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