Fis­cal re­spon­si­bil­ity

The Pak Banker - - Front Page - Dr Ash­faque H Khan

BY the end of the 1990s, high lev­els of debt in de­vel­op­ing coun­tries caused by the pur­suit of ir­re­spon­si­ble fis­cal pol­icy had be­gun to re­ceive greater at­ten­tion from pol­icy mak­ers. High lev­els of in­debt­ed­ness made coun­tries more vul­ner­a­ble to shocks, di­min­ished the ef­fec­tive­ness of fis­cal and mon­e­tary pol­icy, dis­cour­aged in­vest­ment and neg­a­tively af­fected eco­nomic growth.

Com­mit­ment to fis­cal dis­ci­pline over a pro­longed pe­riod was recog­nised as es­sen­tial for main­tain­ing macroe­co­nomic sta­bil­ity, thus pro­mot­ing eco­nomic growth and job cre­ation. Keep­ing in view the macroe­co­nomic dif­fi­cul­ties faced by Pak­istan in the 1990s as a re­sult of large fis­cal deficit (7 per­cent of GDP, on av­er­age) with the con­se­quen­tial rise in pub­lic debt, the government in power at that time put to­gether a rule-based fis­cal pol­icy in 2002-03, which was later ap­proved by par­lia­ment in June 2005 as the Fis­cal Re­spon­si­bil­ity and Debt Lim­i­ta­tion Act. The act was meant to in­ject fi­nan­cial dis­ci­pline in the coun­try.

There were five key el­e­ments of the act. Th­ese in­cluded: (i) within a pe­riod of 10 years be­gin­ning from July 1, 2003 pub­lic debt not ex­ceed­ing 60 per­cent of GDP be­yond June 2013; (ii) elim­i­nat­ing rev­enue deficit by June 2008 (iii) re­duc­ing pub­lic debt by at least 2.5 per­cent­age point of GDP each year un­til June 2013; (iv) not is­su­ing guar­an­tees to the bor­row­ing of pub­lic ser­vice en­ter­prises (PSEs) by more than 2.0 per­cent of GDP in a given year; and (v) main­tain­ing the level of spend­ing on so­cial sec­tor and poverty-re­lated pro­grams above 4.5 per­cent of GDP in a given year and en­sur­ing that ex­pen­di­ture on ed­u­ca­tion and health is dou­bled in terms of per­cent­age of GDP by June 2013.

The law per­formed ex­ceed­ingly well un­til June 2007 since not only were all key per­for­mance tar­gets met but, in some cases, spec­i­fied tar­gets were ex­ceeded. For ex­am­ple, pub­lic debt de­clined from 75.1 per­cent of GDP in 2002-03 to 55.4 per­cent in 2006-07 and rev­enue bal­ance (to­tal rev­enue-cur­rent ex­pen­di­ture) – a mea­sure of the government’s sav­ings or dis-sav­ing, which re­mained in deficit to an av­er­age of 3.1 per­cent of GDP dur­ing 1997-98 to 1999-2000 – shrank to 0.9 per­cent of GDP by 2006-07 and was pro­jected to achieve a sur­plus of 1.0 per­cent of GDP in the tar­get year (2007-08). So­cial sec­tor and pover­tyre­lated ex­pen­di­ture con­tin­ued to re­ceive top pri­or­ity and the amount al­lo­cated was close to 6 per­cent of GDP. The government re­mained within the re­quired limit of is­su­ing new guar­an­tees up to 2 per­cent of GDP. Ex­pen­di­ture on ed­u­ca­tion and health was also grow­ing and there were indi­ca­tions that it would dou­ble by June 2013.

Some key el­e­ments of the law have re­mained in vi­o­la­tion since 2007-08. For ex­am­ple, pub­lic debt in­creased from 55.4 per­cent of GDP in 2006-07 to 61.5 per­cent by 2011-12. In­stead of reg­is­ter­ing a de­cline, pub­lic debt con­tin­ued to rise. Rev­enue deficit, in­stead of turn­ing into a sur­plus, surged to over three per­cent of GDP. Such an out­come was never in doubt given the ir­re­spon­si­ble fis­cal be­hav­iour of the government over the last five years.

Pak­istan’s cur­rent eco­nomic con­di­tions pro­vide a text­book ex­am­ple of the ad­verse con­se­quences of grow­ing in­debt­ed­ness. It has made Pak­istan more vul­ner­a­ble to shocks and cri­sis, di­min­ished the ef­fec­tive­ness of fis­cal and mon­e­tary pol­icy, dis­cour­aged both for­eign and domestic in­vest­ment, slowed eco­nomic growth, given rise to un­em­ploy­ment and poverty, and put the ex­change rate un­der se­vere pres­sure. At present, for­eign ex­change re­serves are de­clin­ing and the coun­try has en­tered into a debt re­pay­ment cri­sis.

The cur­rent fis­cal re­spon­si­bil­ity law is ex­pir­ing in June 2013. Pak­istan needs a new fis­cal re­spon­si­bil­ity law; the present government has no de­sire, com­mit­ment and ca­pac­ity to un­der­take such ex­er­cise. The care­taker regime must ini­ti­ate the ex­er­cise by form­ing a se­lect com­mit­tee of ex­perts to pre­pare a new law that can be passed by the new par­lia­ment. To in­crease the cred­i­bil­ity and op­er­a­tional rel­e­vance of the law, some re­fine­ments to the ex­ist­ing law will be re­quired.

The new law should have a life of 10 years be­gin­ning from July 1, 2013. How­ever, Pak­istan needs to de­fine medium-term debt bur­den goals that can be­come an in­te­gral part of the law. Pub­lic debt bur­den goals should be de­fined in terms of GDP and to­tal rev­enue. In a sense, rev­enues are much bet­ter in­di­ca­tors of the government’s abil­ity to ser­vice debt than GDP. Pak­istan needs an ex­ter­nal bor­row­ing strat­egy, link­ing it to the fis­cal

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