## _cr08129

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---

### INTRODUCTION — Overview and purpose of this update
- Original fiscal ROSC issued in November 2000; updates during Article IV consultations in 2002 and 2004.
- Present update carried out in association with an FAD technical assistance mission on public financial management (PFM) issues.
- Focus: transparency aspects of fiscal management reforms reviewed by that mission and implementation of key ROSC recommendations.
- Reform status noted:
  - Government is at a relatively advanced stage in introducing a comprehensive financial management information system and strengthening the audit function at the federal, provincial, and district levels.
  - Government is progressively introducing a medium-term budgeting framework (MTBF) at the federal level and initiating complementary processes in provinces.
  - Stronger legal framework through the Fiscal Responsibility and Debt Limitation Law (FRDL) enacted in June 2005.
- This update assesses the impact of reforms to date against the main principles of fiscal transparency, indicates reforms underway, and suggests priorities for further transparency improvements.
- The mission did not carry out a full reassessment of the 2000 fiscal ROSC; the original ROSC or update assessments remain unchanged except where otherwise noted.

### A. Clarity of Roles and Responsibilities — key findings
- Medium-term budgeting and planning responsibilities:
  - Traditional planning and budgeting responsibilities have not been fully redefined or coordinated for medium-term budgeting.
  - Limited steps taken to modify separate processes, revise the regulatory environment, or redefine responsibilities for preparation and execution of development and recurrent budgets.
- Fiscal Responsibility and Debt Limitation Law (FRDL):
  - FRDL provides regulatory support for fiscal policy transparency and fiscal reform.
  - Rules-based policies embedded in the FRDL and its publication requirements establish clear standards of accountability for fiscal discipline.
  - Authorities preparing statements concerning reporting compliance with the NAM chart of accounts.
  - Effective implementation requires rigorous application of international standards of fiscal reporting and accounting to ensure verifiable observance of rules.
- Separation of monetary and fiscal policy:
  - State Bank of Pakistan (SBP) has a high degree of operational autonomy in monetary policy.
  - Practice of automatic financing of short-term government liquidity needs may interfere with monetary policy if government does not carefully husband cash resources and exercise expenditure control during the year.
- Financial relations with state-owned enterprises and financial sector:
  - Continued privatization has reduced public sector involvement, particularly in the financial sector; as of February 2007, private sector ownership of the banking and financial sector was about 86 percent.
  - Government equity holdings and policies toward enterprises are maintained by the Corporate Wing of the Ministry of Finance (MOF); data on government investment are collected but are not currently up-to-date.
  - WAPDA, Pakistan Railways, and Pakistan International Airlines impose substantial drains on the budget; subsidies to KESC continue largely due to electricity tariff regulation.
  - Budget and Economic Survey Annexure 1 summarize “implicit contingent liability,” but do not provide details on performance-related contractual arrangements or long-term cost estimates of regulatory policies and implicit liabilities.
- Historical data point:
  - Total equity in nonfinancial enterprises stood at PKR 299.6 billion as of June 2004, with an average return on equity of 22.4 percent.

