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This section of the website presents information about Government of Pakistan's MTBF (Medium Term Budgetary Framework) in the form of FAQ's i.e. Frequently Asked Questions. These have been compiled from the Technical Note - 11.
 

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Following is the list of questions given. Simply click on the required question and you will be presented with its answer. After you have seen the question, simply click on "Back to Top" link given at the end of each answer. This will again bring you the questions list.
 

1 - WHAT IS MEDIUM TERM BUDGETARY FRAMEWORK ?

At its simplest a Medium Term Budgetary Framework (MTBF) is a multi-year approach to budgeting which links the spending plans of government to its policy objectives. Reliable estimates of resources available for expenditure over the MTBF period are required, as government spending plans must respect a reasonable view of what government revenues are likely to be over the medium term.
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2 - What are the Benefits of an MTBF?

The principal benefits of the MTBF approach come from integrating a ‘top down’ view on likely resource availability with a ‘bottom up’ estimate of the cost of meeting policy objectives. This approach means that the government is forced to set priorities which are ‘affordable’, while encouraging a careful scrutiny of how resources may be used most effectively in achieving government objectives.
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3 - Does Pakistan Have an MTBF?

Pakistan does have some important elements of such a framework. It has a medium term economic and revenue forecast which is presented in a number of publications. The Poverty Reduction Strategy Paper (PRSP) published in December 2003 has a five-year forecast of revenue and expenditure and also contains an estimate of spending for the same five-year period on sectors considered important to poverty reduction.  

The PRSP sets out national objectives for improving economic and social performance. Whilst the PRSP presents spending plans by sectors, these plans are indicative rather than firm. They represent what the government would like to deliver rather than what the government will necessarily be able to deliver with the fiscal resources it is likely to mobilize over the next five years.

Government of Pakistan has formally initiated budget reforms under MTBF from FY 2005-06 in Ministry of Health and Ministry of Population Welfare on pilot basis. From FY 2006-07 MTBF will be rolled out to other line ministries.
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4 - How Long is the Medium Term?

Three years has been the most popular choice for an MTBF although some have favoured longer time periods, such as five years. The consensus seems to be that three years is a reasonable compromise between what a useful outlook period is and what is practical in terms of economic forecasting.

It should not be thought, however, that major public policy objectives could be achieved in three years. Social indicators like literacy, life expectancy, infant mortality, etc. respond only relatively slowly even to the most enlightened public policies. Pursuit of these objectives requires a long-term commitment by governments. The ‘vision’ which drives this commitment is often embodied in longer term policies and planning documents such as the PRSP. The MTBF then becomes an important tool for moving towards the goals of that vision by defining medium term objectives (e.g. specific education enrolment targets), which are quantifiable and timed steps on the road to longer term policy goals.

The expression  “rolling three-year plan” is often used to mean a budgetary cycle where a year is added at the end as each initial year passes.
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5 - What is an Economic Forecast?

An economic forecast is a quantitative expression of expected economic performance in the future. Most countries, including Pakistan, undertake economic forecasting for various purposes. Such forecasts may be prepared by: government, for example the Ministry of Finance; by independent organizations affiliated with government such as the State Bank of Pakistan; or by private sector companies like commercial banks. The economic forecast relevant to the MTBF is the estimate of annual economic growth over the medium term prepared for the government of Pakistan and usually reflected in the annual budget. Sometimes the forecast is disaggregated by sector, for example a separate forecast may be provided for, say, transportation, agriculture, etc.

Popular forecast periods are quarterly (the next three month period), annual, two-three years and longer term (five years plus).
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6 - What is a Fiscal Forecast?

A fiscal forecast is simply an estimate of the resources available to government to finance government operations over the forecast period.

The fiscal forecast will usually include tax revenues (often broken down by major categories like ‘sales tax’ or ‘income tax’), non-tax revenues (like payments from state owned enterprises or user fees charged by government), and ‘external’ financing like donor grants. There may also be an element of deficit financing included in the fiscal forecast where the government anticipates net borrowings from domestic or international lenders.
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7- SHOULD THE RESOURCE ENVELOPE FOR AN MTBF BE RESTRICTED TO THE FISCAL FORECAST ?

The resource envelope for the MTBF should not be restricted to the fiscal forecast.  In the context of an MTBF, it becomes very important to include information on funding for public service delivery from all sources. This would include, for example, the direct provision of infrastructure from a foreign donor.

Likewise, in planning expenditure within a particular sector under an MTBF, it also becomes important to improve understanding of what the plans and activities of other participants are likely to be. For example, knowledge of current and planned private sector education provision and household expenditure on education is important in planning what the optimal level and pattern of public sector education provision will be.
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8 - Which Countries Have Successfully Implemented an MTBF?

