Executive summary

1. The objective of the Public Expenditure and Financial Accountability (PEFA) assessment is to review the current performance of the public financial management (PFM) systems, processes, and institutions of the Somali regional government since the last assessment in 2015. The assessment is aimed at assisting the government in identifying PFM weaknesses that may inhibit effective delivery of services to its citizens and the realization of its development objectives in general. Furthermore, the findings of the PEFA assessment will assist the government in developing a PFM reform strategy and provide the basis for a coherent PFM reform program that can be supported by development partners (DPs), as well as through the government’s own initiatives.
2. The Somali assessment covered regional government budgeted units, extra-budgetary units (EBUs), Office of the Regional Auditor General (ORAG), the regional council, public enterprises, and the chamber of commerce. Annexes 3A and 3B provide a comprehensive list of information used and people met (interviewed), respectively, during the assessment. Other reference material used were the 2018 International Monetary Fund (IMF) Debt Sustainability Analysis for Ethiopia Federal Government and Government Finance Statistics (GFS) Manual 2014, Chapter 2—definition of EBUs. The fiscal years for the assessment are Ethiopian Calendar (EC) 2008, 2009, and 2010 (Gregorian Calendar [GC] FY2015/2016, 2016/2017, and 2017/2018, respectively). The last budget submitted to Parliament is the EC 2011 budget or Gregorian FY2018/2019 budget.
3. The assessment shows the state of PFM performance of the region at the time of the fieldwork (November 2019 is the cutoff date). The period covered for each of the 97[1] dimensions (summarized into 32[2] performance indicators) depends on the dimension and in accordance with the PEFA measurement framework. Some dimensions were assessed at the time of the assessment (November 2019 is the cutoff date). Other dimensions were assessed at the relevant time, which is the last completed fiscal year FY2017/2018 or FY2018/2019 for the last budget submitted to Parliament.
4. The assessment management framework, oversight, and quality assurance are summarized in Box 1.1. The assessment was funded by the World Bank, Irish Aid, the U.K. Department for International Development (DFID), the European Union (EU), the United Nations Children’s Fund (UNICEF), and UN Women.[3] It was managed by the World Bank. The task team leader (TTL) was Rafika Chaouali (Lead Financial Management Specialist, Governance, World Bank) and Meron Tadesse Techane (Senior Financial Management Specialist, Governance, World Bank) provided overall and continued guidance.

Impact of PFM system performance on the three main fiscal and budgetary outcomes

Aggregate fiscal discipline

5. All proclamations promulgated by the regional government derive their sources from the federal laws; these proclamations are quite robust for strengthening aggregate fiscal discipline, but these laws must be enforced with a strong political will. The reliability of aggregate expenditures (PI-1 ‘A’) coupled with a credible subsidy transfer from the federal government (HLG-1 ‘B+’) strengthens fiscal discipline. The same cannot be said for domestic revenues; these are unreliable (PI-3 ‘D’). Fiscal discipline is also weakened by the constant and continuous budget reallocations according to administration and/or economic classifications and the excessive use of contingency vote (PI-2 ‘D+’). The rules for in-year budget virements are clear but have no limits to the number and volume of virements; this is a weakness as far as fiscal discipline is concerned. The good news is that revenues and expenditures outside the regional government budgeting and reporting systems are less than 1 percent of total government revenues and expenditures. Also, the stock of expenditure arrears is below 2 percent of total government expenditure. These provide a strengthened approach to fiscal discipline. One particular strength is the fact that there are limits set out for budget spending units which are articulated in advance (PI-21.3 ‘A’); this is a good practice of fiscal discipline. The government does not spend beyond its approved budget without ex ante parliamentary approval; this is also a good fiscal discipline practice and all three supplementary budgets were approved before executive spending. Budget execution elements such as internal controls (PI-25 ‘B’) and internal audit (PI-26 ‘C+’) are satisfactory for the attainment of fiscal discipline.

