Fiscal responsibility: a critical analysis of FRDL (2005) Pakistan.
Qasim, Muhammad Ali ; Khalid, Mahmood
INTRODUCTION
The term fiscal responsibility in financial dictionary is defined
as "A balanced budget". That is a budget wherein expenditures
during a given period of time equal to revenues. The fiscal
responsibility also includes a budget in which revenue is greater than
the expenditures. Fiscal responsibility is achievable and most of the
individuals in their private life practice fiscal responsibility. At
individual level everybody knows that they have to live within the
budget and usually they do not overspend. Usually overspending by
individual results in bad crediting rating which one receives from their
creditors due to non-payments or late payments of installments and thus
denies future benefits to the person concern.
Fiscal responsibility at national level implies that a government
has a balanced budget and has sufficient revenue to pay for its all
expenditures. There would be no overspending if government had a true
balanced budget in each period. The economic future of a nation largely
depends on the way fiscal responsibility is practiced. There is a direct
link between budget deficit today and what nation can enjoy in future.
Fiscal responsibility is crucial for a nation to remain prosperous and
stronger in future. Fiscal responsibility will also determine what kind
of future we are leaving to our children and grandchildren for the next
20 years and beyond. If the fiscal responsibility is not practiced the
government would spend more money than its income and it borrows for the
difference. If the money borrowed come from domestic savings or from
domestic lenders the economy will have less money available for capital
investment and future productivity growth rates and levels would be
lower. If on the other hand deficit is financed by foreign
organisation/country the country will be indebted with growing debt to
the rest of the world, with growing interest costs which must be served
every year. If we rely more on foreign sources to finance the resource
gap the foreign ownership of our resources would grow and so has our
dependences on the actions of foreign governments and investors.
At least for the last two decades poor/weak fiscal responsibility
is being practiced in Pakistan as the fiscal deficit for these two
decades remained more than five percent of GDP. The persistent fiscal
deficit resulted in the increased debt burden both in terms of internal
as well as external debt and interest payments. Our growing dependence
on the action of foreign organisations/countries is manifested from one
of the conditions laid by IMF on the loan given to Pakistan in 2008; the
condition was that the government would raise electricity charges during
the loan period. Perceiving the poor fiscal responsibility practiced by
the federal government the then finance minister, Mr. Shaukat Aziz, in
his budget speech 2001-2002 made a policy commitment by stating
that:" government is considering promulgation of a fiscal
responsibility law that would limit the government's access to
borrowing for financing its expenditure". The policy commitment,
made by the finance minister, was materialised in the form of
"Fiscal Responsibility and Debt Management Act-2005. The objective
of the paper is to critically evaluate the FRDL Act-2005 and also see
the extent of implementation of various conditions laid down in the act.
The paper is organised as follows: Section--I would deal with the
History of FRDL type law enacted in other countries like India etc.
Section--II would deal with the Constitutional provision for framing of
FRDL. Section--III would deal with the critical evaluation of FRDL and
the implementation status of various sub-heads of the act. Finally the
conclusion is drawn on the preceding discussion.
1. FISCAL RESPONSIBILITY IN HISTORICAL PERSPECTIVE
Fiscal Responsibility Laws (FRLs) are now popular and many
countries have enacted FRLs so as to enhance the reliability, certainty,
and transparency of fiscal policy. Generally FRLs are combination of
rules and regulation needed to strengthen fiscal transparency and budget
management, with numerical ceilings on fiscal deficits and public debt
to achieve fiscal discipline. The aim of FRLs is to provide a
comprehensive framework for management of fiscal policy through a single
legislation. New Zealand was at the forefront to adopt FRL in 1994 with
a too much emphasis on transparency requirements. After the adoption of
FRL by New Zealand it has been implemented in several countries in Asia,
Europe and in Latin America.
FRLs are different than stand-alone numerical fiscal rules, which
are defined as a permanent constraint on fiscal policy through simple
numerical limits on budgetary aggregates [Kopits and Symansky (1998)].
