PFM legislation

The last decade witnessed major advances in the realm of Public Finance Management (PFM) legislation in Pakistan. The passage of the 18th Amendment and consistent financial indiscipline highlighted the need for public finance reforms. Accordingly, the Federal Government was the first to draft the Public Financial Management Act, 2019. Since the gross revenue of the country (termed federal divisible pool) gets shared between the provinces according to the NFC formula,  it was the need of the hour to initiate a discourse on provincial-level fiscal management. Hence, the provincial laws namely The Sindh Public Finance Administration Act, 2020, Balochistan Public Finance Management Act, 2020, Khyber Pakhtunkhwa Public Financial Management Act, 2022 and The Punjab Public Financial Management Act, 2022, were enacted.

The provisions of the aforesaid laws are somewhat similar but these provide a sound and comprehensive public financial management structure on provincial as well as federal level. The laws are universally drafted in an idealistic way keeping in view the margin for future development and advancements in the subject with which the legislation deals; public finance in the instant case.

The following paragraphs highlight some of the key features within and differences between the aforesaid legislative instruments.

1. Performance Based Budgeting: Section 9 of the Federal PFM Act 2019 makes it mandatory for presentation of a performance=based budget in respect of every year in view of the policy and goals, past and future expenditure trends, outputs/outcomes and KPIs. Likewise, all provincial acts also reproduce the same provisions regarding performance based budgeting.
2. MTBF: In order to prepare the budgets beyond the conventional incremental method, Medium Term Budgetary Framework (MTBF) has been introduced through PFM legislation. MTBF is based on a 3-4 year time-horizon quantitative analysis of the budgetary allocations. It therefore links the empirical values to policy goals and outcomes over a reasonable period of time.
3. CASH MANAGEMENT: The PFM legislation provides the detailed contours of a cash management system for each tier of the government. It also provides for promulgation of policies and rules under the PFM Act(s) for effective liquidity management of the Government. This provides for effective treasury management along with utilization of idle cash in profitable investments.
4. REVENUE GENERATION: PFM acts were promulgated after the 18^thamendment devolution when the provinces were made financially autonomous. However, financial autonomy requires an increase in the pie of national wealth. This aspect has also been adequately addressed in the letter of law.

It is quite heartening to see the evolving PFM paradigm and recurrent discourse on fiscal discipline, decentralization and VFM aspects of public finances. However, much needs to be done to realize the true potential of theoretical legal instruments and achieve a sustainable financial management framework in the public sphere. 

However, there are certain areas where the implementation of PFM laws is yet to be attained both at federal and provincial levels, some of which are explained here.

1. INCREMENTAL BUDGETING: Despite repeated focus on performance-based and outcome-oriented budgeting, because of certain inherent peculiarities, we still follow, to a large extent, the incremental mode of budget preparation. The incremental budgeting dilutes the entire legislative effort put in the PFM legal framework. The real goal of budgeting should be value for money (VFM) budgeting where each penny spent should give more benefit than the cost of such expenditure
2. DEVELOPMENT AND REVENUE BUDGETING: Our public finance management is still devoid of appropriate rationalization of development and non-development budget. Non-development budget spending gets higher and higher because of inflationary trends and increased size of the public sector. A recent effort by the Federal Government to rationalize the size of the federal government is highly commendable in this regard. Similarly, the development budget gets stuck due to cost overruns, policy inconsistency, political dynamics and fulfilment of codal formalities and so on.
3. NON-PRODUCTIVE EXPENDITURE (RETIREMENT BENEFITS): A common bottleneck for federal as well as all provincial governments is the exponentially increasing expense of retirement benefits i.e. pension, gratuity, an so on. This expense is a real impediment in spending the funds in the development sector. All provincial governments and federal government are now adamant to address this issue on a sustainable basis so that the increased costs are diminished and the government service should also be attractive for new talent viz-a-viz monetary compensation.
4. USE OF IT: The use of information technology tools in financial management is a given. Unfortunately, the public sector has not been fully benefiting from IT tools. The use of ERP systems in budget and payroll is commendable however, the technological tools should be aimed to increase work efficiency and reduce costs at each stage or level of the public sector.

It is quite heartening to see the evolving PFM paradigm and recurrent discourse on fiscal discipline, decentralization and VFM aspects of public finances. However, much needs to be done to realize the true potential of theoretical legal instruments and achieve a sustainable financial management framework in the public sphere.