Law on anvil to arrest mounting debt burden

ISLAMABAD: Amid an increase of around 70 per cent in the country’s total public debt and liabilities over the past three years, a government bill to amend the Fiscal Responsibility and Debt Limitation Act of 2005 seeks to limit the stock of government guarantees at 10pc of GDP and strengthen the public debt office to plan acquiring debt and liabilities but with a reporting downgrade.

This is part of a government bill — Fiscal Responsibility and Debt Limitation (Amendment) Act 2021 — that came up for discussion by the National Assembly’s Standing Committee on Finance and Revenue last week but was deferred due to paucity of time.

The proposed law generally seeks to achieve three key objectives: limit the stock of government guarantees at 10pc of GDP; publish a Medium-Term National Macro-Fiscal Framework (MTMFF); and institutionalise debt management functions in a single office reporting to the finance secretary instead of the finance minister.

Seeks downgrading debt office reporting to finance secretary from minister

The draft 2021 act seeks to increase the number of directors in the Debt Policy Coordination Office (DPCO) from three to four and change its nomenclature to Debt Management Office (DMO).

The DPCO had three directors — two from the private sector and one from the public sector — and one of them was selected as its director general. The new DMO would have one director general and three directors to be hired through a “competitive process from the private or public sector”.

The DMO would have greater powers to plan a ‘debt reduction path’, raise additional loans and hold loan negotiations with international lenders in consultation with the Ministry of Economic Affairs.

The DMO or debt office would, however, administratively report to the finance secretary under the new arrangements instead of the finance minister under the existing arrangement.

In certain areas, the debt office would take over the responsibilities of the finance ministry’s external finance wing as required under a loan of the World Bank for “consolidating debt management functions into single, professionally managed and adequately resourced Debt Management Office”.

This comes at a time when Pakistan’s total debt and liabilities went beyond Rs50.48 trillion as of end-September 2021, up 69pc (or Rs20.7tr) from Rs29.88tr by end-June 2018, according to the State Bank of Pakistan (SBP). This amounts to 93.7pc of GDP compared to 86.3pc in July 2018.

The State Bank also reported total public debt at Rs41.47 trillion as of Sept 30, 2021 against Rs24.95tr at the end-June 2018, showing an increase of Rs16.52tr (over 66pc) in about 39 months. The total public debt now stands at 77pc of GDP, up from 66.5pc in July 2018.

Interestingly, the draft bill seeks to have an upper limit on total public debt and guarantees at 70pc of GDP with the addition of 10pc limit on the stock of guarantees. There is no change in the upper limit for the stock of public debt at 60pc of GDP as envisaged in the 2005 act.

The bar on the government to issue new guarantees or roll over the existing ones no more than 2pc of GDP in a fiscal year remains unchanged, but the proposed amendment adds the following proviso and explanation: “Provided further that the total stock of outstanding guarantees shall not exceed 10pc of estimated GDP.”

Its explanation reads: “For the purpose of this clause, each guarantee shall be valued at its risk-weighted value in accordance with a valuation methodology to be prescribed.”

The proposed law seeks to relax such bars that allow the federal government to depart from the principles of sound fiscal and debt management on the grounds of unforeseen demands on account of “national security or natural calamity as determined by the National Assembly”.

Instead, the proposed law seeks to omit the words “national security and natural calamity” and allows any unforeseen demand on the budget may result in a departure from the intended fiscal and debt reduction path to be assessed by the National Assembly.

A new proposed clause also required the finance ministry to prepare an MTMFF covering aggregate fiscal projections, particularly revenues, expenditures and primary balances of the upcoming fiscal year and the two outer years of the federal and provincial governments and other areas of the country.

This would be presented to the National Finance Commission’s monitoring committee before March 15 of every year. The MTMFF has to be published in the budget strategy papers and annual budget statements of federal, provincial and other governments as part of their budget documents.

The existing law allows a three-year term of the director general and directors extendable for another term while the new law allows three terms of three years each but more terms could be given but not consecutively.

The existing law requires the removal of the director general and other directors through an inquiry by the Federal Public Service Commission if found guilty, but the proposed law seeks their removal by the federal government through an inquiry under the prescribed manner or on performance evaluation by a committee led by the finance minister or secretary.

The DMO would have the powers to maintain a consistent and authenticated record of public debt and government guarantees without prejudice to specific responsibilities of the SBP, Economic Affairs Division, budget and external finance wings of the finance ministry or national savings as it is now but would get additional powers to outsource the record-keeping of these functions through service-level agreements.

The DMO also has an additional responsibility to prepare by law the annual debt review along with progress against the MTMFF in line with government policies with prior approval of the finance secretary.

It would prepare an annual borrowing plan with the support of relevant stakeholders, raise domestic debt through domestic government securities, bank loans or any other instrument except the Central Directorate of National Savings (CDNS).

The DMO would also formulate a process and raise domestic debt through public auctions and issue guidelines to CDNS for domestic borrowing with the approval of the finance secretary.

In addition, it would also raise extern debt through commercial bonds, banks or other instruments and provide advice to the economic affairs division in raising external loans from multilateral and bilateral lenders.

Earlier, many of these functions were in the hands of budget and external finance wings of the finance ministry.

Published in Dawn, December 6th, 2021