B. Progress from first-to second-phase reforms

As summarized in Table 1, the majority of the countries of the former SFRY have undertaken and accomplished most of the reforms in phase one. In Serbia, however, which began the process with the greatest lag, this has yet to be accomplished. Even for those implementing second-phase reforms, some elements of phase one still seem not to have been fully attained –in Bosnia for example, the resolution of the arrears problem in both the Bosnia-Herzegovina Federation and the Republika Srpska has yet to be fully achieved. Moreover, many countries still have to successfully resolve the internal capacity problems in their MOFs, which has not allowed the complete fulfillment of accounting and financial management reforms. With these qualifications, it is evident that between 2000 and 2002, these countries have significantly shifted into the second-phase reforms described previously.
            In this movement, Slovenia has been the first to lead the way. Budget preparation and in-year management has been considerably improved by extensive training and capacity building, Slovenia introduced a program classification in 2000 on a pilot basis, which was fully implemented in the 2001 budget; FYR Macedonia began introducing program budgeting in pilot ministries in 2001; Montenegro’s new budget classification of 2001 has GFS functions and a basic program structure; and it is apparent that Croatia also is seriously considering piloting the program approach. The latter’s new chart of accounts allows detailed specification of activities and projects that would facilitate identification of the program structure;12 however, this may hold the danger that the program structure is only seen as a way of retabulating budgetary data and not for decision-making purposes.

            Most of the republics have moved to provide a macroeconomic and medium-term perspective to their budgets. For many, this evolved from the economic adjustment programs they have had with the IMF, which stressed the need for local counterparts to develop macroeconomic forecasting, policy, and analysis capabilities. Some have progressed beyond this stage. Slovenia, with the assistance from an EU-funded Swedish twinning project, introduced in 2000 a two-stage top-down approach to budget formulation. Macroeconomic decisions on the economy’s evolution determined the future deficit/surplus, with implied ceilings, for discussion with line ministries at a high level before final negotiations on the detailed budgets. This process was further refined in 2001 by the introduction of a two-year detailed budget, aimed mainly at avoiding temporary financing and at providing a more secure horizon for the government’s investment programs. The FYR Macedonia budget circular also is increasingly based on a top-down process, with ongoing work to develop a medium-term macroeconomic framework, with explicit medium-term government priorities that can provide expenditure ceilings. Croatia is also at the early stages of developing a medium-term approach to its budget with a view to meeting EU monitoring and reporting requirements, following closely in the footsteps of Slovenia.13

            All republics have succeeded in making the budget process more transparent, through improved budget procedures, usually required by new legislation. Slovenia with improved economic and program classifications, has provided a better link between priorities and the budget, and consequently political discussion in parliament on policy issues is more informed (amendments are allowed on the subprogram level). Also introduced were new supporting documents and reporting requirements (to support performance auditing) making for a much more transparent budget document. The new Public Finance Act, passed in 1999, had, as one of its requirements, a listing of all the institutions of general government (some 3,200 entities).14 The entities in Bosnia-Herzegovina have been pushed by external donors to improve transparency. Budget laws have been adopted by the entities that improve the transparency of the budget procedures, limit the borrowing by subnational governments, and incorporate own revenues of ministries and budget institutions into the entity budgets. Unfortunately, owing to the highly decentralized government structure, fiscal reporting continues to be generally weak and fragmented. FYR Macedonia has continuously improved its organic budget law, as it also has taken major steps in better defining the role of government, redefining state functions and activities, and, since 2001, has introduced legal changes to divest noncore activities to the private sector. Montenegro’s new budget system law, passed in August 2001, similarly helped make budget procedures more transparent. Serbia has recently introduced significant legislation in 2002: an organic budget law, an accounting law, and a law on government administration, which together aim to reform its budget system to catch up with the other republics. The budget law provides a comprehensive cycle for the preparation, adoption, execution, control, and accounting of the budget. It sets out a clear timetable for the adoption of the budget before the start of the financial year. Considerable effort has been made to improve the coverage of the budget to include own or retained revenues, by identifying and allocating these revenues alongside budgetary resources in the 2002 budget documents.

            Transparency has also been served by other major reforms. For example, the audit function has generally been redefined and considerably strengthened. In 2000, auditors general were appointed for the Bosnian entities, and this was followed by audits of budget execution for 2001 in Republika Srpska, and external audits of military operations have also occurred in Bosnia-Herzegovina Federation. The Montenegrin Budget Law of 2001 specified not only a treasury department and its functions, but also a department of internal audit. FYR Macedonia has strengthened its internal audit with a new department being created in the MOF in 2000, as well as establishing the State Audit Office as the external auditor of the government. Unfortunately, both institutions have found it difficult to recruit staff. Slovenia recently strengthened its Court of Audit to meet EU standards. All republics have introduced new public procurement laws to meet international standards, and they are all addressing the need to strengthen and modernize internal control and audit. Transparency has also benefited from the move to a TSA, closing the accounts of spending units and subunits, recording payments between government entities, ensuring prompt accounting records and more timely and meaningful fiscal reports. In 2001, Slovenia undertook and published a fiscal ROSC, and Croatia is considering following suit.

