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Prudent fiscal policy & accountability essential for stability

Prudent fiscal policy & accountability essential for stability

ISLAMABAD: By tabling debt and fiscal policy statements before the Parliament, the government has fulfilled legal requirement under Fiscal Responsibility and Debt Limitation Act 2005 prepared and approved during the era of former military ruler Gen (Retd) Pervez Musharraf.

The government has accepted that the last fiscal year ended on June 30, 2013 witnessed violation of different provisions of Fiscal Responsibility and Debt Limitation Act 2005.

The FRDL Act, 2005 requires reducing the revenue deficit to nil not later than the 13th June, 2008 and thereafter maintaining a revenue surplus. But the revenue balance remained negative since 2005 because of increasing exogenous and endogenous challenges including campaign against extremism, fragile law and order situation, continued energy shortages, narrow tax base, non-materialization of sufficient external inflows, unprecedented calamity of floods in 2010, torrential rains in Sindh in 2011 and increasing debt servicing requirement.

Under FRDLA2005, it binds the government to ensure “that within a period of ten financial year, beginning from the first July, 2003 and ending on 13th June, 2013, the total public debt at the end of the 10th financial year does not exceed sixty percent of the estimated gross domestic product for that year and thereafter maintaining the total public debt below sixty percent of gross domestic product for any given year.

This provision was violated as the country’s public debt to GDP was recorded at 62.7 percent as on June 30, 2013. Crossing of this threshold by 2.7 percent was mainly due to the actual deficit being higher than projected. The public debt also includes loans from IMF amounting to US$ 4.4 billion or 1.9 percent of the GDP as on June 30, 2013. The borrowing from IMF is only utilized towards Balance of Payment support and is reflected in the country’s foreign currency reserves.

The Fiscal Policy Statement 2013-14 argues thatPakistan economy experienced another challenging year as the fiscal deficit was recorded at 8 percent of GDP against the budgeted target of 4.7 percent in 2012-13.

The tax revenue collection remained 19 percent below the budget target and the expenditure surpassed the target by 22 percent which led to the exacerbating fiscal deficit. The higher fiscal deficit is added to public debt and consumed a major chunk of revenue to service it. Financing mix of deficit is also an area of concern as it is skewed towards domestic sources particularly on bank borrowing owing to lower external receipts. It is crowding out the private sector and is affecting investment, economic growth and ultimately compromising revenue generating capacity of the economy.

The present government is committed to accomplish objectives outlined in the FRDL Act, 2005. Fiscal policy would continue to explore opportunities for augmenting the resource envelop. At the same time, expenditure would be rationalized and non-productive outlays would be curtailed as announced in

Budget 2013-14. These include (i) Other than the obligatory expenditure of debt servicing, defense, pay and allowances of civil servants and grants, there will be a 30 percent cut on all other expenditure (ii) Government intends to replace un-targeted subsidies with targeted subsidies to reach to poor and vulnerable segment of the society (iii) Government is determined to fully reform and restructure public sector corporations. Alongside, full financial restructuring will be carried out to enable them to run on sound commercial basis and reduce their dependence on national exchequer.

The economic vision is based on trade and investment, competitive advantage and market considerations, enhancing private sector involvement, limiting its role to only large scale investment and limit itself within the broader limits imposed by the available resources, broadening the base of resource mobilization for running the government.

Prudent fiscal policy together with strong implementation and accountability of principles is essential for macroeconomic stability. It will help to reduce inflation, strengthen economic growth, and mitigate risks of falling foreign reserves and debt burden. By placing a high priority on structural reform and revenue generation, and establishing a comprehensive framework for management of Public Sector Enterprises (PSEs), the government will be able to finance the envisaged expenditure while containing excessive borrowing and maintaining fiscal sustainability.