Most of the developed countries have moved over the last 30 years to multi-year budgetary frameworks. Although there is no standard for the form this should take, some common elements can be seen.

Mostly the developed country frameworks are for three years although some countries have preferred longer periods for special purposes, like major defence programmes which typically cover longer periods.

Some developing countries have tied such reforms to other reforms like performance based budgeting (see below), or accrual accounting (see below). Others have been less ambitious.

Among the leaders in budgetary reform have been New Zealand, Australia and the United Kingdom. A number of middle-income countries have also been interested in budget reform and have developed MTBFs.  Examples often cited are South Africa and Malaysia.

While a large number of developing countries have tried budget reform, usually with support of technical assistance from donor agencies, the record has been mixed. Among countries, which have received such assistance and have enjoyed some success in reforms directed to producing an MTBF includes Sri Lanka, Albania and Tanzania.

One reason why developing countries have greater difficulty in achieving budgetary reform is because they are not always able to provide stability and predictability in resource allocation. Most developed and middle-income countries enjoy relatively stable economic prospects and can borrow to finance shortfalls in public revenues, provided such shortfalls are manageable over the economic cycle.

A bad harvest in a developing country, which is 50% dependent on agriculture, is a disaster that may undermine years of painful improvement in resource management and social indicators.

Other problems that developing countries may face in budget reform are: weak information systems which impede efforts to improve the efficiency of resource use; arbitrary political interference in resource allocation decisions; human resource and institutional capacity constraints; and efforts to combat corruption which involve excessive bureaucracy.
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9 - How Will an MTBF Help Pakistan?

The most immediate benefit which Pakistan can expect from adopting an MTBF approach is an improvement in the efficiency and effectiveness of the development budget which funds most of the federal efforts in the social sector.

The social sector in Pakistan is fairly broadly defined to include transportation infrastructure, water and sanitation, education, health, social security, irrigation, rural development, social safety nets and law and order. The social sector represents a critical constraint on economic and social development in Pakistan. Economic take-off in Asia has always been linked to overcoming absolute constraints like high rates of illiteracy and poor public health experience. Since Pakistan has limited resources to spend on essential social services the government and donors have a longstanding interest in reforms that may help to make expenditure in the social sector more effective.

MTBF approach will also help to improve the effectiveness of spending under the recurrent budget, which covers areas in and beyond the social sector. This improvement will result from the fact that the recurrent budget is not currently linked to well articulated government objectives and examining the recurrent budget against such objectives should lead to greater efficiency.

More generally, the expanding interest under an MTBF in what budgets will deliver or contribute to (e.g. improved literacy) rather than simply what they will buy (e.g. wages, fuel) will lead to an allocation of resources that better reflects Pakistan’s critical priorities.  This has the potential to significantly increase the productivity of Pakistan’s public expenditure. For many years, for example, there has been little or no debate over what Pakistan’s non-development budget delivers rather than what it buys. This is reflected in the presentation of budget documents to the legislature. Improving information on how ‘what the budget buys’ translates into ‘real public services’ will greatly improve the value of this expenditure.
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10 - What Are the Major Steps in Implementing an MTBF?

The major steps in implementing an MTBF are generally seen as follows:

1.      Stage 1 consists of developing a macroeconomic framework which can be used to make projections of revenues and thus of expenditures for the framework period, say three years. Pakistan, which has embraced policies favouring macro-economic stability and fiscal discipline, has completed much of the work for this stage.

2.      Stage 2 consists of a sector review in which sectoral and ministry objectives can be articulated, discussed and costed. Pakistan has done some of this, most notably through the PRSP for the social sector, but much remains to be done. The budget in Pakistan remains fragmented both between different levels of government and between recurrent and development spending, a distinction which appears at all levels of government. Completing this stage also requires a range of consultations within each level of government (and between levels of government where more than one level of government is involved in programme funding and programme delivery) to agree on the results of the sector reviews.

3.      Stage 3 is where the Ministry of Finance develops an expenditure framework based on information for resources and from the sector strategy process and provides sector expenditure ceilings for the period of the Medium Term Framework. This period is, typically, the upcoming budget year and the next two years. This stage inevitably involves difficult trade-offs between policy objectives and resource availability. Avoiding the decisions on trade-offs at this stage typically leaves budgetary expectations at variance with likely revenue outcomes and risks undermining the MTBF process.

4.      Stage 4 is where budgets respect approved budget ceilings.

Government of Pakistan has followed similar approach as mentioned above.
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11 - What Are the Biggest Problems Encountered in Implementing an MTBF?

