Pakistan: Selected Issues and Statistical Appendix
Author: International Monetary Fund
Publication Date:
11 Nov 2002
eISBN:
9781451830569
Language:
English
Keywords:
ISCR; CR; debt; bank; governance problem; debt policy coordination office; reduction target; policy statement; reduction strategy; expenditure rule; Fiscal rules
Download PDF (1.9 MB)

This Selected Issues paper and Statistical Appendix on Pakistan looks at the worrisome trend of declining growth from a growth-accounting point of view. The paper provides considerable evidence that Pakistan’s striking “social gap” in education and health is indeed a main culprit for a weakening growth performance. It looks at the financial sector as an additional area that is central for growth and governance, and where reforms are well advanced. The paper also analyzes how to ensure a continuation of prudent fiscal policies in Pakistan that would reduce public debt to more sustainable levels.

Abstract

This Selected Issues paper and Statistical Appendix on Pakistan looks at the worrisome trend of declining growth from a growth-accounting point of view. The paper provides considerable evidence that Pakistan’s striking “social gap” in education and health is indeed a main culprit for a weakening growth performance. It looks at the financial sector as an additional area that is central for growth and governance, and where reforms are well advanced. The paper also analyzes how to ensure a continuation of prudent fiscal policies in Pakistan that would reduce public debt to more sustainable levels.

V. Draft Fiscal Responsibility and Debt Limitation Ordinance54

A. The Rationale for a Fiscal Responsibility Law in Pakistan

128. Fiscal policy in Pakistan needs to be targeted at debt reduction to create room for social and development expenditures as well as to reduce fiscal vulnerabilities. The government has prepared a draft fiscal responsibility and debt limitation ordinance (henceforth draft ordinance) that sets an ambitious debt reduction target and would put in place mechanisms to achieve this target. Fiscal responsibility laws have been used successfully in many countries to limit fiscal deficits, achieve public debt sustainability, and promote prudent fiscal policies. Experience shows that fiscal transparency and reporting requirements are backbones of fiscal responsibility laws. Well-designed fiscal rules can guide policy makers in coordinating short-term and long-term objectives.

129. High public debt leaves Pakistan’s public finances vulnerable to shocks and crowds out non-interest expenditures. In 2001/02, public debt stood at 98 percent of GDP, while interest payments accounted for 6.6 percent of GDP or almost 30 percent of public expenditure (Figure V-1). In the present environment, an exploding public debt path does not seem likely; Pakistan is projected to run primary surpluses and nominal growth is projected to exceed the implicit interest rate on public debt. Still, sizable domestic or external shocks could change this outlook and eventually require large fiscal adjustment. Even if the debt dynamics are sustainable, the high cost of servicing the debt stock claims fiscal resources that are much needed in other areas. An ambitious debt reduction strategy would reduce fiscal vulnerabilities and create room for social and development spending. The strategy, however, needs to be balanced to allow for sufficient debt reduction while still providing adequate resources to! other spending areas.

Figure V-1.
Figure V-1.

Pakistan: Public Debt and Interest Expenditure, 1992/93–2001/02

Citation: IMF Staff Country Reports 2002, 247; 10.5089/9781451830569.002.A005

Source: Pakistan authorities; and Fund staff calculations.

130. The draft ordinance requires the government to report regularly on fiscal developments and sets quantitative targets for debt reduction. The reports inform on short-term fiscal policy, including the budget and its underlying assumption, the medium-term budget framework, and progress towards achieving the debt reduction targets. The scope of the reports goes significantly beyond existing publications and would require strong efforts at capacity building. The reports would ameliorate parliamentary and public discussion and thus contribute to informed policy making. The draft ordinance specifies a debt to GDP ratio of 60 percent as a target for 2011/12 and sets a minimum debt reduction path for each fiscal year. Such a fiscal rule would constrain fiscal policy in the short-run to ensure that the debt target can be reached.