### B. Open Budget Preparation, Execution, and Reporting — key findings and progress
- Macro-fiscal framework strengthening in line with FRDL:
  - Establishment of the economic advisor post and the Debt Policy Coordination Office (DPCO) sharpen formulation and implementation of a medium-term macroeconomic framework for budget policy.
  - Role of economic advisor: formulation and maintenance of the medium-term framework, development of long-term (10-year horizon) strategies for economic and fiscal sustainability, and regular reviews of fiscal and debt policy as part of the budget cycle.
  - First steps taken to produce annual statements of fiscal policy and debt policy around the mid-term of the annual budget.
  - Combination of Economic Survey, recent Fiscal Policy Statement and Debt Policy Statement, and a regularly updated medium-term macroeconomic framework provides a basis for policy setting and review.
  - A 10-year macroeconomic perspective paper is envisaged to examine long-term fiscal sustainability issues.
  - The medium-term macroeconomic framework has not yet been published.
  - No formal statement of fiscal risks covering all risks that apply to the annual and medium-term budget exists, although some fiscal risks are presented in Annexure 1.
- MTBF initiated but crucial elements remain incomplete:
  - MTBF process initiated in 2003; detailed activity costing and identification of ministry objectives and output indicators applied progressively from FY 2005–06.
  - From December 2006, strategy changed to emphasize top-down budget control while building management capacity in line ministries.
  - Current and development budgets continue to be prepared and presented as separate elements; three separate call circulars are sent to ministries (current, development, and MTBF budgets).
  - Costs of policy objectives are shown, but further work needed to link output indicators and budget allocations.
  - Out-year estimates lack sufficient technical and policy basis in budget documents; in practice, out-years are resubmitted rather than rolled over as base data for the following year’s budget.
  - MTBF rollout specifics: an MTBF budget was presented for two ministries (Health, and Population Welfare) for FYs 2005–08; for FYs 2007–10, 15 ministries will be presented in the MTBF format; it is intended that all ministries will be covered in the 2009–12 MTBF presentation.
- Cash-basis accounting and financial management information system (PIFRA/SAP):
  - PIFRA implementation accelerated; full cash basis functionality established using SAP accounting software.
  - Accounting and budgeting system operating effectively at 59 out of the total of 133 sites required for coverage of federal, provincial, and district level budgeting and accounting.
  - System fully implemented in the North West Frontier Province; Punjab province expected to be fully covered by September 2007; Sindh Province by December 2007.
  - Federal government coverage contingent on activation of all sites.
  - Monthly summary accounting reports are prepared in a timely way (within 20 days after month-end) for all levels of government using legacy system and SAP sites.
  - Accounts reconciliation improving via monthly review through federal and provincial fiscal monitoring committees; work underway to improve key transaction interfaces, particularly for foreign transactions.
  - System reduces opportunities for discretion (computer-generated checks and, eventually, direct transfer to recipient bank accounts) and reduces transaction processing time.
- Move toward commitments recording and GFSM compliance:
  - Accounting system capable of recording and tracking commitments; commitment accounting being introduced as part of PIFRA.
  - Immediate priority given to extending coverage using cash-basis procedures.
  - Fiscal reports published on the MOF website are not fully GFSM 2001 compatible.
  - Recent mapping work and further system integration should make GFSM 2001 compatibility possible in the near future.
- Addressing discrepancy between fiscal accounts deficit and financing records:
  - Significant discrepancy around 1.2 percent of GDP in 2004–05 between deficit recorded in fiscal accounts and that estimated from financing records.
  - Splitting of responsibilities between AGPR and Budget Wing of MOF has meant no single organizational unit has clear responsibility for eliminating the statistical discrepancy.
  - Problems likely to be overcome once interface between MOF, SBP, Economic Affairs Department (EAD), and AGPR systems is completed.
  - Resolving discrepancy is key to ensuring accountability under the FRDL.
- Internal controls and accountability:
  - Weak internal controls in ministries regularly noted in audit reports of the Auditor General of Pakistan (AGP) and acknowledged by authorities.
  - September 2006 System of Financial Control and Budgeting authorized establishment of chief finance and accounting officers (CFAO) within each ministry.
  - Implementation difficulties related to independent selection of CFAOs by line ministries have prevented completion of this change despite budgetary support.
  - Manuals on internal control prepared and training underway at the Audit and Accounting Training Institute.
  - Stronger SAP system controls and reporting, continuing audit and central agency oversight, and CFAO reforms expected to strengthen ministry management and internal controls over time; crucial for implementing MTBF and audit reforms.
- Replacement of PLAs and assignment accounts:
  - Use of Personal Ledger Accounts (PLAs) and assignment accounts for rapid project disbursement being gradually replaced by more accountable mechanisms.
  - PLAs/assignment accounts recorded as spending when created, give direct authority for project managers to write checks against the public account, and are subject to ex post audit (acknowledged as weak).
  - Receipts (authority granted) to such accounts grew from PKR billion 103.3 in FY 2004–5 to PKR billion 159.0 in FY 2005–6.
  - Payments (actual expenditure) from the accounts expanded from PKR billion 110 to 143.4 over this period.
  - Subsequent to the ROSC assessment, from July 1, 2007, authorities introduced regulations to replace PLAs and assignment accounts with NAM compliant procedures in the SAP system, booking expenditure at time of actual spending.
- Procurement regulations:
  - Federal procurement strengthened: Public Procurement Regulatory Authority (PPRA) set up in 2002; Public Procurement Rules 2004 promulgated.
  - Detailed implementing procedures yet to be developed; monitoring capacity under development.
  - Provinces: Punjab, North West Frontier, and Sindh developing their own regulations; Balochistan adopted federal procurement rules but not yet operational.

