Public Finance is a vast field whereby the flow of resources is managed and monitored in a public paradigm. The word “Public” here connotes the utilization of collective wisdom in financial management. Say if an individual wants Rs. 100, he or she will try to arrange or earn that Rs 100 first and then spend it accordingly. Here the stakeholder is only one individual, or in certain cases a closed family or group.
However, in public finance mode, the stakeholders are large in number and the beneficiaries are also proportionate. The responsibility of the management of these funds is thus of utmost fiduciary nature. That requires delicate and effective handling as well as reporting of the public finance.
Public finance has another unique feature. While individuals first earn and then spend within the limits of that earning, the State (generally) determines the spending first and then raises the finances commensurate with the expenditure required. This therefore requires a different form of financial management than the orthodox financing methodologies.
However, Public Finance Management (PFM) has remained devoid of a detailed and robust regulatory mechanism for reporting purposes in Pakistan. In the last decade, our country has focused more on this aspect and devised some regulatory instruments along with institutions for transparent Public Finance Management.
It is heartening to see that after the promulgation of the 18th Amendment, every province has promulgated provincial PFM acts and the Federal Government has also enacted the Public Finance Management Act 2019. Sindh was the first province to devise the Sindh Financial Management and Accountability Act, 2011. However, it was quite brief and did not delineate the detailed aspects of provincial finances and fiscal transfers. Accordingly, the Sindh Assembly repealed that law and enacted another law, namely the Sindh Public Finance Administration Act, 2020, which is much more detailed and comprehensive.
Public Finance Management doesn’t only require an accounting and reporting methodology but legal backing on a parallel footing also. For example, if a government wants to book an expense in its accounts, it not only has to book an expense entry but more importantly it has to see under which law/rule/policy and so on, is the government or the competent government officer authorized to sanction that expenditure. Therefore, the prevalent conventional accounting and reporting methodologies do not apply strict sensu to public finances. As a result, there existed a greater vacuum in the regulatory arena of public financial management in Pakistan which, in the last decade, has been bridged to an extent by enactment of PFM laws.
It is therefore of immense importance to realize the significance of Public Finance reporting, decision making and administration. The importance of legislative instruments is given; however much more needs to be done to implement the commands of law and for ensuring public fiscal propriety.
The federal PFM Act, 2019 deals with the financial management of the Federal Government; overseeing the inflows and outflows of the federal consolidated fund and public account. Similarly, the Provincial Acts oversee the flows in/out of the provincial consolidated fund and public account.
Despite the above-noted achievements on the academic and legal side, a great deal needs to be done on ground in order to realize the lofty goals of value for money public financial management. Some gaps in theory and practice are stated in the following.
The Provincial PFM Acts require the provincial governments to announce the PFC award on a periodic basis and transfer the funds to the tier of local governments in compliance with Article 140A of the Constitution which requires devolution of financial authority by Provincial governments to Local governments. However, the financial empowerment of Local Governments is only a matter inscribed on paper and with no substantive tangible existence.
Moreover, the PFM Laws as a matter of compulsion require every administrative division (in the Federal Government) and every department (in the Provincial Government) to establish Internal Audit Units in order to ensure an environment of transparency and internal control in the concerned division/ department. However, this requirement of the law is not being implemented in letter and spirit at federal or provincial level.
On the same lines, there is another act which was promulgated first in 2005 and is amended from time to time, namely the Fiscal Responsibility and Debt Limitation Act, 2005”. Certain sections of FRDLA overlap with the provisions of the Public Finance Management Act, 2019. However, the pivotal matter addressed therein is the restriction on debt generation. The Federal Government is obligated under section 3 of the FRDLA to limit the federal fiscal deficit to 3.5 percent of GDP, and the total public debt to 50 percent of GDP. But these targets are made defunct by virtue of section 4 of FRDLA wherein the Federal Government is allowed to depart from the aforementioned thresholds in special circumstances after recording the reasons. Irrespective of section 4 of FRDLA, the outer limits on public debt and fiscal deficit are no doubt prudently prescribed but unfortunately no policy prescription adheres to this legislative command of debt limitation.
The examples quoted above are just the tip of the iceberg. It is therefore of immense importance to realize the significance of Public Finance reporting, decision making and administration. The importance of legislative instruments is given; however much more needs to be done to implement the commands of law and for ensuring public fiscal propriety.
