Financial Planning Part 1 Methodology Tarun Das

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Financial Planning Methodology and Policies Tarun Das

Financial Planning Methodology and PoliciesPart-1: Methodology

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Prof. Tarun Das1, Ph.D.Glocom Inc. (USA)

Strategic Planning ExpertADB Capacity Building Project

On Governance Reforms

________________________________________________________________

Ministry of FinanceGovernment of MongoliaUlaanbaatar, Mongolia.

January 2008

.

1Formerly Economic Adviser, Ministry of Finance and Planning Commission of theGovernment of India, and Professor (Public Policy), Institute for Integrated Learning inManagement (IILM), New Delhi. For any clarifications [email protected]

MOF, Govt. of Mongolia Glocoms Inc. (USA)1
mailto:[email protected]:[email protected]


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Financial Planning Methodology and PoliciesProf. Tarun Das

CONTENTS

Part-1: Methodology

1. Introduction and Scope1.1 Objectives of Financial Planning1.2 Components of Financial Planning

1.2.1 Reallocation of budgetary resources1.2.2 Budgetary Planning for the future1.2.3 Nominal number planning versus ratio planning1.2.4 Independence of fiscal and financial authorities

1.2.5 Financial control systems and mechanisms1.3 Status of Fiscal Planning in Mongolia

1.3.1 The larger role of the government1.3.2 New public sector management

2. Public Finance Management in Mongolia 2.1 Determination of policies and priorities

2.2 Allocation of public resources2.3 Establishment of mechanisms for financial control2.4 Uniformity of accounting standards and fiscal statistics2.5 Internal and concurrent audit system

2.6 Ex Ante Financial Control

3. Relation Between Financial Planning and Budget Planning3.1 Budget planning and Strategic Planning3.2 Public Sector Management and Finance Act (PSMFA 2002)3.3 Progress of Implementation of PSMFA during last five years

4. Methodology for Financial Planning for 2009-20114.1 Macro-economic framework4.1 Methodology for Financial Planning4.3 Financial Planning for 2009-2011

Annex: Financial Accounting Tables prescribed by IMF GFSM-2001

Selected References



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Part-2: Policies

5. Policies for Financial Planning and Risk Management5.1 Risk Management for Natural Disaster

5.1.1 The credit system5.1.2 Risk transfer instruments5.1.3 Insurance and development bonds

5.2 Management of Contingent Liabilities

5.2.1 Contingent liability- definitions and measurement5.2.2 Fiscal risk matrix for Mongolia

5.2.3 Lessons from international best practices5.2.4 Management of contingent liabilities

5.3 Management of Public Debt

5.3.1 Public debt of Mongolia5.3.2 Debt sustainability and fiscal deficit5.3.3 Risk management systems for public debt

(a) Independent and integrated Public Debt Office(b) Composition and functions of the Public Debt Office(c) Transparency in risk management(d) Basic principles f risk management(e) Risk management framework(f) Assessment of risk

5.4 Management of External Debt

5.4.1 Various risks of external debt5.4.2 Risks for different modes of capital transfer5.4.3 External debt sustainability measurement5.4.4 Risk management policies for external debt5.4.5 Stress tests

(a) Standard stress tests(b) Indicators of debt distress episodes(c) Determinants of debt distress(d) Quality of institutions and policies(e) Indicators of debt and debt service thresholds(f) Debt distress classifications

5.4.6 International best practices or debt management

Selected References



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Financial Planning Methodology and PoliciesProf. Tarun Das, Strategic Planning Expert

1. Introduction and Scope

As per the Terms of Reference of the ADB Capacity Building Project onGovernance Reforms, the International Strategic Planning Expert is required todevelop a methodology for the preparation of ex ante financial planning(for the central government). In the broad sense, ex-ante financial planningimplies assessment of feasible financial resources and planning revenues andexpenditures before the budgetary commitments are made, while ex-postfinancial planning means management of public finance after the approval of thebudget by the Parliament. However, both ex ante and ex post financial planningare integrally related. Therefore, in this paper we deal with methodologies andpolicies for both ex ante and ex post financial planning and management.

1.1 Objectives of Financial Planning

Basic objective of government financial planning is to assess the mobilisation,allocation and management of financial resources keeping in view theGovernments strategic objectives and sustainability of pubic expenditure withinthe total available resources and cash budget limits. This includes developing,promulgating and implementing financial policies, rules and regulations acrossthe budget entities. It also includes establishing and strengthening institutionsand policy planning systems for the better management of investment plans, anddevelopment of efficient and vibrant financial, monetary and capital markets.

An effective financial planning serves to provide: Optimal allocation of resources among competing needs and sectors;

Sustainability of fiscal deficit over time; Stability and predictability of government financial resources; Coherence to diverse fiscal objectives for both short and long term interests.

There is of course no universal model, methodology or structure for an effectiveand efficient financial planning. Like physical planning, government financialplanning must satisfy the following characteristics:

TransparencyThere should be openness for governments fiscal, monetary,budgetary and financial policy formulation and implementation. There should notbe any hidden agenda of the government for favoring some particular groups.



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Accountability Actions and decision-making processes should be open toscrutiny by public agencies, Parliament and civil society;

Responsiveness It should have the capacity and flexibility to respond tochanging national and international circumstances;

Future Orientation It must have the inherent ability to anticipate futureproblems and liabilities and to develop policies that take into account future costsand contingent liabilities;

Rule of Law and IntegrityIt must be subject to equitable enforcement of fairand transparent laws, regulations and codes, so that the basic culture in thepublic sector supports ethical behavior and strict actions to fight corruption.

1.2 Components of Financial Planning

1.2.1 Reallocation of budgetary resources

The reallocation of resources is at the heart of budgeting and financial planning.A change in national and global economic environments leads to a change instrategic business plans with subsequent impact on outputs and outcomes.Financial planning must be able to adjust accordingly for resource flows intovarious sectors of the economy. However, there could be inherent difficulties toresource reallocation due to resistance by the groups who might be adverselyaffected. In many cases, support from those, particularly the weaker, poor and

vulnerable groups, who would benefit tends to be weak and diffuse, even thoughthis group may be much larger than the vested interest groups.

When anticipated resources fall short of budgetary targets due to some internaland external shocks, it is customary for the government to resort to pro-ratareduction in the operating expenditures or to have cross-the-board cuts in thecapital expenditure. However, cross-the-board cuts are less desirable than thetougher choice of reallocating among line ministries and budgetary agencies.

1.2.2 Budgetary Planning for the Future

Planning by definition deals with the future. But, annual budget and financial planoften ignore the long-term objectives and sustainability. Therefore, financialplanning must have the medium term panning horizon, just as the Medium-termor multi-year budget frameworks. Although, multi-year allocations may not belegally binding due to change in government or unanticipated events, medium-term plans help to overcome the following difficulties:



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the tendency of the present government to over-estimate future financialprospects and economic growth;

the tendency of budgetary entities to view their unrealistic and wishful goalsas entitlements to future funding.

1.2.3 Nominal Number Planning versus Ratio Planning

It may be emphasized here that in planning one should not focus on absolutemagnitudes and nominal numbers. On the contrary, the focus should be on thedirection of change and on real numbers (generally expressed as percentages ofor ratios to Gross Domestic Product at current market prices), because whennominal economic growth falls or inflation rate accelerates, revenues andexpenditure forecasts expressed as ratios to GDP are automatically adjusted.Thus the Fiscal Responsibility Acts of various countries fix targets for fiscaldeficit, revenue deficit, outstanding public debt and contingent liabilities,

incremental debt or incremental contingent liabilities in terms of percentages ofGDP (and not in absolute numbers).