131. The draft ordinance has many of the positive characteristics shared by fiscal responsibility laws in other countries. In particular, the reporting requirements are important steps towards improving fiscal transparency, even though they may be ambitious and may not be met by the time the next budget is presented. The quantitative fiscal rules can form the basis for sustained debt reduction. They include many firewalls that serve to protect the debt reduction objective, but make the law somewhat complex. There may be scope for simplifying the rules without taking the teeth out of the draft ordinance.

132. The remainder of this note is structured as follows. Section B briefly sketches the experience with fiscal responsibility laws. Section C analyzes the main elements of the fiscal responsibility and debt limitation ordinance and suggests some modifications.

B. Experience with Fiscal Responsibility Laws

133. The experience with fiscal responsibility laws is positive.55 In some countries the focus is more on transparency, in others, the focus is more on quantitative fiscal rules that bind policy makers in their day-to-day business. Fiscal responsibility laws are typically adopted to overcome problems of deficit bias and fiscal illusion that have lead to a build-up of public debt and ultimately reduced the room for fiscal policy. Hence, fiscal responsibility laws are designed to achieve sustainable public debt levels by effectively constraining annual budgets. Transparency is an important aspect of constraining budget planning and execution because it promotes public scrutiny. Quantitative fiscal rules can provide the necessary constraints to make short-term fiscal policy consistent with long-term objectives.

134. Some fiscal responsibility laws focus on transparency, as public debate is thought to ensure that prudent fiscal policies will be pursued. New Zealand’s 1994 Fiscal Responsibility Act mandates the government to openly discuss objectives and expected outcomes of its policies, allows for parliamentary and public assessment of fiscal policy, and strengthens reporting requirements. The Act also stipulates that governments should be judged based on their ability to reduce public debt. Australia and the United Kingdom have adopted similar fiscal responsibility acts. In none of these cases are quantitative fiscal rules included in the fiscal responsibility law. The experience with fiscal responsibility laws focusing on transparency is generally viewed positively. In fact, the IMF’s Code of Good Practices on Fiscal Transparency was partly motivated by the experience of New Zealand, Australia and the United Kingdom.

135. Quantitative fiscal rules constrain fiscal policy in the short-term to achieve a long-term objective. Often, fiscal rules impose a ceiling on the overall deficit (e.g. the Maastricht deficit criterion), public expenditure (e.g., Sweden), or public debt (e.g., the United Kingdom’s requirement to hold public debt at a stable and prudent level). Deficit and expenditure rules have the advantage of constraining policy variables that are directly related to the annual budget. However, successive ex-post deviations from a deficit or expenditure ceiling - even if only small in any given year—can undermine achieving the long-term objective. In some countries, the deficit rule applies to the current balance, defined as revenue less current expenditure. Thus, borrowing is allowed only for investment expenditure. This “golden rule” is intuitively appealing and has worked well, for example in the United Kingdom. However, golden rules can also create temptations for creative accounting that shifts current expenditure into capital expenditure. As a result, transparency would be reduced. Public debt rules do not constrain budget variables directly, but make monitoring progress towards a long-term objective of debt reduction easy. A conceptual problem with debt rules is that there is no accepted theory on what constitutes the optimal debt level.

136. While the particular design of a fiscal responsibility law will depend on country-specific circumstances, there are some basic principles which are important across countries.56 Above all, the law should be guided by the overall long-term objective of fiscal policy. In Pakistan, this long-term objective is clearly to reduce the debt to GDP ratio to restore room for much needed social and development expenditures as well as to reduce vulnerabilities to shocks. Any fiscal rule should be clearly related to this objective and achieve it in a simple and straightforward manner, hi the short-run, sufficient flexibility is needed so that fiscal policy can react to changing circumstances. Fiscal transparency, regular and open reporting on fiscal policy, objectives, and outcomes are instrumental for creating public support and can provide an enforcement mechanism through public scrutiny.

