Tuvalu: Improved Financial Management Program
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Progress Report on Tranche Release Program Number: 41180 Grant Number: 0139 July 2011 Tuvalu: Improved Financial Management Program This consultant’s report does not necessarily reflect the views of ADB or the government concerned. [For PPTAs: Also, all of the views expressed herein may not be incorporated into the proposed project’s design.] CURRENCY EQUIVALENTS as of 4 July 2011 Currency Unit – Australian Dollar (A$) A$1.00 = $1.0770 $1.00 = A$0.9285 ABBREVIATIONS ADB – Asian Development Bank CSO – community service obligation DBT – Development Bank of Tuvalu MFED – Ministry of Finance and Economic Development MFEP – Ministry of Finance and Economic Planning MTFF – medium-term budget framework NBT – National Bank of Tuvalu PFM – public financial management PFTAC – Pacific Financial Technical Assistance Centre TA – technical assistance TTFAC – Tuvalu Trust Fund Advisory Committee NOTE In this report, "$" refers to US dollars unless otherwise stated. Vice President B. Lohani, Vice-President-in-Charge, Operations 2 Director General R. Wihtol, Pacific Department (PARD) Director A. Ruthenberg, Pacific Subregional Office (SPSO), PARD Team leader M. Lototele, Senior Economics Officer, PARD Team members A. Pala, Associate Project Analyst, PARD C. Png, Counsel, Office of the General Counsel E. Veve, Senior Country Specialist, PARD In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area. CONTENTS Page I. INTRODUCTION 1 II. DEVELOPMENTS IN FISCAL AND FINANCIAL REFORMS 1 III. STATUS OF SECOND TRANCHE RELEASE POLICY CONDITIONS 2 A. Summary of Compliance with Policy Conditions 2 B. Progress on Second Tranche Release Conditions 2 IV. MAINTENANCE OF TRANCHE 1 CONDITIONS AND COVENANTS 8 V. CONCLUSION 8 VI. THE PRESIDENT’S DECISION 9 APPENDIXES 1. Status of Compliance with Second Tranche Release Conditions 10 2. Continued Compliance with First Tranche Conditions 13 I. INTRODUCTION 1. In 2008, the Board of Directors of the Asian Development Bank (ADB) approved a grant of $3.24 million from ADB’s special funds resources to Tuvalu for the Improved Financial Management Program, to be disbursed in two tranches of $1.24 million and $2.00 million. 1 The program aims to (i) strengthen the governance framework for the oversight of public enterprises in Tuvalu; (ii) improve (a) capacity for oversight on the part of the Government of Tuvalu, and (b) the capacity to respond positively to such oversight on the part of the public corporations; (iii) strengthen capacity to manage debt; and (iv) reduce government debt to the National Bank of Tuvalu (NBT). The grant agreement was signed on 3 February 2009 and the grant was declared effective on 14 May 2009, following an extension of the date for grant effectiveness. 2 The first tranche of $1.24 million was disbursed to the government on 8 June 2009 following satisfaction of first tranche conditions and upon grant effectiveness. 2. To support the capacity development necessary for the success of the program, standalone technical assistance (TA)—Capacity Development for Public Financial Management—was approved. 3 The TA assists capacity development through the development and implementation of high-level policy and legislation, and formal and informal training and mentoring of individuals with an emphasis on on-the-job learning. 3. This progress report provides the details of achievements that support compliance with the conditions for the release of the second and final tranche of $2.00 million. II. DEVELOPMENTS IN FISCAL AND FINANCIAL REFORMS 4. Fiscal and financial management reforms in Tuvalu have produced mixed results. In the late 1990’s, as part of the reform process to improve public financial management (PFM), the government moved from line-item to output-based budgeting. The intent was to better link policy and expenditures, and to strengthen the performance orientation in the civil service. The government introduced the 2000 national budget as the first comprehensive output budget. However, output-based budgeting quickly returned to an iterative process with an output list being grafted onto the traditional line-item budget. 4 The move to output budgeting failed, at least in part, due to the lack of ownership by the ministries of the outputs they had been tasked to produce. For the 2004 budget, the government reintroduced line-item budgeting. 5. In 2006, ADB—together with the Government of Australia, the Pacific Islands Forum Secretariat and the Pacific Financial Technical Assistance Centre (PFTAC)—assisted Tuvalu to modernize its taxation systems and legislation. 