FRLs can be classified according to several characteristics, including
the emphasis placed on procedural versus numerical fiscal rules, the
jurisdictional coverage (e.g. central versus federal government),
sanctions, escape clauses, and cyclical considerations.
Since the 1990s many governments made serious efforts to devise
such mechanisms which would not be used for winning election and
retaining public office. One of the mechanisms for National governments
to prevent these problems was to pass a fiscal responsibility law (FRL)
which prescribes proper fiscal behaviour for Subnational Governments
(SNGs), provides guidelines for parameters of SNG fiscal legislation, or
sets incentives rewards for success or sanctions for failure in
following the rules. Argentina, Brazil, Colombia, India, and Peru have
done so. The countries such as Turkey, Poland and Mexico have not
adopted fiscal responsibility legislation for subnational but they have
established fiscal rules or debt limitations for SNGs. At this stage it
would be appropriate to briefly discuss FRLs for the countries who have
recently adopted these laws. The prominent countries are Brazil, India,
Argentine and Australia.
Brazil
"In Brazil's political opening through mid-1990s, there
were two major subnational debt crises. Each initial agreement that
tried to resolve a crisis actually made the next crisis more likely,
because they reinforced the perception that the federal government would
provide debt relief, they provided such relief in the form of
rescheduling (allowing the stock of debt to keep growing), set ceilings
on debt service and thus on the effective political cost, bought out
(without penalty) the foreign and private creditors to the SNGs and left
the federal government holding the debt. Thus the state politicians
suffered minimal consequences for their imprudence and their creditors
suffered almost none, and so until 1997 the ex-ante constraints written
in the rescheduling agreements were usually quickly evaded"
[Dillinger (1997); Rodden (2003)]. In late 1990s, this subnational debt
crises came to end because of adoption of national macroeconomic
adjustment programme which not only ended hyperinflation and stabilised
the economy. During 1997-98 the federal government made debt
restructuring agreements with 25 states and the objective was to cease
unsustainable borrowing. As a result of this debt agreement three
largest debtor states supported the reforms and formed the core of a
critical mass of states ready to cooperate in fiscal restraint, making
it worthwhile for additional states join at the margin of cooperation.
Also, the large scale of the states' non-performing debt to the
federal government strengthened the resolve of the federal Congress to
enact the FRL. The federal government negotiated agreements with 25
states in 1997 and 1998. These agreements were sanctioned by Law 9496 of
September 1997 to reschedule the states' debt conditioned on states
undertaking fiscal reforms and compliance with fiscal targets. The FRL
in 2000 codified fiscal adjustment programs sanctioned by various
resolutions [Alfonso (2002); Dillinger (2002)].
Argentine
The provinces in Argentine, during, the 1980s had no budget
constraint they borrowed a lot, and effectively could monetise this
debt, contributing to hyperinflation. The stabilisation programme in
1991 was centered on the Convertibility Plan, which fixed the Argentine
exchange rate to the U.S. dollar. During the 1990s a market based
strategy was followed by the national government mainly for coordinating
fiscal discipline between provinces: the central government would
enforce hard budget constraints ex post and force the provinces to pay
their debts [Dillinger and Webb (1999)]. By the end of the 1990s, the
absence of the ex-ante fiscal controls had allowed a number of Argentine
provinces to over-borrow, party fragmentation had narrowed the scope for
fiscal compromises, and the national government had overcommitted itself
by setting floors on transfers, even if national revenues fell
[Gonzalez, Rosenblatt, and Webb (2004)].