### C. Public Availability of Information — key findings
- Coverage and accessibility:
  - Budget and accounts documents cover most general government transactions and are accessible to the public.
  - Budget and accounts documents are fully consistent with the new chart of accounts and provide both functional and economic (object) classification.
- Analytical information gaps:
  - Budget documents do not include a summary analytical table giving comparisons between original budget and actual data over several immediately prior budget years, although detailed data to make such comparisons is available.
  - Annual appropriation accounts, available only recently within 12 months of the budget year-end, compare actual expenditure with original and revised budget for the relevant year, indicating any variance.
  - Detailed review of actual revenue collection versus targets provided in the annual Central Board of Revenue Year Book and quarterly in the CBR Quarterly Review.
  - SBP Annual Report provides tables of government fiscal data drawn from annual budget and accounts documents in its statistical annexure.
- Public debt reporting and coordination:
  - Economic Survey includes detailed tables and analysis of domestic and foreign public debt, but data for the current and previous year are provisional.
  - SBP reports regularly on public debt in the statistical annexure to its Annual Report.
  - Three organizations responsible for different elements of public debt:
    - SBP: domestic market borrowing via treasury bills and Pakistan investment bonds.
    - Central Directorate of National Savings: nonbank borrowing through the National Savings Scheme.
    - Economic Affairs Department (EAD): external borrowing and grants; foreign economic assistance reported quarterly (about two month lag) and annually in its Year Book; operates external debt database using Debt Management and Financial Accounting System (DMFAS).
  - Reconciling data from these sources and incorporating them in government accounts remains a major continuing problem.
  - Federal Fiscal Monitoring Committee, with assistance from PIFRA, is addressing reconciliation; a system interface between EAD and AGPR is being prepared to reconcile debt-related data.
  - Debt Policy Statement produced by DPCO will rely on available data and provide a sharper focus for resolution of data issues.

### 17. Tax expenditure reporting; Quality of fiscal data; External audit
- Tax expenditure reporting:
  - Tax expenditures are now reported regularly in the Economic Survey (Annexure 2 of the budget) and these estimates are being used by the Central Board of Revenue in its consideration of tax policy changes.
  - Not all exemptions are considered to be tax expenditures. Exemptions designed to encourage foreign investment are not included in the tax expenditure report and absence of this data limits the possibilities for a comprehensive review of tax policy.
- Quality and timeliness of fiscal data:
  - Data comparing original budget with actual outcomes is not readily available on a timely basis.
  - Available data indicates that, in recent years, revenue and grants have substantially outperformed the original budget forecasts, permitting increases in spending through supplementary appropriations during the year.
  - An underlying factor cited by the authorities has been the “soft budget constraint” strategy used to manage budget demands.
  - Lack of reliable forecasts reduces the transparency of government fiscal policy and will make implementation of an effective MTBF more difficult.
- External audit reforms and capacity:
  - Under the PIFRA project, the Auditor General of Pakistan (AGP) has introduced modern, risk- and system-based audit methodology and is applying this to all levels of government (including state-owned enterprises) under AGP jurisdiction.
  - A financial audit manual has been produced and distributed and some 370 staff have been trained.
  - The program is on track to apply these techniques to the finance and appropriation accounts for federal and provincial governments FY 2005–06 (during audit year 2006–07), and for district and self-accounting entities in audit year 2007–08.
  - Risk- and system-based techniques will improve audit efficiency, effectiveness and quality and will emphasize examination of the effectiveness of agency systems of internal controls.
- Audit timeliness, access, and follow-up:
  - Audit of the federal, provincial, and district accounts for FY2005–06 is targeted for completion by June 2007.
  - The 2004–05 accounts have just been presented to the president; presentation of audited accounts to the national and provincial assemblies within 12 months or less is expected to become standard.
  - After certification, the AGP presents the certified accounts to the president, who places them before parliament for consideration by the assembly and its Public Accounts Committee (PAC). Immediately upon tabling in parliament, the audited accounts become public documents.
  - PAC meetings to discuss audit findings with principal accounting officers are open to the public. The AGP reports enhanced authority to ensure follow-up of PAC directives.
  - PACs were not operational for two years from 2000, creating a backlog of audit reports yet to be reviewed. Subcommittees have been set up within the PAC to take action on all audit reports now tabled for PAC review.
- Legal and operational audit limitations:
  - Under the Auditor General's Ordinance, the AGP is prevented from auditing government bodies or authorities if their own ordinance requires audit by bodies other than the AGP. This has limited audit scope in agencies such as the National Highways Authority.
  - Operational factors previously limited scope: because of differences in approach to valuation of liabilities between AGPR and the EAD, the AGP has in the past not audited the stock of debt, but has only audited borrowing and repayment flow data. The AGP is examining measures to remedy this.

