International Monetary Fund (IMF) in its new report on Friday said that Pakistan faces a tight fiscal situation, which will require strong control over the budget in coming years. It further said public debt has increased considerably, and interest payments now absorb 60 percent of budgeted revenue while multiple external shocks and the unprecedented floods in 2022 have buffeted the economy and the government’s fiscal position.
According to the IMF report titled “Pakistan: Technical Assistance Report-Improving Budget Practices”, these shocks have been compounded by policy slippages including unbudgeted subsidies, and delays in implementing revenue measures. The authorities now have the difficult task of converting a primary deficit of 1.3 percent of GDP for FY23 into a primary surplus for FY24 and continuing to exercise fiscal restraint, while preserving essential social and development spending.
In this context, it will be crucial to further enhance the country’s Public Financial Management (PFM) system, as well as strengthening revenue mobilization and administration. This report focuses on how to strengthen budget preparation, execution, and controls, including ways to harness digital technologies for that purpose. There are other important areas in PFM where the authorities are making progress, such as the oversight of state enterprises, cash and debt management, the Treasury Single Account (TSA), and public investment management, which have been the focus of previous IMF technical reports.
An examination of Pakistan’s recent budgetary outcomes reveals substantial deviations from planned budgets.
While these discrepancies are partially due to an unstable external environment and political uncertainties, the establishment of stronger fiscal institutions can help deliver a more credible budget, tighten its execution, and prevent policy slippages Macro-fiscal functions are distributed among different institutions which are responsible for forecasting macroeconomic indicators, tax revenue, public debt service, and development spending (largely comprising capital projects), but are poorly coordinated. A macrofiscal policy unit (MFPU) has been put in place in the Economic Adviser’s Wing but is at an early stage of development and does not yet provide effective support for the Finance Division, particularly its Budget Wing. A National Macro-Fiscal Framework is prepared but does not kickstart the budget preparation process.
A top-down, strategic phase at the start of budget preparation could be strengthened, with spending ministries and agencies required to prepare their budget submissions under relatively weak constraints and insufficient guidance on the available fiscal space. Several other budgeting practices could be strengthen: (i) there is an inefficient dual budgeting system with a bloated pipeline of projects in the Public Sector Development Plan (PSDP) and separate decisionmaking processes for recurrent and development spending; (ii) the budget call circular (BCC) provides spending ministries and divisions with little guidance on budget priorities and spending ceilings are out of date; and (iii) the organization of the Finance Division is fragmented and not well tuned to provide effective policy advice on the budget, and effective scrutiny of budget proposals.
The Executive is a relative outlier internationally in terms of its ability to award in year supplementary grants without ex-ante approval from the National Assembly, and without any limit on their size. Extensive use of these grants has been made in recent years. They amounted to 14 percent of approved spending in the last two years. In addition, technical supplementary grants, or reallocations across budget appropriations, amounted to another 13 percent of approved spending in the last two years.
While legislative approval may occasionally hinder prompt responses to emergencies, a balanced solution should be adopted in Pakistan, as is the case elsewhere. The example of the previous caretaker government, which is overseeing the budget without resorting to supplementary grants, shows that strong commitment can lead to effective budget management without total flexibility. Another challenge in budget execution is the absence of comprehensive commitment control mechanisms, which, at a minimum, affects proper budget monitoring, but can, more worryingly, lead to overcommitment of spending, unwanted supplementary grants, and arrears.
The Ministry of Finance has put in place measures to enhance the digitalization of the budget preparation and execution processes; and improve fiscal monitoring and reporting. Despite several reforms, however, budget processes still involve significant manual and paper-based steps. Fully digitalized processes are yet to be prepared and implemented in the Financial Accounting and Budgeting System (FABS). The Finance Division has designed a data warehouse to store fiscal data and made available a set of dashboards for use by stakeholders, but this is hampered by the lack of timely data provided by some key entities. As a result, fiscal reporting is not yet comprehensive and timely. The regulatory framework and fiscal data governance (FDG) practices, including data exchange, do not yet fully address these challenges.
The report provides the following high-level recommendations: Strengthen capacity at the Finance Division to lead and coordinate macro-fiscal forecasts to support budget preparation, as well as increasing forecast cycles and synchronizing them with the budget. Introduce a strategic phase to the budget process, in line with the Public Financial Management Act (PFMA) 2019 and the accompanying Budget Manual; include more guidance and binding ceilings in the Budget Call Circular; and undertake actions to minimize dual (‘recurrent/capital’) budgeting.
Consider reorganizing the Finance Division with a focus on its budget and budget management functions, to bring the structure into line with good international practice. Implement the Supreme Court ruling on supplementary grants No. 20 of 2013 that Supplementary.
Budget Statements should be subject to the same scrutiny and procedure as the Annual Budget statement, including ex-ante approval by the National Assembly of supplementary grants. Relevant laws and rules can be amended to ensure greater certainty and clarity on the interpretation and application of this ruling, including potentially Article 84 of the Constitution. Propose the creation of a Contingency. Reserve in the budget to maintain budget flexibility. Concurrently, the Auditor General of Pakistan (AGP) could conduct a special audit of the mechanisms and effectiveness of supplementary grants in past years.
Prepare a PFM Digitalization Master Plan, establish a high-level Steering Committee to oversee coordination and implementation of the Plan, strengthen Fiscal Data Governance (FDG) practices, consider next steps after SAP life support ends in 2025, and review the budget preparation and budget execution business processes in FABS.