Strategic allocation of resources

6. The classification and comprehensiveness of the budget are satisfactory (PI-4 and PI-5 rated ‘B’ and ‘C’, respectively), providing a sound basis for the allocation of resources according to strategic priorities and promoting transparency and easy tracking of government resources. These positive elements are however affected by the continuous functional and economic budget reallocations (PI-2 ‘D+’), thereby overriding government original policy intentions, leading to poor resource allocation, which affects efficient service delivery. The government does not monitor total fiscal risks (both explicit and implicit) of state-owned enterprises (SoEs) and other contingent liabilities; this is a weakness as far as strategic resource allocation is concerned as scarce resources could be used to pay off government contingent liabilities. The good performance of the government referencing policy-based fiscal strategy and budgeting (PI-14 ‘A’; PI-16 ‘B’; PI-17 ‘A’; PI-18 ‘C+’), except for fiscal strategy preparation (PI-15 ‘D+’), strengthens strategic resource allocation due to a multiyear perspective in budgeting (Medium-term Expenditure Framework [MTEF]), a sound budget preparation process and costing of sector strategic plans, and alignment of budget estimates to medium-term strategies but for the absence of a fiscal strategy that will ensure proper alignment of fiscal targets to annual budget estimates. The satisfactory performance of both revenue administration and accountability (PI-19 ‘B’ and PI-20 ‘C+’) coupled with the good performance of predictability in resource allocation (PI-21 ‘A’) strengthens strategic resource allocation, but the fact that government continues to miss its aggregate revenue targets (PI-3 ‘D’) raises concerns as to the effectiveness of these revenue administration measures. The absence of standard guidelines for public investment management weakens strategic resource allocation since it encourages selective approach to public investment appraisal, selection, costing, and evaluation.

Efficient use of resources for service delivery

7. The satisfactory performance of actual transfers from the federal government to the regional government (HLG-1 ‘B+’) and the reliability of aggregate expenditures (PI-1 ‘A’), in addition to the timeliness and reliability of information on resource allocation to budget units (PI-21 ‘A’), strengthen primary service delivery by making resources available for payment of goods and services on time, thereby reducing the accumulation of expenditure arrears (PI-22.1 ‘A’). However, the poor performance in expenditure composition outturns by economic and administrative classifications due to the constant reallocation of budgets across votes and the excessive use of contingency budget (PI-2 ‘D+’) weakens the efficiency in service delivery.
8. Efficient service delivery is also strengthened by the relatively strong PFM laws and regulations on procurement, budgeting, and cash management. Revenue administration and accounting show satisfactory performance (PI-19 ‘B’ and PI-20 ‘C+’), but this has very little impact on the overall (aggregate) domestic revenue performance (PI-3 ‘D’), a key factor in terms of making resources available for the effective and efficient execution of primary service to the citizens. Another weakness observed relates to the transparency and public access to fiscal information (PI-9 ‘D’); most information is not published, and if published at all, it is late. Performance information on service delivery is also weak (PI-8 ‘D+’) mainly due to the nonexistence of a comprehensive and consolidated report on resources received by primary service delivery units as well as the non-publication of monitoring and evaluation reports. Internal audit functions have wide government coverage, and similarly there is wide coverage for external audit as well (PI-30.1 ‘A’); these provide assurance to the use of government resources for efficient service delivery. Legislative oversight is strong; this has a positive impact on efficient service delivery since it holds the executive accountable.

Performance changes since the last assessment in 2015

9. Table 0.1 provides a summary of performance change since the last assessment in 2015. On the basis of the 2011 methodology, there have been 8 improvements in performance and 2 deteriorations in performance, 19 performances remained unchanged, 1 indicator was not comparable, and 2 indicators were not used as they were deemed irrelevant. Annex 4 provides a detailed analysis of changes in performance since the 2015 assessment according to the 2011 PEFA methodology.

Table 0.1: Changes in the ratings since 2015 using the 2011 framework

Fiscal discipline

10. Fiscal discipline shows mixed results. While it has been strengthened by the good performance of aggregate expenditure outturn (PI-1 rated ‘A’ in 2018 compared to ‘B’ in 2015), it was negatively affected by the poor performance in expenditure composition outturn and the use of contingency vote which was on average a little above 8 percent (PI-2 rated ‘D+’ in 2018 compared to ‘C+’ in 2015). Transfers from the federal government to the regional government could not be compared since HLG 1, which relates to earmarked grants, was not applicable in 2015. That said, available evidence suggests that the federal government has consistently maintained its performance in terms of ensuring that all budgeted subsidies are actually transferred on time to the regional government. Fiscal discipline was also negatively affected by the poor performance of aggregate revenue outturns due to its poor performance (PI-3 scored ‘D’ in 2018 compared to ‘B’ in 2015). The government has maintained a tight control on expenditure arrears, ensuring that the stock remains below 2 percent of total regional government expenditure, as well as the monitoring and reporting of these arrears (PI-4 rated ‘B+’ in 2015 and ‘A’ in 2018). This performance strengthens fiscal discipline by ensuring that only budgeted and approved expenditure is paid. Another element that usually affects fiscal discipline relates to payroll expenditure which has remained the same since 2015 although deterioration has been noted in the internal controls over payroll which raises some doubt.

