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- 20 Marks
Question
a) Public financial management is critical for the successful implementation of government policies and developmental goals. Public financial management is a linchpin that ties together available resources, delivery of services, and achievement of government policy objectives. The need to assess the extent to which public financial management systems operate led to the development of the Public Expenditure and Financial Accountability (PEFA) framework by a coalition of seven international development partners. Since 2001, the PEFA framework has received recognition across the world.
Required:
i) Explain the purpose of the PEFA framework. (3 marks)
ii) Explain the key pillars of an open and orderly public financial management system under the PEFA framework. (7 marks)
b) Country A and Country B are Sub-Saharan African Countries that attained independence around the same period. Presented below are the financial statements of the two countries:
Statement of Financial Performance for the year ended December 31, 2018
| Description | Country A (GH¢ million) | Country B (GH¢ million) |
|---|---|---|
| Domestic Tax | 26,450 | 17,000 |
| International trade tax | 18,200 | 21,330 |
| Non-tax revenue | 7,500 | 12,800 |
| Grants | 1,300 | 1,100 |
| Total revenue | 53,450 | 52,230 |
| Compensation for employees | 29,800 | 20,300 |
| Use of goods and services | 10,300 | 14,000 |
| Consumption of fixed capital | 240 | 280 |
| Exchange difference | 990 | 600 |
| Interest | 19,660 | 10,460 |
| Subsidies | 510 | 120 |
| Other expenses | 1,600 | 1,430 |
| Total Expenditure | 63,100 | 47,190 |
| Net Operation Result | (9,650) | 5,040 |
Statement of Financial Position as at 31 December 2018
| Description | Country A (GH¢ million) | Country B (GH¢ million) |
|---|---|---|
| Non-Current Assets | ||
| Property, plant and equipment | 2,450 | 22,400 |
| Equity investment | 8,000 | 5,500 |
| Total Non-Current Assets | 10,450 | 27,900 |
| Current Assets | ||
| Receivables | 6,700 | 8,400 |
| Cash and cash equivalent | 4,700 | 18,000 |
| Total Current Assets | 11,400 | 26,400 |
| Total Assets | 21,850 | 54,300 |
| Description | Country A (GH¢ million) | Country B (GH¢ million) |
|---|---|---|
| Funds and Liabilities | ||
| Accumulated Fund | (80,200) | 4,800 |
| Current Liabilities | ||
| Payables | 6,200 | 4,100 |
| Trust monies | 1,400 | 900 |
| Domestic debt | 16,000 | 4,500 |
| Total Current Liabilities | 23,600 | 9,500 |
| Non-current Liabilities | ||
| Domestic debt | 36,000 | 18,000 |
| External debt | 42,450 | 22,000 |
| Total Non-current Liabilities | 78,450 | 40,000 |
| Total Funds and Liabilities | 21,850 | 54,300 |
Required:
a) From the information provided, compute for the two countries respectively:
i) Grant to Revenue ratio
ii) Wage Bill to Tax Revenue ratio
iii) Interest to Revenue ratio
iv) Capital Assets ratio
v) Debt to GDP ratio
vi) Capital expenditure per Capita
(4 marks)
b) Based on the result in question (a), write a report discussing and analyzing the financial performance and financial position of the two countries. Include in your report the limitations of the analysis of the two countries. (6 marks)
Answer
a) Purpose of the PEFA Framework:
i) The Public Expenditure and Financial Accountability (PEFA) framework provides a structure for assessing and reporting on the strengths and weaknesses of public financial management (PFM) using quantitative indicators to measure performance. PEFA is designed to provide a snapshot of PFM performance at specific points in time using a methodology that can be replicated in successive assessments, giving a summary of changes over time.
PEFA is useful in the following ways:
- It helps governments achieve sustainable improvements in PFM practices by providing a means to measure and monitor performance across important public financial management institutions, systems, and processes.
- PEFA provides a framework for assessing transparency and accountability in public financial management.
- It offers a common basis for examining PFM performance across national and subnational governments.
- PEFA scores and reports provide a quick overview of the strengths and weaknesses of a country’s PFM system.
(3 marks)
ii) Key Pillars of an Open and Orderly Public Financial Management System under the PEFA Framework:
- Budget reliability: The government budget is realistic and implemented as intended, measured by comparing actual revenues and expenditures with the original budget.
- Transparency of public finances: Information on public financial management is comprehensive, consistent, and accessible, including budget classification and transparency of all government revenue and expenditure.
- Management of assets and liabilities: Effective management ensures public investments provide value for money, assets are recorded and managed, and fiscal risks are identified.
- Policy-based fiscal strategy and budgeting: The fiscal strategy and the budget are prepared with due regard to government policies and strategic plans.
- Predictability and control in budget execution: The budget is implemented within a system of effective standards, processes, and internal controls.
- Accounting and reporting: Accurate and reliable records are maintained, and information is disseminated at appropriate times for decision-making.
- External scrutiny and audit: Public finances are independently reviewed, with external follow-up on the implementation of recommendations.
(7 marks)
b) Computation of Ratios:
| Ratio | Country A | Country B |
|---|---|---|
| i) Grants to Revenue ratio (%) | 2.43 | 2.11 |
| ii) Wage Bill to Tax Revenue ratio (%) | 66.74 | 52.96 |
| iii) Interest to Revenue ratio (%) | 36.78 | 20.03 |
| iv) Capital Assets ratio | 47.83% | 51.32% |
| v) Debt to GDP ratio (%) | 65.13 | 404.55 |
| vi) Capital expenditure per Capita | 0.524 | 1.864 |
(4 marks)
d) Report on Financial Performance and Position:
Introduction:
This report provides an analysis of the financial performance and position of Country A and Country B based on the computed ratios.
Discussion and Analysis:
- Grants to Revenue ratio: Both countries receive less than 3% of their revenue from grants, indicating a minimal reliance on external aid.
- Wage Bill to Tax Revenue ratio: Country B manages its wage bill better than Country A, as indicated by a lower ratio (53% compared to 67%). This suggests that Country B allocates a smaller proportion of its tax revenue to employee compensation, potentially leaving more resources available for other expenditures.
- Interest to Revenue ratio: Country B also spends a smaller proportion of its revenue on interest payments (20% compared to 37% in Country A), indicating better management of debt servicing costs.
- Capital Assets ratio: Both countries show relatively high ratios, with Country B slightly higher, reflecting significant investments in long-term assets.
- Debt to GDP ratio: Country A has a much lower debt to GDP ratio (65%) compared to Country B (404%), indicating a more sustainable debt level for Country A. Country B’s high ratio suggests a potential debt crisis.
- Capital expenditure per Capita: Country B spends more per capita on capital expenditures compared to Country A, which could imply more investment in infrastructure or other long-term projects.
Limitations:
- The analysis does not consider differences in the accounting bases used by the two countries.
- The stage of economic development and governance systems may differ, impacting financial performance and position.
- The analysis does not account for external economic factors that could influence financial results.
Conclusion:
Country B shows better performance in managing its wage bill and interest payments, but faces a significant debt challenge. Country A, while managing debt better, could improve its expenditure management, particularly concerning employee compensation and interest payments.
- Uploader: Kwame Aikins