IMF points out defects in budget formulation, execution

• IMF suggests strengthening of initial phase of budget preparation.
• Lender calls for establishment of stronger fiscal institutions.
• It demands strengthening of revenue mobilisation, administration.
  

ISLAMABAD: The International Monetary Fund (IMF) has pointed out glaring defects in the budget-making and execution practices in Pakistan underscoring significant changes to the size and composition of spending compared to the approved annual budget by the parliament, The News reported on Tuesday.

IMF's "Pakistan's Technical Assistance Report: Budget Practicing" says that an examination of the country's recent budgetary outcomes has revealed substantial deviations from planned budgets.

While these discrepancies are partially due to an unstable external environment and political uncertainties, the establishment of stronger fiscal institutions can help deliver a more credible budget, tighten its execution, and prevent policy slippages.

The deviation, as per the Fund, reached almost 55% in the approved budget in fiscal year 2022-23 compared to the actual spending through technical supplementary grants and supplementary grants.

The report, while noting changes to the size and composition of spending compared to the approved annual budget, says that these in-year changes have occurred either through technical supplementary grants and supplementary and excess grants — henceforth supplementary grants — which are additional grants approved during the year not met by the surrender of existing grants — as defined by Article 84 of the Constitution.

In FY23, the sum of these supplementary grants exceeded 50% of budget spending. The data quoted by the IMF shows that there were changes of Rs1,910 billion, equivalent to 21.9% of the approved budget in fiscal year 2022-23 and such deviation on development and current budget peaked at 54.7% than the approved budget by the National Assembly.

Given the extraordinary latitude taken by the executive in its interpretation of Article 84 of the Constitution to approve these grants without the prior approval of the NA, this means that a significant proportion of spending does not undergo the prior scrutiny of the latter.

Islamabad faces a tight fiscal situation which will require strong control over the budget in the coming years. The public debt has increased considerably, and interest payments now absorb 60% of budgeted revenue. Multiple external shocks and unprecedented floods in 2022 have buffeted the economy and the government’s fiscal position.

These shocks have been compounded by policy slippages including un-budgeted subsidies, and delays in implementing revenue measures. Authorities now have the difficult task of converting a primary deficit of 1.3 % of GDP for FY23 into a primary surplus for FY24 and continuing to exercise fiscal restraint, while preserving essential social and development spending.

In this context, it will be crucial to further enhance the country's Public Financial Management (PFM) system as well as strengthen revenue mobilisation and administration.

Furthermore, the IMF report focuses on how to strengthen budget preparation, execution, and controls, including ways to harness digital technologies for that purpose. There are other important areas in PFM where the authorities are making progress, such as the oversight of state enterprises, cash and debt management, the Treasury Single Account (TSA), and public investment management, which have been the focus of previous IMF technical reports.

Identifying how this can be done in Pakistan, its main findings are Macro-Fiscal Forecasting which is distributed among different institutions which are responsible for forecasting macroeconomic indicators, tax revenue, public debt service, and development spending — largely comprising capital projects — but are poorly coordinated.

A macro-fiscal policy unit (MFPU) has been put in place in the Economic Adviser’s Wing but is at an early stage of development and does not yet provide effective support for the Finance Division, particularly its Budget Wing. A National Macro-Fiscal Framework is prepared but does not kick-start the budget preparation process.

Budget preparation

A top-down, strategic phase at the start of budget preparation could be strengthened, with spending ministries and agencies required to prepare their budget submissions under relatively weak constraints and insufficient guidance on the available fiscal space.

Several other budgeting practices could be strengthened: (i) there is an inefficient dual budgeting system with a bloated pipeline of projects in the Public Sector Development Plan (PSDP) and separate decision-making processes for recurrent and development spending; (ii) the budget call circular (BCC) provides spending ministries and divisions with little guidance on budget priorities and spending ceilings are out of date; and (iii) the organisation of the Finance Division is fragmented and not well-tuned to provide an effective policy advice on the budget, and effective scrutiny of budget proposals.

Budget execution

The executive is a relative outlier internationally in terms of its ability to award in-year supplementary grants without ex-ante approval from the NA and without any limit on their size. Extensive use of these grants has been made in recent years. They amounted to 14% of approved spending in the last two years.

In addition, technical supplementary grants, or re-allocations across budget appropriations, amounted to another 13% of approved spending in the last two years. While legislative approval may occasionally hinder prompt responses to emergencies, a balanced solution should be adopted in Pakistan, as is the case elsewhere.

The example of the previous caretaker government, which oversees the budget without resorting to supplementary grants, shows that strong commitment can lead to effective budget management without total flexibility.

Another challenge in budget execution is the absence of comprehensive commitment control mechanisms, which, at a minimum, affects proper budget monitoring, but can, more worryingly, lead to over-commitment of spending, unwanted supplementary grants, and arrears.