At the national level, the budget balance was deteriorating and
there were growing debt payments, a Fiscal Solvency Law was approved by
the Congress in 1999--its first try at an FRL. It aimed to and did
inspire a third of the provinces to pass their own FRLs. During 2001,
however, the FRLs virtually stopped working because there was extreme
mismatch between the fiscal and monetary policies of the national
government and furthermore the provincial FRLs do not have enforcement
power and most of the economically important provinces had not passed
them. Only 5 out of 11 provinces that imposed a hard budget constraint
actually fulfilled their commitment [Braun and Tomassi (2004)]. In 2004,
Argentina tried anew with a national FRL that applied to the provinces
as well as the national government and capital federal district. It
passed Congress hastily [Braun and Gadano (2006); Laudonia (2009)], and
it did not come out of a consensus building process with the provinces
nor reflect a solid technical consideration of how the provinces might
adjust their finances to meet the legal requirements. Although many
provinces complied with some of the law's procedural requirements,
almost none were meeting the quantitative targets even before the onset
of the global crisis in 2009. After that the quantitative targets were
put on hold, which further undermined the credibility of the FRL process
in Argentina.
India
The Indian Constitution does not allow the states to borrow from
abroad and the states are require to obtain permission from central
government for domestic borrowing. The borrowing by states is allowed by
the central government after discussing with states on financing state
development plans. The constitution provision, to limit the state
borrowing, could not limit the explosive growth of state debt, the
system could not stopped fiscal deterioration as indicated by high
levels of debt over GSDP ratio in many states in the late 1990s. The
factors responsible for deterioration in fiscal accounts of states in
Indian are: increased expenditures on salaries, pensions, retirement
benefits, and on subsidies, increased borrowing to finance the growing
revenue deficit, and growth in contingent liabilities related with
fiscal support to cooperatives, public sector units, and the statutory
boards.
The fiscal reforms adopted by the government, since the early
2000s, has focused on to a more flexible, market-linked borrowing regime
within sustainable overall borrowing limits imposed by the central
government and self-imposed state-level deficit limits. Fiscal
Responsibility and Budget Management Act was enacted by the federal
government in 2003 which applies to the national government only, but
some states had also adopted their own FRLs before the enactment of the
federal FRL [e.g., Karnataka and Punjab in (2002)] and many states have
since 2003 adopted FRLs in line with the national law. After the Twelfth
Finance Commission (2005), FRL has become mandatory for all the
provinces and the federal government has offered a sizeable incentive to
provinces for passing their FRL.
Australia
In Australia, during 1990s there was growing concern that the
country do not have legislation for fiscal responsibility. The idea of
legislation for fiscal responsibility gained considerable attention in
the 1990s. At the federal level, the Business Council of Australia
called for legislation requiring a surplus budget on average over the
business cycle. The federal government adopted the Charter of Budget
Honesty Act in 1998 and there was improvement in fiscal outcomes.
Australia adopted, in the mid 1980s, its first fiscal rules which put
limits on the growth of expenditure, taxation and budget deficit. During
the recession in the 1990s the net debt of the country increased more
than 20 percent of GDP and in fact net debt has never went beyond 20
percent of GDP. The combined state and Commonwealth general government
net debt had not exceeded 30 percent of GDP in the 1990s [Simes (2003)].
Some states had adopted fiscal responsibility legislation prior to the
federal government's adoption. New South Wales passed legislation
in 1995 to commit itself and future governments to medium- and long-term
fiscal responsible targets including the elimination of the net debt.
Victoria passed the Financial Management Act in 1994, which was amended
in 2000 through the Financial Management (Financial Responsibility) Act,
which outlines principles of sound financial management, reporting
standards and pre-election budget update. Minister must produce a
pre-election budget update 10 days after the issue of a writ for an
election. The Act broadly states what the update must contain and the
principles upon which it must be based.
2. FISCAL RESPONSIBILITY LAW IN PAKISTAN
The approval and implementation of Fiscal Responsibility and Debt
Limitation Act-2005 was meant to provide for elimination of revenue
deficit and reduction of public debt to a prudent level by effective
public debt management. The Federal government has completed seven
fiscal years since the implementation of FRDL in June 2005. In the
following paragraphs we will analyse major conditions laid down for
sound fiscal and debt management.