1.2.4 Independence for Fiscal and Financial Authorities

It is now generally recognized that the central bank must be independent withadequate power to use monetary instruments for inflation targeting and to sustaingrowth prospects. Government should not manipulate monetary policy forpolitical purposes. While government will have independence to determine taxrates, impose new taxes and allocate resources, monetary authority should haveindependence to maintain low inflation rates and stability in real interest and

exchange rates. However, certain parameters for financial and fiscal planning,notably forecasting of major economic parameters such as growth rates, inflation,balance of payments, private savings, private investment etc., deserveagreement by both monetary and fiscal authorities.

1.2.5 Financial Control systems and mechanisms

Financial planning must be integrally related to financial control, accounting andauditing. All the sectoral development, social security and insurance funds needto be properly managed, accounted and utilized for the purposes for which theywere set up. Agencies set up to manage the special funds must fulfill specific

minimum standards concerning operating procedures, internal financial controlsand audits, procurement rules, adequate technical staffing, etc. Similarlyresources from external aids need special accounting and auditing. Financialrules relating to public procurement, financial control and reporting are alsorequired to be framed and strictly enforced.



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1.3 Status of Fiscal Planning in Mongolia

1.3.1 The larger role of government

Presently Mongolian government is passing through a stage of governancereforms to improve efficiency and productivity of the public sector. There isgreater emphasis on public-private partnership in development of both physicalinfrastructure and human capital. At the same time inflation has emerged as amajor problem, and the levels of taxation and public sector borrowing aregrowing over time. The public pressure has, therefore, emerged for betterplanning of public expenditure coupled with a demand for improved managementof the public services.

1.3.2 New Public Sector Management

The central government in Mongolia is in effect moving to a system of NewPublic Sector Management. It has the following key features:

the separation of policy-making from service delivery and strengtheningagencies to deliver services in health, education, employment and social welfareand security;

the separation of the provider function and producer function- governmenthas already privatized and withdrawn from activities where private participationincluding foreign investment is more productive and more efficient;

as required by the Public Sector Management and Finance Law (2002)government is formulating accrual-based output budgets (AOB) and shifting itsemphasis from inputs to outputs and outcomes;

Government is emphasizing on the systematic comparison of activities andoutput costs between various management units (benchmarking);

Government is developing performance measures and indicators for efficientbudget allocations and for rewarding good performance in achieving setobjectives;

Government is also strengthening accounting and auditing standards andsystems,

Government is upgrading capacity and skill of personnel engaged inplanning, budgeting, accounting and auditing; and strengthening the informationtechnology system to support the budget modernization process and systems.



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2. Public Finance Management in Mongolia

Public Financial Management covers the institutions and processes related to themanagement of public resources. This process consists of three stages.

Determination of policies and priorities Allocation of public resources in accordance with the specified policies

Establishment of financial control, accounting and audit mechanisms toensure the economical, effective and efficient acquisition and utilization ofpublic resources

2.1 Determination of the policies and priorities

For efficient operations, a government is required to make strategic plansindicating vision, mission, objectives, strengths and weaknesses of the economyand considering resource constraints in the short and medium terms and to

prepare financial plan and budget to support these policies and objectives. All theline ministries and budgetary entities in Mongolia are already preparing masterplans and strategic business plans indicating desired outputs and outcomes inthe medium term. The Public Sector Management and Finance Act (27 June2002) also requires preparation of multi-year budgeting, output budgeting on thebasis of accrual accounting, benchmarks and performance parameters,accountability by General Managers of Budget Entities, fiscal transparency,efficient internal financial control, which are major components of modernfinancial planning and management.

2.2 Allocation of public resources

Annual Budget prepared by the MOF is the

the main allocation instrument of the limited resources.

the instrument of realizing economic plan and policies.

a basic political choice indicating the common public needs

the financial planning of the government policy.

Establishment of mechanisms for financial control

Financial controls include both Internal Control and External Control, and therecould be both ex-ante control (before disbursement of funds) and ex-postcontrol (after disbursement of funds).

(a) Internal Control comprises

Ex ante control- Before disbursement of any funds, the internalfinancial advisers examine the proposed expenditure to satisfy thatit conforms the scope and limits approved under the budget.



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Ex post internal audit- After finances have been spent, internalauditors examine whether the expenditure was within budgetedpurpose and limits.

(b) External Audit Another audit mechanism is the statutory financial reporting and the

existence of a budget code structure and government accountingprinciples.

Government of Mongolia is also making attempts to improve theautomation and information system of the financial management,accounting and auditing.

2.4 Uniformity of Accounting Standards and Fiscal Statistics

The same accounting system and standards are used in all budget entities within

the scope of the general government. The Ministry of Finance determines the accounting and reporting

standards and frameworks, Chart of Accounts and the format, period andtype of the reports that will be applied by all budgetary bodies within thescope of general government.

MOF provides guidelines for preparation and public announcement of thefiscal statistics.

MOF also determines rules and regulations for Ex ante control over thepayments, procurement, control over public revenues and expendituresand mechanism to prevent irregularities and fraud.

2.5 Internal and Concurrent Audit System

It is understand that there is no system of internal auditing or concurrent auditingin the budget entities. For efficient auditing system, it is recommended that tostart with the major line ministries such as MOF, MOECS, MOSWL, MOH andMOJIA must have a system of internal audit and concurrent audit. It is discussedin more details in the following section on ex ante financial control.

2.6 Ex Ante Financial Control

Ex Ante Financial control implies examination of any expenditure proposal before

its commitment or execution or disbursement of funds. In many countries, likeIndia, Bangladesh, Nepal and Pakistan, there are Financial Advisers/ FinancialControl Officers attached to the Expenditure Department of the Ministry ofFinance but working for various budget entities. The same Financial Adviser/Financial Control Officer may deal with various budget entities. An expenditureproposal approved administratively by any department needs to be examined bythe concerned Financial Adviser before actual disbursement of funds. TheFinancial Adviser examines whether it falls within the scope and limits of the



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approved budget for the budget entity. However, budget entities have the powerto save finances under certain heads and utilize the surplus for developmentpurpose. But the proposal needs be examined and scrutinized by the FinancialAdviser. Thus the Financial Advise/ Financial Control Officer helps the line

ministry for the following functions: allocating appropriations

approving financial commitments

holding tenders and concluding contracts

overseeing purchase of goods or services

overseeing execution of public works

approvals for payment orders

Such Ex ante control mechanism is based on the principle that compliance auditis performed before the payment is made at various stages of the spendingprocess. In the event that the transactions not approved are realized, theauthorizing officer shall be deemed to have personal responsibility.

It is understood that the government of Mongolia does not have a system ofFinancial Adviser/ Financial Controller/ Internal Auditor. It may be advisable forthe Mongolian government to adopt such a system for ex ante financial control.To start with, MOF may appoint Financial Advisers/ Financial Control Officer forthe major ministries like MOF, MOECS, MOSWL and MOH.

3. Relation Between Financial Planning and Budget Planning3.1 Budget Planning and Strategic Planning

Financial planning is an integral part of a sound and transparent budgetingexercise. Budgeting techniques have been changed significantly over the years.Modern budgets emphasize independence between fiscal policies and monetarypolicies and therefore donot make automatic support by the central bank throughmonetization of deficit. As compared with classical budgeting with moreemphasis on sectoral and individual projects budgeting, inputs and expenditurebudgeting and cash accounting; modern budgets are based on strategicplanning, output budgeting, accrual accounting, benchmarks and performanceparameters. In classical budgets, Ministry of Finance used to adopt a top-downapproach under which financial resources are first allocated to various ministrieswhich in turn allocate assigned resources among various projects. Under modernbudgeting, more emphasis is placed on prior consultation with all stakeholdersand a bottom-up approach where outputs and outcomes are given priority andline ministries first prepare their strategic plans and budgets and sends requestsfor financial allocations to the Ministry of Finance. The MOF then decidesallocations for budgetary bodies within budget constraints and to achieve inter-sectoral and inter-regional equity. Table-1 summarizes the major characteristicsof modern budgets as compared with those of classical budgets.



