the last completed fiscal year (2020-2022) includes quantitative fiscal goals and targets together with qualitative objectives for the budget year and the following two years, the score for this dimension is A.

15.3. Reporting on fiscal outcomes

This dimension assesses the extent to which an assessment of government’s achievements against its state fiscal objectives and targets is provided to the legislature as part of the budget documents. The MoF publishes monthly and annual Budget execution tables for the BCG budget , quarterly data for the General Government Budget, quarterly data for the Local Government Budget and a semi-annual report on execution of the Budget by economic classification and by budget users (see also PI-28).

The annual and monthly data are contained in a table broken down by economic classification; however, it does not provide any narrative explanation or assessment of the achievements. The semi-annual report includes a brief tabular and narrative overview of the average execution rates (compared to the original approved budget). The report does not include proposed corrective actions or detailed explanation of any deviations from the approved objectives.

There is no separate report consistently published which elaborates on the progress made against the Fiscal Strategy and explaining the reasons for any deviations in objectives or targets.

Since there is no published or internal report that describes the progress made against the Fiscal Strategy or an explanation of the deviations from the objectives and targets set, the score for this dimension is D.

PI-16. Medium-term perspective in expenditure budgeting

This indicator examines the extent to which expenditure budgets are developed for the medium-term within explicit medium-term budget expenditure ceilings. It also examines the extent to which annual budgets are derived from medium-term estimates and the degree of alignment between medium-term budget estimates and strategic plans. Coverage is BCG and the scope for dimensions 16.1, 16.2 and 16.3 is the last budget submitted to the legislature (2021-2023), and for dimension 16.4 is the last completed and the current approved medium-term budgets.

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In North Macedonia, the medium-term budget is comprised of the Fiscal Strategy and the detailed budget. The Fiscal Strategy includes a medium-term fiscal plan, including aggregate revenue, expenditures, and borrowing covering three years. The detailed budget is prepared based on the Fiscal Strategy. The detailed budget covers one year for operating expenditures (the Special Budget) and three years for capital expenditures (the Development Budget).

The structure and requirements of the medium-term budget have been in place since 2010, when the current Budget Law was passed. Refinements have been made since then, including adoption of a program classification and fiscal rules. Since 2018, the Government has been working on development of a new draft OBL and integrated financial management information system. Key planned reforms relating to the medium-term budget are:

  • Establishment of a Fiscal Council under the Parliament

  • Publication of a Register of Public Sector Entities

  • Medium-term Fiscal Strategy improvements, including preparation of a baseline scenario with separate identification of new initiatives, and

  • Improvement of transparency (e.g. submission of data from public enterprises and local self-governing units).

16.1. Medium-term expenditure estimates

This dimension assesses the extent to which medium-term expenditure estimates are prepared and updated as part of the annual budget process. The preparation of medium-term estimates is intended to strengthen fiscal discipline and improve predictability of budget allocations.

The Fiscal Strategy includes estimates, for each year over the medium-term, of aggregate budget expenditures financed from all major sources of funding: basic budget, self-financing activities, loans, and grants. The aggregate expenditure estimate is further presented by the economic classification only (not by administrative or functional classification), and is subdivided at the second level of the adopted economic classification51 for each year of the medium-term, thus allowing for flexibility when developing the detailed budget. Appendix 1 of the Fiscal Strategy gives medium-term expenditure estimates by administrative classification – i.e., first-line BUs, which are the budget heads for appropriation – for the sum of basic budget and loans only. While Appendix 1 does not cover the entire BCG budget, it meets the aim of strengthening fiscal discipline and improving predictability of budget allocations. First, because the deficit is not affected by self-financing activities and grants52, Appendix 1 estimates by BU satisfy the aim of enforcing fiscal discipline. Second, because BUs are individually most knowledgeable about the dynamics of non-tax revenue it collects and retains, and grants it applies for, predictability is not enhanced by including multiyear estimates for these funding sources in the Fiscal Strategy. That said, estimates for all financing sources and activities supported by them are included in the detailed medium-term budget.

