- The IMF suggests strengthening the initial phase of budget preparation.
- The lender calls for the creation of stronger fiscal institutions.
- This requires strengthening revenue mobilization and administration.
ISLAMABAD: The International Monetary Fund (IMF) has highlighted glaring flaws in Pakistan’s budget formulation and execution practices, highlighting significant changes in the size and composition of expenditure compared to the annual budget approved by parliament , News reported Tuesday.
The IMF’s “Report on Technical Assistance to Pakistan: Budget Practices” says a review of the country’s recent fiscal performance revealed substantial deviations from planned budgets.
Although these gaps are partly due to an unstable external environment and political uncertainties, establishing stronger fiscal institutions can help produce a more credible budget, tighten its execution and prevent political slippage.
The gap, according to the Fund, reached almost 55% in the approved budget during the financial year 2022-23 compared to the actual expenditure under Supplementary Technical Grants and Supplementary Grants.
The report, while noting changes in the size and composition of expenditures compared to the approved annual budget, indicates that these mid-year changes occurred either through additional technical grants and additional and excess grants – now supplemental grants – which are additional grants approved during the year. the year not covered by the waiver of existing subsidies – as defined by Article 84 of the Constitution.
In FY23, the sum of these additional grants exceeded 50% of budget expenditures. Data cited by the IMF shows that there have been changes of Rs 1.91 trillion, or 21.9% of the approved budget in the 2022-23 financial year, and that this gap in development and current budget peaked at 54.7% compared to the budget approved by the national government. Assembly.
Given the extraordinary latitude taken by the executive in its interpretation of Article 84 of the Constitution to approve these grants without the prior approval of the NA, this means that a significant portion of the expenditure does not subject of the latter’s prior control.
Islamabad faces a tense fiscal situation that will require strict budget control in the coming years. Public debt has increased significantly and interest payments now absorb 60% of budgeted revenues. Multiple external shocks and unprecedented floods in 2022 have shaken the economy and the government’s fiscal situation.
These shocks were compounded by policy slippages, including unbudgeted subsidies, and delays in implementing tax measures. The authorities now face the difficult task of converting a primary deficit of 1.3% of GDP in FY23 into a primary surplus in FY24 and continuing to exercise fiscal restraint, while preserving social and health spending. essential development.
In this context, it will be crucial to further improve the country’s public financial management (PFM) system as well as strengthen revenue mobilization and administration.
Additionally, the IMF report focuses on how to strengthen budget preparation, execution and controls, including ways to leverage digital technologies for this purpose. There are other important PFM areas where authorities are making progress, such as oversight of state-owned enterprises, cash and debt management, Treasury Single Account (TSA), and investment management. which have been the subject of previous IMF technical reports. .
Identifying how this can be done in Pakistan, its main findings are the macro-fiscal forecasts which are distributed among different institutions responsible for forecasting macroeconomic indicators, tax revenue, public debt service and development expenditure – including largely investment projects – but are poorly studied. coordinate.
A Macro-Fiscal Policy Unit (MFPU) has been established within the Economic Advisor Wing, but it is at an early stage of development and does not yet provide effective support to the Finance Division, particularly to its fiscal wing. A national macrofiscal framework is prepared but does not restart the budget preparation process.
Budget preparation
A top-down strategic phase at the start of budget preparation could be strengthened, with spending ministries and agencies required to prepare their budget proposals within relatively weak constraints and insufficient guidance on available fiscal space.
Several other budgetary practices could be strengthened: (i) there is an inefficient dual budgeting system with a large project portfolio in the Public Sector Development Plan (PSDP) and separate decision-making processes for recurrent and development expenditure; (ii) the budget circular (BCC) provides spending ministries and divisions with little guidance on budgetary priorities and spending ceilings are exceeded; and (iii) the organization of the Finance Division is fragmented and not well suited to provide effective policy advice on the budget and effective review of budget proposals.
Budget execution
The executive constitutes a relative exception at the international level in terms of its ability to award additional grants during the year without prior approval from the NA and without any limit on their size. Massive use of these subsidies has been made in recent years. They represented 14% of approved spending over the past two years.
Additionally, supplemental technical grants, or reallocations between budget appropriations, accounted for an additional 13 percent of approved spending over the past two years. Although legislative approval may sometimes hinder a rapid response to emergencies, a balanced solution should be adopted in Pakistan, as is the case elsewhere.
The example of the previous caretaker government, which oversees the budget without resorting to additional subsidies, shows that strong commitment can lead to effective budget management without full flexibility.
Another challenge in budget execution is the absence of comprehensive commitment control mechanisms, which, at a minimum, affects good budget monitoring, but can, more worryingly, lead to excessive spending commitments, unwanted additional subsidies and arrears.