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March 25, 2019

How the PFM Act in Pakistan Could Fix Public Finances

Pak
Posted by Muhammad Afnan Alam[1]

The government of Pakistan has implemented a wide range of PFM reforms since the early 2000s. Their impact, however, has been mixed. Improvements in some areas—better informed financial statements, faster external audit scrutiny, introduction of an MTEF, for example—have had a limited impact on controlling the fiscal deficit or reducing the huge volume of off-budget spending. The implementation of an FMIS has not significantly increased the timeliness of financial data, the processing of payments, or more reliable control of government cash flows.

Looking ahead, the government has announced plans to enact a new PFM law. This legislation offers the possibility of remedying some of the remaining deficiencies in the PFM system, where Pakistan still lags its counterparts. Here are some of the critical areas that should be addressed in the short- or medium-term.

a. Enhanced Focus on Budget Transparency: Given Pakistan’s increasing economic literacy, there is a scope to create mechanisms and access points for non-state actors and interest groups to engage more actively with the budget preparation process, for example through formal consultations and public forums on new investment plans or important policy proposals. Similar arrangements could be established for citizens to monitor the execution and impact of key public services such as agriculture, education and health.

b. Strengthened Macroeconomic and Fiscal Forecasting: Pakistan could follow the example of many other countries by legally binding the government to present official macroeconomic and fiscal forecasts with a three-year forecast horizon at least twice a year, first with the budget and, second, as a mid-year update. The economic assumptions underlying the forecasts should also be explained. And the legislation could require the Ministry of Finance to present the forward estimates of revenue and expenditure in detail, separating out the baseline costs of existing policies and the estimated cost of new policies over the next three years. Finally, the Act could establish some mechanism—an independent fiscal council for example (see below)—that would validate the forecasts prepared by the government.

c. Graduation to Accrual Accounting: The existing (cash-modified) accounting and financial reporting system provides limited incentives for fiscal responsibility and transparency, or for further technical advancement of accounting methodologies. The legislation could map out a course for Pakisan to gradually improve its financial reporting system, for example by broadening the coverage of entities and recording more information on the government’s assets and liabilities. Compliance with IPSAS could be the medium- to long-term goal.

d. Strengthened Role of the Auditor General of Pakistan (AGP): The AGP’s role in Pakistan’s public finances has increased in public perception following a series of Supreme Court decisions in the last five years, and increased demands from citizens on the way public resources are allocated through the budget and spent. The proposed PFM Act could aim to strengthen the AGP’s hand, for example by establishing penalties for government organisations that hinder the Auditor’s access to information which is required for external audit.

e. Formation of an Independent Fiscal Council: As pointed in my previous article, the country should consider establishing an independent fiscal council with statutory powers to assess the government’s financial plans and fiscal targets, and validate the macroeconomic assumptions that feed into the budget. Such councils have been recognised by the IMF and other bodies as an integral part of a robust PFM system, and are now used by approaching 40 countries around the world.

f. Modernising Cash Management: The new legislation should address the pressing need to upgrade Pakistan’s existing cash management system. Annual budgets typically include over-optimistic revenue forecasts to justify higher expenditure plans that meet the government’s political agenda. This leads to inefficiencies in spending and difficulties in making reliable estimates of future cash requirements. When the revenue forecasts fail to materialize, the Ministry of Finance comes under pressure to identify savings while executing the budget and “to find money” for powerful spending entities over and above initial budget allocations. Not only could the proposed PFM Act establish mechanisms for improved macroeconomic and fiscal forecasting (as noted above), but also introduce a Treasury Single Account—a core element of most modern PFM systems—and an efficient framework for cash flow forecasting and cash management.

The ideas presented above would offer a sustainable migration towards a technically more robust PFM framework that Pakistan badly needs. But the path will not be easy. Strong political commitment and leadership will be required.

[1] The author is a civil servant and holds an MPA from the London School of Economics and Political Science (afnanalam@gmail.com).

Note: The posts on the IMF PFM Blog should not be reported as representing the views of the IMF. The views expressed are those of the authors and do not necessarily represent those of the IMF or IMF policy.

Comments

A fine read! A candid and practicable set of policy suggestions that, if incorporated, can bring about qualitative improvement in the draft of upcoming PFM Law. Deserves to be placed in the dossier of our lawmakers.

Very well written piece. Insightful

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