Monday, September 20, 2021
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Rebuttal- Puntland economy: Key underlying challenges of budget execution and ways forward

By Osman Elmi

The opinion piece on Puntland Economy  published on WardheerNews, August 2, 2021 by a Abdullahi A. Muse (Sanco)’ with ooh and surprise about the author’s misrepresentation of the current financial performance and significant reforms achieved in Puntland under the new leadership and administration. The author’s claim that the Puntland economy and fiscal policy are poorly planned and managed, the business is over-taxed, the leaders are corrupted and Ministry of Finance (MoF) employees are unskilled is a mis-characterization of the Puntland’s economic performance. The author’s opinion commits errors of fact and interpretation and is based on unfounded hearsay.

President Deni with Hassan Shire

The author’s use of inappropriate vocabulary (such as inept and corrupted leaders) has no merit and is void of any supporting evidence and reference and amounts to street talk that has no research or reference basis. The current Minister of Finance is university graduate with over 23 years of managerial experiences in public finance management. Under his leadership, the government revenue increased by 5-7% and expenditure reduced by 5 percent in the recent years, these gains have significantly contributed to investments, security and stability in Puntland.  The Minister is a competent leader devoted to public services and the betterment of his fellow Puntlanders.

In his misrepresentation, the author has overlooked the tremendous financial and fiscal reforms achieved by the current Puntland administration. In the last two years and half, Puntland government has been modernizing the budget preparation process using multi-year fiscal planning framework that help allow the government to effectively manage the economic cycle that signals fiscal discipline and budget reliance, and focuses on strategic public expenditure over the medium term, and allocates and spends public resources effectively and efficiently. One of the key budget reforms implemented by the current government is the move toward the adoption and implementation of a medium-term expenditure framework (MTEF). This means setting multiyear (3-year budgeting) objectives for fiscal policy and budget expenditure and ensuring that these are respected in budget formulation, approval, and execution.

To implement the multi-year budgeting processes in Puntland, Ministry of Finance (MoF) assesses the fiscal performance in the most recent fiscal years and develops macro-fiscal estimates for 3 fiscal years. This medium-term budget plans assist the government to strategically allocate scarce public resource based on national policy priorities and objectives such as maintaining public protection and security; deepening progress on public financial management (PFM) reform; improving domestic revenue; increasing spending on key services; investing in productive sectors and stronger infrastructure and supporting an export-friendly trade strategy.

The preparation process of the Puntland budget often commences with the release of ministerial circular to submit budget proposals from the Ministries, Departments and Agencies (MDAs), consultation between the MDAs and Puntland Ministry of Finance to reconcile the budget proposals, allocation of the budget to MDAs and approval of the budget by legislature. This budget planning process for Puntland government optimized the use of available budget resources, improved budget credibility by paying employee salaries on a monthly basis and promoted integrity in managing public funds–especially in legality, financial responsibility, transparency and accountability.

The adoption of the medium-term budgeting has also enhanced predictability of taxes; increased the transparency and credibility of government’s fiscal policy and enhanced the opportunities for the participation of Parliament, the public, private sector representatives and civil society in budget-making process and in evaluating and monitoring the performance of government programs.

The multi-year budgeting has allowed the government to significantly strengthen the technical and institutional capacity of the Ministry of Finance and the spending ministries and agencies. The government, for instance has recruited macroeconomists and policy analysis and econometricians tasked to prepare multi-year budget documents such as Budget Outlook paper and sector strategies. The MOF provides training and hands-on support in macro-fiscal policy analysis, forecasting methodology and modern budgeting practices. The MOF has specifically provided on-site job coaching of the MOF officials on macro-fiscal data collection and analysis, on preparation and presentation of the Economic and Fiscal updates and development of the Budget Policy Statement and development of macro-fiscal estimates, preparation of annual and multi-year budget and development citizen budget

Mobilizing revenue is a cornerstone of the state’s progress and citizen’s wellbeing. The author’s assertion on over-taxation is based on false premises because the Puntland’s tax revenue remains just over 3 percent of the GDP. This figure is far below the average tax to GDP ratio (over 17 percent of the GDP) of developing African countries including neighboring countries such as Kenya and Ethiopia. Puntland as well as Somalia suffer the low level of domestic revenue because our domestic taxes have a narrow tax base; few goods and services are taxed. There are a number of “small” fees and specific taxes for which the collection costs for the tax administration plus the compliance costs to taxpayers could exceed revenue collected. There are charges levied alongside import duty, making the effective tax rate on imports substantially different from the statutory rate.