C. The Elements of Pakistan’s Draft Fiscal Responsibility and Debt Limitation Ordinance

137. The draft ordinance mandates the government to publish on a regular basis a number of reports and lays out fiscal rules targeted at debt reduction over the next decade. The publication of a medium-term budget framework, annual fiscal and debt policy statements, a mid-year economic report, and an annual state of the economy report would promote fiscal transparency and constitute a strong backbone for the debt reduction strategy. The fiscal rules specify quantitative targets for the current balance (called “revenue deficit” in the Pakistani context), the annual reduction in the debt-to-GDP ratio, and the target debt-to-GDP ratio by fiscal year 2011/12. An escape clause allows deviations from these quantitative targets for national security or natural calamity reasons, or in case social and poverty related expenditures are squeezed. The draft ordinance also limits the issue of new guarantees. A Debt Policy Coordination Office would assist the government in implementing the debt reduction strategy spelled out in the draft ordinance.

The transparency requirements

138. The draft ordinance requires the government to present to the National Assembly a number of reports on short-term to medium-term economic and fiscal developments. A medium-term budget statement would outline a 3-year rolling fiscal framework, projecting revenue, expenditure, deficit, public debt, and public net worth. In addition, key fiscal measures and risks to the outlook would be discussed. The annual fiscal policy statement would provide details on these aggregates for the coming fiscal year, and discuss how the budget relates to the debt reduction strategy. The fiscal policy statement would be supplemented by an annual debt policy statement which evaluates borrowing strategies, borrowing costs, and vulnerability to exchange rate movements. The debt policy statement would also analyze to what extent fiscal policy conforms with the debt reduction path and could recommend corrective actions, if these appear warranted. A mid-year economic report would update fiscal developments. The “Annual State of the Economy” report would assess the federal government’s performance against its targets and the debt reduction strategy, as well as discuss major policy initiatives during the year. The reporting requirements are partly suspended, in case economic or security interest would be prejudiced, the government would be compromised in a material way, or substantial material loss to the government could ensue.

139. The reporting requirements are similar to requirements in fiscal responsibility laws in other countries, and are sound and attainable for Pakistan. Many of the provisions are aimed mainly at the federal government, but could be appropriately modified to apply for provincial governments, and perhaps even for local governments in other legislation. However, a few aspects may need to take account of Pakistan’s limited capacity to implement advanced fiscal management reforms.

140. For full compliance with the transparency requirements, fiscal projection and reporting capacity will need to be strengthened. In particular, preparing a medium-term budget framework will require significant capacity improvements in the areas of costing and forecasting. In the context of preparing the PRSP and with international assistance, the authorities are currently seeking to enhance their capacity to produce a medium-term budget framework. Another example would be government net worth which Pakistan is unlikely to be able to report meaningfully in the near future; a comparable effort in improving data on financial and nonfinancial assets as well as liabilities would be needed for this to be achieved.

141. The fiscal responsibility law could set a path towards achieving the reporting requirements. Since transparency and reporting to parliament and the public is an important aspect of successful fiscal responsibility laws elsewhere, Pakistan’s approach of including an extensive list of reporting requirements in the draft law is well taken. While the government may not be able to comply with some of the requirements immediately, they would still constitute desirable targets. As such, the ordinance could list those reporting requirements which apply immediately and set target dates by which other requirements have to be complied with. For example, the medium-term budget framework could be required from the 2003/04 budget onward, while reporting on net wealth could be required from the 2004/05 budget on only.

142. The role of the mid-year economic report could be strengthened. It would be important that the report is focused on fiscal developments. Specifically, the report should assess to what extent budget execution is in line with the target for the fiscal year and the debt reduction strategy. If developments are found to conflict with the annual targets, corrective measures should be suggested and the government should be required to act upon these suggestions. This would strengthen the quantitative fiscal rules and limit possible slippages.

143. The ordinance needs to be complemented by reporting requirements for provinces and local governments to the federal government. This would allow the federal government to include information on general government developments in its reports under the fiscal responsibility law. Moreover, information on provinces and local governments will become more important for analyzing fiscal developments as the devolution of responsibilities continues and provinces as well as local governments take on a larger role in the general government. The reporting requirements should be similar to the requirements for the federal government regarding fiscal developments to ensure consistency and allow consolidated general government reporting.

The fiscal rules

Fiscal rules contained in the draft ordinance

144. The draft ordinance contains three quantitative rules and two quantitative escape clauses that can be illustrated by writing down a debt dynamics equation. Letting D denote public debt and OB the overall balance including grants, the change in public debt is given by:57

ΔDt = −OBt.

