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FISCAL AND DEBT MANAGEMENT LAW
DOLLAR LOSSES FANNED JITTERS!

 

FISCAL AND DEBT MANAGEMENT LAW

 

 

From SHAMIM AHMED RIZVI
Islamabad

Aug 05 - 11, 2002

 

As proposed in the report of Debt Reduction and Management Committee headed by Dr. Purvez Hassan and announced by the Finance Minister Shaukat Aziz in his budget speech last month, the draft of Fiscal Responsibility and Debt Management Law has been released by the government for pubic debate and discussion before finally conferring it.

The Daily Nation/Nawa-i-Waqt organised in Islamabad the very first seminar to initiate public debate on the subject. The seminar was scheduled to be chaired by the Finance Minister who however, could not make it because of an urgent summon from the President. The seminar was addressed by Dr. Tariq Hassan advisor to the Finance Minister and reported to be the architect of the law Dr. Ashfaq Hassan Khan, Mr. Haroon Sharif, an expert on financial systems and the former Finance Minister Mr. Sartaj Aziz. A number of economists and economic writers attended the seminar.

The draft Fiscal Responsibility and Debt Limitation Law provides measures to eliminate revenue deficit and minimize public debt to a prudent level by effective debt management. It also seeks to ensure medium-term and long term macro-economic stability in the country.

The foundation of the draft law is based upon the principles and sound fiscal and debt management. These principles will provide continuous and consistent guidelines to the Government to achieve the objectives of this law. The principles are:

i. To eliminate revenue deficit to nil not later than 30th June 2007 and thereafter maintaining a surplus .

ii. To minimize the public debt to sixty per cent of the estimated Gross Domestic Product (GDP) by 30th June 2012.

iii. To reduce the total public debt by not less than two and a half per cent of the GDP in every financial year, provided that the social and poverty related expenditures are not reduced below four per cent of GDP.

iv. To not issue new guarantees including those on rupee lending bonds, rates of return, output purchase agreements and all other claims and commitments that may be prescribed from time to time for any amount exceeding 2 per cent of the GDP.

The Government can depart from these principles on grounds of unforseen demand on the finances for the Government due to national security or natural calamity which are required to be determined by the National Assembly.

The Federal Government shall maintain transparency in its performance, lay before the National Assembly in each financial year the following five conic policy statements:

a) The Medium-term Budgetary Statement included in the Annual Budget Statement (ABS).
b) The Annual Fiscal Policy Statement included in the ABS.
c) The Annual Debt Policy Statement included in the ABC.
d) The Mid-year Economic Report by the end of February.
e) The Annual State of the Economy Report by the end of June.

The Economic Policy Statements shall incorporate to the fullest extent possible all Government decisions which have a material effect on the economic situation of the country, except those that have been excluded for specified reasons by the Finance Minister.

A Debt Policy Coordination Office (DPCO) is proposed to be established to serve as a Secretariat to achieve the objectives of this law. The Office shall prepare a ten year debt reduction path which will be followed by the Government and against which the performance of the Government will be monitored and analyzed by the DPCO. The DPCO shall submit its annual report to the Cabinet after the approval of the Finance Minister.

Where the Government fails to meet the target of debt to GDP over a period of two years, it would be required to take all necessary measures including the suspension of salaries of the Cabinet members to return to the debt reduction path given by DPCO by the end of the next two years. However, this shall not apply to the expenditures charged upon the Federal Consolidated Fund under Article 81 of the Constitution. Furthermore, the social and poverty related expenditures shall not be reduced from four per cent of the GDP for the year.

All the Economic Policy Statements laid before the National Assembly under the proposed law shall be accompanied by a statement of Finance Minister and Secretary Finance comprising the integrity of the disclosures contained therein and consistency with the requirements of the law.

In his detailed analysic as a financial system expert, Mr. Haroon Sharif observed if one looked back at the historical trend, it appeared that most of the debt burden was actually accumulated during past twenty years as Pakistan's total debt rose from Rs.137.5 billion in 1978-79 to Rs.3,840.00 billion in 2001-2002. Debt service in Pakistan amounts to 47% of total budgetary expenditure and 63% of domestic revenue. In total almost 10% of GDP goes into servicing domestic and foreign debt and the total debt actually exceeds our GDP as is evident from the table:

Debt burden

 

1979-80

1989-90

2001-2002

Domestic debt

56.8

378.3

1680.0

 

(24.3)

(44.4)

(45.08)

External debt

70.7

328.9

2160.0

 

(30.02)

(38.4)

(57.97)

Total

137.5

707.2

3,840.0

 

(54.5)

(82.6)

(103.05)