Overview Public Financial Management

Page | 7

2.2: Recent Reforms in Economic and Financial Management

2.2.1: Overview

The MoF has implemented a significant reform program over the last year. Reforms have been concentrated in the areas of economic monitoring, PFM and performance management.

2.2.2: Economic Monitoring

Formulating effective public policies requires a detailed and up-to-date understanding of the economy. The MoF has started drafting quarterly inflations reviews and GFS bulletins to better understand the economy. It has also strengthened its economic forecasting model.

2.2.2.1: Quarterly Inflation Reports

The MoF drafts quarterly inflation reviews to analyse inflation. These reviews analyse trends in the monthly and yearly rates of inflation, and in the underlying categories of the CPI index such as food and transport. The likely causes of inflation, such as changes in Government spending, in exchange rates and in international commodity prices, are also analysed in these quarterly reviews. The quarterly inflation bulletins for Q1 2014 and Q2 2014 were recently published on the MoF s e site. Going forward each review will be published shortly after the relevant data becomes available.

2.2.2.2: Government Financial Statistics

GFS is an internationally recognised reporting framework for the presentation and analysis of fiscal data. The Government has recently implemented this framework and now publishes GFS fiscal bulletins every quarter. The implementation of GFS in Timor-Leste has two main benefits. First, GFS provides an internationally recognised and consistent framework for analysing the fiscal position of the government. The GFS bulletins provide important information on how petroleum revenues and PF investments affect the overall fiscal position of the Government. Second, GFS classifies revenue and expense in a consistent way across all countries. This allows for accurate international comparisons. Page | 8

2.2.2.3 Economic Forecasting

The MoF recently completed new forecasts of economic growth and inflation. These forecasts were made based on an improved economic model and forecasting process. Important reforms to the modelling process included: forecasting the components of non- petroleum GDP, modelling inflation and ensuring internal consistency. Forecasting the components of non-petroleum GDP; in the past non-petroleum GDP, but not its underlying components, were forecasted. This year the MoF has forecasted all the underlying components of non-petroleum GDP such as household consumption and private investment. This strengthens economic policy making as the composition of economic growth, and not just its overall level, is important. Forecasting inflation; the MoF improved the methodology it uses to forecast inflation. The new methodology uses advanced statistical techniques to account for the impact on inflation of Government spending, international commodity prices and exchange rates. Internal Consistency; in Timor-Leste Government spending, economic growth and inflation are all interlinked. Specifically:  Government spending is a component of non-petroleum GDP. So all else being equal high expenditure will lead to higher economic growth.  Inflation is partly driven by Government recurrent expenditure. Thus all else being equal high expenditure will result in higher inflation.  High inflation may reduce long-term economic growth if it undermines competiveness. Overall these reforms have resulted in superior economic forecasts that have assisted the MoF in better understanding recent and likely future economic developments.

2.2.3: Public Financial Management

The Government spends, collects and manages money through its PFM system. This system is made up of the laws, institutions and information technology infrastructure that govern the management of the public finances. An effective and efficient PFM system is essential for constraining corruption and delivering public services. Since 2008 the Government has implemented a broad ranging PFM reform program. Other publically available documents such as the MoF s “t ategi Pla a d the State Budget Book1 2013 describe this reform program in detail. This section only outlines key PFM reforms which have been implemented this year. Key reforms include:  Upgrading the interface used by the integrated financial management information system IFMIS to the web based V7 financials. This new interface allows ministries to Page | 9 use the IFMIS through the internet which has improved accessibility. The new interface also has a clearer, more intuitive and user-friendly lay out.  Making the use of the procurement and contract management modules in IFMIS mandatory. This means that ministries have to record key stages of the procurement process and contracts on the IFMIS before payments are made to contractors. This constrains corruption and encourages line ministries to follow the correct processes.  Improving tax administration by re-registering many tax payers with new unique tax identification numbers.  Establishing a monthly meeting to discuss and resolve problems in budget execution. The meeting is chaired by the Director General of State Finance and is attended by staff from the MoF and the Directors of Finance from each line ministry. This meeting has contributed to higher and more efficient budget execution.

2.2.4 : Measuring Performance