The advice of the day is to take the government’s claims of “no financial crisis”, and “no need for IMF” with a grain of salt. With so many U-turns another one is up ahead. One is still unclear if the IMF is on the itinerary or not, Former Secretary Finance Dr Waqar Masood believes that delaying the inevitable will only cause distress to the economy with dwindling reserves.

Because of Living beyond our means, we are due one last (only time will tell) visit to the IMF to get it out of the mess of its own fiscal profligacy. “Pakistan, after all, is an IMF addict,” says Dr Nadeem ul Haq, the former deputy chairman of the Planning Commission of Pakistan.

The inevitable IMF deal, with the “usual fiscal austerity and monetary tightening measures” as the latest Fitch solution report noted “is unlikely to put an end to the fiscal mismanagement that routinely necessitates external bailouts,” while “further [IMF imposed] austerity measures will likely exacerbate the cyclical slowdown in the Pakistan economy”.

One wonders whether there is any speed-limit sign on our way to the IMF. Whether there is a sound public debt management (PDM) strategy that can help support sustainable debt objectives? In fact, there is.

Promulgated in 2005, the Fiscal Responsibility and Debt Limitation Act (FRDLA) is a rule-based policy “to provide for reduction of Federal fiscal deficit and ratio of public debt to gross domestic product to a prudent level by effective public debt management”. With the latest amendments, “Public debt shall be reduced to 60 percent of estimated GDP until 2017-18, and thereafter a 15-year transition has been set to bring down debt-to-GDP ratio to 50 percent” according to the Finance Division’s DPS 2017-18.

If these speed-limits are in place at every road, then why is that we keep on going at the same speed? Is there no one to enforce fiscal discipline at the top? Quis custodiet ipsos custodes? (Who guards the guards?).

While FRDLA enforces the reporting mechanism, there is nothing in the act that penalises the breach of debt limit or any other clause. Instead it gives power to the federal government to make rules for “any other matter which is required to be, or may be, prescribed” [Section 17(2c)], and “If any difficulty arises in giving effect to the provisions of the Act, the Federal Government may, by an Order published in the Official Gazette, make such provisions not inconsistent with the provisions of the Act, as may appear to be necessary for removing the difficulty” [Section 18(1)]. Thereby, essentially enabling every government to change it to suit its fiscal agenda, given it has majority in both houses.

Exercising this power, the PML-N amended the definition of public debt twice during its tenure. The new FRDLA definition excludes Public Sector Enterprises’ (PSEs) debt (Rs.1.39tr) and other Federal liabilities from the total sovereign debt, bringing it to 67 percent of the GDP (Rs.23tr). This non-compliant yet redeemable debt position, is reportedly understated by Rs.3tr.

Furthermore, there is no mechanism in the law, for real time information on the fiscal deficit. “Inability to appropriately forecast deficit financing needs resulted in the federal government borrowing more than its requirement during FY2016. Borrowed sum was kept in various banks at the prevalent interest rate, which was lower than the cost of borrowing,” revealed Dr Vaqar Ahmed from Sustainable Development Policy Institute. This fiscal-irresponsibility and debt-mismanagement, further calls into question the legal scope of the FRDLA, “since no one was penalized for just a process that can be improved”, he noted.

With its disciplinary shortcomings, the FRDL Act is an act with half-measures. “A new law on public financial management that comprehensively covers aspects such as budgeting, expenditure, sanctions, accounting, auditing and debt is an inescapable need to bring discipline in the country’s fiscal affairs,” says the former finance secretary, Dr Waqar Masood.

Drafting a new law will take time and resources, let alone the parliamentary colloquy. With a surmounting debt stock and economic distress ahead, we must focus on improving the FRDL Act, making it consistent with the IMF’s Guidelines for Public Debt Management. These guidelines suggest levying debt limits on provincial debt through negotiations between the centre and the provinces using rule-based policy models (like Austria, Belgium, and Denmark). While, strong enforcement mechanisms, personal (Suriname’s National Debt Act 2002) or institutional, and civil or criminal (Brazil’s Fiscal Responsibility Law and Fiscal Crimes Law), to instil discipline in PDM at both levels, following the best practices from countries plagued with fiscal-mismanagement are needed.

IMF’s guidelines also call for a comprehensive debt monitoring and management framework. As of now, we have diverse macroeconomic frameworks (EAD, MOF, DPCO and SBP) with different visions. Centralization of all debt functions in one single unit is suggested to decrease disintegration and augment coordination in PDM. It is imperative to consolidate cash and debt management, to provide a holistic-view on all of the commitments thus fostering effective risk-management of the sovereign debt-portfolio, debt-servicing, reporting, audit, and evaluation.

Moreover, optimal debt-stock and fiscal constraints should be consistent with economic growth requirements. The overly ambitious amendments in FRDLA are betraying the real economic needs, and putting excessive pressure on the government. The PTI should act on the advice it gave to the previous government and allow redefinition of fiscal rules basing them on the 2005 version, and restrict any further amendment without due process.

The inadequacies in the prevalent framework should be addressed with pragmatic and prudently attuned policies, to help achieve reform objectives. The procedure should incorporate an in-depth assessment of the current legal-framework in its entireness, by revising it consistent with best practices - pertinent to our legal, political, institutional and economic setup. Revised FRDLA should reflect an optimal balance between flexibility and restrain. Thus, fostering much needed prudence, transparency, and discipline, which in the end will uphold debt sustainability objectives.

 

The writer is an expert in banking regulations and debt sustainability.