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March 22, 2010

Pakistan: Monitoring Implementation of the Fiscal Responsibility and Debt Limitation Law

Posted by YangHyun Jin 

As posted earlier, Fiscal Responsibility Legislation has during the present global crisis become popular as an instrument to anchor fiscal policy. While some legislation focuses on accountability and transparency issues, and others on fiscal process (i.e., are budget totals agreed on in advance of the detailed budget discussion), a main characteristic of many laws is the setting of limits to the main fiscal aggregates. The aim of this post is not to discuss the logic or best model of the FRL approach but rather the practical issues of implementation. Fiscal monitoring is crucial. Pakistan represents a country with a clear fiscal objectives and compliance reporting type fiscal framework in its FRL. The annual Fiscal Policy Statement (FPS) has played an important role in raising the awareness of fiscal policy objectives and guiding the country to better fiscal discipline and long-term economic growth. 

In 2005, Pakistan adopted a Fiscal Responsibility and Debt Limitation (FRDL) Act 2005. To monitor implementation of the law, the Ministry of Finance publishes an annual “Fiscal Policy Statement” and an annual “Debt Policy Statement”. The latest available pertain to 2009-10. The FPS summarizes overall fiscal developments during the past fiscal year and provides clear and comprehensive review of performance of the legal requirements of the FRDL. The FPS also analyzes whether there has been any deviations from the fiscal targets and if federal government policies have remained in conformity with the principles of sound fiscal and debt management.

The FRDL was enacted to eliminate the “revenue deficit” and reduce public debt to a prudent level. The requirements of the law include:  (i) eliminating revenue deficits by June 2008; (ii) lowering total public debt to 60 percent of GDP by 2013; (iii) reducing public debt by at least 2.5 percent of GDP each year; and (iv) limiting the issuance of new government guarantees to 2 percent of GDP in any given year.

Background

In his 2001-02 budget speech, the Minister of Finance made a policy commitment stating the government’s intention to prepare a draft fiscal responsibility law that would limit the government’s access to borrowing. He pointed out that such a law had been envisaged by the framers of Pakistan’s Constitution.  

Article 166 of the Constitution relates to borrowing by federal government, stating that The executive authority of the Federation extends to borrowing upon the security of the Federal Consolidated Fund within such limits, if any, as may from time to time be fixed by Act of Majlis-e-Shoora (Parliament), and to the giving of guarantees within such limits, if any, as may be so fixed. Article 167 concerns borrowing by provincial government and elaborates on issues including: (1) provinces’ borrowing and granting of guarantees; (2) federal government lending to provinces (which is subject to the limits fixed under Article 166).

In mid-2002 a draft FDRL was posted on the Ministry of Finance’s website and comments were solicited from the public before its finalization. Subsequently parliament adopted the FDRL and the law was promulgated in 2005.

Monitoring Implementation

Each year the Ministry of Finance publishes an annual “Fiscal Policy Statement” and an annual “Debt Policy Statement” on its website. The remainder of the blog presents how the FPS present progress in achieving the objectives of the FDRL, linking each fiscal rule prescribed in the FRDL with a report on its compliance. 

Objective 1: Reduce the revenue deficit to nil not later than end-June 2008 and thereafter maintain a revenue surplus. Compliance:  The revenue balance (total revenue minus current expenditure) in fiscal year 2008-09 breached the performance target with deficit of 1.7 percent of GDP, although this was a significant improvement from the 3.4 percent deficit of GDP in fiscal year 2007‐08. The FPS acknowledges that serious corrective measures are required to bring current expenditures to at least the level of total revenue.

Objective 2: Ensure the total public debt does not exceed 60 percent of the GDP by 2013 and thereafter maintain the total public debt below 60 percent of GDP. Compliance: The government has already met and actually exceeded the requirement ahead of time on the level of public debt to GDP. At the beginning of July 2003, the total public debt stood at 75.1 percent of GDP, while at the end of June 2009, the same figure stood at 58.1 percent of GDP.
 
Objective 3: Ensure a reduction of total public debt to GDP by at least 2.5 percent annually until 2013 provided that social and poverty alleviation expenditures are not reduced below 4.5 percent of GDP and education and health expenditure will be doubled during the next ten years. Compliance: After debt fell to 54.6 percent of GDP in 2006-07 it rose to 58.4 percent in 2007-08. In 2008-09, the ratio fell again to 55.6 percent. Fiscal restraint and a limit on borrowing from the State Bank of Pakistan enabled the government to reduce the debt‐to‐GDP ratio in 2008-09.

Subobjectives for the composition of spending. Compliance: Social sector and poverty related expenditure stood at 6.7 percent of GDP in 2008-09, well above the target of 4.5 percent of GDP. However, expenditure on health and education remains a cause for concern. The FRDL requires that these outlays reach 1.18 percent and 3.72 percent of GDP respectively by 2013. In sharp contrast to the target, expenditure on health and education in 2008‐09 stood at 0.3 percent and 1.5 percent of GDP respectively, lower than in 2002‐03. If the government is to meet this target, it is necessary that other expenditure programs be substituted with targeted and effective investments in health and education.

Objective 4: The issuance of new government guarantees any given year shall not exceed 2 percent of GDP. Compliance: New guarantees issued by the government to public sector enterprises in 2008‐09 amounted to 2.09 percent of GDP, which was slightly higher than the stipulated limit of 2 percent. In addition, there has been issuance of continuing guarantees against the commodity financing operations undertaken by Trading Corporation of Pakistan, Pakistan Agriculture Storage and Services Corporation Ltd., and provincial governments. Commodity financing is secured against hypothecation of commodities and letter of comfort from the Finance Division. These guarantees were not included in the limit of 2 percent imposed by the FRDL Act 2005.

In addition, the FPS contains very useful information on:

• The strategic priorities of the federal government for the financial year in the fiscal area;
• The key measures and rationale for any major deviation in fiscal measures pertaining to taxation, subsidy, expenditure, administrated pricing and borrowing;
• An update on key information regarding macroeconomic indicators;
• An analysis of major policy decisions made by the federal government and all other circumstances that may have a material effect on meeting the targets for economic indicators for that fiscal year as specified in the medium‐term budgetary statement;
• An evaluation as to how the current policies of the federal government are in conformity with the principle of sound fiscal and debt management and the targets set forth in the medium-term budgetary statement.

The Slovak translation of this blog post is available here.

The Czech translation of this blog post is available here

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