3. AN EVALUATION OF FRDL ACT--2005
The implementation of Fiscal Responsibility and Debt Limitation
Act, 2005 was the serious effort by the government to create strong
institutional mechanism to restore fiscal discipline at the level of
central government. The other objective was to introduce greater
transparency in fiscal operations of the central government. In the
following paragraphs we will evaluate FRDL act-2005.
According to Act No. VI of 2005 the Federal government shall take
all appropriate measures to achieve following policy objectives:
* To eliminate the revenue deficit.
* To reduce total public debt and maintain it within prudent limits
thereof.
Short Title, Extent Commencement of the Act
The Act may be called Fiscal responsibility and debt limitation
Act. 2005.
* It extends to the whole of Pakistan.
* It shall come into force at once.
The coverage of the act is whole of the Pakistan which means that
the four provincial governments, AJK and Northern Areas are required to
follow the two policy objectives of the FRDL. Here the question is that
in the wake of more provincial autonomy, more transfer of financial
resources to provinces, through NFC award and, furthermore, transfer of
public related sectors, like health, education and social welfare, to
provinces, how the federal government can administered its control over
provincial expenditures and revenues?. The fact is that the act imposes
restrictions only on the federal government but the provincial
governments are not, practically, in the scope/preview of the act. It is
therefore imperative that FRDL may also be framed for the provincial
governments. The federal government has no control over the provincial
expenditures. It worth to note that the first policy objective is
related to revenue deficit which is the interplay of revenue and
expenditure.
* The FRDL is silent about the absolute fiscal deficit which
otherwise is the source of concern for fiscal policy makers. The fiscal
deficit is one of the important indicators of fiscal imbalances. The
government has given top priority to contain fiscal deficit in it
expenditure management strategy. It worth to note that how and why the
FDRL act does not consider fiscal deficit as a source of concern,
therefore, no targets has been set for reduction in fiscal deficit.
* The fiscal deficit is the excess of total expenditure (Current
and Development) over revenue receipts and grants. If we do not consider
fiscal deficit as a source of concern but consider revenue deficit as a
source of concern this clearly implies that we neglect the development
needs of the country. The capital expenditure/development expenditure
contributes to the development process in the country. The share of
development expenditure in total expenditure is less than 20 percent
which is the manifestation of neglect of development need in FRDL-2005.
4. ANALYSIS OF THE PRINCIPLES OF SOUND FISCAL AND DEBT MANAGEMENT
In the following paragraphs we will analyse principle of sound
fiscal and debt management in seriatim and also the current
implementation status of each principle.
(a) Reducing the Revenue Deficit to Nil Not Later Than the
Thirtieth June 2008 and Thereafter Maintaining a Revenue Surplus
* No specific targets have been set to bring revenue deficit to
zero up to 30-62008 and thereafter maintaining a revenue surplus. The
act is devoid of any strategy/implementation plan to bring revenue
deficit to zero. Such as what amount of revenue deficit should be
reduced each year i.e. say 0.5 percent of GDP at the end of each
financial year.
* While formulating the act the possibility that reducing the
expenditure and/or raising the revenue might have adverse affects on the
growth of the country keeping in view the prevalent and emerging
economic conditions. I.e. the possible impact of expenditure
reducing/revenue raising strategy on growth of the economy has not been
fully estimated.
* As the revenue deficit is the result of expenditure and revenue.
The revenue side includes both tax and non tax and surcharges of the
government. In crease in revenue by increasing non-tax revenue requires
that public services be appropriately priced which may be difficult in
the presence of high inflation and increasing cost of fuel and
electricity.
* The above table indicates that the revenue deficit is not zero as
on 30-06-2008 and thereafter it is not in surplus. Thus the first
condition of FRDL is not met till the fiscal year 2010-11. The objective
was to fund for consumption from government's own resources and not
borrowing. "The existence of a high and persistent revenue deficit
indicates government's inability in maintaining fiscal discipline
and instilling austerity measures in order to curtail increasing current
expenditures". The revenue deficit is mostly due to two reasons
firstly revenue receipts are short off the target revenue and secondly
the current expenditure is over and above the planned expenditure. The
increased current expenditure is primarily due to increased expenditure
on security related affairs, interest payments and subsidies.