Expressed in percent of GDP, the change in public debt is given by:

Δdt=g1+gdt−1−obt,

where g is nominal GDP growth and lower case letters denote percent of GDP. The overall balance can be decomposed into revenue, r, current expenditure excluding social and poverty related expenditure, ce, social and poverty related expenditure, sp, capital expenditure, k, and extraordinary expenditure related to national security or natural calamity not already included in current expenditure, nsc.

Δdt=−g1+gdt−1−(rt−cet−spt)+kt+nsct,

145. The draft ordinance specifies quantitative targets for three elements in the debt dynamics equation.

  • Condition 1: Gross public debt is reduced to 60 percent of GDP by fiscal year 2011/12 (i.e., d2011/12≤60).

  • Condition 2: Gross public debt is reduced by at least 2.5 percent of GDP in each fiscal year (i.e., Δdt ≥ 2.5), unless social and poverty related expenditure fall below 4 percent of GDP (i.e., spt ≥ 4).

  • Condition 3: The current balance is in surplus after fiscal year 2006/07 (i.e., (rt-cet-spt) ≥ 0).

146. The 2011/12 debt target is not necessarily achieved by adhering to the debt reduction path of 2.5 percent per annum (Table V-1, scenario 1). For example, the projections underlying the PRGF through 2003/04 and reducing public debt by 2.5 percent of GDP from 2004/05 through 2011/12 leads to a decline in public debt to 68 percent of GDP. Assuming nominal GDP to grow at round 9 percent, this debt reduction path would be consistent with the overall deficit falling from 5 percent of GDP in 2004/05 to 3½ percent of GDP in 2011/12. To achieve the debt target of 60 percent of GDP, Pakistan would need to reduce the public debt-to-GDP ratio by 3.5 percentage points from 2004/05 through 2011/12 (scenario 2). This would imply that the overall deficit falls from around 4 percent of GDP in 2004/05 to 2 percent of GDP in 2011/12.

Table V-I.

Pakistan: Debt Reduction Scenarios, 2001/02–2011/12

(In percent of GDP; unless otherwise indicated)

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Source: Pakistani authorities; and Fund staff calculations and estimations.

147. The fiscal rules appear to allow for a loosening of fiscal policy after 2004/05. In 2003/04, the overall deficit is currently expected to be 2.4 percent of GDP under the PRGF. The overall deficit could increase to 3.7 percent of GDP in 2004/05 under the scenario in which the debt target of 60 percent of GDP is reached. It is not clear why such a loosening would be needed, unless it reflects a substitution of financing for declining grant revenue. Given Pakistan’s high level of debt, it maybe preferable to target an overall deficit of 2½ percent of GDP beyond 2003/04. Such a more conservative approach would also allow room for deviations, for example on account of the specified escape clauses, while still ensuring progress towards debt reduction over the medium term.

148. The annual debt reduction path does not necessarily need to be specified in a fiscal responsibility and debt reduction ordinance. By defining a target debt-to-GDP ratio, the required average annual debt reduction is implicitly also defined. An alternative fiscal rule could therefore simply mandate the government to calculate the required annual debt reduction to achieve the debt target, publish these calculations with the annual budget, and set fiscal policy accordingly. This would avoid having two quantitative targets that may not appear consistent at first sight or in every situation. However, the minimum annual debt reduction path does ensure that at least some debt reduction is achieved every fiscal year, even though this may not be enough to achieve the target by 2011/12. The minimum path would then constitute a “firewall” that would likely be binding in years of low revenue and high expenditure pressures, while debt reduction would be higher in good times. To clarify this “firewall” function, it may be useful to clearly rank the different quantitative criteria to rule out any scope for interpretation.

