Lessons from IMF’s Country Report

The International Monetary Fund (IMF) published on November 17, 2023 Country Report No. 23/370 titled Pakistan Technical Assistance Report–Public Investment Management Assessment–PMIA and climate PMIA [hereinafter “the Report”] prepared during the period of March 14 to March 28, 2023 at the request of our Ministry of Finance with joint assistance from IMF’s Fiscal Affairs Department and World Bank.

The Report states that the efficacy of fiscal targets and regulations in Pakistan’s case has always been limited, with fiscal rules showing minimal impact on curbing expenditure over the past decade, and frequent breaches of debt limits. Institutional strength in relation to national and sectoral planning is also stated to be low, marked by cessation of five-year plan in 2018.

The longstanding tradition of Pakistan’s five-year national planning came to a halt in 2018 and present planning documents lack cost assessments and measurable outcomes. The primary national planning document at present is Vision 2025, adopted in 2011.

Although it outlines seven development pillars and their associated goals, it is primarily aspirational, lacking specific key investment projects, their costs, or their role in accomplishing these objectives.

Since 1955, a more comprehensive five-year development strategy had directed public investment planning, delineated specific projects, and occasionally estimated their costs to attain defined objectives.

However, the most recent strategy (2018 to 2023) was formulated but remained unadopted due to a change in government. Punjab is the only province maintaining this form of medium-term planning. While there are sectoral policies in areas like transport, health, and electricity, they lack identification of investment projects and measurable targets.

Two noteworthy exceptions include the 2017-2030 Plan for China-Pakistan Economic Corridor (CPEC), which encompasses several projects managed by the CPEC Authority, and the National Climate Change Policy (NCCP) updated till October 2021, which outlines specific actions related to energy and climate.

The absence of medium-term planning documents creates a practical disconnect between the annual budget, investment plans, and the goals outlined in Vision 2025 now that it is close to its end, there is a compelling reason to energize this initiative, given the anticipated constrained fiscal capacity in the upcoming years and the imperative to collaboratively identify growth drivers—where public infrastructure plays a crucial role.

Since the current and development budgets are prepared independently by different ministries the overall budget lacks comprehensiveness and coordination. Moreover, the law does not mandate autonomous bodies to report projects funded from their own sources.

Regarding climate-awareness planning, Pakistan’s public investment lacks centralized direction and a multi-year investment strategy. Faulty urban planning and outdated building codes have failed to incorporate climate-related objectives and risks.

Additionally, project appraisal and selection criteria do not consider climate change, and there is an absence of a framework to assess climate sensitivity of Public-Private Partnerships (PPPs).

The Report suggests that Pakistan should do the following to achieve better results:

• Formulate a new five-year strategy that outlines significant projects spanning all sectors and identify funding sources to guide sectoral investment plans. Enhance the appraisal process for large projects by increasing independent scrutiny and developing guidance on crucial appraisal inputs.

• Improve information, scrutiny, and coordination of major projects, irrespective of their funding source, while addressing the fiscal risks they may pose.

• Include summary information on key aspects of the Public Sector Development Programme (PSDP) and the broader public investment programmes in budget documentation.

• Update and supplement the regulatory framework and appraisal methodologies for Public-Private Partnerships (PPPs) across various sectors and levels of government.

As of 2019, the public capital stock in Pakistan constituted 55% of GDP, indicating the end of three decades marked by fluctuations in spending. The public investment budget has exhibited a procyclical pattern, with PPPs investments showing an inverse trend.

In the 1990s, there was a significant decline in the annual investment flow—from nearly 6% of nominal GDP in 1992 to less than 2% in 2000. Subsequently, the following two decades witnessed substantial oscillations, with annual investment flow fluctuating between 4.5% and 2.5%, experiencing notable peaks in 2007 and 2017.

In terms of nominal values, public investment has exhibited fluctuations in recent years. There was a notable increase from2016-17 to 2017-18, reaching approximately Rs. 500 billion and maintaining stability at around Rs. 2000 billion in 2018-19.

Subsequently, there was a gradual decline in 2019-20 and 2020-21, resulting in a lower investment budget of approximately Rs. 1700 billion. However, this was followed by a significant escalation to nearly Rs. 2400 billion. When considered as a percentage of GDP, the overall trend during this period is characterized by a decline—from a peak of 5.28% in2017-18 to 3.55% in 2021-22.

Pakistan’s capital stock, when assessed on a per capita basis, is notably lower compared to its peers. The peer group, referred to as ‘Peers 1’ in the Report comprises Bangladesh, Egypt, Iran, India, Indonesia, Morocco, and Turkey.

In 2019, Pakistan’s capital stock ranked sixth out of the selected eight, representing 54.9% of GDP (purchasing power parity adjusted). However, upon scrutiny of capital stock per capita, Pakistan falls in the last position at US$ 1,900 per capita, slightly trailing behind Bangladesh. This discrepancy is indicative of Pakistan’s elevated birthrate and comparatively slower GDP growth in comparison to most of its peer countries.

Following the Constitution (Eighteenth Amendment) Act 2010 [Commonly called 18th Amendment], a growing portion of public investment has been carried out by provincial governments. The 18th Amendment conferred greater autonomy and authority to provinces, empowering them with control over education and health.

