Public finance: Parliament must scrutinise debt management
Should have authority to reject debt contract that does not offer at least 1% return on costs.
ISLAMABAD:
In 2011, the federal government borrowed Rs136 billion offbudget from a consortium of local banks to clear the circular debt in the power sector. Last week, the government announced imposition of Rs0.30 per unit ‘loan repayment surcharge’ on electricity bills to repay that loan.
There is a straightforward implication: this loan was not contracted with a clearly developed business plan or project with the possible yield of positive return forcing the government to recover the money needed for repayment from elsewhere.
This also suggests that the burden of loan repayment has been shifted from liable customers to all customers. In other words, all customers of electricity will bear the burden of inefficiency of state-run distribution companies.
This is accounting eyewash. If a finance manager of a private firm is caught doing it, he can be fired on account of poor cash-flow management as well as sloppy choices for projects to be financed. However, the finance manager of a government, ie, the finance minister can get off scot-free literally using the sovereign crutches.
The finance ministry issues detailed documents on the budget, which can be considered an alternative form of an income and expenditure statement. This is also accompanied by information on assets and liabilities, akin to a balance sheet.
However, prudent financial management requires a third document, which is cash-flow statement. For fledgling firms, just like struggling economies, the true financial health can only be determined by looking at cash-flow statements. Firms die for want of cash.
The income statements and balance sheets can be very elusive. A cash-flow statement will reveal, for example, how the loan contracted in 2011 was paid or will be paid. It will also reveal the sources on the basis of which the government books expenditures.
The finance ministry does not issue any such statements except in the case of external programme loans which usually appear in ‘estimates of foreign receipts’.
We should remain highly uncertain about the financial health of the government in the absence of this important information. We are particularly in the dark about the repayment of domestic debt, which is not only two-third of the liabilities, but also more expensive and short-term.
No ring-fencing
Public finance in Pakistan is fungible, and there is no ring-fencing applied. In simple terms, all inflows into government coffers land in consolidated accounts, (eg food and non-food), from where they are disbursed to the ministries as per approved budgets after processing through the Accountant General.
When the cash from multiple sources rests in a single account, it remains fungible. Therefore, no one can tell if this cash has come from contracting a loan or levying a tax or receiving a free grant.
This gives extreme level of discretion to the officials of the Ministry of Finance to disburse the cash and gives them a huge cushion to hide their creative accounting.
The government does not apply strict rules to ensure that the cash received for say, building a new hospital in a far-flung district, is not diverted to constructing a new Metro bus service in the capital. Ring-fencing is critical for transparent management of government money.
In the 2014-15 budget, the finance ministry diverted two major funds to the Federal Consolidated Fund instead of letting the ministries concerned use them. This may also speak volumes about the inefficiency of the ministers. The finance ministry appropriated Rs19 billion of the Export Development Fund from the Ministry of Commerce and Rs60 billion from the research and development fund collected from telecom companies.
What can be done to ensure ring-fencing of public finance and reduce fungibility? Parliament should consider introducing an amendment to the Fiscal Responsibility and Debt Limitation Act of 2005. The amendment should make it compulsory for the finance minister to issue a statement on the floor of the house before contracting new debt.
This statement should clearly articulate where the money is going to be spent, and how the government plans to repay. Parliament should have the authority to reject any debt contract which does not offer at least 1% return on costs.
Thus, each new major debt transaction must be linked to such a certificate by the finance minister. If the current trends go unchecked, and unquestioned, the entire nation will bear a heavy burden in the decades to come, undermining both economic and political freedom.
The writer is the executive director of PRIME, an economic policy think tank based in Islamabad
Published in The Express Tribune, November 10th, 2014.
In 2011, the federal government borrowed Rs136 billion offbudget from a consortium of local banks to clear the circular debt in the power sector. Last week, the government announced imposition of Rs0.30 per unit ‘loan repayment surcharge’ on electricity bills to repay that loan.
There is a straightforward implication: this loan was not contracted with a clearly developed business plan or project with the possible yield of positive return forcing the government to recover the money needed for repayment from elsewhere.
This also suggests that the burden of loan repayment has been shifted from liable customers to all customers. In other words, all customers of electricity will bear the burden of inefficiency of state-run distribution companies.
This is accounting eyewash. If a finance manager of a private firm is caught doing it, he can be fired on account of poor cash-flow management as well as sloppy choices for projects to be financed. However, the finance manager of a government, ie, the finance minister can get off scot-free literally using the sovereign crutches.
The finance ministry issues detailed documents on the budget, which can be considered an alternative form of an income and expenditure statement. This is also accompanied by information on assets and liabilities, akin to a balance sheet.
However, prudent financial management requires a third document, which is cash-flow statement. For fledgling firms, just like struggling economies, the true financial health can only be determined by looking at cash-flow statements. Firms die for want of cash.
The income statements and balance sheets can be very elusive. A cash-flow statement will reveal, for example, how the loan contracted in 2011 was paid or will be paid. It will also reveal the sources on the basis of which the government books expenditures.
The finance ministry does not issue any such statements except in the case of external programme loans which usually appear in ‘estimates of foreign receipts’.
We should remain highly uncertain about the financial health of the government in the absence of this important information. We are particularly in the dark about the repayment of domestic debt, which is not only two-third of the liabilities, but also more expensive and short-term.
No ring-fencing
Public finance in Pakistan is fungible, and there is no ring-fencing applied. In simple terms, all inflows into government coffers land in consolidated accounts, (eg food and non-food), from where they are disbursed to the ministries as per approved budgets after processing through the Accountant General.
When the cash from multiple sources rests in a single account, it remains fungible. Therefore, no one can tell if this cash has come from contracting a loan or levying a tax or receiving a free grant.
This gives extreme level of discretion to the officials of the Ministry of Finance to disburse the cash and gives them a huge cushion to hide their creative accounting.
The government does not apply strict rules to ensure that the cash received for say, building a new hospital in a far-flung district, is not diverted to constructing a new Metro bus service in the capital. Ring-fencing is critical for transparent management of government money.
In the 2014-15 budget, the finance ministry diverted two major funds to the Federal Consolidated Fund instead of letting the ministries concerned use them. This may also speak volumes about the inefficiency of the ministers. The finance ministry appropriated Rs19 billion of the Export Development Fund from the Ministry of Commerce and Rs60 billion from the research and development fund collected from telecom companies.
What can be done to ensure ring-fencing of public finance and reduce fungibility? Parliament should consider introducing an amendment to the Fiscal Responsibility and Debt Limitation Act of 2005. The amendment should make it compulsory for the finance minister to issue a statement on the floor of the house before contracting new debt.
This statement should clearly articulate where the money is going to be spent, and how the government plans to repay. Parliament should have the authority to reject any debt contract which does not offer at least 1% return on costs.
Thus, each new major debt transaction must be linked to such a certificate by the finance minister. If the current trends go unchecked, and unquestioned, the entire nation will bear a heavy burden in the decades to come, undermining both economic and political freedom.
The writer is the executive director of PRIME, an economic policy think tank based in Islamabad
Published in The Express Tribune, November 10th, 2014.