The challenges that have been articulated in our most recent budget have led to questions about where and how budget reform may be implemented in our country at this economically critical juncture. Having presented the case for a Public Finance Management Act (PFMA) to numerous countries in the developing world, I see the need now, more than ever, to emphasize the implementation of a PFMA in Pakistan.
Broadly speaking, a Public Finance Management Act is a document that emphasizes the direction, scope, and philosophy of the budget process in a country. It emphasizes who the relevant national actors will be in the budget at its various stages (such as the legislature and the executive), and what sort of rules will be applied whenever budgetary measures exceed prescribed limits. It also suggests the oversight mechanisms appropriate to a nation’s context, while also highlighting the importance of each stakeholder’s participation in the wider budget process.
Due to the guidelines and mechanisms it provides, a good PFMA is considered an essential ingredient for efficient service delivery, strategic resource allocation, sound management of resources and fiscal discipline in a society. Looking the historically unsound fiscal situation in Pakistan, it is evident that many observers would advocate for sound management of the country’s resources, as would they urge better service delivery to the ordinary citizen. With increasing pressure from the IMF’s conditionalities, it is also becoming increasingly clear that fiscal discipline will be necessary for the country going forward.
At present, the absence of any public finance management law to govern the budget process is a yawning gap in the budgetary architecture. We should recall that Article 79 of the Constitution states that all matters relating to the federal consolidated budgetary fund and its operation “shall be regulated by Act of Majlis-e-Shoora (parliament) or, until provision in that behalf is so made, by rules made by the President”. Although nearly 50 nears have lapsed since the adoption of the Constitution, the federal parliament has not proceeded with the instatement of any act akin to a PFMA.
As a consequence, many budgetary functions that would be executed as part of a systematic fiscal framework, as is done in many developed and even emerging countries, instead fall under various ad hoc arrangements deployed by the executive branch in this country. This creates the room for risky short-termism in the budget process, which is a substantial reason why both cyclical and structural elements of our public finances over the past 50 years leave much to be desired.
A PFMA is particularly useful in parliamentary systems, where the same checks-and-balances as exist in presidential systems are not as entrenched. In a parliamentary arrangement such as Pakistan’s, any government that wields a majority in the National Assembly risks misapprehending the absence of a PFMA to take excessive discretion with budgetary resources, and this in turn further reduces their incentives to legislate on structural aspects of budget reform.
In terms of best practices, I have found that the most successful PFMAs are those that strike a balance between being versatile, multifaceted documents and ones that give concrete guidelines. My work on budget reform has continually stressed the inherent trade-off between fiscal discipline and fiscal flexibility. This is because tougher discipline reduces a system’s ability to absorb shocks, but the absence of discipline in turn often itself risks generating many budgetary shocks. That is, unfortunately, the state in which our budgetary situation lies today.
Beyond this, a PFMA should reflect a recognition of local conditions and challenges. For example, although most developed countries are not quite as strained as Pakistan is in terms of revenue collection, they do worry a great deal about the expense side of the national budget. A PFMA for Pakistan, however, must also incorporate the necessary objectives pertaining to revenue collection, and this is because only 1% of the population consists of registered tax filers, who must then shoulder a disproportionate and unfair burden of the remaining 99%.
On that point, it is important to recognize that the majority of citizens in our country wallow in a shadow economy which now represents the single most pressing concern that our policymakers confront. The PFMA must therefore incorporate a strong revenue collection element as part of our national budgetary philosophy that sheds due light on the shadow economy.
To present a more balanced view of PFMAs, it is important to remember that, even though a PFMA can go a long way towards framing, guiding, and shaping public finances, it alone cannot be counted on as a one-size-fits-all solution to budget reform, especially not without stronger institutional and political commitment towards strengthening budgetary processes. This is all the more true for the public’s participation in the fiscal process, in a country where shamefully a full 99% of the public, whether deliberately or unintentionally, fails to pay direct taxes.
In fact, there are indeed cases where PFMAs have been installed to little effect, largely due to much graver socioeconomic problems. The best example of this might be our benighted neighbor, Afghanistan. As part of the cosmetic changes that the coalition of Western forces sought to bring to the country, they also devised a very thorough and excellent PFMA document for the Afghan government. Yet despite its comprehensive stipulations in law, Afghanistan’s budget “process” leaves much to be desired in just about every fiscal category save for the foreign reserves fruitlessly poured into reconstructing it at a superficial level for a temporary period of occupation that seems now at an end.
As such, any country’s PFMA can only play a supportive but nonetheless critical part in a much larger national effort. It can serve as a guiding document which incorporates both a national budgetary philosophy and an emphasis on all stakeholders to adhere to better fiscal discipline, while also broadening the revenue base through which citizens can participate responsibly. In sum, I see a PFMA as an important step in a longer, more arduous, and entirely necessary journey towards fiscal sustainability and prosperity.
The writer is the Director for Economics and National Affairs at the Centre for Aerospace and Security Studies (CASS). He can be reached at firstname.lastname@example.org