Budget deviation hits 55%: IMF calls for stricter fiscal discipline in Pakistan

ISLAMABAD: The International Monetary Fund (IMF) has identified significant shortcomings in Pakistan’s budget-making and execution processes, highlighting substantial alterations in both the scale and structure of expenditures compared to the budget approved by Parliament, reported The News International.

In the fiscal year 2022-23, these deviations reached nearly 55 percent of the sanctioned budget, primarily due to technical supplementary grants and supplementary grants.

The IMF’s report indicates that an analysis of recent budget outcomes in Pakistan demonstrates considerable deviations from planned budgets. While these differences can be attributed in part to an unstable external environment and political uncertainties, the establishment of robust fiscal institutions could enhance the credibility of the budget, tighten execution, and avert policy deviations.

The IMF’s Technical Assistance Report on Pakistan’s budget practices notes that there have been extensive changes to expenditure size and composition compared to the approved annual budget. These mid-year changes, which occurred through technical supplementary and excess grants—referred to collectively as “supplementary grants”—accounted for more than 50 percent of total budget spending in FY23.

As stated in the report, there were alterations totaling Rs 1910 billion, equivalent to 21.9 percent of the approved budget for the fiscal year 2022-23, with deviations in both development and current budgets peaking at 54.7 percent of the National Assembly-approved budget.

The report emphasizes the need to improve budget preparation, execution, and control mechanisms, including leveraging digital technologies for these purposes. Progress is noted in other areas of PFM, such as oversight of state enterprises, cash and debt management, the implementation of a Treasury Single Account (TSA), and public investment management, which have been highlighted in previous IMF technical reports. This current report outlines how these improvements can be achieved in Pakistan.

Key findings include:

Macro-Fiscal Forecasting: Responsibilities for macro-fiscal functions are dispersed among various institutions, leading to poor coordination in forecasting macroeconomic indicators, tax revenue, public debt servicing, and development spending. Although a macro-fiscal policy unit (MFPU) has been established within the Economic Adviser’s Wing, it is still developing and does not yet effectively support the Finance Division’s Budget Wing. The existing National Macro-Fiscal Framework is not robust enough to initiate the budget preparation process effectively.

Budget Preparation: The budget preparation process could be improved by strengthening the initial top-down strategic phase, requiring spending ministries and agencies to better prepare their budget submissions. Inefficiencies exist in the dual budgeting system, which suffers from a backlog of projects in the Public Sector Development Plan (PSDP) and disconnected processes for recurrent and development spending. The budget call circular (BCC) offers insufficient guidance on budget priorities, while outdated spending ceilings further complicate matters. The Finance Division’s organization is fragmented, affecting its ability to provide effective policy advice and scrutiny of budget proposals.

Budget Execution: The executive’s ability to grant in-year supplementary funds without prior National Assembly approval sets it apart internationally. Such grants have comprised 14 percent of approved spending over the last two years, with another 13 percent coming from technical supplementary grants reallocations. While legislative approval can sometimes impede quick responses to crises, a balanced approach is needed in Pakistan, as demonstrated by the previous caretaker government’s effective budget management without reliance on additional grants. Furthermore, the current lack of comprehensive commitment control mechanisms poses a risk of overc-ommitment and potential budgetary irregularities.