### IMF staff commentary — overall assessment
- PFM reforms have resulted in significant improvements against each of the four main fiscal transparency code principles since the 2004 ROSC update.
- Notable improvements:
  - FRDL clarifying fiscal management roles.
  - Implementation of the new accounting model and computerized accounting under PIFRA.
  - Statements on fiscal policy and debt policy under the FRDL.
  - Regular reports on tax expenditures and contingent liabilities annexed to the Economic Survey.
  - AGP strengthening quality and timeliness of external audit.
- Significant weaknesses remain in three main areas:
  - Internal controls and management capacity within line ministries are weak.
  - Inherited systems of planning, budgeting, and reporting need progressive modification to meet MTBF, FRDL, and international standards.
  - Cooperation among main stakeholders in implementing PFM reforms has been limited.

### Immediate and short-term recommendations (selected)
- Ensure fully GFS-compliant reports are generated by the SAP system; map the chart of accounts classification against GFSM 2001.
- Develop a comprehensive manual specifying application of the economic (object) classification code to elements of expenditures.
- Establish a well-trained unit within CGA/AGPR responsible for review of classification, advice, and training to federal and provincial accounting staff; consider giving full operational fiscal reporting responsibility to a single organization (CGA/AGPR) with MOF review.
- Incorporate economic (object) classifications fully in the monthly Civil Accounts; SAP rollout and PIFRA emphasize consolidated detailed monthly reports.
- Strengthen reporting on off-budget activity and fiscal risks:
  - a. Identify other exemptions for specific activities (such as industry-specific exemptions to encourage investment) in addition to currently defined tax expenditures, and provide estimates of revenue foregone; these could be separately identified under “structural exemptions.”
  - b. In the contingent liabilities annexure, extend estimates of cost of implicit contingent liabilities to cover the full cost of the quasi-fiscal activity for which the subsidy is given.
  - c. Make government holdings of equity and policies toward its enterprises more explicit and include up-to-date data on government holdings as part of the Economic Survey.
- Issue a fiscal risk statement as part of the budget papers covering explicit and implicit contingent liabilities, macroeconomic risks from changes in price, interest, or exchange rate, and control risks based on original budget versus actual outcomes.
- Replace PLAs and assignment accounts with NAM compliant alternatives as soon as possible.

### Medium- and long-term recommendations (selected)
- Develop a program classification, based on subdetail functions, covering all ministries as part of the full MTBF rollout to:
  - Unify development and recurrent budget processes.
  - Eliminate crossover problems when development phases complete and recurrent costs transfer to the revenue budget.
  - Provide a framework for phased establishment of effective budget management by line ministries.
  - Coordinate cross-government programs, particularly those included in the PRSP.
  - Set a basis for redefinition and harmonization of the roles of the Planning and Development Division (PDD) and the Budget Wing of the MOF.
- Include actual outcomes as well as forward estimates in the MTBF presentation; show actual outcomes for two years previous and provisional data for one year previous to the budget year and include summary tables showing original budget versus actual outcomes over several years.
- Specify methodology for preparing MTBF out-year estimates with clear technical specifications (such as price) and policy parameters to improve efficiency, transparency, and accountability.
- Prepare a road-map for organizational change associated with major reforms and monitor implementation at a high level; redefine roles of PDD and MOF, improve coordination between Budget and Expenditure Wings, and change responsibilities between central agencies and line ministries as MTBF and internal controls are implemented.
- Accelerate action on filling internal control posts and give clear appointment authority to PAOs; implement CFAO or equivalent positions in ministries, resolve ambiguities on CFAO relationships to central agencies, and favor giving full responsibility for selection of appointees directly to the PAOs, subject to appropriate qualifications.
- Maintain and link procurement practice reforms to present PFM reforms; use SAP platform to monitor procurement and link to contract-tracking software.
- Encourage the AGP to amend the legal framework for audit to permit all areas of risk to the public finances to be audited under the AGP’s direction.

