Thursday, August 17, 2017

Opaque financing hinders budget reform

Government spending on the military is unlikely to be transferred to more productive sectors such as health and education until the true quantity of spending is made clear to internal monitoring bodies and the voting public, according to a report by the Asian Development Bank (ADB).

For many years, spending priorities were heavily distorted, resulting in very low levels of economic and human development, and until 2009 Myanmar was the only country in Southeast Asia where government spending on the military was consistently higher than spending on health and education combined, according to the ADB report published on June 30 titled “Fiscal Management in Myanmar”.

“In the Framework for Economic and Social Reforms (FESR), the government outlines its plans for health and education to account for an increasing proportion of government spending, while the share spent on the military will decline,” said the report.

Over the last couple of years, the government has kept its promise to increase spending on health and education, with expenditure rising from less than 3 percent on each sector to 11.08pc on education and 6.3pc on health in fiscal year 2014. “However, military spending has also continued to increase and accounted for 27pc of government spending for fiscal year 2013,” said the report.

The ADB calls for continued budget reform, including better management of revenues from natural resources such as oil, gas and minerals, and increased transparency at state economic enterprises (SEEs). However, the report makes it clear that the problems with budget comprehensiveness go beyond these issues.

“There are a number of related concerns regarding Myanmar’s budget comprehensiveness, including nonstandard reporting of some revenues and expenditures, extra-budgetary government expenditure from separate accounts within the Myanmar Economic Bank, and potential accounts held outside the Myanmar Economic Bank,” said the report.

Firstly, the budgets published in Myanmar’s official Gazette include a space for “Other General Revenues”. The sources of these revenues are not explained. Secondly, the World Bank’s Public Finance Management Performance Report identifies “Other Accounts” held by ministries and SEEs at branches of Myanmar Economic Bank, which represent extra-budgetary expenditure and are not fully reported, according to the ADB.

“Many government and other public sector entities do not fully report their financial operations, and ‘Other Accounts’ are widely used, with over 13,400 in total. The amount of key fiscal information made available to the public also remains lower than in most other countries, limiting the input citizens and other non-governmental actors can have on fiscal management issues,” said the report.

“In FY2011, total extra-budgetary expenditures were estimated at 24pc of total public expenditures, including SEE expenditures, and the revenues flowing into such accounts were estimated to be 44pc of total public sector revenue, including the revenue of SEEs, much of this from the extractive sector,” said the report, citing research by the World Bank.

Citing the same research from 2013, the ADB said that Myanmar’s Auditor General has “surmised that there may indeed be accounts held outside of the Myanmar Economic Bank and that some revenues generated from joint ventures, as well as from natural resources, could also be extra-budgetary.”

Reform in these areas is needed to support the transformation of future increased revenue intake into better service delivery, which would lead to greater poverty reduction and growth, according to the ADB.

“In particular, the revenue, capital, and debts of the Ministry of Defense are not disclosed in the same manner as those of other ministries. For military spending to be shifted to more productive sectors, in line with the allocation levels of Myanmar’s neighbors, the actual quantity of spending must be made clear,” it said.

Myanmar is one of Asia’s richest in terms of natural resources including oil, gas and a wide range of minerals. In fiscal year 2013, for example, Myanmar exported US$3.3 billion worth of natural gas, comprising 37pc of total exports and at least $1 billion of jade, according to the report.

However, estimating the total size of the mining and gem trade is very difficult, with some suggesting that the official-to-unofficial trade ratio could be close to 1:9, it said.

“The most striking feature of Myanmar’s extractive industry is not the size but its potential. In the short-term, the soon to be commenced extraction from new gas fields will provide additional estimated export revenues of $1.65 billion per year, according to the Ministry of Energy,” said the report.

A large proportion of government revenues is directly or indirectly related to natural resources, including from entitlements, royalties, allocations of shares and income taxes, according to the ADB.

“Precise figures on the total value of such revenues have yet to be made publicly available, but it is known that the contribution of the two major gas projects [Yadana and Yedagun] to government revenues was about $3.6 billion in FY2010, and today is significantly larger.”

By comparison, in fiscal year 2012, total tax revenues were about $3.5 billion and total revenues, including transfers from SEEs to the union government and other SEE receipts, were about $11.1 billion.

According to the report, some of the revenues from oil and gas projects are passed on to the union government and some are retained by SEEs such as the Myanmar Oil and Gas Enterprise.

“Whatever the exact numbers, there is no doubt that at this stage in Myanmar’s economic and social development, natural resources are a vital source of revenues to finance much-needed reforms and investments in the social sectors and infrastructure,” it said.