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Laws for economic management



ISLAMABAD:

After the landmark and watershed unanimous decision by the Supreme Court last week, which restored the National Assembly, the awareness about the constitution has gained more importance.

It will be instructive to review our constitution to find the binding laws for economic management, which I consider a plausible basis for rules-based economic governance leading to a stable policy.

While this is not an exhaustive review, this article argues that our constitution has provided for necessary – if not sufficient – rules for sound economic governance.

I have looked at four pieces of legislation that were included in the constitution in the last 30 years including the Protection of Economic Reforms Act 1992, Fiscal Responsibility and Debt Limitation (FRDL) Act 2005, Public Finance Management Act 2019 and State Bank of Pakistan (SBP) Amendment Act 2021.

These governments deserve appreciation for undertaking work on important pieces of legislation.

The economic reforms – deregulation, liberalisation and privatisation – started in 1991, which were provided legislative cover through the Protection of Economic Reforms Act 1992.

It guaranteed a “liberal environment for savings and investment” including the freedom to bring, hold, sell and take out foreign currency.

It also provided for the protection of fiscal incentives for the setting up of industries, protection of transfer of ownership to the private sector and protection of foreign and Pakistani investment.

In 2005, following successful macroeconomic stabilisation and growth, the then government introduced legislation for fiscal responsibility and debt limitation. Accordingly, the federal government shall take all appropriate measures to achieve the following policy objectives:

One, to eliminate the revenue deficit (ie keep it at 0% of GDP)

Two, to reduce total public debt and maintain it within prudent limits thereof, ie 60% of GDP

In fiscal years 2019-2021, the revenue deficit remained over Rs2 trillion, while the debt-to-GDP ratio, even after rebasing, remained above 70%.

According to a review done by the Pakistan Institute of Development Economics (2012), the FRDL Act is silent about the absolute fiscal deficit, which otherwise is the source of concern for the fiscal policymakers. The fiscal deficit is one of the important indicators of fiscal imbalances and the Act needs amendment.

In 2019, the government passed a new law called the Public Finance Management Act 2019 “to strengthen management of public finances with a view to improving definition and implementation of fiscal policy for better macroeconomic management, to clarify institutional responsibilities related to financial management, and to strengthen budgetary management”.

The Act requires the federal government to introduce plan-based government expenditure estimates, including recurrent and development.

It also requires the government to adopt performance-based budget before the National Assembly including a medium-term performance-based budget along with the Annual Budget Statement.

The Act requires the government to conduct cost and benefit analysis and risk assessment of all development project proposals, in excess of the threshold size prescribed by the Planning Commission.

It also mandates budgetary provision for the operation and maintenance of physical infrastructure assets under government supervision.

Finally, in 2021, the much-debated SBP Amendment Act 2021 was passed.

It introduced important amendments to the SBP Act 1956 and mandated that the primary function of the SBP will be to achieve domestic price stability “by way of regulating the monetary and credit system of Pakistan and, without prejudice to said primary objective, contribute to the stability of the financial system of Pakistan and supporting the general economic policies of the Federal Government to foster development and fuller utilisation of the country’s productive resources.”

This Act has also prohibited government borrowing, as it says “The Bank shall not extend any direct credits to or guarantee any obligations of the Government, or any government-owned entity or any other public entity.”

It has allowed the bank to do the same in the secondary market.

The record of governments on adherence to these constitutional rules for sound economic governance deserves careful scrutiny.

There have been several episodes of violation – to begin with freezing of forex accounts after nuclear blasts in 1998 and continued breach of fiscal responsibility and debt limits.

However, the overall direction towards reforms has been maintained. The country has not gone back to nationalisation even during the three governments of Pakistan Peoples Party, which orchestrated nationalisation in the 1970s.

One needs to create an environment of check and balance on the governments for compliance, which is the sole responsibility of parliament.

With the restoration of the National Assembly, it is hoped that the legislators can perform their basic functions, which is the essence of a functioning democracy.

The civil society, including media, business associations and think tanks also need to play their due role in maintaining this check and balance on the government.

The writer is founder and executive director of PRIME, an independent economic policy think tank based in Islamabad

Published in The Express Tribune, April 11th, 2022.

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