Govt implements sweeping fiscal reforms to cut debt

Rules target trillions in public funds parked by ministries, departments in commercial banks

ISLAMABAD:

The federal government, on Monday, notified new fiscal rules to reduce its debt servicing cost by gradually tapping into trillions of rupees of public money that ministries and departments have parked in commercial banks.

The Ministry of Finance issued new Cash Management and Treasury Single Account Rules in order to capture the details and money parked in the non-interest private bank accounts of government departments in the first phase.

The International Monetary Fund (IMF) has long pressed to bring public money back into the State Bank of Pakistan (SBP) by withdrawing it from commercial banks. However, various entities, including the military and police, have resisted these efforts.

According to these rules, at the end of every working day, the SBP will sweep out the cash of government ministries, divisions, executive offices, and attached departments parked in commercial banks. The next day, the money will be made available to the commercial banks.

The sweeping arrangement will be implemented in phases, starting from current accounts, according to the Ministry of Finance. It said that extending sweeping arrangements to other types of bank accounts would be undertaken in consultation and if found feasible as a policy matter.

Under an arrangement agreed with the IMF, Pakistan has been maintaining cash buffers equal to 1% of GDP or over Rs1 trillion. These buffers are maintained by borrowing from commercial banks at an interest rate of over 22%. These banks are holding trillions of public money thanks to these accounts opened by government entities.

The new rules state that the “Finance Division may, in coordination with the SBP, utilise surplus funds, if any, to retire public debt.”

The idea behind sweeping out surplus funds at the end of the day is to use them as cash buffers to reduce interest costs, according to Ministry of Finance officials.

The central bank, on Monday, maintained the policy rate unchanged at 22%, succumbing to IMF pressure to maintain interest rates despite having room to cut it by 1% to 1.5%. The central bank has lost claim to autonomy due to these decisions that seem contradictory to Pakistan’s ground realities.

The Ministry of Finance has made it mandatory for other ministries to provide a three-month forecast of revenue and expenditure data at the end of each quarter. The Debt Management Office will prepare quarterly projections of debt servicing and repayments.

The ministry also instructed that, in the future, government offices and public entities would maintain and operate bank accounts only in accordance with the Public Finance Management Act. The law stipulates that the federal government would maintain its Federal Consolidated Fund Account 1 and the Public Account of the Federation in the State Bank of Pakistan. However, it may open other bank accounts as required by the Finance Division, in accordance with the State Bank of Pakistan Act, 1956.

For effective financial management and corrective measures to ensure financial discipline, all banks in Pakistan shall provide information on all accounts maintained by ministries, divisions, attached departments, subordinate offices, and public entities, as required by the Finance Division, through the SBP.

It has also been notified that all government entities’ bank accounts opened in commercial banks would be reviewed by the Finance Division, and those accounts found to be non-essential would be closed.