149. The current balance requirement can help strengthen fiscal prudence, though it is not needed for debt reduction. Debt reduction would already have been achieved through adhering to the debt reduction target and/or the debt reduction path. However, the debt reduction path allows for contracting new debt, though at a slow pace so that the debt to GDP ratio is reduced as Pakistan effectively grows itself out of debt. In this context, the current balance requirement would ensure that new debt is contracted only for the public sector development program (PSDP). The requirement thus adds a constraint on expenditure composition within a given debt reduction path. At the same time, the debt reduction path puts effectively an upper limit on PSDP expenditure given nominal GDP growth. In 2001/02, the current deficit—defined as revenue excluding grants less current expenditure—was 2 percent of GDP. For 2002/03, the current deficit is projected at 1.2 percent. Since the overall deficit can even be loosened somewhat under the debt reduction strategy, achieving current balance by 2006/07 implies a reallocation from current expenditure to the PSDP.

150. Achieving current balance or surplus is not fully equivalent to a “golden-rule” in the case of Pakistan. Since the PSDP contains some current expenditure items, current balance does not imply that borrowing is for investment purposes only. Of course, the definition of what constitutes investment is not clear cut. For example, the Lady Health worker program, which is included in the PSDP, would most likely be classified as current expenditure according to the Government Finance Statistics standard, though there is little doubt that spending on health and education can have an investment quality, in particular in developing countries. These considerations do not suggest that targeting current balance cannot be a useful approach, they merely highlight the concept’s ambivalence.

151. The escape clause for social and poverty expenditure could undermine the draft ordinance’s main objective. Certainly, social and poverty expenditure deserves special attention in the case of Pakistan and should be protected. Nevertheless, by having an escape-clause for a particular spending category, the need to prioritize expenditures within a given resource envelope would be weakened. Only the resource envelope should follow from the ordinance, calculated from the debt reduction target, revenue projections, and growth projections. The composition of expenditure would then be decided through the budget process. Commitments on social and poverty related expenditure should be reflected in the budget process which will have to arrive at the hard choices on how to allocate the overall envelope between competing objectives.

152. As an ex-post adjustor, the escape-clause for national security or natural calamity reasons would allow some flexibility in the debt reduction framework. In the case of unforeseen events relating to national security or natural disasters, it may be reasonable to deviate temporarily from the long-term strategy. This would, for example, be consistent with the tax-smoothing literature. The ordinance could explicitly provide for such emergencies and allow an ex-post deviation from the debt reduction path. Thus, if an unforeseen emergency occurs during a fiscal year, a lower than budgeted debt reduction on account of expenditures relating to the emergency would not constitute a violation of the ordinance. However, as argued above in the case of social and poverty expenditure, the ordinance should not allow for deviations from the debt reduction path on account of expenditure pressures that are already known at the time of the budget (i.e., ex-ante). If including such an ex-post escape clause, the ordinance should also specify how to proceed after a one-off deviation. Either, the ordinance could require that the missed debt reduction be made up in subsequent years, or the ordinance could suggest that the debt target be adjusted accordingly. To avoid that a number of subsequent one-off deviations derail the debt reduction process, it may be preferable to mandate that the slippage be offset over the next two fiscal years.

153. The draft ordinance also puts a limit on issuing public guarantees per fiscal year of 2 percent of GDP. Renewal of existing guarantees would be counted against the limit. In addition, the present value of payments for guaranteed rates of return, output purchase agreements, and other claims and commitments over the next five years would also be counted against the limit. The limit on public guarantees reduces the scope for evading the fiscal responsibility law by issuing guarantees rather than financing programs within the budget. Moreover, the limit ensures that the risks to the debt reduction process from called guarantees is bounded. Public guarantees should be reported as contingent liabilities when assessing the debt reduction path. Since public guarantees are a contingent liability which are debt creating when called, the amount of outstanding and new guarantees should be considered when determining the debt reduction path. Over the last decade, the government has issued guarantees each fiscal year ranging from 0.2 percent to 1.2 percent of GDP. Guarantees were extended, for example, for WAPDA and KESC borrowing, as well as for commodity operations; during this fiscal year, Pakistan International Airline (PIA) will receive guarantees for loans taken to finance its fleet renewal.