Strategic allocation of resources

11. The government has maintained its strong performance in the predictability and allocation of its scarce resources coupled with the effective cash management framework through the daily consolidation of its cash/bank balances (PI-16 rated ‘A’ in 2015 and 2018; PI-17 improved from ‘B’ in 2015 to ‘A’ in 2018), all these having positive impact on strategic resource allocation needed for efficient service delivery. The poor performance in expenditure composition outturn (PI-2.1 ‘C’ in 2015 compared to ‘D’ in 2018) has however more or less negated the encouraging performance of the effective cash management system, thereby affecting strategic resource allocation negatively though the legislative framework for budget reviews and approval has improved, setting the tone for budget entities to spend within approved estimates on time (PI-27 rated ‘B+’ in 2018 compared to ‘C+’ in 2015). The comprehensiveness of the budget has seen improvement (PI-6 rated ‘B’ in 2018 compared to ‘C’ in 2015) coupled with improvement in a multiyear perspective in the expenditure framework (that is, MTEF; PI-12 rated ‘C+’ in 2018 compared with ‘D+’ in 2015) points to the government’s commitment to strengthen strategic allocation of resources.

Efficient service delivery

12. The consistent performance of federal government subsidy transfers to the regional government over the years (HLG-1 rated ‘B+’ in 2018 and ‘A’ in 2015 although not directly comparable due to the inapplicability of earmarked grants in 2015) has had a positive impact on efficient service delivery by ensuring that the needed resources are available on time to prosecute government policies and programs. The good performance of predictability of resource allocation (PI-16 rated ‘A’ in 2018) in addition to the effective cash management system (PI-17 also rated ‘A’ in 2018) has contributed positively to the efficiency of service delivery. The government has also maintained strict controls on the level of unreported operations (PI-7.1 rated ‘A’ in 2015 and 2018), except for donor-funded projects that still have a challenge in terms of full reporting and disclosure. The poor performance of domestic revenues (PI-3 rated ‘D’ in 2018 compared to ‘B’ in 2015) meant shortfalls in revenues badly needed to improve service delivery despite the good performance of the tax administration system (PI-13 rated ‘A’ in 2018 compared to ‘B+’ in 2015 and PI-14 rated B in 2015 and 2018). This situation however raises questions as to the effectiveness of the tax administration system and/or the revenue projection framework as the two are delinked. Improvement in external audit coverage (from ‘C+’ in 2015 to ‘B+’ in 2018) provides some assurance to the use of public funds for service delivery. The absence of performance audits however limits the ability to measure efficiency and effectiveness of service delivery

Overview of ongoing and planned PFM reforms and main weaknesses identified

13. The new PFM reform strategy, estimated at a cost of ETB 189.32 million over the five-year period from EC 2010 to EC 2014 (GC 2017/2018 to GC 2021/2022), has nine components:

• Balance government revenues and expenditures over the medium term
• Make cost-effective budget allocations
• Modernize government treasury, cash management, and disbursement systems for efficiency and cost-effectiveness
• Improve the timeliness and accuracy of government accounting and reporting
• Strengthen value for money by improving the internal audit and control systems
• Modernize government procurement and public asset management systems
• Modernize information technology (IT) systems that support government financial administration
• Improve government financial administration that is participatory, transparent, and accountable
• Improve staff technical capacity in government financial administration

14. The new PFM reform strategy fails to address issues relating to external audit (ORAG) and domestic revenue mobilization even though Component 1 mentions ‘balance government revenues and expenditures over the medium term’. The funding arrangements are also not well defined, but the government intends to look for multiple sources of funding including from the federal government and DPs.
15. Though there are no major ongoing PFM reform activities, PFM training and capacity-building programs have been mainstreamed into the day-to-day activities of each sector bureau. Over the past couple of years, the following elements have been achieved:

• Legal reforms on financial administration proclamation, procurement law, and directives.
• Public Revenue and Expenditure Improvement Plan—tax revenue increased at an annual average rate of 48.3 percent during the past five years, which is above the national average of 33 percent.
• Training and capacity building on government budget preparation and management.
• Government cash management and payment systems—Treasury Single Account (TSA) and daily consolidation of government bank accounts on TSA and closure of dormant public bank accounts.
• Revision of government Chart of Accounts (CoA) consistent with international standards (GFS-2001).
• Establishment of procurement complaints board.
• Training of internal auditors to conduct post-audit instead of pre-audit.
• Rollout of Integrated Budget and Expenditures System (IBEX) to all sector bureaus and woredas plus training and capacity building.