An Appraisal of PakistannS Public Finance Management

Abstract

Public Financial Management (PFM) is fundamentally the management of financial resources of a country in order to optimally address national and local priorities. Efficient PFM enhances and sustains economic and social growth in the country and should cover aggregate financial management, operational management, asset acquisition & disposal and treasury management. The major components of PFM are Public Revenues, Public Expenditures and Public Debt Management. The legal and institutional frameworks of PFM along with the procedure for assignment financial powers and distribution revenues have been provided in the Constitution of Islamic Republic of Pakistan, 1973. In Pakistan, all the three major components of PFM suffer from a myriad of problems. These problems are worsened as all three are interlinked and therefore need immediate attention. Revenue Management in Pakistan is plagued with persistently low Tax to GDP ratio, narrow tax base, weak enforcement of laws, skewed tax mix, ad-hoc policies and short-term fixes. Due to inadequacy in tax collection at provincial level, the entire burden of revenue collection has fallen on the Federal Government/FBR alone. Similarly, our poor Expenditure Management and resultantly high fiscal deficit is another point of concern. Since our current expenditure constitutes a major portion of the total expenditure, the development expenditure remains neglected. Moreover, due to misplaced priorities, whatever little is being spent on development projects, has hardly any benefit for the public in general and results in creation of non-productive assets. Adding to the woes is the continuous burden of loss making SOEs, lack of contingency planning and failure of expenditure management reforms.On the Debt Management side, there is an exponential increase in the Public Debt as a result of high Domestic Debt due to unchecked domestic borrowing from SBP as well as commercial banks. This has in turn resulted into increasing the debt servicing expenditure and crowding out the private sector. Debt mismanagement continues in the form of floating government bonds in the international market at high interest rates.Considering the interlinkages of the three components of PFM, their ailments must be addressed as a whole with solutions having long term focus rather than the usual ad-hoc firefighting approach. Long term planning for revenue collection should include broadening the tax base, both at the federal and provincial levels, efficient enforcement measures, monitoring of tax officials’ performance on the basis of KPIs. Long term planning in Expenditure Control is absolutely essential. This refers to investments in developmental projects rather than spending scarce resources on current expenditures. There is a need to freeze the non-development expenditures for at least three years and focus on projects aimed at social and economic development. To break the current debt loop, it is important to begin by giving true autonomy to the SBP and re-evaluate its regulations by including a fixed ratio for fund allocation to the government and to the commercial sector. Another area that needs consideration and attention is the lack of shared understanding between provincial and federal authorities. A Fiscal Coordination Committee should be constituted at Federal Government level with specific timelines and goals, to address and resolve federal and provincial jurisdiction issues.