Public Finance Management in the South Caucasus

Project description

Title: Public Finance Management in the South Caucasus
Commissioned by: German Federal Ministry for Economic Cooperation and Development (BMZ), cofinanced by the EU in Armenia.
Country: Armenia, Georgia
Lead executing agency: Ministries of Finance in Armenia and Georgia
Overall term: 2017 to 2020

Context

The modernisation of the public sector finance management systems and public administration is one of the most important goals of the Georgian and Armenian Governments. Both countries have made progress, for instance in raising tax revenues and fighting corruption. The public sector finance management reforms aim to make public spending more transparent for citizens and to strengthen the legitimacy of governmental action. Public spending should become more efficient and the democratic oversight of the use of funds should be strengthened. 
At present, the administrations primarily lack trained personnel able to manage and implement the complex budget and finance reforms. There is also insufficient data and information for planning and analysing public expenditure. The national supreme audit institutions repeatedly identify shortcomings in the regulation of how government funds are used, and this makes effective management all the more difficult. 

Objective

Subsystems of public finances in Georgia and Armenia have approached European and international standards regarding results orientation, efficiency and accountability. 

Approach

In both countries, the Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH is advising the ministries of finance, the parliaments and the supreme audit authorities. Besides strengthening the capacities of the individual partner institutions, the programme primarily focuses on the interplay between those institutions in the budget cycle. 

The project offers advisory services in the following areas:

Results-oriented budget management: Both countries are adopting a results-based budgeting procedure. A planning process, based on objectives and measurable indicators, will be inter-linked with the accounting and budgeting system. GIZ supports the revision of the budget legislation and the methodological framework, while carrying out capacity development in the participating ministries.

Strengthening internal control systems: The project is advising ministries of finance and federal ministries of both countries on developing and strengthening the internal revision and financial management for public administration, as well as on the modernisation of the regulations regarding the handling of public resources. The approach taken is based on the European Public Internal Financial Control (PIFC) concept. 

Strengthening external financial controls: A properly functioning, independent supreme audit institution fosters transparent and efficient management of government funds. The project is supporting the introduction of new auditing methods as well as improved reporting procedures and processes that strengthen the cooperation with the respective parliament. 

Parliamentary oversight: Efforts to improve the parliamentary analysis of draft budgets and audit reports, and an enhanced discussion of expenditure policies all serve to strengthen democratic controls and make decision-making processes more transparent. 

Tax policy and tax administration: In Georgia, GIZ advises the Ministry of Finance on adapting its tax legislation to match European standards and international tax laws. GIZ supports the Armenian tax administration with strategic planning to increase its efficiency and effectiveness. The cooperation aims to increase state revenues to create more scope for the implementation of the national development objectives with its own funds. 

Interaction between the institutions and citizen participation: An effective budget cycle requires cooperation between all participating institutions and good communication with civil society. The project advises its partner institutions on achieving a common understanding of their roles and regular communication with civil society. 

Results

The programme builds on an earlier project that started in 2014 and on bilateral measures carried out in both countries.

  • Expertise and skills improved
    Around 50 per cent of the employees who work in public finance management in the South Caucasus (Georgia, Armenia) have been trained in the topics mentioned since 2013 and now contribute to a more transparent and more results-based use of public funds in both countries.
  • State revenues increased
    State revenues in Georgia rose by 31.1 per cent from 2013 to 2016. Foreign direct investments in Georgia increased by 5.17 per cent between 2015 and 2016. This strengthening of the country’s own revenue decreases the dependency on international financial assistance. 
  • Corruption combated
    The advisory services on internal and external financial oversight generally contribute to ensuring proper use of public funds. Georgia was also able to improve its position on the Corruption Perceptions Index by 11 places from rank 55 (2013 - 49 points) to rank 44 (2016 - 57 points), which places the country between Spain and Latvia on the list.
  • Poverty in the South Caucasus reduced
    The advisory services on results-oriented budgeting in Armenia and Georgia contributed to the proportion of social spending increasing between 2013 and 2016 from 41 per cent (Armenia) and 28 per cent (Georgia) to 46 per cent and 31 per cent respectively. This EUR 605 million increase contributes to reducing poverty. 
  • Public tax revenues and international support used more effectively
    Results-based audits of the supreme audit institutions in Armenia and Georgia have resulted in far-reaching improvements for the population. The implementation of the recommendations by the Georgian and Armenian supreme audition institutions, for example, resulted in the following:
    • improvement of medical emergency care for 61 per cent of the Georgian population (approx. 2.2 million people) thanks to a faster response time for medical emergency calls and the provision of a sufficient amount of qualified staff in rural areas
    • improved care for people with disabilities in Armenia with assistive devices such as wheelchairs and hearing aids
    • an increase in the amount of apprentices in Georgia who found full-time employment after completing their training from 23 per cent to 47 per cent, which prevents migration movements and retains capacity in the country.