To overcome these weakness, the current government has taken a series of revenue mobilization actions including ( but not limited to) streamlining the tax laws; tackling the problem of the hard-to-tax informal sector of the economy; imposing and collecting income taxes on wages and salaries in both the public, private, increasing tax compliance by large companies; and levying departure fees and other sources of nontax revenue. Due to the successful leadership, the gross annual revenue for Puntland in 2020 has risen to US$ 342 million, up from the actual domestic revenue  per annum of US$125,000 in 1998 – a tremendous achievement for Puntland.

Good government cash management matters for the efficient budget execution; for the determination and maintenance of an optimal cash liquidity reserve in the consolidated bank accounts to meet government’s obligations and for the development of the local financial markets. In the past, Puntland government has used an application-based cash release system whereby spending ministries requested for cash release. This cash rationing was used as an arbitrary way of closing the gap between the reality of available financial resources and proposed budget expectations.

To move to an active cash management system, the new Puntland government has implemented cash management policy; established effective institutional arrangement within the MOF that provides an oversight of the cash management; strengthened cash forecasting functions; consolidated the government bank account into a Single Treasury Account (TSA); revamped the financial regulation to ensure effective cash management practices, implemented modern payment transaction and enhanced the capacity of the treasury employees on cash management and cash forecasting techniques. The current government provided capacity building and training on cash flow forecasting for employees of the treasury function in MOF. Practical training and on job skills transfer on the cash management and forecasting techniques.

I am in agreement with Author’s statement on the significant role that integrated financial management systems can play in ‘empowering the government to gain effective control over their finances, boost integrity and combat corruption. For these reasons, the government has implemented a robust Financial Management Information Systems (PL-FMIS) with full integration of key activities of budget management, expenditure controls and accounting and reporting, provided trainings to build the capacity of accounting staffs in the government. The government has also recently integrated its payroll system with the Financial Management Information Systems PL-FMIS.

The new government has also implemented a comprehensive Chart of Accounts, which details proposals for a new coding structure, effective use of the Program budget codes and for economic classifications of assets and liabilities. As a result, the government accounting system can record all transactions and capture relevant information on the government bank accounts.The government has completed the unification of its charts of accounts with those of the Federal government and federal member states of Somalia.

At the same time, Puntland has made great efforts to improve budget dissemination and increase budget transparency. The government prepares and publishes a range of budget documents, including pre-budget statement outlining the medium-term fiscal strategy; the annual budget statement with progressive improvements in its content; a citizen’s budget along with enhanced social media coverage of related budget reports and issues; an end-year report comparing budget forecasts and outturns and explaining the main reasons for deviation; and quarterly budget performance reports providing timely information on fiscal developments.

As noted above, the government has been preparing and disseminating the Annual Citizen Budget for Puntland on an annual basis since 2019. The Citizen Budget increases the availability and access of fiscal information to the public, and the dialogue between the Government, Parliament and non-state actors on macroeconomic and budgetary policies and provides additional awareness of Parliamentarians and civil society of the budget process.

In sum, the new Puntland government has taken and is taking bold steps to improve the public financial management by implementing multi-year budgeting framework that results in a greater fiscal discipline and sound budget planning, preparation and execution. As part of the going efforts led by the current administration to enhance fiscal discipline, the budget department produces budget outlook paper with the aim of providing independent and authoritative analysis that supports budget committee by allowing them to effectively allocate resources. The government has also implemented a robust Financial Management Information Systems that enable the Puntland government to gain effective control over its finances, boost public financial integrity and root-out corruption.

Osman Elmi
Email:[email protected]

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Mr. Elmi is development economist who follows economic issues in Somalia and IGAD countries.


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