The Fiscal Strategy, including the medium-term expenditure aggregates, is updated every year. The forward two years of the medium-term estimates are indicative only.

Since the annual budget presents estimates of expenditure for the budget year and the two following fiscal years allocated by administrative and economic classification, but not program (or functional) classification, the score for this dimension is B.

16.2. Medium-term expenditure ceilings

This dimension assesses whether medium-term expenditure ceilings are applied to the estimates produced by ministries to ensure that expenditure beyond the budget year is consistent with government fiscal policy and budgetary objectives. Such ceilings should be issued to ministries before the distribution of the first budget circular at the commencement of the annual budget preparation cycle.

The expenditure estimates by BU provided in Appendix 1 of the Fiscal Strategy are treated as expenditure ceilings.53 There is not a release of ceilings other than the Fiscal Strategy before budget circulars are issued. Customary practice in recent years has been for the Government to approve the Fiscal Strategy, which contains aggregate and ministry-level expenditures ceilings in Appendix 1, before release of the budget circular. However, approval of the 2021-2023 Fiscal Strategy was delayed because of uncertainty caused by the Covid-19 pandemic, and when issued did not include the customary Appendix 1. Thus, in the 2021-2023 budget process BUs were not notified of expenditure ceilings prior to receiving the budget circular. The ceilings can be allocated by BUs to operating or capital expenditures when preparing detailed budget proposals.

Since the aggregate expenditure ceilings for the budget year and the two following fiscal years were not approved by government before the first budget circular was issued for the 2021-23 budget, the score for this dimension is D.

16.3. Alignment of strategic plans and medium-term budgets

This dimension measures the extent to which approved expenditure policy proposals align with costed ministry strategic plans or sector strategies. Strategic plans should identify resources required to achieve medium-to long-term objectives and planned outputs and outcomes.

The formal system of planning is designed primarily to implement Government’s 4-year strategic program54 and is managed by the General Secretariat. It focuses on ministry medium-term strategic plans, even as there are other national and sectoral strategies55.

Ministry strategic plans are costed. They are developed in parallel with preparation of the annual budget. Parallel development ensures that the plans are made with full knowledge of financial constraints, while influencing the allocation of resources required to achieve medium-term objectives and planned outputs and outcomes.

However, implementation of the integrated planning and budgeting system has been less than complete. The SAO audit of the 2018 budget noted that only 76 percent of BUs submitted strategic plans along with their budget request, of which 21 percent did not include data on the cost of programs or activities. For the 2021 budget preparation, one third of BUs did not submit a strategic plan with their budget request.56 Thus, in practice the majority, not most, of BUs prepare strategic plans that are effectively aligned budget proposals.

Recent updates to the planning process include the requirement for BUs to prepare annual work plans (beginning in 2019) and an information system for BUs to submit their annual work plans (beginning in 2020). Annual work plans reflect the proposed budget, and add confidence that resources in the budget will lead to realization of the strategic plans.

Since medium-term strategic plans are prepared for the majority of ministries, and include cost information, and the majority of expenditure policy proposals in the approved medium-term budget estimates align with the strategic plans, the score for this dimension is B.

16.4. Consistency of budgets with previous year’s estimates

This dimension assesses the extent to which the expenditure estimates in the last medium-term budget establish the basis for the current medium-term budget. This will be the case if every expenditure variation between the corresponding years in each medium-term budget can be fully explained and quantified.

The MoF recognizes the need to explain changes between previous and current medium-term estimates. As discussed in PI-15, the Fiscal Strategy 2020-2022 included a numerical comparison of the three-year fiscal aggregates (revenue and expenditures estimates at the second level of the economic classification) in the budget under development with the medium-term fiscal aggregates in the Fiscal Strategy of the previous year.57 However, there is no explanation for why the changes occurred. At the BU level, changes in expenditures estimates with the previous year’s estimates are not quantified.