(b) Ensure "that within a period of ten financial year,
beginning from the first July, 2003 and ending on thirtieth June, 2013,
the total public debt at the end of the tenth financial year does not
exceed sixty percent of the estimated gross domestic product for that
year and thereafter maintaining the total public debt below sixty
percent of gross domestic product for any given year."
As it is stated in the debt policy statement that "future
levels of debt hinge around the primary balance of the government".
Mathematically, the primary balance is the fiscal deficit before the
interest payments. Empirically there exists a long run relationship
between fiscal deficit and debt relative to GDP. It is argued that large
structural primary deficits and interest payments relative to GDP have
had an adverse effect on growth in recent years. The FRDL -2005 does not
consider the fiscal deficit as its objective; therefore, the targets of
debt to GDP ratios for coming years are not seemed to be realistic. In
other words the act should have to define targets for fiscal deficit
along with the target for debt to GDP ratio.
The FRDL -2005 is not effective on the provincial governments,
therefore, federal government cannot control borrowing by the provincial
governments. For effective debt management policy it is therefore felt
that there is a need for provincial fiscal responsibility legislations.
The necessity of legislation is supported by the fact that the debt-GDP
ratio is combined federal and provincial debt.
As per above table the government seems to full fill the FRDL
condition and it is expected that total public debt to GDP ratio will be
maintained from the fiscal year 2012-13 and own wards.
There is a need for through investigation that how the target for
60 percent debt to GDP ratio has been determined.
(c) Ensure "that in every financial year, beginning from the
first July, 2003, and ending on the thirtieth June 2013, the total
public debt is reduced by no less than two and a half percent of the
estimated gross domestic product for any given year, provided that
social and poverty alleviation related expenditures are not reduced
below 4.5 percent of the estimated gross domestic product for any given
year and budgetary allocation to education and health, will be doubled
from the existing level in terms of percentage of gross domestic product
during the next ten years."
The above condition has following three objectives:
* The reduction in total public debt beginning from 01-07-2003 and
ending on 3006-2013, the total public debt is reduced by no less than
two and a half percent of the estimated GDP for any given year.
* The above condition of FRDL-2005 protects the federal government
expenditure on social and poverty related sectors. The act restricts
that while reducing debt the social and poverty related expenditure
should not be reduced below 4.5 percent of estimated GDP for any given
year. The social and poverty related expenditure includes Infrastructure
(highways, roads and bridges), water supply and sanitation, food
subsidies, food support programmes, village electrification, rural
development etc.
* The budgetary allocation to education and health will be doubled
from the existing level in terms of percentage of gross domestic product
during the next ten years. The investment in health and education is
vital for economic development of any country.
Billion of Rupees
The three sub-conditions of clause-c are analysed in the above
table.
* The debt reduction strategy ensures continues reduction in total
public debt from July 2003 till June 2013 and the and for each year the
extent of reduction in debt is not less that 2.5 percent of estimated
GDP for any given year. The row "debt as debt reduction
strategy" contains the amount of debt if the strategy is fully
followed. The total public debt for fiscal year is Rs. 10709 billion
whereas the debt should have been Rs 1515.4 Billion in case the debt
strategy is fully implemented. There is a gap of Rs.9193.6 Billion
between the existing and planned total public debt for 2010-11. In fact
the total public debt has increased from Rs 3623 billion in 2002-03 to
Rs. 10709 billion in 2010-11. The increase in total public debt over the
FRDL period is mainly due to persistent high level of fiscal deficit
which for Yll is 6.6 percent of GDP. In net shall the debt reduction
strategy failed due to unrealistic targets/non inclusion of important
fiscal variable (fiscal deficit) in the FRDL-2005.
