IMF detects flaws in making, execution of FY23 budget

ISLAMABAD: The IMF has found glaring flaws in the budget-making and execution practices in Pakistan, revealing that substantial changes occurred to the size and composition of spending compared to the approved annual budget by the parliament.

This deviation has witnessed a peak up to almost 55 per cent in the approved budget in fiscal year 2022-23 compared to the actual spending through technical supplementary grants and supplementary grants.

An IMF report says an examination of Pakistan’s recent budgetary outcomes reveals substantial deviations from planned budgets. While these discrepancies are partially due to an unstable external environment and political uncertainties, the establishment of stronger fiscal institutions can help deliver a more credible budget, tighten its execution, and prevent policy slippages.

The IMF’s Pakistan’s Technical Assistance Report: Budget Practicing states that there have been substantial changes to the size and composition of spending compared to the approved annual budget. These in-year changes have occurred either through technical supplementary grants and supplementary and excess grants (henceforth “supplementary grants”), which are additional grants approved during the year not met by the surrender of existing grants (as defined by Article 84 of the Constitution). In FY23, the sum of these supplementary grants exceeded 50 per cent of budget spending. The data quoted by the IMF shows that there were changes of Rs 1910 billion, equivalent to 21.9 per cent of the approved budget in fiscal year 2022-23 and such deviation on development and current budget peaked to 54.7 per cent than the approved budget by the National Assembly.

As discussed later in this report, given that extraordinary latitude taken by the executive in its interpretation of Article 84 of the Constitution to approve these grants without the prior approval of the National Assembly, this means that a significant proportion of spending does not undergo the prior scrutiny of the latter.

Pakistan faces a tight fiscal situation which will require strong control over the budget in coming years. The public debt has increased considerably, and interest payments now absorb 60 per cent of budgeted revenue. Multiple external shocks and unprecedented floods in 2022 have buffeted the economy and the government’s fiscal position. These shocks have been compounded by policy slippages including unbudgeted subsidies, and delays in implementing revenue measures. Authorities now have the difficult task of converting a primary deficit of 1.3 per cent of GDP for FY23 into a primary surplus for FY24 and continuing to exercise fiscal restraint, while preserving essential social and development spending. In this context, it will be crucial to further enhance the country’s Public Financial Management (PFM) system as well as strengthening revenue mobilization and administration.

This report focuses on how to strengthen budget preparation, execution, and controls, including ways to harness digital technologies for that purpose. There are other important areas in PFM where the authorities are making progress, such as the oversight of state enterprises, cash and debt management, the Treasury Single Account (TSA), and public investment management, which have been the focus of previous IMF technical reports. This report identifies how this can be done in Pakistan. Its main findings are Macro-Fiscal Forecasting. Macro-fiscal functions are distributed among different institutions which are responsible for forecasting macroeconomic indicators, tax revenue, public debt service, and development spending (largely comprising capital projects), but are poorly coordinated. A macro-fiscal policy unit (MFPU) has been put in place in the Economic Adviser’s Wing but is at an early stage of development and does not yet provide effective support for the Finance Division, particularly its Budget Wing. A National Macro-Fiscal Framework is prepared but does not kick-start the budget preparation process.

Budget preparation: A top-down, strategic phase at the start of budget preparation could be strengthened, with spending ministries and agencies required to prepare their budget submissions under relatively weak constraints and insufficient guidance on the available fiscal space. Several other budgeting practices could be strengthened: (i) there is an inefficient dual budgeting system with a bloated pipeline of projects in the Public Sector Development Plan (PSDP) and separate decision-making processes for recurrent and development spending; (ii) the budget call circular (BCC) provides spending ministries and divisions with little guidance on budget priorities and spending ceilings are out of date; and (iii) the organization of the Finance Division is fragmented and not well-tuned to provide an effective policy advice on the budget, and effective scrutiny of budget proposals.

Budget execution: The executive is a relative outlier internationally in terms of its ability to award in year supplementary grants without ex-ante approval from the National Assembly, and without any limit on their size. Extensive use of these grants has been made in recent years. They amounted to 14 per cent of approved spending in the last two years. In addition, technical supplementary grants, or reallocations across budget appropriations, amounted to another 13 per cent of approved spending in the last two years. While legislative approval may occasionally hinder prompt responses to emergencies, a balanced solution should be adopted in Pakistan, as is the case elsewhere. The example of the previous caretaker government, which is overseeing the budget without resorting to supplementary grants, shows that strong commitment can lead to effective budget management without total flexibility. Another challenge in budget execution is the absence of comprehensive commitment control mechanisms, which, at a minimum, affects proper budget monitoring, but can, more worryingly, lead to overcommitment of spending, unwanted supplementary grants, and arrears.