Laws for good governance

The last decade witnessed major advances in the realm of public finance management (PFM) legislation in Pakistan. The passage of the 18th Amendment and consistent financial indiscipline highlighted the need for public finance reforms.

Accordingly, the federal government was the first to draft the Public Financial Management Act, 2019. Since the gross revenue of the country (termed federal divisible pool) gets shared between the provinces as per the NFC formula, it was the need of the hour to initiate a discourse on provincial-level fiscal management.

Hence, provincial laws – the Sindh Public Finance Administration Act, 2020, the Balochistan Public Finance Management Act, 2020, the Khyber Pakhtunkhwa Public Financial Management Act, 2022 and the Punjab Public Financial Management Act, 2022 – were enacted.

The provisions of these laws are somewhat similar, but they provide a sound and comprehensive public financial management structure on the provincial and federal levels. The laws are universally drafted in an idealistic way, keeping in view the margin for future development and advancements in the subject with which the legislation deals.

The following paragraphs highlight some of the key features within and differences between these legislative instruments.

Performance-based budgeting: Section 9 of the Federal PFM Act 2019 makes it mandatory to present a performance-based budget every year given the policy and goals, past and future expenditure trends, outputs/outcomes, and KPIs. Likewise, all provincial acts also reproduce the same provisions regarding performance-based budgeting.

MTBF: To prepare the budgets beyond the conventional incremental method, a medium-term budgetary framework (MTBF) has been introduced through PFM legislation. This MTBF is based on a 3-4-year time-horizon quantitative analysis of budgetary allocations. It links the empirical values to policy goals and outcomes over a reasonable period.

Cash management: PFM legislation provides the detailed contours of a cash management system for each tier of the government. It also provides for the promulgation of policies and rules under the PFM Act(s) for effective liquidity management of the government. This provides for effective treasury management along with the utilization of idle cash in profitable investments.

Revenue generation: PFM laws were promulgated after the 18th Amendment when the provinces were made financially autonomous. However, financial autonomy requires an increase in the national wealth pie. This aspect has also been adequately addressed in the law.

However, there are certain areas where the implementation of PFM laws is yet to be attained both at the federal and provincial levels, some of which are explained here.

Incremental budgeting: Despite repeated focus on performance-based and outcome-oriented budgeting, we still follow an incremental mode of budget preparation to a large extent, partly due to certain inherent peculiarities. Incremental budgeting dilutes entire legislative efforts put into the PFM legal framework. The real goal of budgeting should be value for money (VFM) budgeting, where each penny spent should give more benefit than the cost of such expenditure.

Development and revenue budgeting: Our public finance management is still devoid of the appropriate rationalization of development and non-development budgets. Non-development budget spending gets higher and higher because of inflationary trends and the increased size of the public sector. Recent efforts by the federal government to rationalize the size of the federal government is highly commendable in this regard. Similarly, the development budget gets stuck due to cost overruns, policy inconsistency, political dynamics, fulfilment of codal formalities, etc.

Non-productive expenditure (retirement benefits): A common bottleneck for the federal and provincial governments is the exponentially increasing expense of retirement benefits – pension, gratuity etc. This expense is a real impediment to spending in the development sector. The provincial and federal governments are now adamant about addressing this issue on a sustainable basis so that the increased costs are diminished, and government service should also be attractive for new talent vis-a-vis monetary compensation.

Use of IT: The use of information technology tools in financial management is a given. Unfortunately, the public sector has not been fully benefiting from IT tools. The use of ERP systems in budget and payroll is commendable, however, technological tools should be aimed to increase work efficiency and reduce costs at each stage/level of the public sector.

It is quite heartening to see the evolving PFM paradigm and recurrent discourse on fiscal discipline, decentralization and VFM aspects of public finances. However, much needs to be done to realize the true potential of theoretical legal instruments and achieve a sustainable financial management framework in the public sphere.

The writer is a civil servant and chartered accountant.