154. The ordinance could lay out a vision for fiscal policy after the debt target has been achieved. Such a vision could simply set the limit on public debt in percent of GDP equal to the debt target beyond the target date. Thus, public debt should be kept at or below 60 percent of GDP after reaching this target in 2011/12. Alternatively, the ordinance could require the debt target to be revisited to take account of any developments that could influence the choice of a maximum debt to GDP ratio.

155. Fiscal rules for provinces and local governments should be developed as well. As fiscal devolution proceeds, the federal government will lose some control over macroeconomic fiscal policy and public-debt accumulation to provinces and local governments. Hence, limiting federal government debt may not suffice to achieve debt sustainability and regain room for non-interest expenditure. A balanced budget requirement for provinces and local governments would address this issue. While more complex rules are conceivable, they would likely strain implementation capacity and would be fairly difficult to monitor by the legislative and the public at large.

156. The draft ordinance does not fully specify whether the fiscal rules apply ex-ante or ex-post. On the one side, the rules would clearly need to be considered for the annual budget. On the other side, the draft ordinance includes sanctions, if the rules are violated two years in a row, suggesting that the rules also apply ex-post. Since nominal GDP growth which is beyond the government’s control contributes to debt reduction, applying the draft ordinance’s rules as ex-post rules may not be feasible. In particular, the draft ordinance would have to define whether sanctions apply only if the deviation from the rules is due to policy failure or whether they apply independent of the source of deviation. As these requirements would certainly add to the ordinance’s complexity, a more simple approach may be preferred.

157. The fiscal rules should be ex-ante rules. The rules would determine the general framework with which the annual budget would have to comply. In fact, the ordinance could rule that any budget that does not comply with the ordinance’s rules and objectives is void and does not have the force of law. Ex-post deviations from the rules should trigger automatic adjustment going forward. This would ensure that past deviations do not accumulate and derail progress towards meeting the debt target.

158. The ordinance’s sanctions for noncompliance with the rules may not be practical. It would often be difficult to determine whether the rules have been violated since the final budget outcome data are available only with a significant lag. Hence, sanctions could not be imposed immediately, but possibly only one or two years after the effect. However, in many countries, parliamentary and public scrutiny have proved to be an effective sanctioning mechanism. With the government being required to provide detailed reports on its performance against the. ordinance’s rules, this sanctioning mechanism should prove forceful in Pakistan as well.

Possible alternative fiscal rules

159. The draft ordinance has several targets relating to debt reduction, expenditure composition, and guarantees. It would appear that the debt target for 2011/12 is the central objective and the other targets could be viewed as supporting elements. In this case, two simpler alternative rules could be considered. Both alternatives would take the debt target as the central objective and specify a fiscal rule for annual fiscal targets that would ensure the debt reduction required to achieve the debt target. One alternative would have the fiscal rule set a path for the overall deficit. The other alternative would have the fiscal rule set a ceiling on expenditures. The resulting debt reduction path as well as the implicit path for the fiscal targets should be smooth rather than back loaded to ensure that it can be achieved in an orderly manner without requiring excessive adjustment as the target date approaches. Moreover, a smooth debt-reduction path spreads the burden of fiscal restraint over successive governments and avoids giving early governments an easy way out.

160. The fiscal rule could set an annual floor for the overall balance consistent with the debt target. Two ways to determine the annual floor for the overall balance consistent with the debt target could be considered. First, the annual debt reduction in percent of GDP can be held constant (scenario 2). The floor on the overall balance then follows by subtracting the projected growth effect from the debt reduction. Second, the floor on the overall balance in percent of GDP can be held constant (scenario 3). The annual debt reduction in percent of GDP then follows by adding the projected growth effect to the overall balance. An argument for the second approach is that a smooth overall balance path is appropriate for short-term demand management purposes. Moreover, this would spread the burden of fiscal restraint over all governments.

161. The annual floor on the overall balance floor should be adjusted, if actual debt reduction falls short of the debt reduction target in any given year. If the debt reduction falls short of target because growth was lower than expected, a revised constant floor for the overall balance would be calculated. This amounts to updating the fiscal rule every year in order to ensure that past shortfalls beyond the government’s control do not threaten the debt target. If the debt reduction falls short of target because of policy slippages, the shortfall should be made up by raising the floor for the overall balance in the two following fiscal years accordingly. Likewise, shortfalls due to an escape clause should be made up through adjustment of the annual floor on the overall balance.

