Limited autonomy because of financing constraints stands out as a shortcoming of budget formulation bysubnational governments. This is largely related to the particularities of the management of intergovernmental transfers in Algeria. Wilayas and municipalities are legal entities with their own budgets. They are administered by elected assemblies. The budget law formally defines a revenue-sharing arrangement that mandates the following: (a) the share of tax revenues that they are to directly receive, which is 20 percent of VAT revenues; (b) the amount of budgetary transfers from the Local Government Common Fund (FCCL), financed by taxes and budgetary appropriation;53 (c) their expenditure responsibilities; and (d) the mechanisms through which the government approves and oversees their budgets. As seen, exceptional subsidies lead to extensive central government intervention in the preparation of municipal budgets and to absorption of debts that municipalities owe to certain public enterprises. It would be unsurprising to find that subnational governments, so heavily dependent on transfers, then become cash-strapped and less able to manage their budget execution.
Budget formulation at the local level replicates deficiencies found at the central level. Oversight of the municipalities’ budgets is exercised by the walis, the government’s representative at the wilaya level. The walis are also in charge of executing the wilaya budget. Few wilayas and municipalities have a strategic plan. The emphasis in budget management is on recording rather than reporting or planning. Basically, they tend to view budget formulation as another necessary evil imposed by the central government, at best a rote inertial exercise.
Wilayas and municipalities formulate their budgets in isolation from national strategic directives. There is no legal requirement to do otherwise.54 But if such a requirement were to exist, subnational governments would be hard-pressed to implement it, because of the general lack of definition of national objectives. There are some exceptions. Because the central institutions have not formulated national objectives, some wilayas and municipalities do communicate among themselves and have built consensus on local common goals (see Chapter 7 for examples in the education sector).
For subnational governments, there is no framework for fiscal discipline. The level of annual transfer, which itself is discretionary and problematic, is the only formal budget constraint affecting wilayas and municipalities. There are no constraints on the level of indebtedness nor on obtaining grants. Thus, subnational governments often incur arrears with public utility companies. International experience shows that this practice often leads to unsustainable local debt. Available information did not permit assessment of the level of indebtedness of local governments to the public banking system.
Budget formulation is short term. The budget process is not used to improve allocative efficiency nor match public services with citizen priorities. The lack of multiyear budgeting is also typical of subnational governments. Moreover, participatory budgeting is nonexistent. Only a few municipalities regularly engage communities on short-term budget issues.
Future expenditures are projected based on past levels, and efficiency considerations are absent. Subnational governments replicate inertial budgeting practices of central management. No incentives are given to local politicians to find creative solutions in terms of costing exercises to improve their budget efficiency.
There is no information on whether budget execution is affected by regular arrears in transfers, not only on a yearly but on a monthly basis. Revenue-sharing transfers in Algeria are made on an irregular basis. In any given month, there might be several payments, a single payment, or none at all. Consequently, the flow of transfer payments is volatile. This volatility of transfers undermines the ability of municipalities and wilayas to cover the cost of regularly used services. It also impedes efficient delivery of local services in the water, sewerage, and road sectors, and leads to interruptions in service provision.
Budget control and monitoring in subnational governments is weak and cumbersome. Neither municipalities nor wilayas conduct internal audits regularly. In addition, the Ministry of Interior does not externally monitor the wilayas, and the walis do not monitor municipalities. The Cour des Comptes does not initiate administrative sanctions although they formally hold the power to do so. Local citizens and users possess even less monitoring capacity and budgetary oversight.
Reporting on subnational budgets and debt is very poor. Local government taxation is not reported in publicly accessible documents. The MoF does not require reports on executed municipal and provincial budgets. If requested, local administrations send incomplete information. Although there are no official data on reporting, MoF officials indicate that barely a minority of municipalities and wilayas send their executed budget back to MoF, and when they do so, they often do it late.
E. Recommendations
The performance of PEM needs improvement at every stage—formulation, execution, monitoring, control, procurement, and evaluation. Fortunately, Algeria is already in the process of implementing a multiyear action plan to modernize its budgetary system (Projet de modernisation des systèmes budgetaires—MSB). The MSB refers mainly to the central level, though there are some extensions to the subnational level as well. This section outlines the main measures to be taken, while including those under the ongoing action plan. It also takes into account recommendations from the 2005 IMF Report on the Observance of Standards and Codes (ROSC). Broadly speaking, the short-term priority should be to keep the ongoing budgetary modernization process on track based on the existing non-yet fully computerized system. While also upgrading the regulatory framework, the government is attempting to develop sector strategies to guide multiyear sector budget allocations and program prioritization and benchmarking.
Interesting lessons can be learned from four years of implementing similar budget modernization actions plans by HIPCs, which were examined by World Bank and IMF (2005). The easiest area for significant improvement appears to be budget reporting, especially in tracking poverty spending (Indicator 13), timely recording and closure of transactions by end of year (Indicator 14), and timeliness of audited information (Indicator 15). In contrast, no country has met the procurement benchmark. Budget formulation, execution, and control show uneven performances. More significant improvements in budget formulation are seen in the coverage of the budget (Indicator 1), the budget reclassification on a functional or programmatic basis (Indicator 5), and the integration of multiyear expenditure projections in the budget cycle (Indicator 7). More rapid improvements in budget execution are seen in the routine reconciliation of fiscal and banking records (Indicator 11). Identification of these areas promises to be a valuable input for defining the sequence of possible actions in the future.
Another valuable input is contained in the ROSC recommendations for transparent budget management in Algeria. The main recommendations are shown in Box 4.2.
In the short term, there is a logical linkage among, first, ongoing work aimed at modernizing budget preparation and expenditure classification; second, improving the expenditure channel; and third, computerizing budget management. The set of actions aimed at modernizing budget preparation and expenditure classification will help to (a) reorganize the budget by program; (b) facilitate presentation of the budget in a variety of forms, including economic, administrative, financial, operational, and programmatic; (c) define better the sectoral objectives of each program; and (d) identify a small set of performance-based budget-tracking indicators. The set of actions aimed at improving the expenditure channel will help to streamline expenditure execution and oversight procedures, while monitoring expenditure when necessary. Both set of actions are related to a computerized budget management system that will integrate budget and accounts management systems virtually, thus facilitating detailed tracking of expenses.
