IMF wants safeguards against reckless borrowing, unchecked expenditures

IMF wants safeguards against reckless borrowing, unchecked expenditures


ISLAMABAD: The International Monetary Fund (IMF) has asked Pakistan to adopt a new legal framework for public finance management, aimed at stopping the country from borrowing recklessly and ensuring strict oversight of parliament on unchecked expenditure.

The IMF pushed its demand during the on-going talks under the umbrella of Post Programme Monitoring (PPM). But the federal government is not willing to accept any such proposal which it thinks might shut down the government, sources in the Ministry of Finance said.

The IMF’s position is consistent with the views of the World Bank that has pegged disbursement of a $400-million loan to the approval of the draft Public Finance Management Bill 2017 from the National Assembly, sources said. The Board of Directors of the World Bank is set to approve the $400-million loan this month but its release will be linked with the initiation of the process to get the bill approved, they added.

The major thrust of the new proposed public finance management regime is that the government will not borrow more than the limit set out in the Fiscal Responsibility and Debt Limitation (FRDL) Act of 2005 for the debt reduction path.

Sources said that global lenders have proposed that the federal government may raise loans only for the purpose of financing its budget deficit, refinancing maturing public debt, obtaining foreign currency loans, furthering prudent fiscal and monetary policies, onwards lending to an approved institution and paying legally mandated expenditures.

But lenders want to insert an overarching clause in the proposed legal regime that says that the net amount that the Ministry of Finance may borrow should not exceed the amount set out in the debt reduction path being set out in the FRDL Act of 2005.

The sources said that the Ministry of Finance would not accept this condition, as this would eventually shut down the federal government.

Under the FRDL Act of 2005, it was legally binding for the federal government to limit the overall public debt to GDP ratio to 60%. But the same law gives an escape route that says that if the limit is breached, the finance ministry can still borrow but the finance minister has to only inform parliament about the limit being breached.  As of June 2017, the gross public debt was Rs21.4 trillion or equal to 67.2% of the GDP – way above the statutory limit. The breach occurred despite the fact that the federal government twice amended the definition of public debt in the past two years.

Now, the IMF and the World Bank want to airtight the law that will stop the finance ministry from borrowing beyond the limit prescribed in the FRDL Act of 2005, said the sources. The PML-N government has been severely criticised for throwing the country into a deep debt trap where it is borrowing to retire previous loans. A recent report of the finance ministry confirmed that by June this year seven out of nine debt sustainability indicators have weakened.

The Ministry of Finance has misused another avenue – the supplementary budget.

The supplementary budget is issued during the course of the fiscal year without prior approval of parliament. The finance ministry has used this avenue to buy luxury cars, pay subsidies to sugar barons and finance the expenditures that it deliberately understates at the time of the new budget’s approval to hide the actual budget deficit.

The sources said that global lenders also wanted to place checks and balances on this account as well. They want to introduce a Contingency Fund that will be approved by parliament in new budgets in the future for allowing the finance ministry to handle unforeseen expenditures. The sources said that the Contingency Fund could ensure strict control of parliament on government expenditures.

In the same vein, the global lenders wanted Pakistan to discontinue the supplementary budget method.

The World Bank has found serious flaws in the current public finance management system that it wants to correct through a billion-dollar programme. Out of the total cost of $980 million, the World Bank is likely to give $400 million as a loan.

There is a need for system improvements to support integrated budgeting and reporting of recurrent and development budgets and critical ex-ante transaction processing, according to the World Bank papers.

These papers further state that budgeting, accounting, reporting and auditing rules and procedures require revisions to align the government’s financial management system with medium-term budgets, electronic fund transfers and requirements due to a shift in responsibilities after the 18th Amendment in the Constitution.

It further noted that there was no linkage between approved budget and procurement plans with inefficiencies in procurement systems and processes that result in project implementation delays. There is also a need for improved and timely service delivery in pension payments to prevent and detect unlawful pension payments on time.

The World Bank also wants to improve the working of the Department of the Auditor General of Pakistan for better oversight of parliament. It said that a major challenge facing the AGP office is that quite often its recommendations are ignored or not implemented by government departments.

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