1 Afghanistan Public Expenditure and Financial Accountability (PEFA) Performance Assessment Report Based on PEFA Framework 2016 Baseline Report June 2018 Fiscal Year: December 22 – December 21 CURRENCY EQUIVALENTS Currency Unit = Afghani (AFN) US$1 = AFN 70.7 (as of May 12, 2018) 2 Public Expenditure and Financial Accountability (PEFA) Performance Assessment Report Table of contents Acronyms and Abbreviations......................................................................................................................................... 4 Executive Summary............................................................................................................................................................ 10 Chapter 1 1.1 Assessment Rationale ....................................................................................................................................... 17 1.2 Assessment Management and Quality Assurance ............................................................................... 18 1.3 Assessment Methodology ............................................................................................................................... 19 Chapter 2 2.1 Country Economic Situation............................................................................................................................ 24 2.2 Fiscal and Budgetary Trends ........................................................................................................................... 25 2.3 Legal and Regulatory Arrangements for PFM .......................................................................................... 28 2.4 Institutional Arrangement for PFM .............................................................................................................. 30 Chapter 3 Pillar I: Budget reliability................................................................................................................................................ 37 PI-1 Aggregate expenditure outturn.................................................................................................... 37 PI-2 Expenditure composition outturn............................................................................................... 39 PI-3 Revenue outturn.................................................................................................................................. 40 Pillar II: Transparency of public Finances................................................................................................................ 43 PI-4 Budget classification......................................................................................................................... 43 PI-5 Budget documentation.................................................................................................................... 45 PI-6 Central government operations outside financial reports................................................ 47 PI-7 Transfers to subnational governments...................................................................................... 48 PI-8 Performance information for service delivery......................................................................... 50 PI-9 Public access to fiscal information............................................................................................... 53 Pillar III: Management of assets and liabilities................................................................................................... 55 PI-10 Fiscal risk reporting............................................................................................................................ 55 PI-11 Public investment management.................................................................................................. 58 PI-12 Public asset management............................................................................................................... 60 PI-13 Debt management............................................................................................................................. 62 Pillar IV: Policy-based fiscal strategy and budgeting......................................................................................... 64 PI-14 Macroeconomic and fiscal forecasting...................................................................................... 64 PI-15 Fiscal strategy....................................................................................................................................... 66 PI-16 Medium-term perspective in expenditure budgeting........................................................ 67 PI-17 Budget preparation process........................................................................................................... 68 PI-18 Legislative scrutiny of budgets...................................................................................................... 71 Pillar V: Predictability and control in budget execution................................................................................... 73 PI-19 Revenue Administration.................................................................................................................. 73 PI-20 Accounting for revenue.................................................................................................................... 77 PI-21 Predictability of in-year resource allocation............................................................................. 79 PI-22 Expenditure arrears............................................................................................................................ 81 PI-23 Payroll controls..................................................................................................................................... 83 PI-24 Procurement management............................................................................................................ 84 PI-25 Internal controls on non-salary expenditure........................................................................... 89 PI-26 Internal audit........................................................................................................................................ 91 Table of Contents 3 Pillar VI: Accounting and reporting........................................................................................................................... 93 PI-27 Financial data integrity..................................................................................................................... 93 PI-28 In-year budget reports...................................................................................................................... 94 PI-29 Annual financial reports.................................................................................................................. 96 Pillar VII: External scrutiny and audit....................................................................................................................... 97 PI-30 External audit....................................................................................................................................... 97 PI-31 Legislative scrutiny of audit reports............................................................................................ 99 Chapter 4 4.1 Integrated Assessment of the PFM Performance................................................................................. 104 4.2 Effectiveness of the Internal Control Framework................................................................................. 108 4.3 PFM Strengths and Weaknesses.................................................................................................................. 108 4.4 Performance Changes since the 2013 Assessment............................................................................. 110 Chapter 5 5.1 Approach to PFM Reforms.............................................................................................................................. 113 5.2 Recent and Ongoing Reform Actions......................................................................................................... 113 5.3 Institutional Considerations......................................................................................................................... 114 Annex 1 Performance Indicator Summary.......................................................................................................... 117 Annex 2 Summary of Observations on the Internal Control Framework...................................... 128 Annex 3 Source of Information .............................................................................................................................. 134 ..................... 138 Annex 4 Summary of Changes in Performance Based on 2011 PEFA Methodology Annex 5 Calculation sheets for PI-1, PI-2, and PI-3.......................................................................................... 156 4 Public Expenditure and Financial Accountability (PEFA) Performance Assessment Report Acronyms and Abbreviations ACD Afghanistan Customs Department AFMIS Afghanistan Financial Management Information System ANPDF Afghanistan National Peace and Development Framework ANDS Afghanistan National Development Strategy ARD Afghanistan Revenue Department ARDS Afghanistan Reconstruction and Development Services ARTF Afghanistan Reconstruction Trust Fund ASYCUDA Automated System for Customs Data BC-1 Budget Call Circular 1 BC-2 Budget Call Circular