Sunday, December 28, 2008

The ideal macro-fiscal policy department?

IMF gives some suggestions for institutional strengthening of Armenian Ministry of Finance;

The Armenian authorities are taking steps to establish a strategic, coordinated, and multi-year approach to macro-fiscal policy. Recent measures include strengthening public financial management systems, further institutionalizing the MTEF, and adopting performance-based budgeting over the next few years. In the last few months, macroeconomic projections and analysis have been strengthened with the use of fiscal impulse indicators for macro-fiscal analysis during the budget preparation. However, macrofiscal policy-making could benefit from a more elaborated analytical approach within an enhanced and supportive institutional environment.

28. Many countries have relied on strong macro-fiscal policy departments to strengthen their policy framework. Best international practice suggests that an effective macro-fiscal policy department should “own” its country’s fiscal framework by helping:

-Develop the fiscal framework, through forecasting, analysis, and monitoring of other
short- and medium-term fiscal policy developments;
-Monitor the implementation of the fiscal framework, by assessing budget execution and by linking it to developments in other macroeconomic areas such as growth and inflation; and
-Protect the fiscal framework, by advising the Minister on emerging near and mediumterm risks; flagging the need to undertake corrective actions; and identifying possible alternatives.

29. The core tasks of the department should be well coordinated and carried out in close cooperation with other units within the Ministry of Finance, and relevant institutions with related responsibilities. The value added of the department would come from adopting a topdown or big-picture perspective, thus helping the work of other units in related areas:

- By performing macroeconomic analysis the department should ensure an internally consistent macroeconomic framework.

- By performing fiscal modeling, forecasting and impact analysis, the department should develop multi-year fiscal projections under the baseline of unchanged policies that allows to superimpose the impact of any expected or potential policy change, all of which could be included in budget documents. This task requires sound fiscal forecasting to examine the linkages from the real, monetary, and external sectors into the fiscal sector.

- By aligning all aspects of fiscal policy toward the achievement of the government’s economic objectives, the department should help create a consistent framework in which policies and objectives are clearly linked. The appropriate path for the fiscal aggregates within a specific time horizon can be chosen to attain objectives such as macroeconomic stability, medium-term growth, poverty reduction, and fiscal and debt sustainability. The impact of these targets on macroeconomic stability can be examined through macroeconomic analysis, while the appropriateness of the fiscal path’s financing implications can be assessed through debt and fiscal sustainability analysis. Once a consistent set of policies is determined, revenue, expenditures and debt targets can be refined. A macro-fiscal policy department plays a key role in assessing this consistency, and also in identifying fiscal risks associated with the proposed policies, through the examination of alternative scenarios and stress tests.

- By monitoring fiscal performance, the department should analyze in-year budget outcomes—financing, revenues, and expenditures; help explain deviations of outturns from plans; assess the implications of such deviations for end-year forecasts; and determine whether some in-year corrective measures are required. It should also participate in the design of such corrective policies from the analysis of their impact on the short- and medium-term. Close coordination with other departments is required to avoid duplication.

Armenia MTEF

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