* The only positive recommendation of FRDL is that in the act
expenditure on social and poverty alleviation has been protected up to
4.5 of GDP for any given year. By comparing rows 4.5 percent of GDP and
social & poverty related expenditure it will be clear that for first
three years of FRDL social & poverty related expenditure remained
below the 4.5 percent of GDP but since Fy06 the expenditure has
increased rather than any reduction in it and are more than the minimum
limit set in the FRDL but these increased expenditure are at the cost of
higher debt. In other words we have increased expenditures on social
& poverty sector but at the same time we have also increased public
debt.
* The FRDL is silent about the expenditures incurred by the
provincial governments on social & poverty related issues.
* The budgetary allocation to education and health as percent of
GDP was required to be doubled from FY03 to FY13. The budgetary
allocation to education and Health during FY03 as % of GDP was 1.6
percent and 0.5 percent respectively. The FRDL is silent over the rate
by which the expenditure on education and health would be double. In the
absence of any indicated growth rate for increased expenditure on
education and health it is difficult to check the compliance of FRDL on
yearly basis from 2003 to 2010-11. However the above table indicates
that expenditures on education and health have not witnessed any
significant increase since 2002-03.
(d) Not issue "new guarantees, including those for 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 two percent of the estimated gross domestic
product in any financial year: Provided that the renewal of existing
guarantees shall be considered as issuing a new guarantee."
* This clause put restriction only on issue of new guarantees and
does not speak about the stock of contingent liabilities which are
associated with major hidden fiscal risk.
* The act in fact put restriction on contractually binding
guarantees i.e. explicit contingent liabilities and does not put
restriction on implicit contingent liabilities. (Economic Survey 2002-03
page-241).
* Keeping in view the past trends of contingent liabilities one can
ask the question that what is economic rational of including guarantees
in the FRDL. The following table contains description of contingent
liabilities:
The above table indicates that neither prior to the formulation of
FDRL nor after the imposition of FRDL the contingent liabilities pose
any threat to the fiscal policy formulation. In fact the FRDL target
only new and renewal of explicit guarantees whose share in total
liabilities is less than 30 percent for the period 2002-03 to 2007-08.
This small share in no way is a source of concern for the fiscal policy
formulation of the country.
Interestingly the FRDL overlooked the one of the important action
of the government i.e. FRDL did not put any restriction on the federal
government borrowing from the SBP. The government borrowing from SBP for
budgetary support is steadily increasing over the last two decades.
5. CONCLUSION
The FRDL was implemented to improve overall fiscal discipline in
the country so as to put the country on the desire path of economic
growth. The FRDL was not frame on the basis of overall economic
situation of the country rather it was frame on the basis of
constitutional provision. The jurisdiction of FRDL is only the federal
government and provincial governments are not in its jurisdiction. The
FRDL put constrain only on the revenue deficit and ignores the fiscal
deficit which is source of concern for the fiscal policy makers. The
FRDL put numerical restriction on total public debt but these
restrictions (targets of debt to GDP ratios) do not seems to be
realistic because empirically there exists a long run relationship
between fiscal deficit and debt relative to GDP. As already stated above
fiscal deficit is not considered as source of concern and that is why no
restriction/limitation is set for the growth of fiscal deficit. The only
positive recommendation of FRDL is that in the act the expenditure on
social and poverty alleviation has been protected up to 4.5 of GDP for
any given year. Since Fy06 the expenditure on social & poverty
alleviation has increased rather than any reduction in it and is more
than the minimum limit set in the FRDL but these increased expenditures
are at the cost of higher debt. In other words we have increased
expenditures on social and poverty sector but at the same time we have
also increased public debt. The FRDL is silent about the expenditures
incurred by the provincial governments on social and poverty related
issues.
