1. Argentina is one of the world’s largest agricultural producers, has vast natural resources, andbenefits from a highly literate populace. Average long-run economic growth has been 2.7 percent between 1950 and 2016, about half that of high performing regional peers and less than a third the level of emerging countries in Asia. Over the past years, Argentina has faced the challenges of pervasive macroeconomic imbalances, large microeconomic distortions, and a weakened institutional framework. Despite some progress in tackling these challenges, Argentina remained vulnerable to the tightening of global financial conditions in the first part of 2018. In the context of global emerging market currencies depreciations, the Argentine Peso was the most hard-hit, losing half of its value in 2018. As a result, inflation accelerated, reducing household real income and private employment, leading to a 2.5 percent decline in the gross domestic product (GDP). In this context, the Government of Argentina (GoA) requested International Monetary Fund (IMF) financial support.
2. This downturn in economic growth underscores the importance of an overall public financial management (PFM) reform agenda to achieve key budgetary outcomes. Consequently, the main objectives of this Public Expenditure and Financial Accountability (PEFA) Report are to (a) assess the performance of the national PFM system and institutions of the Government of Argentina, benchmarked against internationally recognized good practice standards; and (b) provide a basis for dialogue between GoA and development partners on the country’s future PFM reform needs, and thereby assist GoA in designing and monitoring of a Public Financial Management Reform Strategy, to contribute to the achievement of longterm economic and financial sustainability.
3. This evaluation was conducted by a World Bank (WB) cross-sectoral team and was undertaken jointly with GoA’s Ministry of Treasury (MoT) and the Federal Council of Fiscal Responsibility (FCFR) to promote full ownership by the government through an iterative consultation and validation process, both at technical and political levels. The assessment was performed in coordination with relevant development partners—the Inter-American Development Bank (IDB) and the IMF. The French Development Agency (AFD) office in Argentina was informed of the evaluation.
4. The assessment findings show that the performance of the PFM systems at the national level are reasonably aligned with international standards and good practices. In particular, “transparency of public finances” performance is advanced, and the “policy-based fiscal strategy and budgeting” pillar shows solid performance. While the “budget reliability” and “accounting and reporting” pillars are slightly above the basic level of performance, two pillars (“management of assets and liabilities” and “predictability and control in budget execution”) show widely mixed results, with some indicators being aligned with a solid performance and others not. Finally, the “external scrutiny and audit” pillar had indicators that clearly underperformed in relation to international good practices. Although the systems and tools in place are deemed adequate to support fiscal and budgetary outcomes, there remain opportunities for improving the efficiency and effectiveness of public resources.
Methodology, Period, Assessment Coverage, and Timing
5. The assessment was performed using the 2016 PEFA Methodology, which provides a framework for assessing and reporting on PFM strengths and opportunities for improvement using international standards and good practices.1 PEFA incorporates a PFM performance report that presents evidence-based indicator scores and analyses. The assessment analysis period covers the previous three completed fiscal years (2016, 2017, and 2018). The PEFA indicators focus on the operational performance of key elements of the PFM system rather than on all the various inputs and capabilities, and provides a snapshot of PFM performance at a specific juncture. In addition, the PEFA framework does not involve fiscal or expenditure policy analysis that would determine whether fiscal policy is sustainable, and it does not evaluate whether expenditures incurred through the budget ultimately have their desired effect, or whether value for money is achieved in service delivery.
6. The assessment scope covers budgetary and extrabudgetary units of the central government of Argentina (as depicted in Figure 1 on page 4). The activities of public corporations, public-private partnerships (PPPs), and social security funds are covered only to the extent that they receive central government budget allocations and from the perspective of fiscal risks and contingent liabilities to the central government. Similarly, subnational governments (SNGs) are covered through the central government transfers they receive through the assessment of their oversight practices.
7. The assessment took place from March 2019 to May 2019. The fieldwork mission between April and May 2019. Evidence and information to support an assessment of most of the performance indicators was gathered during the field mission, and a draft report was sent to the PEFA Secretariat and the reviewers in August 2019. The draft report was formally presented to GoA and other peer reviewers to comply with the PEFA Check on October 25, 2019. Hence, the report was also distributed to the PEFA Secretariat, the World Bank, IMF, FCFR, and IDB for comments. The final report was submitted to the GoA and FCFR on December 4, 2019.
Integrated Assessment of PFM Performance.
8. In general terms, the Argentine national-level PFM system is reasonably well-aligned with international good practices and standards as they are schematized by the PEFA framework. Of the 31 indicators assessed, 25 indicators (80.6 percent) show scores that are equal to or better than “C,” which suggests a basic level of performance in alignment, in general terms, with international good practices. Only 6 out of the 31 indicators (19.4 percent) had scores lower than “C” and thus are not compliant with the standards required for a good or basic performance level.
9. An analysis of the results of the assessment at the pillar level shows that “transparency of public finances´ performance is advanced, and “policy-based fiscal strategy and budgeting” pillar shows solid level of performance. While “budget reliability” and “accounting and reporting” pillars are slightly above basic level of performance, two pillars—“management of assets and liabilities” and “predictability and control in budget execution”—show widely mixed results, with some indicators being aligned with a solid PFM performance and others not. Finally, the “external scrutiny and audit” pillar had indicators that clearly underperformed in relation to international good practices.
