Time for a Public Finance Management Act

The challenges that have been articulated in our most recent budget have raised questions about where and how budget reform may be implemented in our country at this economically-critical juncture. Having presented the case for a Public Finance Management Act (PFMA) to numerous countries in the developing world, I see the need now, more than ever, to emphasise the implementation of PFMA in Pakistan.

Broadly speaking, the PFMA is a document that highlights the direction, scope and philosophy of the budget process in a country. It stresses upon who the relevant national actors will be during the various stages of the budget (such as the legislature and the executive), and what sort of rules will be applied whenever budgetary measures exceed prescribed limits. It also suggests the oversight mechanisms appropriate to a nation’s context, while highlighting the importance of each stakeholder’s participation in the wider budgetary process.

Due to the guidelines and mechanisms it provides, a good PFMA is considered an essential ingredient for efficient service delivery, strategic resource allocation, sound management of resources and fiscal discipline in a society. Given the historically unsound fiscal situation in Pakistan, it is evident that many observers would advocate for sound management of the country’s resources, just as they would urge for a better service provision to the ordinary citizen. With increasing pressure due to the IMF’s conditions, it is also becoming clear that fiscal discipline will be necessary for the country going forward.

At present, the absence of any public finance management law to govern the budget process is a yawning gap in the budgetary architecture. We should recall that Article 79 of the Constitution states that all matters relating to the federal consolidated budgetary fund and its operation “shall be regulated by the Act of Majlis-e-Shoora (Parliament) or, until provision in that behalf is so made, by rules made by the President”. Although nearly 50 years have passed since the adoption of the Constitution, Parliament has not proceeded with the instatement of any act akin to a PFMA.

As a consequence, many budgetary functions that would be executed as part of a systematic fiscal framework, as is done in many developed and even emerging countries, instead fall under various ad hoc arrangements deployed by the executive branch in the country. This creates room for risky short-termism in the budget process, which is a significant reason for why both, cyclical and structural elements of our public finances over the past 50 years leave much to be desired.

A PFMA is particularly useful in a parliamentary framework, where the system of checks-and-balances that exists in a presidential system, is not as entrenched. In a parliamentary arrangement such as Pakistan’s, any government that wields a majority in the National Assembly risks misapprehending the absence of a PFMA to take excessive discretion with budgetary resources. This, in turn, further reduces their incentives to legislate on structural aspects of budget reform.

In terms of the best practices in place, I have found that the most successful PFMAs are those that strike a balance between being versatile, multifaceted documents and ones that give concrete guidelines. My work on budget reform has continually stressed the inherent trade-off between fiscal discipline and fiscal flexibility. This is because tougher discipline reduces a system’s ability to absorb shocks while the absence of discipline in turn often risks generating many budgetary shocks. Unfortunately, this is the state of our budgetary situation today.

Beyond this, a PFMA should recognise the local conditions and challenges. For example, although most developed countries are not quite as strained as Pakistan is in terms of revenue collection, they do worry a great deal about the expense side of the national budget. A PFMA for Pakistan, however, must also incorporate the necessary objectives pertaining to revenue collection, and this is because only one per cent of the population consists of registered tax filers, who must then shoulder a disproportionate and unfair burden of the remaining 99%.

Given this, it is important to recognise that the majority of citizens in our country wallow in a shadow economy which now represents the single most pressing concern that our policymakers face. The PFMA must, therefore, incorporate a strong revenue collection element as part of our national budgetary philosophy that sheds due light on the shadow economy.

To present a more balanced view of PFMAs, it is important to remember that, even though a PFMA can go a long way towards framing, guiding, and shaping public finances, it alone cannot be counted on as a one-size-fits-all solution to budget reform, especially not without stronger institutional and political commitment towards strengthening budgetary processes. This is all the more true for the public’s participation in the fiscal process, in a country where — shamefully — 99% of the public (whether deliberately or not) fail to pay direct taxes.

In fact, there are indeed cases where PFMAs have been installed to little effect, largely due to much graver socioeconomic problems. The best example of this might be our benighted neighbour, Afghanistan. As part of the cosmetic changes that the coalition of Western forces sought to bring to the country, they also devised a very thorough and excellent PFMA document for the Afghan government. Yet despite its comprehensive stipulations in law, Afghanistan’s budget “process” leaves much to be desired in just about every fiscal category, save for the foreign reserves fruitlessly poured into reconstructing it at a superficial level for a temporary period of occupation, that seems to be at an end now.

As such, any country’s PFMA can only play a supportive but a critical part in a much larger national effort. It can serve as a guiding document which incorporates both a national budgetary philosophy and an emphasis on all stakeholders to adhere to better fiscal discipline. It will also broaden the revenue base, through which citizens can participate responsibly. In sum, I see a PFMA as an important step in a longer, more arduous, and entirely necessary journey towards fiscal sustainability and prosperity. 

Published in The Express Tribune, July 25^th, 2019.

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