Economic reforms

We now turn to a key economic reform that has eluded policymakers for a long time. This is related to the establishment of a ‘Treasury Single Account (TSA)’ for managing public funds. We have a single fiscal system, which is divided across federal, provincial, local governments and all public funds belong to one of these tiers. Although our discussion is general, we will focus on the federal government.

The concept of TSA revolves around a single bank account or several linked accounts that get consolidated in a master account. For finance managers, responsible for efficient financial management, it is imperative that they are aware of the overall cash position of the government which could only be provided by an effective TSA.

International best practices require a TSA system that has three elements. First, a unified system of bank accounts that allows the Ministry of Finance to track movement of public funds across different accounts and enable it to efficiently manage cash resources and estimate borrowing requirements. With significant advances in the use of technology in the banking system, the required unity can be achieved in real time. Second, no agency of the government should operate a bank account that is outside the unified system. Third, the consolidation of funds is required across the entire spectrum of public agencies, irrespective of whether they are part of the budgetary process or outside it.

In the absence of TSA, public funds would be subject to sub-optimal use or downright abuse. The cost of funds is central to prudent cash management, particularly for an entity that is capable to incur deficit on a permanent basis, such as government. This is so because if there are positive balances in some government accounts outside TSA, while the Ministry of Finance borrows funds for an extra expenditure that borrowing cost would be much higher than the return earned on that balance. What is worse, the balance would likely be used in lending to the government to meet the expenditure. Consequently, a perverse situation arises where for lack of a unified system of single account, deposits made out of government monies are used for lending to the government and huge margins would be earned by the banks in the process.

To see the status of TSA in Pakistan, we begin by noting the legal framework applicable to this subject. Article 78 of the constitution stipulates as follows: “(1) All revenues received by the federal government, all loans raised by that government, and all moneys received by it in repayment of any loan, shall form part of a consolidated fund, to be known as the Federal Consolidated Fund. (2) All other moneys (a) received by or on behalf of the federal government; or (b) received by or deposited with the Supreme Court or any other court established under the authority of the Federation; shall be credited to the Public Account (PA) of the federation.”

Evidently, the constitution has mandated only a single account, called the Federal Consolidated Fund (FCF), for managing the finances of the federation where all tax revenues, borrowings and repayment of loans would be credited. The Public Account is essentially for keeping moneys in trust such as those received by or on behalf of the courts. Both accounts are established in the SBP; our focus is the FCF.

The constitution further requires that the custody of the FCF and PA would be regulated by an act of parliament and, in its absence, by rules made by the president, which is the case at present. Treasury Rules made for this purpose are the core guiding principles with respect to the management of public funds. Needless to say that they require utmost care in the handling of such funds and that these funds must be deposited in treasury accounts within the shortest possible time without fail.

The constitution also spells out that expenditure from these accounts would require presentation of a budget before the National Assembly and its approval thereof. General Financial Rules (GFR) lay down the rules regulating the use of public funds and impose elaborate conditions for efficient procurement, value for money in purchases, limited advance payments and avoiding debiting treasury without actually making an expenditure.

The constitutional scheme envisages that the government treasury would be debited only when an expenditure approved by parliament is incurred. There is no possibility under this system to withdraw funds from the treasury and put them in a bank account outside the treasury. Unfortunately, this happens at a fairly large scale and because of this a true TSA is not in existence in Pakistan. Huge balances belonging to governments are kept in the banking system, outside the TSA. Past efforts to curb this tendency have not been successful.

Before we point out the reasons behind this failure, let us identify the size of the problem. As of Dec 31, 2018, the gross public debt was estimated at Rs27.5 trillion. This is total indebtedness of the country. But when one realizes that a significant amount of government deposits are lying in the banking system, the same amount is deducted from the gross to arrive at the net public debt. The net public debt was Rs25.3 trillion, giving a difference of Rs2.2 trillion.

This is a phenomenal sum, nearly as much as the fiscal deficit incurred during 2017-18. This covers all governments and agencies, federal and provincial, local bodies and autonomous bodies. The total banking deposits were Rs13.4 trillion as on Dec 31, 2018. The share of public deposits works out to 16 percent, which is quite sizable. As we stated at the outset, such deposits would be earning a fraction of the cost that the government would have incurred in raising such funds. It is true that not all these deposits represent government funds withdrawn from the treasury and kept in the bank without expending. Yet this is a great loss to the public exchequer and needs correction. In the next article, we will discuss past efforts to correct this distortion, reasons for failure, and suggest a way forward to reform the system.

The writer is a former finance secretary. Email: waqarmkn@gmail.com