The budgetary allocation to education and health as % of GDP was
required to be doubled from FY03 to FY13. The budgetary allocation to
education & Health during FY03 as % of GDP was 1.6 percent and 0.5
percent respectively. The FRDL is silent over the rate by which the
expenditure on education and health would be double. In the absence of
any indicated growth rate for increased expenditure on education and
health it is difficult to check the compliance of FRDL on yearly basis
from 2003 to 2010-11. However the above table indicates that
expenditures on education and health have not witnessed any significant
increase since 2002-03.
Interestingly the FRDL overlooked the one of the important action
of the government i.e. FRDL did not put any restriction on the federal
government borrowing from the SBP. The government borrowing from SBP for
budgetary support is steadily increasing over the last two decades.
Recommendations
Following recommendations are suggested to improve the quality of
FRDL and to make it more effective.
* The basis of FRDL should be more on economic reality of the
country rather than on the basis of constitutional provision.
* There is a need to put restrictions on fiscal deficit besides
revenue deficit.
* The jurisdiction of FRDL should be enhanced from federal
government to all provincial governments.
* The increased expenditures on social and poverty sector should
not be at the cost of increased public debt.
* In order to double expenditure on education and health as
percentage of GDP from 2003 to 2013 there must be specific rates by
virtue of which the expenditure on these two sectors would be doubled.
* There is a need to put restrictions on federal government
borrowing from SBP.
REFERENCES
Braun, Mignel and Mariano Tomassi (2004) Fiscal Rules for
Subnational Government: Some Organising Principles and Latin American
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Oaxaca, Mexico, February 14-16.
Braun, Mignel and Nicolas Gadano (2007) What are Fiscal Rules for:
A Critical Analysis of the Argentine Experience. CEPAL Review 91.
Brazil (2002) Fiscal Responsibility Law. Constitution of Pakistan
1973.
Dillinger, William (1997) The Brazilian Debt Crisis. Washington,
DC: The World Bank.
Dillinger, William (2002) Brazil: Issues in Fiscal Federalism.
Washington, D.C, WB. (World Bank Report 22523-BR).
Dillinger, William and Steven B. Webb (1999) Fiscal Management in
Federal Democracies: Argentina and Brazil. World Bank. (Draft Report).
Kopits, George and Steven A. Symansky (1998) Fiscal Policy Rules.
IMF, July. (Occasional Paper No. 162).
Laudonia, Mare (2009) Responsabilidad Fiscal, unaley bajola lupa
del fondo. Economia, September.
Pakistan, Government of (n.d.) Pakistan Debt Policy Statement
2011-12. Islamabad: Ministry of Finance.
Pakistan, Government of (Various Issues) Pakistan Economic Survey.
Islamabad: Ministry of Finance.
Punjab, Government of (2002) White Paper on State's Finance.
Chandigarh Department of Finance, India.
Simes, Iric (2003) Fiscal Policy Rules in Australia. Australia:
Chifley Research Center.
Steven, B. Webb (2004) Fiscal Responsibility Laws for Subnational
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Comments
Study is a good contribution in the field of fiscal and especially
in Pakistan there was a need to see the FRDL critically and study has
done quite a good job. It seems like the study is a part of big
assignment and it was at preliminary stage. It would be good to see the
entire study when it will be finalised. While reading the literature of
different countries mentioned in the study on the Fiscal law, Pakistan
made in 2005, I felt that there are several analysis done in the past on
Pakistan's FRDL are missing, which needs to be cited in the paper.
Those include Ashfaque H. Khan's paper on the "A Rule Based
Fiscal Policy" in which he stated that all targets in the FRDL are
achieved during 2002-03 to 2006-07. However authors may need to
emphasise on what happened after that. There is another audit report by
the Auditor General of Pakistan which stated that Government is
consistently violating the core objectives of FRDL. Similarly there is a
report by SBP "The State of Pakistan's Economy" which
criticised the FRDL. Dr Hamza Malik, Direct Research at the State Bank
of Pakistan, also proposed some amendments to the FRDL.
It is my suggestion to include all the previous studies which will
improve the current study and eventually tells us the important
conclusions which will help government to make policy to achieve the
targets of FRDL or changed FRDL towards better management of fiscal
responsibility.