*Source: _cr08129 - INTRODUCTION; _cr08129 - 17. Tax expenditure reporting has been established but could be further*

### INTRODUCTION

### INTRODUCTION

### Overview and purpose of this update
- The original fiscal ROSC was issued in November 2000, and was subsequently updated during Article IV consultations in 2002 and 2004.  
- The present update was carried out in association with an FAD technical assistance mission on public financial management (PFM) issues.  
- Focus: transparency aspects of fiscal management reforms reviewed by that mission and implementation of key ROSC recommendations.  
- Reform status noted:
  - Government is at a relatively advanced stage in introducing a comprehensive financial management information system and strengthening the audit function at the federal, provincial, and district levels.1
  - Government is progressively introducing a medium-term budgeting framework (MTBF) at the federal level and initiating complementary processes in provinces.2
  - Stronger legal framework through the Fiscal Responsibility and Debt Limitation Law (FRDL) enacted in June 2005.
- This update assesses the impact of reforms to date against the main principles of fiscal transparency, indicates reforms underway, and suggests priorities for further transparency improvements.
- The mission did not carry out a full reassessment of the 2000 fiscal ROSC; the original ROSC or update assessments remain unchanged except where otherwise noted.

*1 Through the World Bank-supported Pakistan Improvement to Accounting and Auditing (PIFRA) project.*  
*2 Supported by the U.K. Department for International Development.*

### A. Clarity of Roles and Responsibilities — key findings
- Traditional planning and budgeting responsibilities have not been fully redefined or coordinated for medium-term budgeting.
  - Medium-term budgeting was seen in the 2000 fiscal ROSC as important for clarifying planning–budgeting linkages; limited steps have been taken to modify separate processes, revise the regulatory environment,3 or redefine responsibilities for preparation and execution of development and recurrent budgets.
- FRDL provides regulatory support for fiscal policy transparency and fiscal reform.
  - Rules-based policies embedded in the FRDL and its publication requirements establish clear standards of accountability for fiscal discipline.4
  - Authorities are preparing statements concerning reporting compliance with the NAM chart of accounts.
  - Effective implementation requires rigorous application of international standards of fiscal reporting and accounting to ensure verifiable observance of rules.
- Separation between monetary and fiscal policy remains incomplete.
  - State Bank of Pakistan (SBP) has a high degree of operational autonomy in monetary policy, as noted in the 2000 ROSC.
  - Practice of automatic financing of short-term government liquidity needs may interfere with monetary policy if government does not carefully husband cash resources and exercise expenditure control during the year.
- Financial relations with state-owned enterprise and financial sector being streamlined, but further work needed.
  - Continued privatization has reduced public sector involvement, particularly in the financial sector.5
  - Government equity holdings and policies toward enterprises are maintained by the Corporate Wing of the Ministry of Finance (MOF); data on government investment are collected but are not currently up-to-date.6
  - WAPDA, Pakistan Railways, and Pakistan International Airlines impose substantial drains on the budget; subsidies to KESC continue largely due to electricity tariff regulation.
  - Budget and Economic Survey Annexure 1 summarize “implicit contingent liability,” but do not provide details on performance-related contractual arrangements or long-term cost estimates of regulatory policies and implicit liabilities.

