The Pakistan is confronting many complex and difficult challenges that have posed serious economic existential risks to our economy. If these challenges remain unaddressed in systematic, coherent and innova­tive ways, the objective of eco­nomic prosperity and growth would remain an unrealised dream and people shall con­tinue to live under abject eco­nomic conditions. Some of the major economic challenges among others include fiscal deficit, unfavorable exchange rate regime, trade imbalance, ballooned public debt, souring inflation, unemployment, poverty and unequal distribution of wealth. Our burgeoning fiscal deficit every year has compelled successive governments to resort to bor­rowing money both internally and ex­ternally resulting in a situation where all tax revenue of current financial year will be consumed on debt servicing. It is a proven fact that fiscal governance of any country is closely linked to an effec­tive Public Financial Management (PFM) system, which focuses on principles of fiscal discipline, legitimacy, transparen­cy and accountability of public finances.

PFM is framed around achieving an overall discipline which specifically in­cludes resource allocation and oper­ational efficiency and effectiveness of public expenditure. Some of major chal­lenges of our PFM system discussed here include inefficient cash manage­ment, ritualistic budgeting practices, ab­sence of linkage between budgetary pro­visions and expenditure outcomes and weak oversight regime. The mainte­nance of “aggregate fiscal discipline” is foremost and primary objective of PFM which revolves around interaction of two streams; revenue and expenditure. Revenue generation and Public Expen­diture Management (PEM) complement each other in attaining the strategic mac­roeconomic objectives of the state. Rev­enue generation has been inefficient as Pakistan in South Asia is among one of countries having lowest GDP to tax ratio. Furthermore, tax net has not been broad­ened despite many campaigns started by FBR in last few year due to which gap be­tween our revenue and expenditure has adversely impacted our economy.

PFM Act 2019 provides a broad frame­work for regulating the public sec­tor financial management from budget making, revenue generation, cash man­agement, expenditure, accounting to scrutiny through public audit. The per­formance and quality of our PFM regime is marred due to some chronic issues which not only promote wasteful spend­ing practices but also create distortions in the our resource allocative processes and cash management regime. Through aggregate fiscal discipline public ex­penditure is aligned to total revenues, which means keeping the government spending within sustainable limits and this objective is achieved through bud­get instrument. However, fiscal deficit has been a conspicuous feature of pub­lic spending which resulted in borrow­ing heavily to fund government opera­tions. During F.Y 2022-23 budget deficit of Rs. 6521 billion was recorded which was 7.7 percent against budgetary tar­get of 7.1 percent.

National budget is a critical compo­nent for effective public service imple­mentation, which requires funds to de­liver the services with better financial planning, execution and monitoring sys­tems. Sometimes due to disconnect be­tween policy and budget allocation par­ticular priorities “get too few or too many” resources as has happened in Pakistan in context of different unsus­tainable transportation and other social sectors projects and programs.

Our traditional expenditure approach has been input based without aligning it to outputs/ outcomes. The approach of Public Expenditure Management (PEM) takes expenditure as a mean to achieve outputs which ultimately result in out­comes. Our budgeting practices in min­istries and line departments are still following approach of incremental in­crease for fund allocation without align­ing their projected expenditure stream to the outputs or outcomes. The con­ventional budgeting approach has to be done away with output/ performance budgeting approach. A three years Mid Term Budgetary Framework (MTBF) is prepared in respect of each ministry but it is not used as an instrument to align it with regular budget document in terms of outputs/ outcomes. The moni­toring of expenditure flow is done to en­sure percentage of budget spent without linking it to the achievement of results and outcomes. Number of PSDP projects are funded on political basis which ne­gate principles of equity and fairness of overall development funding.

Recently organisation of Controller General of Accounts has introduced IT initiatives and solutions such as DCS, on­line payment system and opening of ac­counts cells in some of the ministries to streamline the payment functions. The current centralised payment system which over the period has developed certain operational bottlenecks which hinder efficient budget execution and fiscal control. When the entire account­ing and payment function in Pakistan has been computerised then it would be better if payment function is decentral­ised at ministries level along with relo­cation of relevant staff of AGPR to ensure efficient service delivery by the PAOs. A pilot project of decentralisation of pay­ment function was initiated in a few min­istries 3 years ago, therefore, based on lessons learnt this scheme can be further refined and rolled over in rest of the min­istries. Overall accounting and payment functions would still remain under con­trol and supervision of CGA and AGPR for integration, consolidation and prepa­ration of government accounts. This will help to make our PAOs more accountable in context of management of resources and delivery of services. For effective fi­nancial management in ministries and to strengthen the Principle Accounting Of­ficer (PAO) the scheme of Chief Finance & Accounts Officers (CFAOs) was intro­duced and officers were posted in min­istries. However, in certain cases the ser­vices of CFAOs are not utilised for the purposes for which this scheme was im­plemented which dilutes the focus on de­veloping a robust fiscal control.