162. Another alternative would be an expenditure rule consistent with the debt reduction target, which could give some more flexibility than an overall balance floor. The expenditure rule would derive an expenditure ceiling based on the overall balance necessary to achieve the debt reduction target and revenue projections. This framework would allow for some cyclical fluctuations on account of automatic stabilizers on the revenue side. Some countries have found expenditure rules effective in bringing about fiscal consolidation because they stress the resource constraint within which the budget process has to set expenditure priorities. In addition, expenditure rules can be effective in containing expenditure pressures in the course of the fiscal year. The expenditure rule should compensate any past deviation from the debt reduction path on account of revenue shortfalls in a fiscal year via an explicit link to the debt target.58 This mechanism would also claw back any shortfalls on the debt reduction path on account of overoptimistic revenue projections.

163. The debt target should be set sufficiently ambitious, while also allowing resources for social and development expenditures. By explicitly designing the debt target with the resource needs for social and development expenditures in mind, an escape clause to protect these expenditures would not be necessary. Based on broad long-term revenue and expenditure projections, the scope for debt reduction in Pakistan can be gauged. On current trends, while allowing for some increase in I-PRSP expenditure to around 5 percent of GDP as well as in the PSDP to around 4½ percent of GDP, the debt target of 60 percent of GDP by 2011/12 appears within reach, if growth remains strong. While this exercise seems to duplicate the fiscal rule, the two should not be confused. The rough calculations serve to check whether a debt reduction target is reasonable. The fiscal rule would take the debt target as given and then generate an overall balance or expenditure path accordingly. Decisions on revenue and expenditure policies would then be made in the budget process subject to the fiscal rule.

The role of the debt policy coordination office

164. The debt policy coordination office would set the broad macro economic fiscal targets by preparing the medium-term budget statement and the debt reduction path. The government would have to follow the principles laid out by the debt office. In addition, the office would draft the debt policy statement and advice on the debt management strategy. The office would report directly to the minister of finance.

165. The idea of a debt council or an independent fiscal councils is controversial in the literature. On the one side, having an independent fiscal council is thought to take the politics out of fiscal policy similar to the approach to monetary policy. Hence, independent fiscal councils are intended to overcome political economy problems of fiscal illusion and deficit bias. Based on technocratic reasoning, the independent fiscal council would set the macroeconomic parameters for fiscal policy and ultimately achieve a sustainable level of public debt.59 On the other side, fiscal policy has direct implications for allocation and distribution and it is not clear whether such decisions should be taken outside the realm of politics by appointed technocrats (cf. Hemming and Kell 2001). In the case of Pakistan, an independent fiscal council may not be needed because the draft ordinance already spells out fiscal rules that determine a debt reduction path. This in itself sets the macroeconomic fiscal background with which the annual budget and the medium-term budget framework have to comply.

166. Several functions assigned to the debt office have to be carried out by a dedicated unit in the ministry of finance. For example, the debt reduction path consistent with the debt target needs to be calculated and the medium-term budget framework which is consistent with that path needs to be prepared. Also, debt management capacity could be further developed to minimize borrowing costs and vulnerabilities associated with public debt. In this regard, a debt policy coordination office or a fiscal responsibility law secretariat could play a useful and critical role. However, the focus should be on strengthening the macrofiscal management capacity within the ministry of finance and improve the quality and public accessibility of fiscal policy and debt strategy statements. While these tasks could be taken on by a dedicated office, they could also be incorporated in the existing organizational structure, for example in the budget wing.

References

  • Blinder, Alan S. (1997), “Is Government Too Political?” in: Foreign Affairs, November/December, pp. 115‘126.

  • Danninger, Stephan (2002), “A New Rule: ‘The Swiss Debt Brake’” IMF Working Paper 02/18 (Washington: International Monetary Fund).

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  • Hemming, Richard and Michael Kell (2001), “Promoting Fiscal Responsibility—Transparency, Rules and Independent Fiscal Authorities”, Banca d’Italia.