The MTBF process can encounter the following difficulties:

§         Unrealistic estimates of overall resource availability, a common failing that tends to invalidate all subsequent stages.

§         Failure to agree on a useful integrative framework in stage 2 and the underlying procedures to make this effective.

§         Failure to make the tough trade-offs in stage 3.

§         Failure to insist that budget ceilings are respected in stage 4.

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12 - How Do MTBFs Function in Decentralized Federal Systems like PAKISTAN?

Decentralized or federal systems like Pakistan, divide political power between a central decision-making authority and locally autonomous units (such as provinces).

Whilst in principle decentralization is not a major problem in introducing an MTBF, it requires more extensive consultation and coordination.  If a federal state is to derive maximum benefit from an MTBF approach it is very important that all levels of government share information on policy priorities and maintain common reporting standards so that meaningful information can be compiled on how government spending at all levels supports government priorities. A comprehensive sector review can play a useful role in this regard bringing greater vertical integration of expenditure among all tiers of Government.

It is not necessary for all levels of government to have the same priorities. It is only necessary that they be able to compare amongst themselves what their respective objectives are, what resources have been allocated to achieve them and, ultimately, how effective that spending has been.
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13 - ARE THERE LEGAL OR CONSTITUTIONAL PROBLEMS IN IMPLEMENTING AN MTBF IN PAKISTAN?

There do not appear to be any legal or constitutional problems in implementing an MTBF. By definition the framework implemented in Pakistan would be one that respects the legal and constitutional framework of the country.

One issue often raised in this context is the multi-year nature of the budget versus the constitutional requirement for an annual budget. In practice, countries that have multi-year budgets articulate these through an annual budget cycle. The multi-year budget really has the status of a plan, which is approved by the legislature one year at a time in much the same way as the PC-1, a five-year plan at the programme or project level, is subject to annual approval.
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14 - How Does the MTBF Relate to PIFRA?

Project for Improvement of Financial Reporting and Auditing (PIFRA) is a very important part of overall governance reform in Pakistan and, ideally, PIFRA implementation and the introduction of an MTBF would proceed in parallel recognizing that it will take a number of years for the two initiatives to reach maturity.

In the fullness of time, the reforms under PIFRA, such as the New Accounting Model (NAM) and those under the MTBF would be articulated in common procedures. For example, both would appear in a document similar to the Accounting Policies and Procedures manual of the NAM.

Budget reform does not have to wait accounting reform.  However, accounting reform without budgetary reform does not provide optimal value.

The necessary relationship between the two initiatives is best illustrated by the new Chart of Accounts circulated in draft in 1999 and implemented for budget purposes in revised form for budget year 2004-2005. One important feature of the new Chart of Accounts is a revised functional classification. A functional classification is intended to link budgets and spending to the purposes for which the money is allocated and is thus clearly critical to successful articulation of government policy objectives with resource allocations. 

If the functional classification provides a good linkage between policy objectives and resources then performance against budget allocations can be tracked during budget execution and the accounting system can provide feedback on what has been spent for what purposes and this, in turn, can inform policy makers and managers of where spending has fallen short of expectation and, ultimately, on what works well and what works less well.
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15 - What Would the MTBF Mean for the Work of the Ministry of Finance?

In general the introduction of an MTBF would give the Ministry of Finance greater analytical insight on which to base its advice on how to allocate spending to achieve government policy objectives. This would tend, over time, to give the Ministry more of a strategic, policy oriented, role to complement its current focus on financial control and fiscal discipline.
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16 - WHAT WOULD THE MTBF MEAN FOR THE WORK OF THE PLANNING & DEVELOPMENT DIVISION?

Introduction of an MTBF would lead to a greater convergence between the roles of Planning & Development and Finance Divisions. In some countries this convergence has lead to actual merging of the planning and finance role although typically such convergence takes a long time. Just as the Ministry of Finance tends to become more strategic and analytical with an MTBF in place so the Planning & Development Division becomes less theoretical and hypothetical. Ideally the government ‘central agencies’ dealing with, say, health would speak with a single voice to the federal Ministry of Health and there would be a single fully integrated planning and budgeting cycle.
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17 - What Would the MTBF Mean for the Line Ministries?

Line ministries under an MTBF would have much greater responsibility both for developing budgets within the multi-year guidelines and, ultimately, for managing the resulting resources in order to achieve programme / ministerial objectives. In particular, the greater certainty associated with indicative estimates of resources available to them over the medium term would enable the line ministries to plan activities over a longer time period, thereby improving their focus on outputs and outcomes.

This would require line ministries to build up both budgeting and management capacity beyond their current levels.
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18 - Could a Province Implement an MTBF?

