Debt limitation law

Feb 23 - 29, 2004



To ensure fiscal discipline and maintain fiscal credibility especially after exit from IMF program this year, the Government of Pakistan has prepared a draft of Fiscal Responsibility and Debt Limitation Law, which has been placed before the Parliament recently for approval.

The proposed law, having significant fiscal objectives, is aimed at eliminating revenue deficit till June 30, 2007 and running a surplus after that and to reduce the public debt to 60 percent of GDP till June 30, 2012.

The key features of the law include reduction of public debt not less than two and half percent of GDP in every year and keep poverty related expenditures minimum at 4 percent of GDP.

Under this law, no new guarantees will be issued, for any amount exceeding 2 percent of the GDP. The government can deviate from these rules on the basis determined by the National Assembly i.e. natural calamity, and national security.

This law will help maintain transparency in the performance in each year by issuing the Economic Policy Statements (EPS). The EPS shall incorporate to the fullest extent possible all government decisions, which have a material effect on the economic situation of the country.

A Debut Policy Coordination Office (DPCO) is proposed to be established and will prepare a ten-year reduction on the basis of which the performance of the government will be monitored and analyzed by the DPCO. Where the government fails to meet the target of debt to GDP over a period of two years, it would be required to take steps to return to the debt reduction path given by the DPCO by the end of next two years.

All the EPS shall be accompanied by a statement of the Finance Minister and Secretary Finance for ensuring integrity and consistency of the disclosures.


Even through Pakistan's recent fiscal performance has been relatively disciplined, the considerably weaker track record in earlier years continued to cloud the credibility of the fiscal commitments, particularly in view of the country's expected exit from IMF lending programs by 2004. thus, the enactment and implementation of a transparent, rule-based, fiscal framework, together with the limitations on the proven of conditional liabilities, could bolster business/investor confidence in the continuity of prudent fiscal policy and add to transparency of fiscal practices.



In particular, the pre-determined multi-year annual targets, the requirements for regular performance updates counter signed by senior officials, would provide timely warning of slippages. Moreover, in the latter case, the mandatory requirement for remedial measures in the case targets are consistently unmet, would help limit the long germ impact of fiscal imprudence.

The proposed law also attempts to address some key concerns regarding generic fiscal responsibility laws. It seeks to permit the government some flexibility in adjustment expenditures in the event of economic shocks. But, at the same time, seeks to reduce the risk of misuse of the clause by broadly restricting since exceptions to natural calamities and national security issues.

Such fiscal frameworks with legislative backing have been enacted in a number of countries in the recent year and the recent fiscal consolidation in the OECD countries is attributed partly to such frameworks. The United States in the mid 1980s promulgated the Balanced Budget and Emerging Deficit Control Act, bound the federal government to reduce its deficit to zero within a stipulated time period. There are various other countries that have legislation on this subject which including Australia, Brazil, Canada, Japan and New Zealand. The UK is following a golden rule principle, borrowing only for the development purposes. In South Asia, India and Sri Lanka are also in the process of enacting the fiscal responsibility law.

Substantiating the promulgation of the proposed law, the State Bank of Pakistan in its recent economic review has said that the presence of large, persistent budgetary deficits in any economy is associated with significant macro-economic negatives including high interest rates, crowding out of private investment, inflationary pressures, a slowdown in growth etc. Unfortunately, despite the general acceptance of the negative impact of sustained fiscal indiscipline, governments' throughout the world have demonstrated an inability to rein-in their fiscal excesses in any given budgetary year, often due to negative short term political connotations. Consequently, the debt/GDP ratios for many countries have steadily risen over the years. There is increasing interest in more fiscally responsible economies to legislate automatic, transparent, ruled-based "poison pill" mechanism in order to partially insulate the fiscal deficit decision from the relatively short-term compulsions of the annual budgetary exercise. The enactment of a fiscal responsibility law can lend credibility to a government's commitment to fiscal discipline, the report said.