Pakistan’s PFM Act 2019 One Year On

Posted by Muhammad Afnan Alam^[1]

Pakistan's legal and institutional framework for PFM is evolving. However, substantial gaps arise between projected and actual expenditures and revenues, thus reducing the predictability of the budget and necessitating in-year adjustments in budgetary appropriations. Many other weaknesses in the PFM system still exist and its overall performance is suboptimal by international standards.

In June 2019, Pakistan's Parliament approved a new Public Financial Management Act which was amended in June 2020. This Act was designed to improve the performance of the country’s fiscal institutions. Key provisions include: publication of a budget strategy paper at the beginning of each budget round and mid-year budgetary performance reports; the establishment of a Treasury Single Account (TSA); and setting up an internal audit function within line ministries. The June 2020 amendment contains an additional chapter on policy formulation and administration of non-tax revenue. It also binds the government to place a report before Parliament commenting on the government’s performance in delivering its targets on the the delivery of public services.

Recent progress in improving PFM

1. Strengthening budgetary discipline and transparency. The government has prepared its first fiscal risk statement, published a Budget Mannual (incorporating performance-based budgeting elements), developed a PFM Reform Strategy, and strengthened the implementation of internal controls through the computerized financial management information system (GFMIS).
2. Rollout of a Treasury Single Account. In August 2020, the government completed an inventory of government accounts and established a dedicated TSA implementation team in the Ministry of Finance (MoF). The accounts of line ministries, autonomous organizations and arms-length agencies have already been brought into the TSA framework.
3. Fiscal risk management and tax policy. The MoF is in the process of establishing a macro-fiscal unit to identify, quantify and monitor selected macroeconomic and budgetary risks. The unit will also play a key role in the design and coordination of tax policies that enable the government’s tax net and fiscal space to be expanded.

Related developments

1. Improvements in statistical capacity. Effective implementation of the PFM Act will require a concerted effort to upscale the country's national statistical capacity. The World Bank’s Statistical Capacity Indicator for Pakistan in 2019 was 71.1, higher than the South Asian average of 69.9. The country's rating, however, has continued to decline since 2016. Substantial efforts will be required to improve statistical human capital (cross-country knowledge and skills), coordination between statistical stakeholders, and improvements in data systems and technologies.
2.  Establishment of a Fiscal Council. The PFM Act emphasises the government’s need to improve the formulation of fiscal policies, macro-economic forecasting, and public reporting of budget execution. The government intends to establish an Independent Fiscal Council which will be mandated to scrutinize the governments macroeconomic forecasts and fiscal policies, and publish reports on these matters. The Council will enrich the public policy debate through analysis, information, and advice.
3. Commitment accounting and reporting. To conform with the PFM Act, the government needs to implement a system to control spending commitments which should be incorporated in the GFMIS and integrated with cash planning and management processes.

The impact of the COVID-19 crisis in Paksistan has proved to be quite a test for Pakistan's PFM framework.  It has revealed how many reforms were far from being well-entrenched. It has also encouraged the government to engage in activities and transactions that cloud the actual state of its public finances. The PFM Act, though not fully comprehensive in its scope, creates an opportunity to change many of these discouraging trends and practices.

 

[1] Muhammad Afnan Alam is a career civil servant at the Government of Pakistan and can be reached at afnanalam@gmail.com

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