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Table-1: Characteristics of Modern Budgets Compared with Classical Budgets

Classical Budgets Modern Budgets

Unbalanced budget with reliance onmonetized deficit financed by the monetaryauthority with creation of additional moneysupply.

Balanced budget without any monetizeddeficit. Fiscal deficit is financed by marketborrowings from either domestic markets orfrom external sources including bilateralcountries and multilateral funding agencies.

Sectoral financial planning focusingbasically on short-run or sectoral gains

Strategic business planning keeping in viewbroader objectives, vision, mission, strengthsand weaknesses

Input based budgeting- Budgeting in terms ofwages and salaries, purchases of goods andservices

Activity based budgeting- costing andbudgeting of activities required to producedesired outputs

Inputs/ resources budgeting budgeting forlabor, energy, transport, goods and services

Output/ Outcome budgeting- budgeting forspecific outputs and outcomes

Cash accounting- accounting revenues andexpenditures when cash is received or paid

Accrual accounting- accounting revenuesand expenditures when commitments aremade or liabilities are created it does notmatter whether cash is received or not.

Project budgeting- focusing on completion ofindividual projects

Program budgeting- focusing on integratedprogram for a specific purpose such asemployment generation or poverty reduction

Expenditure based budgeting- allocation ofmoney on the basis of expenditures

Performance based budgeting- allocatingfinance on the basis of performance

Annual budgeting- budgeting for a year Multiyear budgeting- budgeting for a numberof years, generally for the budget year and twoforward years

Non-Transparent budgeting budgets areprepared in top secretary

Transparency based budgeting lesssecretary in preparation of budgets, expertsand stakeholders are consulted, governmentsobjectives are announced.

No public scrutiny- does not allow scrutiny byothers

Public scrutiny- allows scrutiny by the mediaand the general public

No stakeholders consultation- stakeholdersare not consulted

Multi-stakeholders consultation-stakeholders are consulted before finalizingthe budget

Top-Down Approach- MOF first allocates theresources to line ministries who then allocatefunds under various heads

Bottom-up Approach- Line ministries firstprepare their budgets and sends requests toMOF who makes adjustments on the basis ofresource constraints and inter-sectoral equity

Complete secrecy in budget preparation Limited secretary and public consultation

3.2 Public Sector Management and Finance Act (PSMFA June 2002)



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It is well known that the Government of Mongolia enacted the Public SectorManagement and Finance Act (PSMFA) on the 27 June 2002 in order tomodernize budget planning and budgeting systems as per international best

practices. The complete implementation of the provisions of the Act requires thefollowing activities on the part of the government:

(1)Preparation of a Strategic Business Plan for each budgetary bodyindicating its strategic objectives for the next three years and the outputs to bedelivered during the budget year specified by category, quantity, quality andcosts. Output costs shall be determined on the basis of accrual cost ofproduction including management overheads and capital charges.2

(2)Signing ofoutput purchases agreement between the Portfolio Minister andthe budgetary bodies for purchase of goods and services. Output purchase

agreement shall specify terms of delivery of outputs and prices to be paid fromthe budget3.

(3)Setting accounting policies for budgetary bodies in conformity withInternational Accounting Standards and implement these policies4:

(4)To prepare Financial Statements containing operating statement, balancesheet, and statements of cash flows, net assets and contingent liabilities 5,which are also the requirements of the IMF Government Finance StatisticsManual (GFSM 2001). The details of the Financial Accounting Tablesprescribed by the IMF GFSM-2001 and the current situation in Mongolia along

with necessary action are discussed in the Annex.

(5) To prepare Fiscal Framework Statement including the Governmentsmedium term objectives, public investment plans, forecast balance sheet andcash flow for the budget year and two forward years6.

(6) To conclude Performance Agreement between the Portfolio Minister and theGeneral Managers (GM) of a budgetary body within one month from the date ofthe approval of the State Budget by the State Great Hural7. The Act alsospecifies systems for the Assessment of Performance Agreement8 .

3.3 Progress of implementation of PSMFA during last five years2Articles 26.1 to 26.3 of the Public Sector Management and Finance Act (27 June 2002).3 Article 23 of the PSMFA.4 Article 9 of the PSMFA.5 Article 37 of the PSMFA.6 Article 25 of the PSFMA.7 Article 18 of the PSMFA.8 Article 47 of the PSFMA.



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The government of Mongolia initiated measures to implement the provisions ofthe PSMFA almost immediately since its inception in June 2002. Good progresshas been made with the preparation of Strategic Business Plans in major line

ministries; formulation of Medium Term Fiscal and Budgetary Framework,preparation of consolidated financial statement for the general government, timebound execution of budget and improved fiscal reporting on cash basis withsome steps towards accrual accounting.

MOF is implementing two major capacity building projects being financed bygrants and loans from the World Bank and the Asian Development Project.Significant progress has been made in the development of basic concepts,preparation of methodological papers, guidelines, manuals on strategic planning,output costing and output budgeting, accrual accounting, setting benchmarks andperformance parameters for the budgetary bodies, improving technical

capabilities of the staff engaged in budget formulation, strengthening Informationtechnology (IT) system and creating general awareness of the stakeholdersabout the usefulness and necessity of modern techniques for output budgetingon the basis of accrual accounting and benchmarks.

In addition to the mobilization of the national capacities, valuable assistance andconsultancy from experts of the international financial institutions such as ADB,IMF and the World Bank have been extensively used in the implementation offiscal reforms and enforcing related legislation. Assessment and evaluationsmade by the international experts facilitated the fiscal reforms process,particularly for strengthening the capacity building for governance reforms.

Despite these efforts and good results during the last five years, progresstowards full implementation of the PSMFA remains slow due to some structuralproblems. Assessments made by the IMF and ADB experts have indicated thefollowing constraints:

(a) There is absence of a specialized institutional system at various levels ofthe Government, line ministries and local governments, which haveadequate experience and expertise in strategic planning, output costingand accrual budgeting;

(b) The issues and activities involved in budget modernization are complex,but the international experiences for transition from the classical budgettechniques to the modern framework were not studied carefully and in atimely manner.

(c) Assessment of national capabilities for implementation of the law such asoutlining of required human resources, suitable organizational structures,and adequate information technology was also neglected.



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(d) Thus, a hustled approach was adopted to complete the fullimplementation of the framework within 1-2 years without adequatecapacity building and necessary infrastructure, which is responsible forslow progress and partial success.

Above observations lead to the conclusion that the successful implementation ofthe PSMFA (2002) as regards strategic business plans and output budgeting onthe basis of accrual accounting and benchmarks will require the following actionson a priority basis by the present government of Mongolia:

(1) To consolidate the progress made until now by properdocumentation in both English and Mongolian;

(2) To build up necessary institutions for modernizing budgets;(3) To build up capacity and skill of the personnel engaged in planning,

budgeting, accounting and auditing;

(4) To strengthen and upgrade the information technology system tosupport the budget modernization process and systems.

(5) To conduct all these works in a time-bound systems framework butstep by step and in a phased manner.

We have already outlined a seven year action program to complete theseactivities in a phased manner (see Tarun Das and E. Sandagdorj 2008).

4. Methodology for Financial Planning for 2009-2011

4.1 Macro-economic framework

In this section we describe a methodology for Financial Planning for theMongolian Budget. However, it must be kept in view that there is no uniquemethodology which can be applied at all times. Financial Planning depends onthe macroeconomic prospects and on the budgetary and fiscal frameworkalready approved by the Parliament.

