: / Strategies / National Poverty Reduction Strategy (2003-2005)

Kyrgyzstan Review, 10 years ago

F. Reforming State Financial Management

138. To ensure sufficient and timely financial support for social and economic transformation in the country, and functioning of the financial system as a whole in a transparent, controlled and accountable manner, there is a need for its drastic and comprehensive reform in the following areas:
  • Reforming state financial management in strict compliance with transformation of the overall system of public administration to implement the mission of the National Poverty Reduction Strategy.
  • Ensuring financing for priority areas of development based on transfer to financing of only national, sector and regional development programs. It is necessary to stimulate the transfer of ministries and departments, oblast administrations and other governmental structures to a form of program budgeting.
  • Broadening the powers of ministries, departments and regions in managing state funds and simultaneously strengthening responsibility for and control of their expenditure.
  • Securing predictable inflow and expenditure of funds through formation of the budget on a medium-term financial basis, using projections of the countrys macroeconomic indicators.
  • Ensuring transparent, accountable and timely expenditure of funds allocated by the budget. Transfer of cash to a real time mode, using information and communication technologies will be secured. For this purpose it is intended to update and strengthen the Treasury system.
  • Achieving effective financial expenditures at any level of public administration through transfer of all state accounts to the Treasury system.
139. Successful development of the major principles of the budgetary process reform will be implemented based on the example set by the Ministry of Finance as the chief financial body in the country. This should serve as a model for conducting reforms in other ministries and departments. The main purpose of reforming the Ministry of Finance is to assist in building an effective system of state financial management by streamlining the functions of all its subdivisions. Financial system reform will be accompanied by reforming the structure of the Ministry of Finance. This will ensure synergy in the mechanisms of structural and financial transformations. Besides, the costs for a transfer to up-to-date practices of financial management will be reduced.
140. For this purpose, reorganization of the overall structure of the Ministry of Finances central office will be undertaken on the basis of a functional analysis. In 2002, experts from international financial organizations studied the organization of the Ministry. The analysis showed that, on the whole, many functions do not meet up-to-date requirements of financial management and administration; functions frequently do not define clear areas of responsibility. Financial execution of the budget is not concentrated in the Treasury because, in practice, the Ministrys sectoral departments are engaged in these issues. As a result of proposals that have been developed, a staged reforming of the Ministry of Finance organizational structure will be carried out. These stages include:
  • Reorganization of the central office of the Ministry of Finance through approval of a new structure, reduction by 10 percent of staff number in the central office, development and adoption of necessary regulations covering the Ministrys activity in compliance with the new structure.
  • Functional reorganization of the structures within the jurisdiction of the Ministry of Finance, development and implementation of main activities in unifying functions of revenue collection into one fiscal body.
  • Decentralization of financial functions.
141. To increase accountability and efficiency in managing state expenditures the following activity is being carried out in the area of:
  • compilation of reports on public administration comprising the consolidated national budget and the Social Fund budget;
  • incorporation into the budgetary documents of data on macroeconomic principles of their preparation, on the state debt, tax arrears and expenditure indebtedness for the previous period; and
  • publication of the quarterly budgetary bulletin containing information about budget execution, including the PIP, usage of proceeds from privatization and so forth.
142. To improve coordination between different ministries and departments, and to increase their responsibility for the expenditure plans, budgeting will be gradually transferred to a program basis and a relevant classification through the Medium Term Budgeting Framework (MTBF) for 2003-2005.
Starting in 2003, the Ministry of Finance will start establishing program budgeting procedures in the sectors and regions. Thus, branch and regional expenditures will be linked with the budgetary process through scheduled volumes of expenditures allocated for implementation of relevant programs. In this case, the functions of sectoral departments of the Ministry on execution of the budgetary expenditure, part will be transferred to the Central Treasury.
It is planned to conduct the activity on reviewing and improving the legislation that regulates the budgetary process. The Chamber of Accounts will regularly publish the results of the audit of public finances. Such publications will encourage those managers who are aware that their actions are being analyzed by the public to spend government resources in a more rational way. On the other hand, the public will have the opportunity to familiarize itself with the activity of the Chamber of Accounts.
143. It is intended to introduce the practice of concluding resource agreements between the Ministry of Finance and budget-funded instrumentalities. This approach will be a flexible instrument of resource management that gives broad opportunities to the ministries, departments and regions in implementing government policy within existing financial capacity. It is intended to conduct a more in-depth and complete functional review of budget funded instrumentalities and develop recommendations for reforming their structure and activity.
144. Medium term macroeconomic forecast that takes into account the priorities of the Republics development within the framework of the NPRS will serve as a mandatory basis to reinforce the projected plans through the budget. Issues that are raised in the development policy of the country, its regions, sectors of economy will be brought to the forefront. Within the framework of this approach, the budget will become an effective instrument of implementation of planned prioritized activities, foremost among which will be those targeted at poverty reduction.
145. To build up the capacity of the Ministry of Finance in developing macroeconomic policy, its staff composition will be strengthened by attracting professional people, and training in up-to-date methods of analysis and forecasting will be provided to young specialists with potential.  
146. The processes of project planning and prioritization will be reinforced and improved in order to reduce the overall cost of external borrowings under the Governments guarantee. Timely co-financing of all projects will be ensured.
147. The existing legal base that regulates the activity of the Treasury system meets, on the whole, its contemporary objectives. However, the low level of technical equipment and lack of a computerized information system is hindering further development of the Treasury in accordance with international standards. Treasury transactions and procedures are only partially computerized, and in the remote areas all the functions are performed manually.
148. Reforming of the Treasury system will include full computerization not only of the Central Office, but also its regional divisions. It is planned that technical equipment upgrading and the development of the payment system will be implemented within three years. This assumes a gradual transfer to the modern classification system for government finance. It is intended to improve budgetary classification and accounting of expenditures. It is necessary to improve the Treasurys chart of accounts, and correspondingly develop a uniform system of codification. It is planned to strengthen internal control over proper execution of treasury transactions, accounting and reporting of completed payments, and projections of cash flows. It is necessary to transfer the Treasurys reporting system to international standards.
149. To intensify participation of the Treasury in the process of transparent and effective budget execution at all levels, it will be assigned the status of a legal entity within the structure of the Ministry of Finance. The Treasury system shall ensure timely and quality management of budgetary resources and strict control over their spending.
150. To improve the tax collection system and coordination of actions among different departments on revenue collection, it is expected to merge the State Customs Committee, State Tax Inspectorate, Financial Police and subdivisions of the Social Fund responsible for collecting social insurance contributions, into a single state revenue body under the Ministry of Finance.
151. To improve the efficiency of information exchange, an information network will be created with the support from the international donors (ADB, Switzerland and others).
152. To improve the repayment rate of the loans issued under the Governments guarantee, it is necessary to improve the activities of the Foundation for Economy Development and a recently established Debt Resolution Agency DEBRA.
153. Within the framework of finance and budgetary decentralization it is planned to strengthen the powers of state local administrations and aiyl okmotu on revenue collection and expenditure. To reinforce budgets at the lower levels, it is planned to revise the norms of deductions on regulated types of taxes. As well, it is planned to transfer the regional financial bodies of the Ministry to the jurisdiction of the state local administrations.
154. The reform of the Ministry of Finance will lead to its significantly improved performance, as well as to the thoughtful and consistent transformations of state financial management as a whole.