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Box 4.2 Main Recommendations of the Algeria IMF–ROSC Transparency Module

In December 2004, an IMF Report on the Observance of Standards and Codes (ROSC) evaluated Algeria’s fiscal transparency practices in light of the IMF Code of Good Practices on Transparency in Monetary and Financial Policies (IMF 2005a).

The ROSC found that Algeria is carrying out reforms that have helped to clarify the roles that stakeholders play in the public sector as well as to elucidate how government authorities can operate in the economy. However, major progress is needed to attain a satisfactory level of transparency in the fiscal sector. Major issues include: (a) significant quasi-fiscal operations of banks and public enterprises, not accurately assessed; (b) fiscal data that refer for the most part to the central government; (c) a legal framework governing budget preparation and execution, with much room for improvement in government accounting, budgeting, and compliance; and (d) very little information made available to Parliament and the general public regarding budget options and the state of government finance.

The ROSC recommended four key measures:

1. 
   Information provided to Parliament and the public must be improved by overhauling budget documents and broadly disseminating fiscal data that is much easier to understand. Information proposed for inclusion: special accounts for earmarked funds; temporary liquidity operations, projections for repayment of principal of debt, primary and non-oil balances, tax expenditures, and detailed accounts of financial assets, government guarantees, and implicit subsidies.
   
2. 
   A new organic budget law should be approved regulating financial legislation. This would replace quasi-fiscal activities of public sector entities with a system of direct fiscal subsidy. It would also reform local government finance.
   
3. 
   Fiscal management should be strengthened, first and foremost by modernizing the budget classification system, the accounting framework, and fiscal audits.
   
4. 
   The number of special accounts should be reduced.
   

Source: IMF 2005a

2. 
   Under the timeframe of the ongoing budgetary modernization process, several outputs should be complete by the end of 2007. These include: (a) a new budget economic classification; which integrates recurrent and capital budgets, as well as reorganizes programs structure in pilot ministries; (b) several updated sectoral strategies supporting the preparation of the 2008 budget; and (c) new regular reports on the monitoring of PCSC projects. Change has to be gradual, taking into account the time normally required for preparation and implementation of a new IT system, the integrated accounting and budget execution system cannot be expected to be jointly operational before 2009. The budget should nevertheless be executed and tracked based on the new classification before that date. In this regard, the main recommendations are:
   

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  Complete the new budgetary economic classification by the end of 2006 as top priority. . The new classification will be in line with the IMF’s Government Finance Manual.
  
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  Revamp the budget documents through new regulations. These should (a) introduce the new economic classification and integrate recurrent and capital outlays; and (b) reorganize the program structure, first in pilot ministries, and then to the rest of the central government. Pilot ministries expected to have completed the new program structure by end-2006 are Health, Higher Education, Public Worls and Finance.
  
• 
  Submit to Parliament the new Budget Organic Law by end-2006. Its present draft aims to restructure the budget presentation; separate, reduce and better regulate the Special Treasury accounts; specify and expand the annexes of the budget law; provide more transparency to offbudget resources; introduce new procedures for approving budgetary supplements in case of contingencies; and introduce new regulations for local governments’s finance. The new law should also introduce important legal specifications—for example, a unique budgetary classification, updated definitions of revenues and expenditures, a common definition for capital spending and investment (actually different; see Chapter 3), and standard tables to be included as annexes in the annual Budget law (MoF, 2006b).
  
• 
  Publish the first annual report on 2006 PCSC project execution in 2007. From 2008 onwards, such report could be produced twice a year.
  

2. 
   In the medium term, Algeria needs to accelerate its move into a MTEF. On the positive side, Algeria’s fiscal space represents a distinct advantage for developing a MTEF. However, international experience has amply demonstrated that malpractices in public expenditure management can undercut the full benefits of using available fiscal space to finance a MTEF. In any case, improving budget formulation in a multiyear fashion would prove extremely valuable to the PCSC, though it should not be viewed as a panacea for the multitude of PEM problems that otherwise exist. As important as it may be, a MTEF should not distract attention away from other shortcomings. More fundamentally, Algeria needs to address and resolve several other critical issues:
   

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  Complete, in this order, the restructuring of budget programmes and the definition of performance indicators for pilot ministries; while starting to collect data more systematically on medium term results. This should help align budgeted allocations (inputs) with MTEF sectoral outcomes. To do this, consult with spending units on informed, ex-ante costing exercises for selected goals.
  
• 
  Deepen the strategic sectoral content of budget negotiations between line agencies and the MoF. “Deepening” implies more technical discussions on tradeoffs, decisions based on the merits of particular cases, and far less use of budgetary decisionmaking through inertial allocations. This process has already started in the pilot ministries, while defining their performance indicators, based on their budgets-programmes.
  