In recent years Mongolian economy has performed very well. In fact, Mongolianeconomy is presently in a rebound and resilient mood after successfully tacklingthe adverse impact of the severe and successive dzuds during 2000-2002.Economy performed very well since 2003 and achieved an average growth rate

of 8.4 per cent during 5 years 2003-2007 with peak at 10.7 per cent recorded in2004 (Table-2). The mining, construction, wholesale and retail trade, financialservices, transport and tele-communications served as the main drivers of growthsupported by favorable weather conditions. Mongolian economy usually doeswell when the weather conditions are favorable and commodity markets arebuoyant. Consumer prices inflation moderated from 11 per cent in 2004 to 7percent in 2006, but increased to 8.6 percent due to rise of wages by 30 percentat home and hardening of international prices of petroleum products abroad.



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Interest rate on central bank bills declined from 15 percent in 2003 to 5.8 percentin 2006, but was raised to 6.4 per cent in September 2007 by the Bank ofMongolia as a part of policies for inflation targeting. The current account balanceon both the government budget and the external sector improved significantly

and were in surplus in 2006 and 2007.

Net present value of public external debt halved from 64 percent of GDP in 2003to 32 percent in 2006. External debt service ratio (as percent of exports of goodsand services) declined significantly from 34 percent in 2003 to 3.4 percent in2006. As per World Bank classification, Mongolia is now categorized as a lowincome and les indebted country.

Table-2 Mongolia: Trends of Selected Economic Indicators in 2003-2006

Economic Indicators 2003 2004 2005 2006 2007P

1. Real GDP growth (percent) 5.6 10.7 7.0 8.7 9.9(a) Agriculture 4.9 17.7 9.6 7.5 10.0

(b) Industry 4.8 15.0 1.2 7.0 7.9

(c) Services 6.1 6.3 8.7 10.0 11.1

2. Consumer prices inflation rate (percent) 4.7 11.0 9.5 7.0 8.6

3. Growth rate of broad money supply (%) 49.7 20.3 37.3 34.9 43.8

4. Interest rate on central bank bills (percent) 15.0 15.8 3.7 5.8 6.4

5. Revenue and grants (as % of GDP) 37.9 37.3 37.0 36.6 39.5

6. Mineral revenue (as % of GDP) 2.8 4.1 4.5 13.5 NA

7. Non-mineral revenue (as % of GDP) 34.2 32.5 29.0 27.0 NA

8. Expenditure and net lending (% of GDP) 42.1 39.4 33.7 33.3 40.5

9. Overall budget balance as % of GDP -4.2 -2.1 3.2 3.3 -1.0

10. Current account balance as % of GDP -7.7 1.6 1.4 5.2 NA

11.Year-End foreign exch. reserves (US$ ml) 178 208 333 626 1290

12. Forn. exch. reserves (months of imports) 1.5 1.6 2.1 3.4 8.0

13.Total public debt (as % of GDP) 113 93 68 54 NA

14. External debt (as % of GDP 98 85 64 51 NA

15. NPV of external debt (as % of GDP) 64 52 40 32 NA

16. Domestic debt (as % of GDP) 15 8 4 3 NA

17. External debt service (as % of exports) 34 7.5 2.9 2.1 NA

18. End-period Exchange rate (MNT/US$) 1170 1209 1221 1164 1186

Source: ADB, IMF, Govt of Mongolia 2008 Budget and the Bank of Mongolia.Note: P stands for preliminary and the latest available information.

Foreign exchange reserves were rebuilt from their end-2003 low level after thesettlement of the pre-1991 Russian debt, and reached US$626 million(equivalent to 3.4 months of imports) at the end-2006 and further to US$1290million (equivalent to 8 months of imports) at the end-2007.



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Mongolian economic prospects in the short and medium term are considered tobe bright. Assuming that there would be no major internal or external shockshaving destabilizing effects on the Mongolian economy and no monsoon failures,

Mongolia would be able to sustain real GDP growth rates around 10 percent in2008-2011 supported by a growth rate of 5 to 6 percent in agricultural valueadded, 10 to 11 percent in industry and 11 percent in services (Table-3).Industrial and services production are expected to sustain growth momentumlargely driven by cyclical factors and induced by a rise in agricultural income andincreased public spending on physical and social infrastructure.

Table-3: Projections of real GDP growth by main sectors (in percentage)

Sectors 2007P 2008 2009 2010 2011

Agriculture 9.9 5.0 5.8 6.0 6.0

Industry 10.0 11.5 10.6 10.0 10.0Services 7.9 11.5 11.1 11.0 11.0Total 11.1 10.1 9.9 9.8 9.8

Source: Government of Mongolia Budget 2008 for the years 2007 to 2010, and theauthors estimate for 2011.

Parliament of Mongolia has earlier approved major macroeconomic and fiscalparameters as medium-term objectives under the Medium Term BudgetaryFramework (Table-4). For Financial planning during 2009-2011, we considermajor macro-economic and fiscal parameters such that these parameters complythe basic targets under MTBF.

Table-4 Compliance with the 2008 MTBF targets(As percentage of GDP unless otherwise specified)

Major macro-economic and fiscalparameters

MTBF Budget for 2008

FinancialPlan9 for

2009-2011

1. Floor on GDP growth rate (%) 8.7 10.1 10.02. Ceiling on inflation rate (%) 5.0 5.5 5.53.Ceiling on total budget revenue 40.2 44.0 43.74. Ceiling on total budget expenditure 43.2 47.0 46.25. Floor on current balance 7.9 7.7 7.76. Ceiling on budget deficit -3.0 -3.0 -2.57. Floor on capital expenditure 8.0 8.8 9.0Source: Government of Mongolia Budget 2008 for MTBF and 2008 Budget, and theauthors estimate for the Financial Plan for 2009-2011.

9Authors projections in this report. For details, see section 4.2.



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It may be mentioned here that the Socio-Economic Development Guideline ofMongolia for the year 2008 has an inflation target of less than 10 percent. This issignificantly higher than the European Unions inflation target at 3 percent, andthe inflation target of the most of the developing countries at less than 5 percent.

Mongolian policy implies a major departure from the neo-liberal macroeconomicframework that has dominated policymaking in many developing countries. Theneo-liberal model favors strict fiscal discipline that is pre-occupied withmaintaining small fiscal deficits, monetary policy that has low inflation targets andexchange-rate policy that is committed to be fully flexible and market-determined.While the government of Mongolia also supports fiscal discipline (with overallfiscal deficit targeted at less than 3 percent of GDP as in the European Union)and flexible exchange rate, it is more liberal for the target of inflation rate. This isbecause the overall inflation in Mongolia is highly correlated with global prices ofminerals and petroleum products, which had witnessed significant increases overthe past few years.

Higher inflation rate also implies a more expansionary fiscal policy to encouragework efforts and production, to enhance buoyancy in government revenues andto foster private investment. Monetary policy can be accordingly designed tosupport fiscal expansion and export promotion by achieving low real interestrates for private investment and the alleviation of public-sector debts.

With higher inflation rate prevailing in the economy, monetary authority (i.e. theBank of Mongolia) could take direct measures (such as selective credit controlsand higher cash reserve ratios) to dampen the inflationary pressures resultingfrom supply shocks e.g., sharp increases in food and energy prices. They

should not hold back economic growth by raising interest rates and trying tocontain inflation at five percent or less. They could move aggressively to provideincreased access to affordable credit, through offering loan guarantees forproductive activities and reviving development banks. They could also pursueappropriate foreign exchange management policies to reduce volatility inexchange-rates and to maintain stability in real interest rates.

4.2 Methodology for Financial Planning

Financial planning means forecasting different components of governmentsrevenues and expenditures for the financial planning horizon. In this exercise, the

current budget year 2008 has been taken as the base year and the threeforwarding years viz. 2009-2011 have been taken as the planning horizon.Trends of different revenue and expenditure items are examined during 2006-2008 and then one of the following methods, depending on the pattern of pasttrends and underlying relationships, are used for projecting these items for theplanning horizon:



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(a) Growth method- Average growth rate of an item during 2005-2008 orgrowth rate during 2008 or average growth rate in the past excludingextreme values;

(b) Stability approach- Stable value for an item over the planninghorizon implying attainment of satiety or saturation level;

(c) Ratio or intensity approach- Average ratio of an item to GDP atcurrent market prices.

