The proposed fiscal responsibility and debt limitation ordinance-2002 (FRDLO) sounds not only impractical but in certain respects reflects naivete. Complex and chronic issues of reducing fiscal deficit and public debt have been dealt with by fixing unachievable targets within limited timeframe with punitive actions against the executive in case of failure to achieve them.

It is certain that the ordinance has been written keeping in view the state of economy which notwithstanding the claims made by the finance minister and officials of the finance ministry is sluggish. It is still to come out of recession. Macro-economic indicators about which the government is emphatic to be stable, owe much to macro-economic numbers. They hardly reflect real state of economy that affects the common man in terms of utility bills and rising cost of living.

The outgoing fiscal year speaks a lot about two specific macro-economic indicators, i.e., fiscal deficit and public debt liability which have been specifically targeted in the ordinance for reducing them to levels which seem quite difficult to achieve within the framework and timeframe given in the ordinance.

The GDP growth rate of past three fiscal years averages to 3.5 per cent compared to 4.5 per cent during the “lost decade” of the 90s. Similarly, fiscal deficit of the past three financial years averages to 6.2 per cent of GDP compared to 6.5 per cent during the’ lost’ decade. Other macro-economic indicators like exports, tax revenue collection, trade deficit, unemployment do not represent an enviable picture of the economy specifically with reference to developing capacity to give a quantum jump either to tax revenue that might reduce fiscal deficit or to exports that might enhance national wealth to pay back public debt particularly its foreign debt component.

The crucial questions that hold true for any public law are: will it be practical to implement? will it enjoy the support of those who are to execute it? will the stake-holders particularly the civil and military bureaucracy who take their share out of national pie, be ready to see their share reduced if the government were to reduce current expenditure in order to reduce fiscal deficit to nil by end of FY-2007 as laid down in the ordinance. And finally, what sense does it make really to stop the salary of the PM and his cabinet if they did not succeed to meet the fiscal deficit, debt reduction and other targets during two consecutive years.

It is really amazing to read such a naive solution to resolve fiscal and debt issues whose solutions are dependent on a number of internal and external variables, some of which are beyond the control of any civilian or military government.

There is hardly any doubt that promulgation and execution of a fiscal responsibility law has been overdue since long. In fact it should have been there since the early 90s when fiscal problems hitherto overshadowed by Afghan War of the 80s, started showing up with all horrendous implications because of squeezing of foreign assistance and lack of hard decision-making by pliable and somewhat easy going politicians who were more rhetorical in their approach than solid in their performance.

The governments during the 90s needed to observe strict fiscal discipline that could have been prescribed by the fiscal responsibility law. Partially, it was the absence of such a law which let the public debt increase to more than double and jump to around 102 per cent of GDP, with $ 38 bn (now reduced to $ 36 ten) foreign debt by the end of FY-00. This has made Pakistan to stay in the queue of HIPCs unofficially but that hardly changes the ground reality. Seen in this background, a fiscal responsibility law is need of the economy and nation to ensure that government in future is legally responsible and accountable to manage fiscal budgets in efficient manner to achieve the desired fiscal results for the benefit of state and citizens. That is the end purpose of any such law.

The ordinance aims at achieving medium and long term macro-economic stability, eliminating fiscal deficit within five years starting from current fiscal year, reducing public debt to sustainable limit of 60 per cent of GDP within 10 years from now as prescribed by the IMF and allowing government borrowing only for developmental projects through effective debt and fiscal management. To achieve these objectives it makes obligatory for the government to submit a medium-term budgetary and annual debt policy statement along with a few other statements to the National Assembly for scrutiny. The medium-term budgetary statement will fix three-year rolling macro-economic targets in accordance with principles of sound fiscal and debt management.

The ordinance also envisages the establishment of a debt policy co-ordination office (DPCO) within 60 days of promulgation of the Ordinance which will prepare a medium-term debt retirement plan consistent with the objective of reducing debt and principles of fiscal and debt management to be executed by the government. It will monitor and evaluate external and domestic debt strategies of the government and submit annual reports to the cabinet after approval by the finance minister. How would such an arrangement under which DPCO is to monitor and evaluate the working of government specific to debt retirement, will function in case it is to seek prior approval of the finance minister before putting the report to the cabinet?

In case execution of debt retirement policy does not yield the desired results, how will the finance minister, a member of the cabinet and confident of the PM let DPCO be critical of government’s policies unless he is president’s man sitting in the cabinet to give a jolt to the cabinet or the PM and the finance minister do not have mutual confidence.

The ordinance provides some leeway to the government to deviate from principles of sound fiscal and debt management for short period in case a national calamity and security imperatives demanded so. The extent of short period has not been stated in the ordinance. The cabinet or the National Assembly may decide about it. It sounds logical.

Fiscal space for the government has been narrowed down by binding her to reduce public debt “by no less than 2.5 percent of the estimated GDP of that year provided that the social and poverty related expenditures are not reduced below four per cent of GDP”. Also, the government has been restrained not to issue new guarantees including renewal of the existing ones, exceeding two per cent of the GDP in any financial year.

It is to be appreciated that targets fixed for eliminating fiscal deficit, reducing public debt and restraining government not to add additional financial burden to public exchequer and to remain on track to execute the IMF-sponsored poverty alleviation programme under PRGF, a lot has been presumed about good economic governance and fiscal discipline. Whereas such presumption is desirable but keeping in view the performance of the present and previous governments to reduce fiscal deficit and debt, it is misplaced presumption that makes the entire Ordinance slanted.

The economic wizards have made extra efforts to hold governments responsible during next ten years to achieve fiscal deficit and debt reduction targets about whom their own record has been wanting for much improvement. It is incomprehensible as to how do they expect a government to achieve unachievable targets, if it is to work in unforeseen economic environment and under a number of political constraints which are likely to come up because of highly controversial constitutional amendments which the government is all set to implement with cosmetic changes. The targets are unachievable because none of the governments in the past, irrespective of their claims of enviable economic performance, have succeeded to reduce fiscal deficit to 3 per cent of GDP, hammered and demanded by the IMF over past 15 years. This led the debt to accumulate.

It is equally important to observe that the Fiscal Ordinance cannot be executed in isolation. It must have the support of all stakeholders in the fiscal budget. The government must have the freedom to create surplus revenue by executing economic strategies even if they deviate from the policies of the present government which it wants to be followed, in order to facilitate high economic growth, increase exports and tax revenue. If necessary, the government should also have the freedom to create surplus revenue by reducing current expenditure which may include reducing defence and civil expenditure.

They together will consume 33 per cent (Rs203 billion) of current expenditure of Rs608 billion against net federal revenue of Rs481 billion, provided the CBR succeeded to generate tax revenue of Rs460 billion for the current fiscal year. The most crucial question in the context of creating surplus revenue by decreasing current expenditure is: will stakeholders like civil and military bureaucracy be willing to reduce their share in the budget and trim their expenditure and organizations and as demanded by the WB/IMF to let the government achieve the targets fixed in the ordinance. It is doubtful if such an eventuality will be acceptable to the ruling elite. The conflict of interest in such a scenario will render the fiscal law either irrelevant or the government will be sent home or the elected PM and his cabinet will be punished like the school children, that is, their salaries will be withheld in case they failed to produce results envisaged in the fiscal ordinance for two consecutive years. One is yet to come across such a horrendous and disgraceful punitive measure on account of failure of policies ever stipulated in contemporary history of civilised world. It only reflects a mediaeval mindset that dominates our governance.

In all probability, framers of the fiscal ordinance are not serious about the practicality of the ordinance. They are equally unconcerned or least concerned about achieving targets specific to eliminating fiscal deficit, reducing debt burden and restricting government to pursue the IMF/WB sponsored poverty alleviation strategy. What they are concerned about is simply to keep the government under constant pressure and fear of punitive actions against it lest it deviates from the policies that have been executed thus far. That is why the Fiscal Ordinance, if executed in its existing form will be more of a problem than a means to solve the chronic problems of fiscal deficit and public debt.