June 27, 2003	Friday	Rabi-us-Sani 26,1424

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ISLAMABAD, June 26: The federal cabinet here on Thursday approved the draft “Fiscal Responsibility and Debt Limitation Ordinance 2003” that binds the government to seek prior permission of parliament for “extraneous” expenditures.

Informed sources told Dawn that Foreign Minister Khurshid Mehmood Kasuri and a couple of his cabinet colleagues opposed the draft law on the grounds that it will restrict the government’s development spending.

The draft law calls for eliminating the entire revenue deficit (approximately Rs125 billion) by June 30, 2007, and for reducing the outstanding public debt (approximately Rs1,500 billion) to 60 per cent of GDP by June 30, 2012.

The sources said that Mr Kasuri wondered as to how the government would meet the development needs of the people if zero fiscal deficit was to be achieved. However, he was informed by DG Debt Coordination Office Dr Ashfaque Hasan Khan, who was also present at the meeting, that the purpose of the new law was to make the revenue deficit zero, and not the fiscal deficit.

Sources said that after a lot of discussion, Prime Minister Mir Zafarullah Khan Jamali, who presided over the meeting, said the cabinet should endorse the new law as it will help control undue government spending.

Mr Jamali agreed with Dr Khan that the government should not borrow for consumption, but there was no harm in borrowing for development purposes.

The foreign minister, the sources said, told the meeting that the country had to pay a very heavy price in the past for being “fiscally irresponsible” due to which the economic conditions continued to worsen over the years.

Water and Power Minister Aftab Sherpao said the new law should be approved as it will bring the government good name. The ordinance will be submitted before parliament for approval within four months after its promulgation by the president.

Dr Khan, when contacted, explained that the ordinance approved by the cabinet was still a draft law and will be promulgated by the president after necessary vetting by the ministry of law.

He told the meeting that if the government wanted transparency and certain financial discipline, then the ordinance should be approved by parliament as early as possible.

The prime minister, the sources said, announced that he would work with all the political parties of parliament to get the ordinance approved for the welfare of the country.

The draft law was to be enacted by August 31, 2002, but was delayed due to the government’s preoccupation with political issues, including the holding of general elections.

The government has accepted and incorporated in the draft law some of the proposals given by the private sector experts and professionals to make this law more effective.

It has been decided to withdraw the provision of suspending the salaries of the cabinet members in case any government overspends against certain prescribed limit, the sources said.

The draft law also seeks to reduce the outstanding public debt by at least 2.5 per cent of GDP every fiscal year, while ensuring that social and poverty related expenditures are not reduced below 4 per cent of GDP.

It also requires the government not to issue guarantees, including those on rupee borrowing by the public-sector enterprizes, minimum rates of return, output purchase agreements, and other claims and comments for any amount exceeding two per cent of GDP.

According to the draft law, the government can deviate from various targets only on grounds of unforeseen demand on its resources due to national security or national calamity, which is to be determined by the National Assembly. The draft law asks the Debt Policy Coordination Office to serve as secretariat in the ministry of finance to prepare a 10-year debt reduction path to be followed by the government.

The DPCO will be responsible for monitoring and analyzing the performance of the government against this path and submitting annual reports to the cabinet. If the government fails to meet the target of debt-to-GDP ratios over a two-year period, it would be required to take all necessary actions to return to the debt reduction path delineated by the DPCO by the end of the next two years.

Article 166 of the Constitution empowers the federal government to borrow for financing its budgetary expenditures within such limits as parliament may fix from time to time.

“Parliament never enacted a law to prescribe these limits and as a result, successive governments demonstrated complete lack of fiscal responsibility, particularly during the 1980s and 1990s. With the result the outstanding public debt increased from 66 per cent of GDP in 1980 to 102 per cent in 1999, at which level it was unsustainable,” Dr Ashfaque said.