In principle a province can implement an MTBF successfully independent of national government provided it had a fair degree of confidence on medium term resource availability and a fair degree of autonomy in designing and implementing programs. Some of these conditions appear to have existed for a number of years in Pakistan with mechanisms like the five-year agreements on revenue sharing arrangements under the National Finance Commission (NFC) and the constitutional responsibilities of provinces in areas like health and education.

One critical factor is that information, such as economic and fiscal estimates, must circulate in a timely manner between the federal government, provinces and below.   Subject to this caveat, it is possible for a province to implement an MTBF independently or in advance of national government. However, it is clear that Pakistan as a whole would benefit if all levels of government, federal, provincial and district, move forward together in the budget reform process.  For example, federal programs in social services should complement and complete provincial programs, not compete with or contradict them. Indicators of success, such as literacy and health indicators, are best agreed and measured at the national level with dis-aggregation to provinces and districts as necessary. In any event, it is important to important to have similar MTBF architecture at all levels of Government.
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19 - Could a District Implement an MTBF?

Much the same arguments apply to districts as apply to provinces. A district could implement an MTBF independent of the province but the relatively large investment of time and effort would favour province-wide or national approach from which all political entities can benefit.

There may be a special case for large urban areas to pursue governance reforms more aggressively even on their own because they have larger incentives to do so and larger resources to address problems with.
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20 - How Does MTBF Relate to Program and Performance-Based Budgeting?

Programme budgeting involves the allocation of resources to ‘programmes’ which are groupings of related activities having well articulated objectives. Programme budgeting dates back to the American experience in the 1960s when major concerns began to emerge over defence spending. It spread rapidly in the 1970s, usually under the rubric ‘Programme Planning and Budgeting Systems’ (PPBS).

Programme budgeting has never lost its popularity although concepts have become more refined and expectations more ambitious in the last 30 years.  Programme budgeting reinforces many of the principles underlying an MTBF, such as strengthening the link between budget and government policies.

Performance-based budgeting essentially builds on the programme budgeting of the 1970s and 1980s. It carries the linking of resources to objectives one step further and tries to link resources to results. Generally performance budgeting requires sophisticated planning, budgeting and reporting mechanisms that emerge later in the budget reform process.
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21 - How Does MTBF Relate to Zero-Based Budgeting?

Zero-based budgeting enjoyed a fairly brief period of popularity in the 1970s and 1980s. It requires that budgets start from a blank sheet of paper (the zero-base in question) and build the budget from scratch in every budget cycle.

Most countries have found this radical approach too cumbersome and time consuming to be practical.  However, the approach remains valid and useful when establishing baselines for budgets, like the Pakistan recurrent budget, which may not have been examined in depth for a number of years.
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22 - How Does MTBF Relate to Cash Accounting?

At its simplest cash-accounting means that revenue is recognized when received and expenditures are recognized when paid.  Cash accounting was the universally accepted basis of government accounting well into the 20^th century.

Over the last 30 years budgetary reform has almost always gone on in parallel with accounting reform. This is because a tradition of single year cash accounting does not work well in areas where the cost of policy decisions is deferred entirely into future years so the decision appears to be “free” in the period in which it is made.

A classic example of this is the generous state funded pensions that pose difficulties to much of the developed world.  Pakistan also has problems with valuing outstanding obligations at the end of the financial year because of the cash accounting convention currently in use.
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23 - How Does MTBF Relate to Accrual Accounting?

At its simplest accrual accounting means that revenues are recognized when they are earned (or in the case of taxes, assessed) and expenditures are recognized when they are committed.  This is different from cash accounting where revenues are only recognized when received and expenditures recognized when paid.  Accrual accounting has been recognized as an important aspect of public governance reform for at least the last 30 years.

As noted above budget reform and accounting reform have tended to go hand in hand although such linkages are not inevitable. Generally accrual accounting ensures better estimates of the cost of policy initiatives because it tends to reflect ‘life cycle’ costs rather than immediate costs.

It is interesting that accrual accounting is the norm in the commercial sector and for taxation purposes where a key ‘accrual’ concept is depreciation, which must be allowed for in calculating the tax liability.

The current convention in Pakistan is for pure cash accounting although the PIFRA project proposes to modify this approach in favour of some form of accrual accounting.
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24 - What Factors Favour Successful Development of an MTBF in Pakistan?

The key factor is political will on the part of national and state government in a federal state similar to the political will demonstrated through the decision to implement the New Accounting Model (NAM) with the FY2004-05 budget.

Other critical factors are leadership and sustained capacity development, usually led by the federal Ministry of Finance.

Adequate accounting and information systems are also needed to provide feedback on budgetary processes and inform decision making on resource allocation.
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This page was Last updated on: June 22, 2006 07:34:33