(d) Elasticity approach- Elasticity of an item with respect to GDP atcurrent market prices.

The methodology for specific items is described in details in Table-5. If largertime series data were available, one could have used the usual trend analysis or

multiple regression techniques. Here, very simple but logical techniques havebeen used for forecasting an item for financial planning. The results are indicatedin Tables-6A, 6B, 7A and 7B.

Table-5: Methodology for Financial Planning for the Period 2009-2011ITEMS Methodology Value

1. TOTAL REVENUE AND GRANTS 2+3+42. CURRENT REVENUE 2.1+2.2

2.1 Tax revenue 2.1.1 to 2.1.82.1.1 Income Tax PIT+CIT+WT2.1.1.1 PIT Elasticity with respect to GDP 0.422.1.1.2 CIT Elasticity with respect to GDP 1.152.1.1.3 wind fall tax GR in 2008 0.16

2.1.2 Social security contributions Average GR during 2006-2008 22.152.1.3 Tax on immovable properties Average GR during 2006-2008 19.532.1.4 Sales Tax ( VAT ) Elasticity with respect to GDP 1.102.1.5 Excise Tax Elasticity with respect to GDP 0.772.1.6 Special purpose revenue Average GR during 2006-2008 17.122.1.7 Taxes on foreign trade Elasticity with respect to GDP 1.152.1.8 Other Taxes and fees Average GR during 2006-2008 37.832.2 Nontax revenue GR in 2008 7.48

3. CAPITAL REVENUE Average GR during 2006-2008 13.91

4. FOREIGN GRANTS Stable at 2008 level



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Table-5: Methodology for Financial Planning for the Period 2009-2011

ITEMS Methodology Value5. TOTAL EXP & NET LENDING 6+7+86. CURRENT EXPENDITURE 6.1+6.2+6.3

6.1 Goods and Services 6.1.1+6.1.26.1.1 Wages and Salaries Inflation rate 0.106.1.2 Purchase of goods/services Inflation rate 0.10

6.2 Interest payment Average GR during 2006-2008 1.716.3 Subsidies and transfers 6.3.1+6.3.2

6.3.1 Subsidies GR in 2008 15.126.3.2 Transfers GR in 2008 37.78

7. CAPITAL EXPENDITURE 7.1 to 7.47.1 Domestic Investment Investment/ GDP ratio in 2008 0.077.2 Capital Repairs Average ratio of (7.1) 0.087.3 Other capital expenditures Average GR during 2006-2008 40.387.4 Road fund by project loan GR of GDP 0.10

8. NET LENDING 8.1+8.28.1 Domestic (net) Stable at 2008 level8.2 Foreign (net) Stable at 2008 level

9. Overall Balance (1)-(5)10 Current Balance (2)-(6)11. Mineral balance ----

12. FINANCING: 12.1+12.212.1 Foreign (net) 12.1.1 to 12.1.3

12.1.1 Project loans Residual after domestic12.1.2 Cash loans Stable at 2008 level12.1.3 Amortization As per debt profile

12.2 Domestic (net) 12.2.1 to 12.2.612.2.1 Privatization receipts Stabilize at 2008 level

12.2.2 Repayment of Govt bonds As per debt profile12.2.3 Long term bond New Amortization

12.2.3.1 New GR in 2008 18.4412.2.3.2 Amortization As per debt profile

12.2.4 IMF ( Net ) As per IMF loan profile12.2.4.1 Disbursement As per IMF loan profile12.2.4.2 Amortization As per IMF loan profile

12.2.5 Banking system net credit 12.2.5.1 to 12.2.5.312. 2.5.1 Increase in the DF bal Estimated by Bank of Mongolia12.2.5.2 Net changes in C/A Estimated by Bank of Mongolia12.2.5.3 Opening Balance No balance12.2.6 Non-banking system Preferably nil

Table-6-A: Financial Planning for the Govt of Mongolia for 2009-2011 (Billion MNT)

ITEMS 2005 2006 2007 2008 2009 2010 2011



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Outturn Outturn Outturn MOFFinal

Forecast Forecast Forecast

.1. . 2. . 3. . 4. . 5. .6. .7. .8.

1. TOTAL REVENUE AND GRANTS 838 1360 1786 2404 2865 3431 41292. CURRENT REVENUE 833 1354 1781 2387 2848 3414 4112

2.1 Tax revenue 692 1128 1417 1996 2428 2962 36262.1.1 Income Tax 179 477 626 800 945 1118 13252.1.1.1 PIT 58 77 70 85 92 99 1082.1.1.2 CIT 121 222 242 352 433 532 6552.1.1.3 wind fall tax 0 178 314 363 421 487 563

2.1.2 Social security contributions 96 112 135 174 212 259 3172.1.3 Tax on immovable properties 6 7 8 11 13 15 182.1.4 Sales Tax ( VAT ) 181 241 237 451 550 672 8192.1.5 Excise Tax 79 100 119 163 188 217 2512.1.6 Special purpose revenue 11 11 13 17 20 24 282.1.7 Taxes on foreign trade 57 72 98 169 208 255 3142.1.8 Other Taxes and fees 84 108 181 211 291 402 5532.2 Nontax revenue 140 226 364 391

421 452 4863. CAPITAL REVENUE 1 2 1 1 1 2 24. FOREIGN GRANTS 4 5 4 16 16 16 16

5. TOTAL EXP & NET LENDING 765 1237 1832 2569 3037 3622 43636. CURRENT EXPENDITURE 600 982 1414 1968 2335 2798 3391

6.1 Goods and Services 387 692 667 1020 1122 1234 13576.1.1 Wages and Salaries 143 197 307 566 623 685 7546.1.2 Purchase of goods/services 244 496 360 454 499 549 604

6.2 Interest payment 21 18 20 21 22 22 236.3 Subsidies and transfers 193 272 727 927 1191 1542 2011

6.3.1 Subsidies 8 12 330 380 437 503 5796.3.2 Transfers 185 259 397 548 754 1039 1432

7. CAPITAL EXPENDITURE 90 176 312 482 584 706 8547.1 Domestic Investment 67 146 250 375 450 540 6497.2 Capital Repairs 5 12 19 27 34 41 497.3 Other capital expenditures 7 9 18 17 24 34 487.4 Road fund by project loan 10 9 26 63 76 91 109

8. NET LENDING 74 79 106 118 118 118 1188.1 Domestic (net) -14 -10 19 -44 -44 -44 -448.2 Foreign (net) 89 89 87 162 162 162 162

9. Overall Balance 73 123 -46 -165 -172 -191 -234

10 Current Balance 232 372 367 419 513 616 721

11. Mineral balance -49 -190 0 0 0 0 0



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Table-7-A: Financial Planning for the Govt of Mongolia for 2009-2011Share of GDP (in percentage)2005 2006 2007 2008 As % As % As %


Of GDP of GDP of GDP

.1. . 2. . 3. . 4. . 5. .6. .7. .8.

