A safety valve against debt trap in future


Mar 14 - 20, 2005



The National Assembly has passed the historic bill the fiscal responsibility and debt limitation bill aims at elimination of revenue deficit and reduction of public debt to a prudent level through effective public debt management.

Prime Minister Shaukat Aziz introduced the bill as a finance minister in 2003 to put in place a sound fiscal discipline and help Pakistan come out of its decade's old poor financial managed system. The bill was so comprehensive and made such eminent sense that the whole house including opposition had no particular grounds to criticize it. Spelling out rationale and importance of the bill, Prime Minister Shaukat Aziz observed that the fiscal responsibility and debt limitation bill would help eliminate revenue deficit and reduce public debt through effective debt management.

The legislation would ensure check and balance on the financial management system and put the country on the road to progress and economic development. Only four or five countries of the world have such a law, basically designed to curtail unnecessary borrowing. Once the bill came into force, only the national parliament would have the authority to sanction directly needed borrowing from the international agencies.

The State Minister for Finance, Omer Ayub Khan, however, revealed that IMF and other international donor agencies had resisted Pakistan's efforts to introduce 'fiscal responsibility and debt limitation bill' meant to achieve fiscal discipline. Giving reasons for opposition, Omer said that IMF and other major international donors doubted Pakistan's capacity to take such a big initiative. He gave credit of introducing the fiscal discipline to Prime Minister Shaukat Aziz.

The bill makes mandatory for the government to table its mid-term performance on economic front before the parliament and get its clean chit for remaining six months of the fiscal year. The new bill would help Pakistan strike a balance between expenditures and revenue to reduce its fiscal deficit, he added.

The bill, as passed, will bind the government to bring down the revenue deficit to zero by June 30, 2008 and maintain a revenue surplus thereafter, reduce total public debt to 60 percent of GDP by June 2013 and maintain it below this level in the subsequent years. The public debt is to be reduced by not less than two and a half percent of the estimated GDP for any given year with the added proviso that social and poverty alleviation related expenditures would not be allowed to fall below 4 percent of the GDP. To plug the possibility of loopholes, it would be mandatory for the government not to issue new guarantees, including those for rupee lending, bonds, rates of return, output purchase agreements and all other claims and commitments for any amount exceeding two percent of the estimated GDP.



Necessary provisions have also been incorporated in the bill to keep the National Assembly fully informed about the emerging scenario in the relevant fields. The government would be responsible to file three statements each year to the parliament, namely, the fiscal policy statement and the debt policy statement. Mandatory presentation of these statements is meant to cover all areas of fiscal and debt strategy and its outcome in a very detailed manner on a regular basis. Transparency at all levels would be ensured through comprehensive public disclosures. Deviations from the set course could only be allowed in exceptional circumstances.

The passing of the present bill by the parliament is, by any standard a landmark decision in the economic history of Pakistan. If followed in letter and spirit, it could usher the country into an era of responsible and sound economic management. High fiscal deficits year after year were undoubtedly the basic cause of most of the ills affiliating the economy and the present government has definitely done something spectacular even at the cost of reducing in its own powers for the sake of fiscal prudence. Some of the adverse consequences of fiscal indiscipline the country suffered for years in the past, included inflation, high interest rates, crowding out of private sector credit and low growth, depreciation of the rupee, the loss of reserves, allocation of large part of the budgetary revenues for debt servicing and neglect of social sectors. Unfortunately, successive governments in Pakistan continued to indulge in profligacy for political expediency without caring for its after effects. Such an irresponsible behaviors had to be stopped somehow and the present dispensation can rightly claim the credit for introducing a bill, which has all the elements of bringing sanity in the fiscal management of the country.

The reading of the bill makes it clear that the government has put in a lot of effort in drafting. No unnecessary freedom to the economic managers, present or future, has been given to sidetrack the basic obligations of fiscal prudence. On the other hand, the bill would add to the responsibilities, accountability and transparency of the financial management of the country. This was extremely essential after discontinuation of the IMF programme, which always obliged the governments to live within the parameters of a given fiscal discipline. Once this condition was relaxed, future government could again revert to the old ways of extravagance with the attendant horrendous consequences.

The most outstanding feature of the bill is its promise and potential to save future generations from the curse of mounting debt and for this they would always be thankful to the present government and Prime Minister Shaukat Aziz in particular, who as the finance minister spearheaded this effort.