August 22, 2010

The Technology of Fiscal Reform - Imperatives for Finance Ministries

Governments around the world are in various stages of fiscal reform, with many taking the steps necessary to more effectively rein in costs and better align spending with revenues. In the Middle East region, Egypt, Jordan, and the United Arab Emirates are among the leaders implementing new systems to gain greater transparency in their fiscal management processes.

As finance ministers in the Middle East seek to improve their fiscal oversight, one approach gaining favour is the adoption of a government fiscal management information system (GFMIS). This standardised, robust, and automated system for managing government revenues and expenditures is giving finance ministers and other decision makers the tools they need to improve government services, reduce costs and attract better borrowing terms.

Furthermore, special care must be taken to develop a clear strategy and establish realistic expectations. “Designing a GFMIS programme with a vision of how each end-state element will support critical fiscal management processes, and introducing the programme methodically through modules, will dramatically increase the efficiency of the implementation and help stakeholders see the benefits,” commented Ramez Shehadi, a partner at Booz & Company.

Government Budget Woes in the Middle East

Generally speaking, government entities in the Middle East suffer from the absence of clear and consistent methods to project and monitor the level of funds they require to properly perform their duties. Without realistic estimates of future expenditures, governments perpetuate a spiral of overspending in certain areas and under-spending in others, and take on expensive debt to overcome the cash flow shortfalls that inevitably result.

“Once budgets are approved and appropriated, Middle East countries then often struggle with managing actual revenues and expenditures. Liquidity shortages force governments to take on additional and unnecessary debt to fund cash shortfalls,” commented Shehadi.

A further fiscal management issue faced by governments in the Middle East relates to budget reporting. Middle East countries often lack basic transparency in their standard budget lines across government entities. This shortcoming complicates the aggregation and analysis of financial activities, leading to delays in the budget reporting process and inaccurate information.

Fiscal Management Reforms

The GFM cycle begins with the preparation and approval of government entities’ budgets before the start of the new fiscal year, and the allocation of these approved funds according to planned expenditures. As government entities purchase goods and services, funds are released to pay suppliers. Cash inflows and outflows are closely monitored to ensure adequate cash is on hand for short-term needs, while funds to meet long-term budget needs are raised through raised revenues and debt. Financial transactions are reported and measured for performance and compliance against the approved budget. Finally, fiscal operations are audited to ensure compliance with national and international standards.

“A healthy fiscal management cycle enables a multitude of significant performance improvements, including greater transparency and accountability, tightened fiscal control, improved accounting and reporting, reduced cash flow shortfalls, improved credit ratings and cost savings,” commented George Atalla, a partner at Booz & Company.

Across the globe, government leaders are undertaking ambitious fiscal management reform programmes and developing countries are following suit. With funding and active support from international bodies such as the World Bank and the International Monetary Fund (IMF), they have begun turning to GFM reform as a way of decreasing public debt, increasing fiscal transparency and improving overall fiscal management.

A country’s GFM capabilities usually depend on its level of economic development:

  • Developing: Governments mainly use paper-based fiscal management, cash-based accounting, and incremental budget planning that is not connected to performance. As a result, they tend to have difficulty securing the required debt to finance their deficits, face liquidity problems due to the mismatching of receipts and payments, and can’t obtain attractive borrowing terms due to higher perceived risk. This category includes countries such as Ghana, Bolivia, and Syria.

  • Emerging: Emerging nations typically have adopted incremental and phased approaches in automating GFM processes that remain tied to cash accounting procedures. Some countries have shifted to performance-based budgeting methods, yet their higher perceived risk leads to unattractive borrowing terms. Mexico, Colombia, Saudi Arabia, Kuwait, and Qatar fall into this category.

  • Transition: These governments are in the midst of modernising their GFM processes, with some processes automated and linked with the banking sector. They have implemented a combination of cash and accrual-based accounting, their budget planning is informed by performance metrics, and they have some measures of cash flow management. These advances have contributed to improved credit ratings and borrowing capabilities. Examples include Slovenia, India, China, the UAE, Egypt, Jordan, and Lebanon.