1. TOTAL REVENUE AND GRANTS 37.0 36.6 39.5 44.0 43.7 43.6 43.72. CURRENT REVENUE 36.7 36.4 39.3 43.7 43.4 43.4 43.5

2.1 Tax revenue 30.5 30.4 31.3 36.5 37.0 37.6 38.42.1.1 Income Tax 7.9 12.8 13.8 14.6 14.4 14.2 14.02.1.1.1 PIT 2.6 2.1 1.5 1.5 1.4 1.3 1.12.1.1.2 CIT 5.3 6.0 5.3 6.4 6.6 6.8 6.92.1.1.3 wind fall tax 0.0 4.8 6.9 6.6 6.4 6.2 6.0

2.1.2 Social security contributions 4.2 3.0 3.0 3.2 3.2 3.3 3.42.1.3 Tax on immovable properties 0.3 0.2 0.2 0.2 0.2 0.2 0.22.1.4 Sales Tax ( VAT ) 8.0 6.5 5.2 8.3 8.4 8.5 8.7

2.1.5 Excise Tax 3.5 2.7 2.6 3.0 2.9 2.8 2.72.1.6 Special purpose revenue 0.5 0.3 0.3 0.3 0.3 0.3 0.32.1.7 Taxes on foreign trade 2.5 1.9 2.2 3.1 3.2 3.2 3.32.1.8 Other Taxes and fees 3.7 2.9 4.0 3.9 4.4 5.1 5.92.2 Nontax revenue 6.2 6.1 8.0 7.2 6.4 5.7 5.1

3. CAPITAL REVENUE 0.0 0.0 0.0 0.0 0.0 0.0 0.04. FOREIGN GRANTS 0.2 0.1 0.1 0.3 0.2 0.2 0.2

5. TOTAL EXP & NET LENDING 33.7 33.3 40.5 47.0 46.3 46.0 46.26. CURRENT EXPENDITURE 26.5 26.4 31.2 36.0 35.6 35.6 35.9

6.1 Goods and Services 17.1 18.6 14.7 18.7 17.1 15.7 14.46.1.1 Wages and Salaries 6.3 5.3 6.8 10.4 9.5 8.7 8.06.1.2 Purchase of goods/services 10.8 13.3 7.9 8.3 7.6 7.0 6.4

6.2 Interest payment 0.9 0.5 0.4 0.4 0.3 0.3 0.26.3 Subsidies and transfers 8.5 7.3 16.1 17.0 18.2 19.6 21.3

6.3.1 Subsidies 0.4 0.3 7.3 6.9 6.7 6.4 6.16.3.2 Transfers 8.2 7.0 8.8 10.0 11.5 13.2 15.2

7. CAPITAL EXPENDITURE 4.0 4.7 6.9 8.8 8.9 9.0 9.07.1 Domestic Investment 3.0 3.9 5.5 6.9 6.9 6.9 6.97.2 Capital Repairs 0.2 0.3 0.4 0.5 0.5 0.5 0.57.3 Other capital expenditures 0.3 0.2 0.4 0.3 0.4 0.4 0.57.4 Road fund by project loan 0.5 0.2 0.6 1.2 1.2 1.2 1.2

8. NET LENDING 3.3 2.1 2.3 2.2 1.8 1.5 1.38.1 Domestic (net) -0.6 -0.3 0.4 -0.8 -0.7 -0.6 -0.58.2 Foreign (net) 3.9 2.4 1.9 3.0 2.5 2.1 1.7

9. Overall Balance 3.2 3.3 -1.0 -3.0 -2.6 -2.4 -2.5

10 Current Balance 10.2 10.0 8.1 7.7 7.8 7.8 7.6

11. Mineral balance -2.2 -5.1 0.0 0.0 - - -



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Table-7-B: Financial Planning for the Govt of Mongolia for 2009-2011Share of GDP (in percentage)2005 2006 2007 2008 As % As % As %


Of GDP of GDP of GDP

12. FINANCING: -3.2 -3.3 1.0 3.0 2.6 2.4 2.512.1 Foreign (net) 4.0 2.0 1.4 3.1 3.1 3.0 3.2

12.1.1 Project loans 4.4 2.6 2.5 4.1 4.3 4.3 4.412.1.2 Cash loans 0.5 0.2 0.0 0.1 0.1 0.1 0.112.1.3 Amortization -0.9 -0.8 -1.1 -1.1 -1.3 -1.3 -1.3

12.2 Domestic (net) -7.2 -5.3 -0.4 -0.1 -0.5 -0.6 -0.712.2.1 Privatization receipts 0.2 0.8 0.7 0.3 0.2 0.2 0.1

12.2.2 Repayment of Govt bonds -0.6 0.0 0.0 0.0 0.0 0.0 0.012.2.3 Long term bond -0.5 -2.5 0.5 -0.3 -0.6 -0.7 -0.7

12.2.3.1 New 0.0 0.0 1.2 1.2 1.2 1.2 1.212.2.3.2 Amortization -0.5 -2.5 -0.7 -1.5 -1.8 -1.9 -1.9

12.2.4 IMF ( Net ) -0.3 -0.2 -0.2 -0.1 -0.1 -0.1 -0.112.2.4.1 Disbursement 0.0 0.0 0.0 0.0 0.0 0.0 0.012.2.4.2 Amortization -0.3 -0.2 -0.2 -0.1 -0.1 -0.1 -0.1

12.2.5 Banking system net credit -6.0 -3.4 -1.5 0.0 0.0 0.0 0.012. 2.5.1 Increase in the DF bal 0.0 0.0 7.0 8.5 9.2 7.6 6.412.2.5.2 Net changes in C/A 0.0 -3.4 -8.5 -8.5 -9.2 -7.6 -6.412.2.5.3 Opening Balance 0.0 0.0 0.0 0.0 0.0 0.0 0.012.2.6 Non-banking system 0.0 0.0 0.0 0.0 0.0 0.0 0.0

4.3 Financial Planning for 2009-2011

It may be observed from the above tables that the overall fiscal balance as per

the fiscal planning is projected to decline to 2.5 percent of GDP during 2009-2011compared with MTBF ceiling on fiscal deficit at 3 percent of GDP. This impliesthat the financial planning for the period is consistent with fiscal sustainabilityover time. Resource mobilizations from individual taxes and duties andexpenditures by economic classifications appear to be reasonable and realistic.Governments financing planning also appears to be feasible. Needs for foreignproject loans will continue and the government will be able to repay domestic andforeign loans and make associated interest payments in time without unduepressure on government budgets. Underlying parameters for the real GDPgrowth rates and the inflation rates for consumer prices are realistic as judged bypast trends. Overall, the fiscal planning as indicated in the Tables 6-A, 6-B, 7-A

and 7-B appears to be realistic and feasible.



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Annex10

Financial Accounting TablesPrescribed by theIMF Government Finance Statistics Manual 2001

A.1 Basic Concepts

In this report we describe the financial tables prescribed by the GovernmentFinance Statistics Manual 2001 (GFSM 2001) of the International Monetary Fund(IMF). GFSM 2001 is a major step forward in terms of fiscal reporting. It fullyintegrates flows and stocks, considers both financial and mom-financial assetsand puts emphasis on accrual accounting and preparation of a comprehensivebalance sheet of the government. GFSM 2001 financial statements and fiscalindicators help for improved fiscal analysis and policy.

Under GFSM, all flows are classified either as transactions or as other economicflows. A transaction is an interaction between two units by mutual agreement orby force of law such as interest payments, tax and non-tax revenues. Everytransaction is either an exchange or a transfer. A transaction is an exchange ifone unit provides a good, service or asset a second unit and receives somethingof the same value in return. Compensation of employees, purchases of goodsand services, interest expense etc. are exchanges. A transaction is a transfer ifone unit provides a good, service or asset to a second unit without receivinganything of any value in return, such as government subsidies, grants, and socialassistance benefits to the people. All taxes and duties are treated astransfers. Transactions cover monetary flows and in-kind activity (such as the

receipt of commodity grants and non-cash remuneration).

Other economic flows are the result of events that affect the value ofnonfinancial assets, financial assets, and liabilities but which are not exchangesor transfers. These flows can reflect either price changes (including exchangerate movements) or volume changes due to one-off events such as mineraldiscoveries and natural disasters.