Before PFM Act 2019 there was no co­herent policy framework available for cash management in the country, how­ever, the above law provided a legal ba­sis to manage cash and introduced con­cept of Treasury Single Account (TSA). Being one of the pillars of modern prudent PFM it envisages a system of “one account or set of linked accounts where all the government cash would be swiped at the end of the day”. The Government also issued Cash Manage­ment and Treasury Single Account Rules 2020. The ministries and line depart­ments had developed a practice of open­ing up accounts in commercial banks to stack public funds there. This practice has resulted in a situation where on the one hand lot of government money is available in commercial banks accounts and on the other hand, federal finance division has to incur more on borrowing money from open market from the same commercial banks to bridge the financ­ing gap. TSA was introduced to address this situation while providing a window to the federal government to have full and true picture of its available cash on daily basis. However, objective of having a robust and efficient TSA regime could not be achieved as the departments still operate commercial bank accounts and stack government money there. There are approximately 80000 accounts maintained by government departments in commercial accounts out of which only 4000 have been closed. It shows that a significant chunk of public mon­ey is still parked in commercial banks which adds additional fiscal burden on government in form of paying interest on borrowed money. State Bank data disclosed that in June 2009 an amount of Rs.526.251 billion ( of both federal and provincial governments) was avail­able in commercial bank accounts which went up to Rs. 4839.503 billion in 2022. It is evident from the above figures that even after promulgation of TSA Rules 2020 still considerable public money is parked in commercial bank accounts. A reasonable mechanism under TSA shall have to be developed for cash manage­ment keeping in view the operational needs of autonomous bodies and public sector enterprises.

In context of a transparent and ac­countable PFM system the role of ex­ternal audit is important as it provides feedback to legislature regarding stew­ardship and utilisation of taxpayer mon­ey by the PAOs. The constitution of Paki­stan provides the mandate to the Auditor General of Pakistan (AGP) to audit the public expenditure and submit his re­ports to parliament for the scrutiny by the public representatives. Tradition­ally the audit reports of AGP have been highlighting mainly compliance and pro­cedural issues without commenting on achievement of outputs and outcomes. The reader of AGP’s audit report could find isolated points on some of the sig­nificant national issues. However, some topical performance audit reports were also produced and submitted in parlia­ment, however, the focus of audit ap­proach has been on compliance based reporting. Over the period, the needs of the users of audit reports have under­gone a change and they expect AGP to produce more value added reports high­lighting significant issues of economy with in-depth analysis rather than mere­ly focusing on compliance and procedur­al matters. Department of Audit General of Pakistan in 2020 took an initiative to shift from compliance based reporting to thematic issue-based reporting and for this capacity building of staff is under­way. The positions of Chief Internal Au­ditor would have to be created and made functional in ministries as envisaged in PFM Act 2019 so that through internal auditing the routine and procedural is­sues of financial management could be addressed at PAO level. In presence of ef­fective internal audit in ministries, AGP would have more space to work on sig­nificant issues of economy and produce reports which could better serve pur­poses of transparency, fiscal control, gov­ernance and accountability.

So far, implementation of PFM Act 2019 has been quite slow and consistent efforts are needed to bring an effective change as per spirit of the law. A sound PFM system being a yardstick to mea­sure the success of government’s con­duct of business would depend on how effectively the stakeholders address the issues discussed above. The major lead in this respect needs to be taken by the Finance Division along with CGA, Es­tablishment Division and AGP. There is need to create synergy among various players and remove the bottlenecks ei­ther through policy instruments or es­tablishing structures and system. All stakeholders responsible for financial management need to play their role as envisaged in PFM Act 2019 to create a robust and efficient financial manage­ment system in the country.

Javaid Jehangir
The writer is the Former Auditor General of Pakistan