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Parliamentary Budget Office and Public Financial Management Acts Contain Key Policy Actions for Enhancing Sri Lanka's Public Finance

The recently enacted Public Financial Management Act, No. 44 of 2024 and the Parliamentary Budget Office Act, No. 6 of 2023 contain several key policy actions aimed at improving public finance management in Sri Lanka. Notably, four of these policy actions are similar to the recommendations proposed by Verité Research. 

Verité Research proposed four policy actions in 2020 

In February 2020, Verité Research organized a forum (Forum Presentation) with key stakeholders, including government officials, to address critical issues in Sri Lanka’s public finance management and propose essential reforms. During this forum, Verité Research highlighted key policy actions necessary to enhance the country's public finance processes: They include;  

1. Backing Proposals and Estimates with Analysis 

Verité Research emphasised the importance of supporting all revenue and expenditure proposals with comprehensive and detailed information. This includes: 

  • Detailed Estimates: Providing precise calculations for all financial proposals. 
  • Sensitivity and Scenario Analysis: Conducting thorough analyses to assess how estimates might vary under different circumstances. 
  • Feasibility Assessment: Evaluating the practicality and viability of proposed projects. 
  • Risk Identification and Mitigation: Identifying potential risks and outlining mitigation strategies. 

2. Enhancing Information Disclosure  

The forum stressed the need to increase transparency by improving the disclosure of financial information. Verité Research proposed that all disclosed information should be consistent, clear, and accessible. This includes: 

  • Expenditure Arrears Estimates: Publicising estimates of any unpaid government expenditures. 
  • In-Year Reports: Regularly updating reports on the government's financial status within the fiscal year. For example, on a monthly or quarterly basis.  
  • Sensitivity Analysis of Macroeconomic Assumptions: Making public the analysis of how changes in macroeconomic variables might impact the budget. 
  • Progress Reports on Budget Proposals: Keeping stakeholders informed about the progress of budget implementations. 

3. Limiting the Discretionary Budget to 2% of Expenditure 

Verité Research proposed a strict limit on the discretionary budget—expenditures allocated under the Development Activities budget head of the Department of the National Budget. These discretionary funds, which can be used by senior Ministry of Finance officials (Secretary to the Treasury, Deputy Secretary to the Treasury, or the Director General of the National Budget Department), should be capped at 2% of the government’s total expenditure. 

This recommendation was made in response to past misuse of discretionary funds, where the flexibility intended for unforeseen expenditures was exploited for purposes such as purchasing motor vehicles for government ministers and officials—expenditures not initially anticipated in the budget. 

4. Establishing a Parliamentary Budget Office  

A Parliamentary Budget Office will provide technical, reliable, and non-partisan analysis of budgetary reports to the public, and support parliamentary Committees and members of Parliament. This office will contribute to continuous improvements in public finance reforms, enhance the credibility of budgets and fiscal policies through independent expert opinions, and strengthen Parliament's role in budget approval and oversight. 

Policies included in the Public Financial Management Act  

1. Backing Proposals and Estimates with Analysis 

Section 49 of the Public Financial Management Act (PFM) mandates the government to publish information on the basis for the estimates, a sensitivity analysis, and a quantification of the risks to the fiscal position.  

  1. Section 49 (g) of the Public Financial Management Act (PFM) mandates that all revenue and expenditure estimates, as well as other figures used in the budget, must be accompanied by information detailing the basis for these estimates. 
  1. Section 49 (h) mandates the government to release a statement outlining the sensitivity of the budget estimates and changes that could occur based on different economic scenarios.  
  1. Section 49 (i) requires a statement on the risks that may have a material effect on the fiscal position.  

However, the PFM Act does not require a feasibility assessment of the proposals, which was another suggestion made by Verité Research. This recommendation is critical, as a feasibility assessment ensures that government funds are allocated to economically viable projects. 

2. Enhancing Information Disclosure

 

The PFM Act requires the government to publish a wide range of information to improve transparency.

 

Disclosure Requirement

Section

 

 

Annual Reports

Fiscal Strategy

Section 11

Medium-Term Fiscal Framework

Section 12

Annual Budget Document and Accompanying Documents including;

  • Revenue and expenditure estimates,
  • Appropriation Bill,
  • Budget speech
  • Public-friendly version,
  • Fiscal strategy statement
  • Economic and fiscal position report,
  • Medium-term debt management strategy
  • Public investment projects list,
  • Outstanding loans and outstanding guarantees provided,
  • A summary of public service employment across budgetary entities,
  • A statement of tax expenditures

Section 20

Final Budget Position

Section 51

Annual Government Financial Statements

Section 53

Debt Sustainability Analysis

Section 13

Annual Financial Statement

Section 47

Annual Performance Report and Annual Reports of Public Entities (Public Entities includes (a)budgetary entities; b)Statutory Funds and Trusts to which public finances are allocated; c) State-Owned Enterprises; and d) Provincial Councils, Provincial Ministries, Provincial Departments, other Institutions functioning under the Provincial Councils, and Local Authorities in terms of the relevant written laws)

 

Section 47

In- year Reports

Quarterly Financial Performance Statement

Section 53

Mid-Year Fiscal Position Report

Section 50

 

 

Special Reports

Report on Non-Compliance with Primary Balance Target

Section 14

Report on Guarantee Limit Breach

Section 17

Transfer Reporting under Virement Procedure

Section 24

Report on Annual Budget Reserve Allocation

Section 25

Supplementary Estimate Proposal

Section 26

Statement on Excess Expenditure

Section 27

Pre-Election Budgetary Position Report

Section 52

 

3. Limiting the Discretionary Budget  

Section 25 of the PFM Act mandates that the annual budget reserve (discretionary budget) shall not exceed 2% of the proposed estimate of primary expenditure. Primary expenditure refers to the total expenditure of the Government, excluding debt servicing. 

Policies included in the Parliamentary Budget Office Act  

1. Establishing a Parliamentary Budget Office  

The Parliamentary Budget Office Act, No. 6 of 2023 establishes an independent Parliamentary Budget Office (PBO) in Sri Lanka. The PBO is designed to assist Parliament in its public finance responsibilities by providing independent, non-partisan analysis related to the budget, fiscal policies, and economic forecasts. It also offers cost analysis for policy proposals and political party manifestos, especially during elections.  

Note: Verité Research also proposed a fifth recommendation to extend the budget timelines to at least 5 to 7 months. This would ensure that there is sufficient time for the preparation of budget estimates and proposals, as well as thorough scrutiny of the budget in parliament.  However, the government has not yet taken any action to implement this measure. 

Sources:  

 

  • Public Financial Management Act, No. 44 of 2024 

 http://www.documents.gov.lk/files/act/2024/8/44-2024_E.pdf 

  • Parliamentary Budget Office Act, No. 6 of 2023 

 http://www.documents.gov.lk/files/act/2023/6/06-2023_E.pdf 

2024-08-30
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