*3 Regulatory reform was started in September 2006 with the adoption of the System of Financial Control and Budgeting. Further development of higher level legal framework may be required in due course.*  
*4 The rules require, among other things (a) reducing the revenue deficit to nil by end-June 2008; (b) achieving a debt/GDP ratio below 60 percent by June 2013; (c) annual reduction of debt by 2.5 percent of GDP; (d) issuance of guarantees to be less than 2 percent of GDP each year. Objective (b) was achieved in 2005–06, and the authorities advise that rule (c) continues to apply.*  
*5 As of February 2007, private sector ownership of the banking and financial sector was about 86 percent and the government plans further divestment of shares in several domestic banks.*  
*6 Total equity in nonfinancial enterprises stood at PKR 299.6 billion as of June 2004, with an average return on equity of 22.4 percent and considerable variation among enterprises. These data are to be brought up to date for 2007.*

### B. Open Budget Preparation, Execution, and Reporting — key findings and progress
- Macro-fiscal framework strengthening in line with FRDL.
  - Establishment of the economic advisor post and the Debt Policy Coordination Office (DPCO) sharpen formulation and implementation of a medium-term macroeconomic framework for budget policy.
  - Role of economic advisor: formulation and maintenance of the medium-term framework, development of long-term (10-year horizon) strategies for economic and fiscal sustainability, and regular reviews of fiscal and debt policy as part of the budget cycle.
  - First steps taken to produce annual statements of fiscal policy and debt policy around the mid-term of the annual budget.7
  - Combination of Economic Survey, recent Fiscal Policy Statement and Debt Policy Statement, and a regularly updated medium-term macroeconomic framework provides a basis for policy setting and review.
  - A 10-year macroeconomic perspective paper is envisaged to examine long-term fiscal sustainability issues.
  - The medium-term macroeconomic framework has not yet been published.
  - No formal statement of fiscal risks covering all risks that apply to the annual and medium-term budget exists, although some fiscal risks are presented in Annexure 1.
- MTBF initiated but crucial elements remain incomplete.
  - MTBF process initiated in 2003; detailed activity costing and identification of ministry objectives and output indicators applied progressively from FY 2005–06.8
  - Phase one emphasis: better costing and budget preparation techniques in line ministries.
  - From December 2006, strategy changed to emphasize top-down budget control while building management capacity in line ministries.
  - Current and development budgets continue to be prepared and presented as separate elements; three separate call circulars are sent to ministries (current, development, and MTBF budgets).
  - Costs of policy objectives are shown, but further work needed to link output indicators and budget allocations.
  - Out-year estimates lack sufficient technical and policy basis in budget documents; in practice, out-years are resubmitted rather than rolled over as base data for the following year’s budget.
- Cash-basis accounting and financial management information system progress.
  - PIFRA implementation accelerated; full cash basis functionality established using SAP accounting software.
  - Accounting and budgeting system operating effectively at 59 out of the total of 133 sites required for coverage of federal, provincial, and district level budgeting and accounting.
  - System fully implemented in the North West Frontier Province; Punjab province expected to be fully covered by September 2007; Sindh Province by December 2007.
  - Federal government coverage contingent on activation of all sites.
  - Monthly summary accounting reports9 are prepared in a timely way (within 20 days after month-end) for all levels of government using legacy system and SAP sites.
  - Accounts reconciliation improving via monthly review through federal and provincial fiscal monitoring committees; work underway to improve key transaction interfaces, particularly for foreign transactions.
  - System reduces opportunities for discretion (computer-generated checks and, eventually, direct transfer to recipient bank accounts) and reduces transaction processing time.
- Move toward commitments recording and GFSM compliance.
  - Accounting system capable of recording and tracking commitments; commitment accounting being introduced as part of PIFRA.
  - Immediate priority given to extending coverage using cash-basis procedures.
  - Fiscal reports published on the MOF website (http://www.finance.gov.pk/pak_fis/main.htm) are not fully GFSM 2001 compatible.
  - Recent mapping work and further system integration should make GFSM 2001 compatibility possible in the near future.
- Addressing discrepancy between fiscal accounts deficit and financing records.
  - Significant discrepancy around 1.2 percent of GDP in 2004–05 between deficit recorded in fiscal accounts and that estimated from financing records.
  - A rigorous mapping and analysis of the reconciliation process should resolve this issue.
  - Splitting of responsibilities between AGPR and Budget Wing of MOF has meant no single organizational unit has clear responsibility for eliminating the statistical discrepancy.
  - Problems likely to be overcome once interface between MOF, SBP, Economic Affairs Department (EAD), and AGPR systems is completed.
  - Resolving discrepancy is key to ensuring accountability under the FRDL.
- Internal controls and accountability
  - Weak internal controls in ministries are regularly noted in audit reports of the Auditor General of Pakistan (AGP) and acknowledged by authorities.
  - September 2006 System of Financial Control and Budgeting authorized establishment of chief finance and accounting officers (CFAO) within each ministry.10
  - Implementation difficulties related to independent selection of CFAOs by line ministries have prevented completion of this change despite budgetary support.
  - Manuals on internal control prepared and training underway at the Audit and Accounting Training Institute.
  - Stronger SAP system controls and reporting, continuing audit and central agency oversight, and CFAO reforms expected to strengthen ministry management and internal controls over time; crucial for implementing MTBF and audit reforms.
- Replacement of PLAs and assignment accounts
  - Use of Personal Ledger Accounts (PLAs) and assignment accounts for rapid project disbursement being gradually replaced by more accountable mechanisms.
  - PLAs/assignment accounts recorded as spending when created, give direct authority for project managers to write checks against the public account, and are subject to ex post audit (acknowledged as weak).
  - Receipts (authority granted) to such accounts grew from PKR billion 103.3 in FY 2004–5 to PKR billion 159.0 in FY 2005–6.
  - Payments (actual expenditure) from the accounts expanded from PKR billion 110 to 143.4 over this period.
  - Subsequent to the ROSC assessment, from July 1, 2007, authorities introduced regulations to replace PLAs and assignment accounts with NAM compliant procedures in the SAP system, booking expenditure at time of actual spending.
- Procurement regulations
  - Federal procurement strengthened: Public Procurement Regulatory Authority (PPRA) set up in 2002; Public Procurement Rules 2004 promulgated.
  - Detailed implementing procedures yet to be developed; monitoring capacity under development.
  - Provinces: Punjab, North West Frontier, and Sindh developing their own regulations; Balochistan adopted federal procurement rules but not yet operational.13