10 This Annex is primarily based on the Government Finance Statistics Manual 2001(GFSM 2001) and other papers on GFSM 2001 published by the International MonetaryFund (IMF), Washington, D.C. It may be mentioned here that the author was a Member

of the Expert Group Meeting at IMF, Washington D.C. in February 2001 to discuss the

Draft GFS Manual 2001 and to incorporate final round changes and conclusions inGFSM 2001 (refer the Preface by Mrs. Carol S. Carson, the then Director, Statistics

Department, IMF in the GFS Manual 2001, p.ix).The author was also Country Reporter

for India on IMF Government Finance Statistics when he worked as Economic Adviser inthe Ministry of Finance, Government of India during 1989-2006.



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Transactions and other economic flows are recorded on an accrual basis.This means that they are recorded when the economic impact associated with anevent occur. However, there are difficulties in identifying revenue on an accrualbasis. In practice, a tax liability is normally recorded at the time of assessment.

Transactions in nonfinancial assets, financial assets and liabilities are alsorecorded at the time assets change ownership and liabilities are incurred.

A.2 Financial Statements

The basic relationships under the GFSM 2001 analytical framework aresummarized in three accrual-based statements relating to transactions, othereconomic flows, and the balance sheet, and one cash-based statement.

The Statement of Government Operations distinguishes between revenueand expense transactions, transactions in nonfinancial assets, andtransactions in financial assets and liabilities. Revenue covers all transactions

that increase net worth and expense covers all transactions that decrease networth. Transactions in nonfinancial assets, financial assets and liabilities arenot included. The difference between revenue and expense is the netoperating balance. Subtracting the net acquisition of nonfinancial assets fromthe net operating balance yieldsnet lending/borrowing, which in turn is equalto the net acquisition of financial assets less the net incurrence of liabilities.

The Statement of Other Economic Flows presents information on changesin net worth that arise from flows other than transactions.

The Balance Sheetshows the governments net worth at the end of a fiscal

year, which is equal to the stock of nonfinancial assets plus net financial worth(i.e., the difference between financial assets and liabilities). The change in networth in a year is the sum of changes due to revenue and expensetransactions and to other economic flows. The links between the componentsof the balance sheet and the other accrual-based statements are shown inTable-A.1.

Statement of Sources and Uses of Cash shows cash flows associated withrevenue and expense transactions and transactions in nonfinancial assets,and their net impact in terms of the cash surplus/deficit. Adding the cashflow from transactions in financial assets and liabilities to the cash

surplus/deficit gives the net change in the stock of cash.

A.3 Valuation

All flows and stocks are valued at market prices. This is the cash value of in-kind transactions or the amount for which goods, services, assets, labor orcapital are exchanged. Flows are valued at the current prices on the dates when



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they are recorded. Stocks are valued at the market prices current on the balancesheet date.

Table-A.1 GFSM 2001 Analytical Framework

OpeningBalanceSheet

Statement ofGovernmentOperations

Statement ofOther Economic

Flows

ClosingBalance Sheet

Revenue

Minus

Expense

=

Net operatingbalance

=

Net worth + Change in networth due torevenue and

expensetransactions

+ Change in networth due to other

economic flows

= Net worth

= = = =

Nonfinancial

assets

+ Net acquisition of

nonfinancial assets

+ Change in

nonfinancial assetsdue to other

economic flows

= Nonfinancial

Assets

+ Plus + +

Net financialworth

+ Netlending/borrowing

+ Change in netfinancial worth dueto other economic

flows

= Net financialWorth

= = = =

Financial

assets

+ Net acquisition of

financial assets

+ Change in financial

assets due to othereconomic flows

= Financial

assets

Minus

Liabilities + Net incurrence ofliabilities

+ Change inliabilities due toother economic

flows

= Liabilities



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Consumption of fixed capital is the economic equivalent of depreciation. Itis the decline in the current market value of the stock of fixed assets during theaccounting period as a result of physical deterioration, normal obsolescence, andaccidental damage. Consumption of fixed capital accrues continuously over theaccounting period and is treated as an expense under accrual accounting.

Although the balance sheet is to be valued at market prices, provision is made inGFSM 2001 for reporting the nominal value of the debt as a memorandum item.

Net lending/borrowing, the net operating balance, and the cashsurplus/deficit are the main GFSM 2001 fiscal indicators.

Net lending/borrowing is the most important indicator, as it reflects thegovernments financing operations.

The net operating balance is an indicator of the impact of fiscal policy onnet worth.

The cash surplus/deficit measures the change in the governmentsliquidity position due to revenue and expense transactions, andtransactions in nonfinancial assets.

A.4 Implementation by Countries

Successful implementation of GFSM 2001 in the first instance involves the

reclassification of existing fiscal information, which can be done relatively quickly.The second step relates to developing key institutional set up for a modern publicexpenditure management (PEM) framework, which provides assurance thatgovernment accounting and classification systems are capable of supportingstatistical reporting that is fully GFSM 2001 compliant.

Key Institutional Features of the PEM Framework

Four institutional features of the PEM framework can support a successfulchangeover to GFSM 2001. These include the following:

A chart of accounts, which is a hierarchical coding framework forclassifying and recording fiscal data that is fully mapped into GFSM 2001.

A general ledger which provides a central accounting record of allgovernment financial transactions.



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A treasury single account into which all government receipts aredeposited and from which all payments are made on the basis of budgetauthorization.

A Government Financial Management Information System (GFMIS),which is an integrated accounting system that can generate detailedinformation to support budget preparation and execution, commitmentcontrol, arrears management, liquidity management and other tasksinvolved in managing government finances.

Experiences of IMF technical assistance for PEM reforms in many countriessuggest that a well-functioning chart of accounts, general ledger, single treasuryaccount and GFMIS constitute a sound institutional basis for meeting a widerange of PEM objectives.

A.5 Phased Approach to the Implementation of GFSM 2001(a) Categories of countries

IMF has suggested a phased approach to the implementation of GFSM 2001. Tothis end, countries are divided into three groups depending on their capacity tobuild appropriate PEM capacity.

Group-I countries are those who record revenue, expenditure, andfinancing transactions mainly on a cash basis, but aim at reportingfiscal statistics on GFSM 2001 basis.

Group-II countries are those who report revenue and expensetransactions (other than consumption of fixed capital), andtransactions in nonfinancial assets, financial assets and liabilities onan accrual basis, and produce a balance sheet for financial assetsand liabilities. This method is known as a partial accrual basis or amodified accrual basis.

Group-III countries recognize consumption of fixed capital, extendthe balance sheet to cover nonfinancial assets, and complete theinstitutional development required to fully implement GFSM 2001.

(b) Implementation and coverage of government



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The focus ofGFSM 2001 is the general government. A reasonable objective forGroup-I countriesis that they achieve comprehensive coverage on a cash basisfor the central government and at least the important subnational governments.

Group-II countries should routinely expand coverage from central government togeneral government, and a shift from a cash to a partial accrual basis. Group-IIIcountries should be reporting fully GFSM 2001 compliant fiscal statistics for thewhole of general government.



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On the basis of the above described characteristics, in August 2003 IMFcategorized Fund member countries into Group I, II, and III countries. Table-A2shows that, out of 182 Fund member countries, as per the judgment by the Fundstaff, 50 countries were in Group II and 13 countries in Group III (excluding seven

viz. Australia, Canada, Finland, Iceland, New Zealand, Sweden, and the UnitedKingdom that had fully, or almost fully, implemented GFSM 2001). The rest of thecountries were in Group-I. Mongolia did not appear in either Group-II or Group-III.Therefore, Mongolia was categorized as a Group-I country.