            There has been a general recognition of the need to develop accounting and information systems. Slovenia has established centralized financial management and reporting standards to be applied by all general government units through its Law on Public Finance. Based on the Accounting Law, which came into effect in 2000, cash-based accounting was prescribed for all general government units, but with additional requirements for accrual accounting by around 1,500 general government institutions classified as indirect budget users. Bosnia-Herzegovina Organic Budget Law in 1998, spelled out the role of the treasury, but only with the regulations regarding treasury operations in 2000 (amended in 2001) were the TSA and general treasury ledger established. This, in turn, required introducing regulations on budget accounting the same year, that was supported in the subsequent year with financial regulations regarding the chart of accounts, financial reporting, and annual accounts. Generally, as these countries changed their budget classifications to international standards, so too were amendments made to the government chart of accounts (e.g., Croatia in 2002).
            All countries have turned to computerized information systems as a means to fulfill their new accounting and reporting requirements. In Slovenia, budget execution and accounting is supported by a locally developed software package for all central government units provided by the MOF (MFERAC). In addition, in the last five years, considerable effort has also been directed to computerizing the budget preparation process. The Budget Department now has a fully operational government-wide budget submission system that allows subsequent modifications and provides the electronic budget documents data that is transmitted to parliament in the first week of October. The changes made in parliamentary deliberations are also recorded, and then the final appropriation data is transferred to the government’s MFERAC information system. Most other countries have concentrated their efforts on budget execution, partly to cope with the closing of their payments bureaus. In FYR Macedonia –following the creation of a treasury department in the MOF in 2000– with the reconstruction of the payments bureau, the control of expenditures passed to a treasury system. The system operated a domestically operated software application, an “interim system,” to allow the treasury to operate with a TSA in the National Bank. The system uses a relational database and includes complete budget control, payment request approval, and a payment order generator, revenue recording, reconciliation with accounting, and the facility to export data to Excel. The software was expanded to allow communication between the treasury and the National Bank’s real-time gross settlement (RTGS). They are planning to replace this with a more modern integrated accounting system in the near future. In Croatia, a financial management information system (FMIS) has been developed, based on the SAP software within the MOF, and that allows the MOF to communicate with other central government DSUs, but not used by them. As previously indicated the Bosnian Entities, have benefited from an externally financed computerization project by the USAID, which provided Oracle Financial software to support the various treasuries. Similarly, Montenegro has benefited from a less extensive EU-funded FUMES but recently has moved to adopt an integrated FMIS, with SAP software, and Serbia is planning to follow the same route.

            Generally, the republics of the former SFRY have not done so well in deepening government .financial management capacity. Slovenia, which has been developing its treasury system for the longest period, is perhaps and exception. In 1996, it reorganized its treasury department into two departments, one for cash management and the other one for public debt. This allowed specialization and skill development: the former specializing in liquidity management and the money market use of funds in overnight deposits; the latter in establishing the capacity to issue bonds in the European market, as well as in developing the domestic market in longer-term government debt, including development of a repo facility with government securities. Some Republics, however, have not introduced a full TSA. In Croatia, although budget institutions still maintain foreign exchange accounts, many of the payments are made directly to suppliers via the TSA. Other republics are in the process of recruiting and training their staffs in new skills required for an increasing range of treasury functions. For example, FYR Macedonia has introduced a central register of public servants and other employees in the public administration, on which basis it has a new software for updating monthly and monitoring public employee expenditure. There are also plans to begin a treasury bill auction, to replace that of the National Bank, and to take over debt management functions from them. However, taking on new functions such as this has demonstrated a potential constraint –most MOFs are generally weak in financial management skills, and this is even more true of the other government agencies.

            Recognizing this constraint has occasioned a new regional initiative. All republics of the former SFRY have major ongoing reform agendas, and all are keenly aware of the need to train/retain their staff to ensure that these reforms stay on course. However, local public service training has, on the whole, not kept pace with the changing environment, and the universities have also been slow to modernize their curricula. In 2001, the Center of Excellence in Finance (CEF) was created to meet these needs. Slovenia, whose reforms are probably the most advanced in the region, has made both financial and technical commitments to supporting the new center that was established in Ljubljana. The CEF has benefited from significant lecturer resource assistance from a wide range of bilateral and multilateral donors and institutions, including the IMF. The CEF is currently developing a PEM training program for newly recruited public finance staff in both central and local governments and expects this program will eventually be localized in local training institutions. A second area of focus is the development of a training and certification program for pubic accountants, to meet a critical shortage faced by the region.

Notes

12 The 2002 budget was tabled at the level of activities/ projects.
13 It should also be noted that recently both FBiH and SR undertook a medium-term expenditure review.
14 In the process, many inconsistencies were resolved. This cleared the way for common treasury management rules to be prescribed for all in 2001/02.