Impact of PFM Systems on the Three Main Budgetary Outcomes
10. As described by the PEFA Methodology,2 in an effective PFM system the three main budgetary outcomes are (a) Aggregate Fiscal Discipline; (b) Strategic Allocation of Resources; and (c) Efficient Use of Resources for Service Delivery. The GoA monitoring mechanisms to support fiscal and budgetary control are deemed adequate. However, there are still opportunities for improvement in specific areas related to the efficiency of institutions and use of resources in certain areas of revenues and expenditures. Aggregate fiscal discipline
11. Aggregate fiscal discipline is supported by several areas of high performance, such as the robust reporting of revenue and expenditure operations outside the budget (PI-6); the comprehensive recording of government debt (PI-13)(although there is need to develop a debt-management strategy); a clearly defined fiscal strategy (PI-15), as reflected in the Stand-by-Agreement with the IMF; the preparation of a multiannual budget (PI-16) (although the consistency between multi-annual budget estimates and actual budget outcomes remains weak and these differences are not explained in the budget documentation); predictability of in-year resource allocations (PI-21); and adequate internal controls on non-salaryexpenditure (PI-25).
12. However, this positive aggregate fiscal discipline outcome is adversely affected by limitations inpublic investment management and expenditure arrears.
13. Although most major public investment projects are assessed using robust appraisal methods, there is no rigorous and transparent arrangement for the prioritization and selection of projects included in the budget, and forward-looking capital and recurrent costs that are likely to be incurred over the life of the investment are not registered (PI-11). Given that Argentina is rich in natural capital and the limited fiscal space available, investment in the right projects is essential to unlock the country’s potential.
14. Although the stock of payment arrears appears to be low, it has been difficult to determine precisely the stock of expenditure arrears held by the central government, as there is limited information on expenditure arrears, including disaggregation by type, age, and composition of expenditure (PI-22).
Strategic allocation of resources
15. The strategic allocation of resources is advanced by the following factors: reliable expenditure allocations (with the allocation of resources among competing priorities established in the original budget generally respected during the budget execution phase) (PI-2); a robust budget classification system (PI-4) (although it is not fully compliant with the Classification of the Functions of Government/COFOG, it can produce documentation at the sub-functional level that is comparable to the COFOG standard); the provision of transparent and comprehensive budget management information and documentation (PI-5); the robust reporting of revenue and expenditure operations outside the budget (PI-6); timely transfers to subnational governments determined by an adhered to and clear rules-based system (PI-7); a clearly defined fiscal strategy (PI-15); the preparation of a multi-annual budget (PI-16); an orderly and timely budget preparation process (PI-17); and well-established and adhered to procedures for legislative scrutiny of budgets (PI-18).
16. However, the strategic allocation of resources is being subverted by poor public investment management (PI-11) (mentioned above), revenue administration (PI-19), and accounting for revenues (PI- 20).
17. Strengthened revenue administration brings in more revenue for GoA, which would then be available for funding public services, thereby reducing the need to borrow to fund such services. The Federal Revenue Collection Agency has facilitated procedures and improved dissemination of information on taxpayers’ rights and obligations, but additional efforts are needed with regard to redress processes. The
latter is key to ensuring a sound tax system, whereby taxpayers can be confident that the tax administration will assess their declarations with objectivity and fairness. Risk management is gradually becoming more systematic, comprehensive, and structured, but there is still a long way to go to promote voluntary compliance, a situation that impacts adversely on revenue audits and investigations (PI-19).
18. Reporting, transfers of revenue collections, and tax reconciliations between the Federal Revenue
Collection Agency and the National Treasury Office show mixed results. While tax revenue reporting and transfers from the Revenue Agency to the Treasury are organized according to international standards, the reconciliation of revenue accounts does not adhere to good practice methods. The latter is critical to ensure that, especially, tax arrears are properly recorded, reconciled, and their collection enforced systematically (PI-20).
Efficient use of resources for service delivery
19. It should be noted that as a result of Argentina’s federal fiscal arrangement, subnational governments (provinces and municipalities) are responsible for primary and secondary education, as well as public health care (primary health care centers and hospitals)—that is, the traditional aspects of service delivery. As such, given the scope of this assessment (i.e., central government) and the high level of policy autonomy granted to subnational governments, improving the performance of the PEFA indicators at the central government level may not necessarily translate to efficient and effective service delivery.
20. Nevertheless, the assessment findings indicate that efficient service delivery is fostered by reliable expenditure allocations (PI-2); timely transfers to subnational governments (PI-7); timely availability to the
public of fiscal information (PI-9) (with the exception of the audited central government financial reports and all other external audit reports produced by the Auditor General’s Office); the preparation of a multiannual budget (PI-16); predictability of in-year resource allocations (PI-21); and adequate internal controls on non-salary expenditure (PI-25).
21. However, the assessment pointed to opportunities to improve the following indicators: revenue administration (PI-19, mentioned above), accounting for revenues (PI-20, mentioned), external audit (PI-30), and legislative scrutiny of audit reports (PI-31).
22. The Auditor General’s Office, responsible for auditing government revenue and spending at the national level in Argentina, operates independently from the Executive branch and has unrestricted access to records and documentation from all institutions covered by its mandate. National auditing standards are compatible with the International Standards of Supreme Audit Institutions (ISSAI), but coverage of audits, timely submission of reports, and follow-up of recommendations or observations in audit reports cannot beproperly assessed, because of the absence of relevant and adequate information (PI-30).
23. Legislative scrutiny of the audited financial reports of the central government is delegated to the Parliamentary Public Accounts Review Committee of the National Congress. However, evidence collected suggests that legislative scrutiny of the audit reports for the last three completed fiscal years has not yet been undertaken. Hence, transparency of proceedings, in-depth hearings, and follow-up of
recommendations made by the Legislature to the Executive branch with regard to these audits could not be properly benchmarked against international good practices (PI-31).