That said, consistency of fiscal aggregates across the medium-term Fiscal Strategies is reasonably good. Table 16.2 shows the percent change from earlier to later versions of the Fiscal Strategy for the same year in two consecutive Fiscal Strategies. The percent changes in versions show a mix of positive and negative differences, and the absolute value of the differences are not unusually large.58

Explanation of deviations of expenditure estimates across years, at both the aggregate and BU levels, will become more important in the future. The draft new OBL envisions development of baseline budget projections and separate identification of policy changes, including new initiatives.

Table 16.2:

Cross-year consistency of expenditure aggregate in Fiscal Strategies*

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Source: Fiscal Strategy documents* percent change compared to the estimate for the same year in the previous year Fiscal Strategy

Since the budget documents do not provide any explanation of changes to expenditure estimates between the second year of the last medium-term budget and the first year of the current medium-term budget at the aggregate level, the score for this dimension is D.

PI-17. Budget preparation process

This indicator measures the effectiveness of participation by relevant stakeholders in the budget preparation process, including political leadership, and whether that participation is orderly and timely. The time period for Dimensions 17.1 and 17.2 is the last budget submitted to the legislature (2021-2023) and for Dimension 17.3 it is the last three completed fiscal years. The coverage is BCG.

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17.1. Budget calendar

This dimension assesses whether a fixed budget calendar exists, which allows sufficient time for BUs to comply with it, and the extent to which it is adhered to. Dates of prescribed and actual events in the 2021-2023 budget cycles are presented in Table 17.1.

The budget calendar is determined primarily by the Budget Law.59 The annual budget circular provides detailed guidance necessary for completing tasks in the calendar. The budget calendar applies to all BUs in the BCG. The tasks in the budget calendar defined in the Budget Law are discrete actions not susceptible to misinterpretation.

Table 17.1:

Budget calendar

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Source: PEFA assessment team, based on input from authorities

The budget calendar is generally and largely adhered to. The majority of tasks were completed by the respective deadline in 2020. As noted in Dimension 16.2, the Fiscal Strategy and issuance of ceilings were delayed in 2020 due to disruptions caused by the Covid-19 pandemic.The budget calendar allows all BUs 10 weeks from receipt of the budget circular to meaningfully complete their detailed estimates by the deadline of September 1. Because Appendix 1 of the Fiscal Strategy, normally issued by the end of May, is interpreted as being a statement of BU expenditure ceilings (for the basic and loans funding sources), BUs effectively have 12 weeks in which to prepare the detailed budget proposal.

That said, planning for capital projects funded from external sources is ongoing through the year and culminates in the SPP (see dimension11.2). Domestically funded projects are developed over many months, and are prioritized within expenditure ceilings following issuance of the Fiscal Strategy. Thus, while it is not possible to specify the number of days available to BUs to prepare the development budget, the open-ended beginning of the planning process suggests that BUs have adequate preparation time if they choose to use it.

Material changes in the budget calendar are contemplated in the draft new OBL currently under consideration in Parliament. The Fiscal Strategy is proposed to be completed by April 30 rather than May 30; the proposed budget is proposed to be submitted to Parliament by October 15 rather than November 15.

Since a clear annual budget calendar exists, is generally adhered to, and allows all budgetary units at least six weeks from receipt of the budget circular to meaningfully complete their detailed estimates on time, the score for this dimension is A.

17.2. Guidance on budget preparation

This dimension assesses the clarity and comprehensiveness of top-down guidance on the preparation of annual detailed budget submissions. It examines the budget circular to determine whether clear guidance on the budget process is provided, including whether expenditure ceilings or other allocation limits are set for ministries or other budgetary units or functional areas.

This dimension covers a number of scoring factors relating to the budget circular. For simplicity of presentation, they are listed below as bullets:

  • Clear circular: the Budget Law defines the general content of the budget circular: macroeconomic forecasts included in the Fiscal Strategy, strategic priorities of the government expressed through programs and sub-programs, expenditures ceilings by BU, and technical guidance and instructions, among other issues. These requirements have been in place since 2010, and thus are well understood.

  • Covers all BUs: the budget circular applies to all BUs included in BCG.

  • Covers total expenditures: expenditure ceilings apply to the basic budget and loans only, thus excluding self-financing and grant funds. Therefore, the expenditure ceilings do not provide guidance on total expenditures.