Table-A2 indicates further that the countries in Asia and Pacific were far behindthe complete implementation of GFSM 2001. None of the Asia and Pacificcountries belonged to Group-III and only nine countries viz. Hong Kong, India,Japan, Korea, Malaysia, Nepal, Philippines, Singapore and Thailand belonged toGroup-II, and all other countries including Mongolia were in Group-I.

Table-A2 Group II and III Countries

Group IICountries

Group IIICountries 1/

AFR Benin, Burkina Faso, Cameroon, CotedIvoire, Gabon, Mali, Mauritius,Senegal, South Africa

APDHong Kong, India, Japan, Korea,Malaysia, Nepal, Philippines,Singapore, Thailand

EU1 Bulgaria, Cyprus, Czech Republic,Greece, Hungary, Israel, Malta,Poland, Portugal, Romania, Serbiaand Montenegro, Slovak Republic,Slovenia, Switzerland, Turkey

Austria, Belgium, Denmark,France, Germany, Ireland, Italy,Luxembourg, Netherlands,Norway, Spain

EU2 Armenia, Estonia, Latvia, Lithuania,Ukraine

MED Morocco, Tunisia

WHD Argentina, Bahamas, Barbados, Chile,

Grenada, Jamaica, Mexico, Panama,Peru, Uruguay

Brazil, United States

1/ Australia, Canada, Finland, Iceland, New Zealand, Sweden, and the UnitedKingdom already report on a full (or close to full) accrual basis as on August 2003.



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IMF observed that in general a country, which is fully committed to GFSM 2001implementation, could spend 12 years in Group-I, 45 years in Group-II, and 23 years in Group-III. Thus a country could expect to achieve full implementationin at best 7 years and possibly up to 10 years.

Four years have passed since 2003, and now Mongolia has moved toGroup-II. Government of Mongolia has already developed chart of accounts andGFMIS and is engaged in upgrading both software and hardware for the BudgetPreparation Information System (BPIS). Even then, full implementation ofGFSM2001 is a major task for Mongolia. It requires careful planning and managementso that the normal flow of fiscal statistics is not disrupted. Furthermore, there isneed to train, recruit, and retain skilled staff to work for the National StatisticalOrganisation (NSO), the Ministry of Finance, Bank of Mongolia and othergovernment agencies.

(c) Links to other reforms

The ultimate objective is that fiscal tables in IMF reports will be presented in fullGFSM 2001 format. This should be the outcome for Group-III countries.However, systematic steps in this direction should be taken by Group-I andGroup-II countries. Tables-A3.1 and A3.2 set out schematically how fiscal tablescould be modified to parallel the progress that is made with implementation.

While GFSM 2001 involves a shift to accrual reporting, this does not imply anautomatic shift to accrual budgeting. Only a few industrialized OECD countriescurrently prepare budget on the basis of an accrual accounting, while most of the

other member countries still prepare budgets on cash basis or on a mixture ofcash and accrual accounting. Successful implementation of GFSM 2001,however, cansupport other best practices for PEM reforms. The introduction ofaccrual output budgeting (AOB), which involves an explicit focus on theeffectiveness of public policy and efficiency of service delivery, provides a goodexample of governance reforms. We have already indicated in the main reportthat Mongolia has made significant progress on preparation of output budgets onthe basis of accrual accounting, benchmarks and performance parameters.



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Table A3.2 Modifications of Fiscal Tables for Accrual Accounting

Group II Presentation(Partial accrual basis)

Group III Presentation(Accrual basis)

STATEMENTOF SOURCESAND USESOF CASH(ASFOR GROUP I)

STATEMENTOF SOURCESAND USESOF CASH(ASFOR GROUP I)

STATEMENTOF GOVERNMENT OPERATIONS

Revenue(accrual basis)Expense (accrual basis, excludingconsumption of fixed capital)

Gross operating balanceNet acquisition of nonfinancial assets

Net lending/borrowing (accrual basis)Net acquisition of financial assets (accrualbasis) (I)Net incurrence of liabilities (accrual basis)(J)

STATEMENTOF GOVERNMENT OPERATIONS

RevenueExpense (including consumption of fixedcapital)

Net operating balanceNet acquisition of nonfinancial assets (Q)

Net lending/borrowingNet acquisition of financial assetsNet incurrence of liabilities

STATEMENTOF OTHER ECONOMIC FLOWS

Other changes in net financial worth(K=L-M)Other changes in financial assets (L)Other changes in liabilities (M)

STATEMENTOF OTHER ECONOMIC FLOWS

Other changes in net worth(R=S+L-M)

Other changes in nonfinancial assets (S)Other changes in financial assetsOther changes in liabilities

FINANCIAL BALANCE SHEET

Net financial worth (N=O-P)Financial assets (O=Oo+I+L)13Liabilities (P=P o+J+M)14

BALANCE SHEET

Net worth (T=U+O-P)Nonfinancial assets (U=U o+Q+S) 15Financial assetsLiabilities

Selected References

13A 0 subscript indicates beginning of year value.





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Das, Tarun (1999a) East Asian Economic Crisis and Lessons for External DebtManagement, pp.77-95, in External Debt Management, ed. by A. Vasudevan, April1999, Reserve Bank of India (RBI), Mumbai, India.

_______ (1999b) Fiscal Policies for Management of External Capital Flows, pp. 194-207, in Corporate External Debt Management, edited by Jawahar Mulraj, December1999, Credit Rating and Investment Services of India Ltd. (CRISIL), Mumbai, India.

_______ (2000) Sovereign Debt Management in India, pp.561-579, in Sovereign DebtManagement Forum: Compilation of Presentations, November 2000, World Bank,Washington D.C.

_______ (2002) Management of Contingent Liabilities in Philippines- Policies,Processes, Legal Framework and Institutions, pp.1-60, March 2002, World Bank,Washington D.C.

______ (2003a) Off budget risks and their management, Chapter-3, PhilippinesImproving Government Performance: Discipline, Efficiency and Equity in ManagingPublic Resources- A Public Expenditure, Procurement and Financial ManagementReview (PEPFMR), Report No. 24256-PH, A Joint Document of The Government ofthe Philippines, the World Bank and the Asian Development Bank, PovertyReduction and Economic Management Unit, World Bank Philippines Country Office, April30, 2003.

______ With Raj Kumar, Anil Bisen and M.R. Nair (2003b) Contingent LiabilityManagement- A Study on India, pp.1-84, Commonwealth Secretariat, London.

_______ (2003c) Management of Public Debt in India, pp.85-110, in Guidelines forPublic Debt Management: Accompanying Document and Selected Case Studies, 2003,IMF and the World Bank, Washington D.C.

_______ (2005) International Cooperation Behind National Borders- A Case Study forIndia, pp.1-50, Office of Development Studies, UNDP, UN Plaza, New York, 2005.

_______ (2006a) Management of External Debt: International Experiences and BestPractices, pp.1-46, Best Practices series No.9, United Nations Institute for Trainingand Research (UNITAR), Geneva, January 2006.

_______ (2006b) Governance of Public Debt- International Experiences and BestPractices, pp.1-23, Best Practices series No.10, United Nations Institute for Trainingand Research (UNITAR), Geneva, January 2006.

_______ (2008) Accrual Accounting Rules for Government Finance Statistics, pp.1-36,ADB Capacity Building Project on Governance Reforms, Ministry of Finance,Govt of Mongolia, Ulaanbaatar, January 2008.

Das, Tarun and E. Sandagdorj (2007a) Strategic Business Planning- objectives andsuggested structure for Mongolia, pp.1-95, ADB Capacity Building Project onGovernance Reforms, Min of Finance, Govt of Mongolia, Ulaanbaatar, August 2007.



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_______ (2007b) Output costing and output budgeting, pp.1-50, ADB CapacityBuilding Project on Governance Reforms, Ministry of Finance, Govt of Mongolia,Ulaanbaatar, October 2007.

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Financial Planning Part 1 Methodology Tarun Das

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