*8 That is, with the first year in FY 2004–5 and the third out-year in FY 2007–8. An MTBF budget was presented for two ministries (Health, and Population Welfare) for FYs 2005–08. For FYs 2007–10, 15 ministries will be presented in the MTBF format, and it is intended that all ministries will be covered in the 2009–12 MTBF presentation. The first year of the MTBF budget corresponds precisely to the appropriated and charged expenditures included in the annual budget for these ministries. Out-years beyond the budget year are not appropriated.*  
*9 At present, at functional level only. Work is underway to prepare reports with an object-wise summary in early 2007.*  
*10 The budget and accounting processes of government are currently highly centralized: financial advisors (FAs) from the MOF, attached to each ministry, supervise budget preparation and execution processes; nearly all payments are pre-audited and executed through the federal and provincial Accountant Generals (AGs) and the Controller General of Accounts (CGA).*  
*12 Assessment in this area is based on World Bank analysis.*

### C. Public Availability of Information — key findings
- Coverage and accessibility
  - Budget and accounts documents cover most general government transactions and are accessible to the public.
  - Budget and accounts documents are fully consistent with the new chart of accounts and provide both functional and economic (object) classification.
- Analytical information gaps
  - Budget documents do not include a summary analytical table giving comparisons between original budget and actual data over several immediately prior budget years, although detailed data to make such comparisons is available.
  - Annual appropriation accounts, available only recently within 12 months of the budget year-end, compare actual expenditure with original and revised budget for the relevant year, indicating any variance.
  - Detailed review of actual revenue collection versus targets provided in the annual Central Board of Revenue Year Book and quarterly in the CBR Quarterly Review.
  - SBP Annual Report provides tables of government fiscal data drawn from annual budget and accounts documents in its statistical annexure.
- Public debt reporting improved, but data coordination issues persist
  - Economic Survey includes detailed tables and analysis of domestic and foreign public debt, but data for the current and previous year are provisional.
  - SBP reports regularly on public debt in the statistical annexure to its Annual Report.
  - Three organizations responsible for different elements of public debt:
    - SBP: domestic market borrowing via treasury bills and Pakistan investment bonds.
    - Central Directorate of National Savings: nonbank borrowing through the National Savings Scheme.
    - Economic Affairs Department (EAD): external borrowing and grants; foreign economic assistance reported quarterly (about two month lag) and annually in its Year Book; operates external debt database using Debt Management and Financial Accounting System (DMFAS).
  - Reconciling data from these sources and incorporating them in government accounts remains a major continuing problem.
  - