As the policymakers move into the budget making process, they are faced with the challenge to put in place a sustainable basis for a three-year rolling programme under the Medium-Term Budgetary Framework along with short-term stabilisation roadmap for a year.
It is in this background that authorities have started pursuing a new IMF loan programme that could help them enlist the needed support from other lending agencies for a three-year rolling budget (2011-14). With this in mind, Finance Minister Dr Abdul Hafeez Shaikh is attending weeklong annual spring meetings (April 11-16) of the IMF and the World Bank in Washington.
The feedback from multilateral and bilateral lenders for policy reforms and budgetary support would provide a roadmap to policymakers to design their next year budget and align it with next two years’ strategic priorities.
Unrealised projections of the last budget and the government’s inability to push through the reform process have been a drag in improving macroeconomic framework.
The IMF is concerned about the lack of progress on tax reforms and targeted increase in tax-to-GDP ratio, currently stuck at about 9.2 per cent of GDP – lowest in the Asian region and insufficient to support economic growth, job creation, poverty reduction and development needs.
The budgetary projections and strategic priorities should normally lead to achieving broader macroeconomic and fiscal targets. Poverty and poor social service delivery is on account of inadequate resources, inefficiency in allocation and use of available funds, mostly focused on inputs rather than outputs, services, outcomes or impacts.
The Medium Term Budgetary Framework (MTBF) reform process was initiated, in a phased manner, about a decade ago with the assistance of the lending agencies spearheaded by UK Department for International Development (DFID) to improve predictability of public finances and service delivery through better financial management in various ministries on the basis of outputs and outcomes.
It was adopted as part of annual budget last year with a stated objective of adequate documentation, at the time of budget announcement, of the purposes for which parliament has to appropriate funds for government’s economic policies. Almost all ministries of the federal government were taken on board last year.
The aim was to “provide the parliament and other stakeholders with the clearest possible statement of the services which are to be delivered and the investments to be undertaken through the application of funds appropriated by the parliament, and, equally important, the results which are expected to be achieved in terms of goals of public sector activity and the benefits expected to accrue to different population groups from the activities of the federal government” and, to ensure transparency of the federal budget.
While a true picture of the measurement of outputs and outcomes may be available along with the next year budget, clear indications are there to suggest that most of the targets and allocations set under the MTBF 2010-13 have fallen short of projections by a wide margin and changed the very basis of the next two years.
In fact, the MTBF 2010-13 has already become irrelevant because of the government’s inability to generate promised resources and major slippages in the base year as a result of devastation caused by floods.
Deviations in the macroeconomic framework have also been noted in many cases as the results have fallen short of expectations because MTBF projections were over-ambitious without taking adequately into account the starting conditions and because the existing budgeting practices and their costs were poorly defined.
For example, the federal public sector development programme originally estimated at Rs280 billion has been curtailed to Rs150 billion. As a result, about 900 projects included in the PSDP have not been able to get any financing. Hundreds of road projects have been given up at least in the current year while projects in health and education have suffered significantly.
The real GDP growth rate was estimated at 4.5 for the current year, followed by five and 5.5 per cent in the next two years.
The growth rate is now estimated at a paltry 2.5 per cent, making projections for the next two years irrelevant and unachievable.
The Asian Development Bank has forecast 3.7 growth rate for 2012, against the MTBF estimate of 5.5 per cent.
Likewise, the rate of inflation was envisaged to be in single digit – 9.5 this year and falling progressively to eight and seven per cent in the next two years. The government has already increased its forecast for the current year inflation rate at 14 while ADB has put it at 16 per cent. There is hardly any indication to suggest that inflation could come down to single digit over next two years.
How much of this slippage might have affected living standards of the people would perhaps need a detailed study on a sector to sector analysis of targets versus outputs and outcomes.
Fiscal deficit limit that was put at four per cent for the current year in the last MTBF and 3.7 and 3.2 per cent in the subsequent two years has also failed to materialise.
The government has revised deficit to 5.5 per cent while lending agencies call this projection as unrealistic.
The MTBF had estimated total public debt at 51.5 per cent of GDP for the current year which has already gone beyond 60 per cent.
This suggests that the target for bringing it down to 48.9 next year and 46 per cent in 2013 would be hard to achieve.
The public debt position has exceeded the limit set by the Fiscal Responsibility and Debt Limitation Act for the last three consecutive years.
The fiscal targets and expenditure patterns change constantly because of disorderly induction of new initiatives and projects.
Besides the changes in accounting, budgeting and outcome measurement procedures and modules, are not designed properly to ensure fiscal discipline so that budget outturn is closer to the original estimates and promised services are actually delivered.