Additionally, it augmented the allocation of federal resources to the provinces and authorized them to generate and retain revenue from specific sources. As a result, capital investment conducted at the subnational level (encompassing provinces and special areas) has consistently increased, constituting an average of 60% of total capital expenditure over the past six years.

On the contrary, at the federal level, capital spending is directly carried out by line ministries or by autonomous and semi-autonomous agencies, such as National Highway Authority, Water and Power Development Authority, Pakistan Civil Aviation Authority, and various Port Authorities.

The Fiscal Responsibility and Debt Limitation Act, 2005 establishes a cap on the total public debt at 60% of GDP. An amendment in 2016 introduced an operational limit to the debt ceiling, specifying that the annual federal deficit (excluding grants) should not surpass 4% of GDP from fiscal year (FY) 2018 to FY2021, and 3.5% of GDP thereafter.

The 2016 Amendment mandated measures to reduce debt below the 60% ceiling within two years and outlined a trajectory for further reduction until 2033. To constrain contingent liabilities, a 2022 Amendment restricted the stock of Federal government guarantees to 10% of GDP.

However, the debt and deficit ceilings outlined in this framework have proven ineffective in curbing expenditure, with consistent breaches over the years.

Total public debt has seen an upward trend since 2010, consistently surpassing the 60% ceiling after 2012. In contrast, provinces have consistently maintained fiscal surpluses in recent years, with their aggregated fiscal surpluses averaging 0.4% of GDP from FY2016 to FY2022.

Non-compliance with fiscal rules are due to several factors, but reforms in public financial management can enhance fiscal discipline. Some of these reforms are currently underway and progressing effectively.

They encompass initiatives to fortify the budget process and increase transparency, establishment of new mechanisms for coordinating cash and debt management, and enforcement of commitment controls.

The technical assessment Report underscores the following:

• Absence of a comprehensive medium-term planning document undermines the connection between economic development aspirations and their realization through public infrastructure projects.

• Enhancing the appraisal process is imperative, with larger projects warranting greater scrutiny through more thorough analysis and review compared to smaller projects. Furthermore, the public disclosure of feasibility studies and ex-post reviews has proven highly beneficial in enhancing the quality of these documents and ensuring accountability, particularly for significant projects.

• Public investments lack effective coordination and a comprehensive presentation across all funding sources. Autonomous entities undertake substantial investments with their own revenue, which, due to less oversight and coordination, can lead to challenges.

There is a necessity to enhance the monitoring of investment plans for State-Owned Enterprises (SOEs) and gain a better understanding of their impact on the broader public investment portfolio and fiscal position.

• Project selection is inherently distinct from the processes of planning and appraising projects. It entails choosing projects from a pool of appraised options, giving due consideration to pertinent economic, social, environmental, and other objectives. The project selection process should incorporate a centralized review of project proposals to ensure uniform analysis and the creation of an efficient project pipeline. Additionally, the criteria for project selection should be clearly defined and transparent.

• Enhancing allocative efficiency can be achieved by employing comprehensive selection criteria to direct the allocation of development budget funding. Currently, there is insufficient guidance on the criteria for selecting projects to receive limited funding in the Public Sector Development Programme (PSDP).

• Excessively large numbers of ongoing projects in the Public Sector Development Programme (PSDP) lead to project delays and escalated costs.

The presence of a substantial stock of technically approved and ongoing projects, surpassing available funding, results in projects being unable to meet their scheduled completion timelines.

According to estimates by the Planning Commission, project delays and cost overruns are approximately 2 to 3 times the initially planned figures.

• Ministries lack multi-year PSDP ceilings, hindering their ability to efficiently plan and execute projects over an extended period. Additionally, approved annual budgets are not strictly adhered to as there exists considerable flexibility for ministries and the executive to adjust within the fiscal year.

The Auditor General of Pakistan (AGP), a constitutional post, conducts an annual review of procurements for all public investment projects. Additionally, procuring entities routinely provide information on contracts exceeding Rs. 50 million to the National Accountability Bureau.

The Public Procurement Regulatory Authority (PPRA) conducts a preliminary review of advertisements before publication and addresses complaints related to the procurement process. The Competition Commission of Pakistan is legally empowered to detect and prosecute collusive bidding in public procurement.

However, there is a lack of a structured procurement database with analytical capabilities, notwithstanding the individual mechanisms and mandates for oversight by various agencies. Such a database alone could assess information from different sources to identify and act when actual procurement practices deviate from the standard. Procurement information is currently available in fragmented forms, such as advertisements, evaluation reports, and the disclosure of contract awards on the PPRA website. Additionally, audit observations highlighting noncompliance are present in AGP’s reports.

However, there is no structured data available on compliance and performance.

The Report provides clear guidance and recommendations to address these issues in Pakistan. Implementing the suggestions outlined in this Report will not only assist in resolving our fiscal discipline issues but also promote public investment, setting the country on the path to prosperity.

(Huzaima Bukhari & Dr Ikramul Haq, lawyers and partners of Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS), members Advisory Board and Visiting Senior Fellows of Pakistan Institute of Development Economics (PIDE) and Abdul Rauf Shakoori is a corporate lawyer based in the USA and an expert in ‘White Collar Crimes and Sanctions Compliance’)

Copyright Business Recorder, 2023