GRIPS Development Forum > Diversifying PRSP > Ch.3 Types of Poor Countries and Appropriate Responses

Medium-Term Expenditure Framework (MTEF)

The MTEF is annual, rolling three year-expenditure planning. It sets out the medium-term expenditure priorities and hard budget constraints against which sector plans can be developed and refined. MTEF also contains outcome criteria for the purpose of performance monitoring. MTEF together with the annual Budget Framework Paper provides the basis for annual budget planning.

For the details of MTEF, please visit the World Bank's Website

The concept and objectives of the MTEF are described as follows in the World Bank's paper ("Medium Term Expenditure Frameworks: From Concept to Practice. Preliminary Lessons from Africa," by Philippe Le Houerou (AFTPT1) et al., February 2002, Africa Region Working Paper Series No. 28).
[quoted from pp.2-4, II. MTEFs in Theory]

Concept
According to the World Bank's Public Expenditure Management Handbook (1998), "The MTEF consists of a top-down resource envelope, a bottom-up estimation of the current and medium-term costs of existing policy and, ultimately, the matching of these costs with available resources... in the context of the annual budget process." The "top-down resource envelope" is fundamentally a macroeconomic model that indicates fiscal targets and estimates revenues and expenditures, including government financial obligations and high cost government-wide programs such as civil service reform. To complement the macroeconomic model, the sectors engage in "bottom-up" reviews that begin by scrutinizing sector policies and activities (similar to the zero-based budgeting approach), with an eye toward optimizing intra-sectoral allocations.[1]

Table 1. The Six Stages of a Comprehensive MTEF
STAGE
CHARACTERISTICS
I. Development of Macroeconomic/Fiscal Framework
  • Macroeconomic model that projects revenues and expenditure in the medium term (multi-year)
II. Development of Sectoral Programs
  • Agreement on sector objectives, outputs, and activities
  • Review and development of programs and sub-programs
  • Program cost estimation
III. Development of Sectoral Expenditure Frameworks
  • Analysis of inter- and intra-sectoral trade-offs
  • Consensus-building on strategic resource allocation
IV. Definition of Sector Resource Allocations
  • Setting medium term sector budget ceilings (cabinet approval)
V. Preparation of Sectoral Budgets
  • Medium term sectoral programs based on budget ceilings
VI. Final Political Approval
  • Presentation of budget estimates to cabinet and parliament for approval
Source: PEM Handbook (World Bank, 1998: 47-51), adapted.

The value added of the MTEF approach comes from integrating the top-down resource envelope with the bottom-up sector programs. It is at Stage III that the policy making, planning, and budgeting processes are joined (see Table 1). Once the strategic expenditure framework is developed, the government defines the sectoral resource allocations, which are then used by the sectors to finalize their programs and budgets. Key to the sectoral review process is the notion that within the broad strategic expenditure framework, which reflects the resource constraint as well as government policy, sectors have autonomy to manage by making decisions that maximize technical outcomes like efficiency and effectiveness.[2] Once the MTEF has been developed it is rolling in the sense that the first outward year's estimates become the basis for the subsequent year's budget, once changes in economic conditions and policies are taken into account. The integration of the top-down envelope with bottom-up sector programs occurs by means of a formal decision making process. As the Handbook (1998) suggests, "Key to increasing predictability and strengthening the links between policy, planning, and budgeting is an effective forum at the center of government and associated institutional mechanisms that facilitate the making and enforcement of strategic resource allocation decisions."
Objectives
The MTEF is intended to facilitate a number of important outcomes: greater macroeconomic balance; improved inter- and intra-sectoral resource allocation; greater budgetary predictability for line ministries; and more efficient use of public monies (World Bank, 1998). Improved macroeconomic balance, including fiscal discipline, is attained through good estimates of the available resource envelope, which are then used to make budgets that fit squarely within the envelope. MTEFs aim to improve inter- and intra-sectoral resource allocation by effectively prioritizing all expenditures (on the basis of the government's socio-economic program) and dedicating resources only to the most important ones. A further objective of the MTEF is greater budgetary predictability, which is expected as a result of commitment to more credible sectoral budget ceilings. Moreover, to the extent that budgetary decision making is more legitimate, greater political accountability for expenditure outcomes should also ensue. The MTEF also endeavors to make public expenditures more efficient and effective, essentially by allowing line ministries greater flexibility in managing their budgets in the context of hard budget constraints and agreed upon policies and programs.

Table 2. The Objectives of an MTEF
  • Improved macroeconomic balance, especially fiscal discipline
  • Better inter- and intra-sectoral resource allocation
  • Greater budgetary predictability for line ministries
  • More efficient use of public monies
  • Greater political accountability for public expenditure outcomes through more legitimate decision making processes
  • Greater credibility of budgetary decision making (political restraint)
[1] Note that this type of sector review presupposes either program-based budgeting or, at the very least, a functional and organizational budget classification system.
[2] Some have suggested that an MTEF might include additional elements, such as output based budgeting systems (Oxford Policy Management, 2000).