  • Advanced: Developed nations have highly automated GFM cycle processes that are integrated with the banking sector, modified accrual accounting, and performance-based budgeting. These attributes allow these governments to proactively and optimally manage their cash flow, maintain balanced budgets, and benefit from higher credit ratings and better borrowing terms. Australia, New Zealand, Singapore, and the U.S. all qualify as having mature GFM systems.

The Case for a Government Fiscal Management Information System

As finance ministers in the Middle East seek to improve their fiscal oversight, few available options offer the same impact that a government fiscal management information system (GFMIS) can deliver.

“Having a sound GFMIS enables automated communication between the ministry of finance and other government entities and spending units, standardises processes across the fiscal management cycle, allows up-to-date visibility on government-wide expenditures and receipts, defines and enforces user authorities, and centralises and automates reporting functionalities,” commented Atalla.

Booz & Company has developed a framework that aims to develop GFMIS design elements at three distinct levels, including overarching, process-specific, and support elements.

  • Overarching: This includes streamlining government banking accounts, standardising the Chart of Accounts, and overhauling the accounting basis.

  • Process-specific: Examples of this are process-specific design elements including the standardisation of cash flow planning and monitoring across the government or the introduction of a centralised system for executing transactions on behalf of government authorities.

  • Support: Support elements typically include the necessary IT infrastructure, training programmes, and sufficient capabilities in internal communications, change management, and implementation management.

After defining what elements the GFMIS will include, stakeholders will need to evaluate their impact along four dimensions:

  • Organisation: Identify the key entities involved in the GFM cycle and processes, their roles and responsibilities, and their points of interaction.

  • Processes: Design, map, and detail the main processes entailed in the recommended GFMIS end state, such as budget preparation, cash flow planning, and budget execution.

  • Technology: Describe and detail the IT landscape for GFM processes and the required IT infrastructure for the GFMIS platform, including system modules, functionalities, and hardware and software requirements.

  • Regulatory: Identify and detail the main legal and regulatory updates and modifications required to enact the GFMIS.

Detailing each of the GFMIS’s elements along the four dimensions allows for the creation of a comprehensive and detailed GFMIS manual.

Overcoming Implementation Challenges

As with any large-scale and deep-rooted transformation, the implementation of the GFMIS operating model has its challenges. Reforming a government’s fiscal management processes will often require changes to systems that have been in place and performed in the same manner for decades.

Moreover, many countries have hundreds of entities with spending and revenue collection authority. This makes the rollout of a new operating model a true logistical challenge. Technological readiness at these units, as well as at the ministry of finance proper, may vary widely, affecting the speed and flexibility of the transformation plan.

Most governments also have strong binding laws and legislation that can severely hinder, if not block, some of the required changes. In order to systematically overcome these challenges, ministry officials will need to employ two approaches simultaneously.

The first approach involves grouping the elements of the GFMIS into modules based on which will have the greatest impact, the greatest ease of implementation, and/or the most dependencies.

The second approach involves deciding the order in which the spending units will receive the deployed modules. Spending units are typically prioritised based on their strategic importance as measured by each unit’s share of government expenditures and receipts, though ease of implementation is also a factor.

“Incorporating both of these approaches can dramatically increase the efficiency of the GFMIS implementation, and allow for spending units lower down the priority list to benefit from the early units’ experience. Doing so minimises up-front costs and improves the overall rollout of the modules,” commented Shehadi.
A final major challenge is the development and delivery of a comprehensive and effective GFMIS training curriculum.


It is imperative to establish an operating model that will serve as the comprehensive plan to achieve the desired objectives. This plan should incorporate numerous initiatives, and aggregate them into a modular target design that engages all stakeholders.

Secondly, the overall design and implementation of the GFMIS programme must be seen as more than an IT endeavour. “Such programmes hinge just as much on a thorough understanding of budgeting mechanisms, laws, accounting procedures and other factors that demand a business-centric governance model. It is imperative to ensure that all design elements drive and enhance business requirements, and not merely automate existing, inefficient business processes,” commented Atalla.

Finally, the implementation of GFMIS and GFM reform requires the prioritisation and regular attention of the minister of finance. Without it, it is very likely that the momentum required for such a complex and multi-year programme will not materialise.