  • Covers all year: the ceilings and general guidance cover the full fiscal year for each year of the medium-term budget.

  • Adherence to ceilings: for the 2021 budget, BUs submitted a total of 4.5 percent more than the sum of limits assigned to them. The approved 2020-2022 budget for BUs was 3.6 percent higher in total than the ceilings issued to them.60 These deviations are reasonable in light of international experience.

  • When BU ceilings are announced: for the 2021-23 budget process, BU expenditure ceilings were announced in the budget circular, not in the Fiscal Strategy, as is customary.

Since the budget circular does not provide expenditure ceilings for total funds, the score for this dimension is D.

17.3. Budget submission to the legislature

This dimension assesses the timeliness of submission of the annual budget proposal to Parliament and thus the adequacy of time for its review of the budget before the start of the fiscal year.

The Budget Law prescribes that the proposed budget should be submitted to Parliament by November 15 of each year. The Budget Law is consistent with the Rules of Procedures of Parliament, which specifies that the date to receive the Government’s proposed budget shall be prescribed by law. Table 17.1 indicates the dates for the last three years on which the executive submitted to Parliament its proposed budget.

Table 17.1:

Actual dates of budget submission for the last three completed fiscal years

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Source: MoF

Since the executive did not submit its proposed budget to Parliament at least two months prior to the start of the fiscal year, the score for this dimension is C.

PI-18. Legislative scrutiny of budgets

The indicator assesses the nature and extent of legislative scrutiny of the annual budget. It considers the extent to which the legislature scrutinizes, debates, and approves the annual budget, including the extent to which the legislature’s procedures for scrutiny are well established and adhered to. The indicator also assesses the existence of rules for in-year amendments to the budget without ex-ante approval by the legislature. Coverage is BCG and the reference period in this indicator are the last three completed fiscal years for dimension 18.3 and the last completed fiscal year for dimensions 18.1, 18.2 and 18.4.

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Legislative scrutiny of the budget operates under a clear legal framework. The Constitution gives Parliament the power to approve the budget of the Republic of North Macedonia. The Budget Law sets several important guidelines on Parliament relating to procedures and substance, such as prohibiting changes to total expenditures proposed by the executive. The Law on the Assembly of the Republic of North Macedonia, and subsequent Rules of Procedures, provide detailed guidance.

The capacity of Parliament to scrutinize the budget is being strengthened. In 2020, the Parliamentary Budget Office was created to answer finance and budget questions from individual members of Parliament. The draft new OBL includes establishment of a Fiscal Council under the Parliament with responsibilities to address broader issues of fiscal policy, including the Fiscal Strategy, macroeconomic forecasts and fiscal assumptions underlying the budget proposal, and fiscal risks. In addition, the Finance and Budget Committee of Parliament is considering creation of sub-committees to better manage the workload of budget review in the 45 days allotted to it under the budget calendar.

18.1. Scope of budget scrutiny

This dimension assesses the scope of legislative scrutiny. Such scrutiny should cover review of fiscal policies, medium-term fiscal forecasts, and medium-term priorities as well as the specific details of expenditure and revenue estimates. Regarding key budget-related documents, Parliament has the following roles:

Table 18.1:

Budget documents reviewed by Parliament

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Source: Budget Law

Parliament views the Fiscal Strategy as an integral part of the budget submission. It exercises a challenge function for fiscal policies, fiscal indices, medium-term macroeconomic and medium-term priorities included in the Fiscal Strategy, as well as allocations to each BU. That said, its authority to unilaterally change the budget proposed by the executive is limited. It can ask the executive to revise fiscal policy, macroeconomic projections, and medium-term priorities as stated in the Fiscal Strategy, but cannot revise them itself. However, Parliament has authority to re-allocate expenditures among BUs, programs, and sub-programs in the executive proposed budget, and thus to change priorities directly. Any increase of proposed appropriations must be accompanied by equal reduction of other proposed appropriations.

