Prevention and Management of Government Expenditure Arrears: Theory & Practices

10/30/2017 - 11/03/2017 at Ebene, Mauritius

The accumulation of government expenditure arrears is one of the biggest challenges in public financial management (PFM). A recent survey of 121 Public Expenditure and Financial
Accountability (PEFA) assessments revealed that in only 31 percent of countries was the stock of central government arrears less than 2 percent of total central government expenditure. In almost 20 percent of countries it was more than 10 percent; in 22 percent it was between 2 and 10 percent; and in 28 percent the information was not available demonstrating lack of both adequate reporting and control. AFS countries are also concerned by this issue. The accumulation of expenditure arrears by governments can have a serious negative effect on the economy: a large flow of arrears may disguise the true size of the government deficit, significantly reduce the impact of fiscal policy on aggregate demand, and potentially undermine macroeconomic stability.

Government expenditure arrears are financial obligations that have been incurred by any level of the public sector for which payments have not been made by the due date. Payments may be overdue based on a legal obligation (such as payment of social security benefits, or salaries), a specific contractual commitment (such as payment for construction of a road), or a continuing service arrangement (such as payment for electricity supply). The value of expenditure arrears constitutes the amount of the original overdue payment, as well as any interest or financial penalties that the government might accrue (and not pay) as a result.

Persistent expenditure arrears are typically a symptom of underlying weaknesses in a country’s PFM system. Expenditure arrears can be the result of failures at any or all stages of the PFM cycle, including: an inadequate legal framework; unrealistic budgeting; weak or cumbersome commitment or expenditure controls; inefficient cash management; lack of or problems with the integrity and functionality of the financial management information system (FMIS); or gaps in fiscal reporting. Another reason that expenditure arrears can accumulate is that governments are not aware of them. The most effective approach to dealing with expenditure arrears, therefore, depends on their underlying causes and usually requires concerted action in a number of PFM areas.