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  • Kopits, George, and Steven Symansky (1998), Fiscal Policy Rules, International Monetary Fund Occasional Paper No. 162, Washington, D.C..

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  • von Hagen, JÜrgen and, Ian J. Harden (1994), “National Budget Processes and Fiscal Performance” in: European Economy, No. 3.

STATISTICAL APPENDIX

Table 1.

Pakistan: Sectoral Origin of Gross Domestic Product, 1997/98–2001/02

(At 1980/81 constant prices)

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Source: Federal Bureau of Statistics.
Table 2.

Pakistan: Sectoral Origin of Gross Domestic Product, 1997/98–2001/02

(At current prices)

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Source: Federal Bureau of Statistics.
Table 3.

Pakistan: Expenditure and Savings, 1997/98–2001/02

(At current prices)

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Source: Federal Bureau of Statistics
Table 4.

Pakistan: Gross Fixed Capital Formation by Economic Sector, 1997/98–2001/02

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Source: Federal Bureau of Statistics.
Table 5.

Pakistan: Production of Major Crops, 1997/98–2001/02

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Source: Ministry of Food, Agriculture, and Livestock.

In thousands of bales.

Table 6.

Pakistan: Area, Production, and Yield of Major Crops, 1997/98–2001/02

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Source: Ministry of Food, Agriculture, and Livestock.
Table 7.

Pakistan: Output in Selected Industries 1997/98–2001/02

(In thousands of metric tons; unless otherwise specified)

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Source: Federal Bureau of Statistics.

July 2001–May 2002.

Table 8.

Pakistan: Consumer and Wholesale Price Indices, 1997/98–2001/02

(1990/91=100)

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Source: Federal Bureau of Statistics.

For fiscal year data, refers to the change in the 12–month average of the indices during the year. For monthly data, refers to the percentage change in the current month’s 12–month average of the indices over that of the Corresponding month of the preceding year.

For fiscal year data, refers to the change in the indices at the end of the year. For monthly data, refers to the percentage change in the indices in any given month compared to the corresponding month of the preceding year.

Table 9.

Pakistan: Selected Commodity Prices, 1997/98–2001/02

(In Pakistani rupees per 100 kilograms)

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Sources: Ministry of Finance and Economic Affairs; and Ministry of Food, Agriculture, and Cooperatives.

Usually announced in September/October.

Minimum procurement prices.

Table 10.

Pakistan: Increases in Procurement Prices of Selected Agricultural Commodities, 1997/98–2001/02

(Annual Percentage changes)

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Sources: Ministry of Food, Agriculture, and Cooperatives.
Table 11.

Pakistan: Domestic Retail Prices of Selected Petroleum Products, 1997/98–2001/02

(In Pakistani rupees per liter) 1/

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Source: Ministry of Petroleum and Natural Resources.

Annual averages.

MS 87-RON

Pakistan rupees per metric ton.

Fuel oil prices were deregulated with effect from July 1, 2000.

Table 12.

Pakistan: Natural Gas Prices, 1997/98–2001/02

(In Pakistani rupees per thousand cubic feet)

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Source: Ministry of Petroleum and Natural Resources.
Table 13.

Pakistan: Summary of Consolidated Federal and Provincial, Budgetary Operations, 1997/98–2001/02 1/

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Source: Ministry of Finance and Economic Affairs.

Differences with staff report tables are on account of rounding errors unless otherwise specified.

Includes income and profits taxes, wealth and capital taxes, federal excise duty, sales tax, and customs duties.

Includes settlement of tax refunds on behalf of the CBR for PRs 20 billion in 2001/02.

Accrued payments. Excludes interest expenditure by the military which is included in the defense allocation.

Includes certain current outlays under the public sector development program. Also includes recapitalization of KESC for PRs 32 billion in 2001/02.

Foreign currency debt is valued at the end-of-period exchange rate.

Table 14.

Pakistan: Consolidated Federal and Provincial Revenue, 1997/98–2001/02

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Source: Ministry of Finance and Economic Affairs.