Last, I would like to see some kind of empirics in the paper which
will make the argument stronger what is explained theoretically in the
paper.
M. Ali Kemal
Pakistan Institute of Development Economics, Islamabad.
Muhammad Ali Qasim <qasim@pide.org.pk> is Research Economist
at the Pakistan Institute of Development Economics, Islamabad. Mahmood
Khalid <mahmoodkhalid@pide.org.pk> is Research Economist at the
Pakistan Institute of Development Economics, Islamabad.
Authors' Note: The authors are grateful to Dr Fazal Husain for
his encouragement and valuable support in the research. The views
expressed in the paper are purely those of the author's and does
not represent the Institution view on the issue.
Table 1
Revenue Deficit as a Percentage of GDP
2007-08 2008-09 2009-10 2010-11
Revenue Balance as % of GDP -3.2 -1.2 -2.4 -3.3
Source: Debt Policy Statement 2011-12.
Table 2
Debt Composition
FY03 FY04 FY05 FY06 FY07
Domestic Currency Debt 1852 1995 2152 2322 2601
Foreign Currency Debt 1771 1816 1913 2038 2201
Total Public Debt 3623 3810 4065 4359 4802
GDP 4876 5641 6500 7623 8673
Total Public Debt As % of GDP 74.3 67.6 62.5 57.2 55.4
FY08 FY09 FY10 FY11
Domestic Currency Debt 3266 3852 4651 6015
Foreign Currency Debt 2778 3776 4270 4694
Total Public Debt 6044 7629 8921 10709
GDP 10243 12724 14837 18063
Total Public Debt As % of GDP 59 60 60.1 59.3
Source: Pakistan Debt Policy Statement 2011-12.
Table 3
Domestic Debt and Budgetary Allocations
FY03 FY04 FY05 FY06 FY07
Domestic Currency
Debt 1852 1995 2152 2322 2601
Foreign Currency Debt 1771 1816 1913 2038 2201
Total Public debt
(existing) 3623 3810 4065 4359 4802
GDP 4876 5641 6500 7623 8673
Debt as per debt
reduction strategy 3481.98 3319.48 3128.90 2912.08
4.5% of GDP 219.42 253.84 292.5 343.04 390.28
Social & poverty
Related expenditure 175.54 219.99 273 373.53 424.98
Budgetary allocation
to Education as %
of GDF 1.6 1.7 1.8 1.9 1.9
Budgetary allocation
to Health as % of
GDP 0.5 0.5 0.5 0.5 0.6
FY08 FY09 FY10 FY11
Domestic Currency
Debt 3266 3852 4651 6015
Foreign Currency Debt 2778 3776 4270 4694
Total Public debt
(existing) 6044 7629 8921 10709
GDP 10243 12724 14837 18063
Debt as per debt
reduction strategy 2656 2337.9 1966.98 1515.4
4.5% of GDP 460.94 572.58 667.66 812.84
Social & poverty
Related expenditure 952.60 877.96 994.08 1246.35
Budgetary allocation
to Education as %
of GDF 1.8 1.9 1.8 1.8
Budgetary allocation
to Health as % of
GDP 0.6 0.7 0.8 0.6
Source: Pakistan Debt Policy Statement 2011-12.
Table 4
Contingent Liabilities
Share in Total
Years Contingent Liabilities Liabilities
Total as
Explicit Implicit Total % of GDP Explicit Implicit
2002-03 16.18 84.47 100.65 2.47 16.08 83.92
2003-04 13.18 62.69 75.87 1.35 17.38 82.62
2004-05 15.02 79.55 94.57 1.44 15.88 84.12
2005-06 16.17 67.86 84.03 1.10 19.24 80.76
2006-07 35.56 88.62 124.18 1.42 28.64 71.36
2007-08 63.05 154.17 217.21 2.07 29.02 70.98
Source: Economic Survey (Various Issues).