5 The TA helped revise and implement the Tuvalu customs and income tax legislation, and put in place and implement new consumption tax legislation. The modernized customs and consumption tax legislation provided legal backing for Tuvalu to join regional and international free trade agreements. The TA also trained staff on 1 ADB. 2008. Report and Recommendation of the President on the proposed Asian Development Fund grant to Tuvalu for the Improved Financial Management Program. Manila (Grant 0139-TUV approved on 16 December 2008 for $3.24 million). 2 The date was originally 4 May 2009. 3 ADB. 2008. Technical Assistance to Tuvalu for Capacity Development for Public Financial Management. Manila (approved 3 November for $857,750, with Government of Australia cofinancing of $57,750). The TA, while related to the program, was processed separately to allow the diagnostic analysis of the capacity of the Ministry of Finance and Economic Planning (MFEP) to be undertaken promptly to provide ADB and other development partners with a better understanding of where capacity gaps are and how to better address these. 4 ADB. 2002. Tuvalu: 2002 Economic and Public Sector Review. Manila. 5 ADB. 2006. Capacity Building for Taxation Reform. Manila (TA4902-TUV approved on 18 December 2006 for $300,000). 2 the use of the revenue monitoring system in the Internal Revenue Department and the modified PC Trade system (software used by Customs) in the Customs Department. 6. In 2008, the Government of Australia assisted the government to implement a medium- term fiscal framework to provide forward-looking macro resource allocation. The use of the medium-term fiscal framework helped the government forecast the medium-term impacts of policy decisions on its financial position. Currently, the Government of Australia is also working with the government on medium-term expenditure frameworks for health and education. 7. ADB has built on these areas of assistance through the program and standalone TA (para. 2) to help the government improve the efficiency and effectiveness of its public enterprises and improve debt management. Under the program, policies were put in place to strengthen oversight of and management capacity in public enterprises. 8. The government’s continued commitment to strengthened PFM is shown by their support for the ongoing public expenditure and financial accountability assessment, which is scheduled to be completed in June 2011. A PFM roadmap will then be formulated that will guide the government in prioritizing future PFM development in Tuvalu for support by development partners. III. STATUS OF SECOND TRANCHE RELEASE CONDITIONS A. Summary of Compliance with Policy Conditions 9. The second tranche has seven conditions in three output areas: (i) improving public debt management, (ii) strengthening oversight of public enterprise, and (iii) strengthening management capacity in public enterprises. While putting in place policies to improve public debt management and strengthen oversight of public enterprises has progressed well, legislative reforms—especially on the adoption and implementation of a legal framework for the licensing, ongoing supervision and regulation of banking institutions—delayed the government’s compliance with all the second tranche release conditions. As a result, the second tranche could not be released in November 2009 as originally envisaged. The closing date was extended from 30 September 2010 to 30 June 2011. 6 The government has since provided compliance documentation for all seven second tranche release conditions (Appendix 1). Based on the documentation provided, the government has complied with six second tranche release conditions and substantially complied with one second tranche release condition. B. Progress on Second Tranche Release Conditions 1. Output 1 : Improved Public Debt Management Capacity 10. The conditions under this output area seek to support the development and implementation of a debt risk management and mitigation policy and strategy. The intent is to support the government’s move to a more sustainable debt level and to ensure that financial risks are at prudent levels. 11. Policy Condition 2.1 (complied with). Cabinet to approve the debt risk management and mitigation policy and strategy, which shall include: (i) processes and responsibilities for the 6 The first extension was approved on 23 September 2010 for six months, a second extension for a further three months was approved on 25 March 2011, and the third extension approved on 22 June 2011 for an additional three months. 3 analysis and approval of the proposed new guarantees and debt; (ii) processes for prioritizing and scheduling debt repayment including debt which is currently not being repaid; and (iii)