The Finance and Budget Committee of Parliament actively scrutinizes, debates, and comments on the budget documents. This is evidenced in 2020 by the time devoted to the second reading of the budget (Committee meetings were held on 9 days between November 24 and December 5, 2020), officials from the executive appeared before the Committee to explain and defend the executive’s budget proposal, revisions were made by Parliament to the allocations of funding across BUs proposed by the executive, and some members of the Committee proposed to press the executive to revise the total fiscal envelop61 . Opposition Members of Parliament serve on the Committee, who typically scrutinize the executive’s budget proposal with a critical eye.

The draft new OBL expands Parliament’s capacity to challenge the executive on its budget proposal. The planned Fiscal Council will examine the macroeconomic and fiscal assumptions used for preparation of the budget and the Fiscal Strategy, fiscal risks and the probability of fulfillment of the budget and the Fiscal Strategy, and fulfillment of the fiscal rules. The deadline for submission of the executive’s proposed budget is envisioned to be October 15 rather than November 15, thus allowing more time for Parliamentary review. However, the authority of Parliament to unilaterally amend the executive’s budget is, arguably, less clear than under the current Budget Law.

Since the legislature’s review covers fiscal policies, medium-term fiscal forecasts, and medium-term priorities as well as details of expenditure and revenue, the score for the dimension is A.

18.2. Legislative procedures for budget scrutiny

This dimension assesses the extent to which review procedures are established and adhered to. This includes public consultation arrangements as well as internal organization arrangements, such as legislative committees, technical support, and negotiation procedures.

The procedure for reviewing the budget, reflected in law and Rules of Procedure, have been stable. The Law on the Assembly of the Republic of North Macedonia was approved in 2005, with the latest revisions taking effect in 2010. The current Rules of Procedure were initially approved in 2010, and last updated in 2013. The procedure for adoption of the budget is explained in a dedicated section of the Rules of Procedure.62 There is an Internal Audit Department of Parliament, which evaluates adherence by Parliament of its own Rules and Procedures.63

The internal organization arrangements are laid out in the Law on the Assembly and the Rules of Procedure. The Finance and Budget Committee is responsible for detailed review of the budget proposal, supported indirectly by the Parliamentary Budget Office. The Finance and Budget Committee is supported by a staff of five persons. The Parliamentary Budget Office has a staff of six persons.

The Rules of Procedure determine how Parliament negotiates the budget. Adoption of the budget follows the same procedure for second readings of any proposed legislation, with a compulsory general debate. Additional features established in the Rules of Procedure apply specifically to the procedure for reviewing the state budget, including: (i) the revised draft budget, reflecting amendments approved by the Finances and Budget Committee and adopted by Parliament, must be drafted by the executive;64 (ii) an explanatory note must be attached to the revised draft budget issued by Finances and Budget Committee; (iii) time limitations – debate cannot start for 20 days following receipt of the executive’s budget proposal and maximum number of days devoted to stages of review; and (iv) the maximum number of minutes members can speak on the proposed budget. By custom, the Finances and Budget Committee is chaired by a member from the major opposition party.

The Committee has authority to hold public consultation on the draft budget, but has not done so in recent years. The Finances and Budget Committee invites representatives of the Government to answer questions on the draft budget.

Since the legislature’s procedures to review budget proposals are approved in advance of budget hearings and are adhered to, and the procedures include internal organizational arrangements, but there is no public consultation, the score for the dimension is B.

18.3. Timing of budget approval

This dimension assesses the timeliness of the scrutiny process in terms of the legislature’s ability to approve the budget before the start of the new fiscal year. The deadline is important so that BUs know at the beginning of the fiscal year what resources they will have at their disposal. Scoring is based on the experience of the most recent three years.

For each of the three years under review, Parliament approved the annual budget law before the start of the fiscal year. Actual dates of approval are shown in Table 18.2. In addition, as noted in Table 17.1 for 2020, the Government submitted the annual budget proposal to Parliament within the deadline established in law, thus giving Parliament the full amount of time for review of the budget allotted to it by law.

Table 18.2:

Actual dates of budget approval for the last three completed fiscal years

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Source: MoF