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  Gradually integrate more pilot ministries into the MTEF. These pilot ministries are preparing sector expenditure frameworks, including strategy, objectives, key programs and costs, and performance indicators. By end 2006, five pilot ministries were initially selected—Finance, Higher Education, Public Works, Transports and Health, and their program structure had to be completed. In 2007, a global MTEF, setting global allocations (and performance indicators) by sector over a three-year period is planned. This global MTEF should be introduced in the 2008 Budget Law.
  
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  Set a clear schedule between the multiannual and annual budgeting processes during each year’s budget formulation cycle. Successful MTEF countries complete a first draft by April, which is then used as a guideline to help line ministries in preparing their annual budgets.
  

2. 
   The MTEF should be seen as a complement to—not as a substitute for—basic budgetary reform. By preceding the formulation of the initial guidelines of the annual budgets (issued by the end of March or early April), the MTEF can gradually achieve more significant impact at the budget formulation stage. It can start by defining ceilings on the major aggregate fiscal variables and on key sectoral spending. It could then be piloted in those ministries where predictability of funding and transparent outturns would warrant good monitoring. These necessary building blocks should first be in place before attempting to move forward to more advanced stages of an MTEF.
   
3. 
   This chapter derives several other medium term recommendations. These include:
   

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  Building a macroeconomic model to improve budget projections (cadrage).
  
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  Gradually reducing the period for the annual Journée Complémentaire from 3 months to 1 month, and pari-passu approving the credits de paiement from the beginning of the fiscal year.
  
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  Reduce the actual number of STAs and strictly enforce regulations on regular reporting.
  
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  Developing a registry of all offbudget activities and contingent liabilities.
  
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  Strengthen internal and external audit procedures. The first step is to verify compliance with required procedures. Internal and external controls should benefit from the development of indicators to measure performance.
  
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  Complete the computerized integrated financial management system by 2009. In the meantime, and as a transitory solution, the ministry has been testing a software so-called SIGBUD, in the preparation of budgets-programme. Complete parametrisation and validation of this software is urgent.
  

2. 
   Regarding procurement, a thorough review should be done of the public procurement codes and procedures. This involves taking into account the recommendations made by the World Bank as part of a procurement review (World Bank 2002d), and the following actions taken, among others:
   

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  Permanent provision of procurement training and development courses to the relevant staff at all levels.
  
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  Use of quantitative ex-post-qualification criteria that are clear, verifiable, and commensurate with the scope of the contract and time period for execution, so as to replace the current grading system. This would facilitate elimination of unqualified bidders and subsequent selection of the lowest cost bid that meets the basic requirements, in the case of contracts for works and supplies.
  
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  Setting of standard specifications and standard bid evaluation documents (similar to those established by Sonatrach). This also applies to guidelines and implementation circulars. Technical specifications and close monitoring and oversight of all contracts should be stepped up in order to enhance the quality of works and services. This would most likely help staff prepare documents better and more expeditiously, and would facilitate review and oversight activities.
  
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  Preliminary pre-selection of enterprises when studies are being finalized or specifications prepared for major projects. This would ensure the participation of a greater number of qualified enterprises and save time in the shopping process. Pre-selection should take place on the basis of quantifiable technical criteria that are clear and transparent, based on the work to be done or supplies to be provided.
  

2. 
   Regarding budget management in wilayas and municipal governments, it is essential to revert to sound processes. Critical recommendations are to:
   

• 
  Design a strong regulatory and institutional framework that clearly assigns expenditure responsibilities in line with the administrative capacity of subnational governments. This framework should consider establishing incentives for the transfer of resources in exchange for new expenditure responsibilities (for example, using standard per student criteria as a basis for making budget assignments to education).
  
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  Once defined, convey national priorities that induce municipalities to align their budgets.
  
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  Condition actual delivery of transfers on the timely, reliable, standardized budget reporting by wilayas and municipal governments. This could be part of the new Organic Budget Law.
  
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  Promote responsible subnational borrowing. This involves further legislation under which the central government might intervene in wilayas and local governments that incur unsustainable debts. The new Organic Budget Law should specify the main elements of reprogrammed debts and exclude the possibility of bailout at the subnational level.
  
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  In the medium term, budgetary transparency should be institutionalized at all levels of government. This includes subnational governments; and civil society participation should be encouraged.⁵⁵ This could include eventually a Fiscal Observatory, playing a better-informed and more effective watchdog and advocacy.
  
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  The future monitoring/evaluation system at various levels (wilayas, ministries, entities) should be established. Its implementation should also permit assessment of the effectiveness of procurement and contract management, and the adoption of transparent corrective measures.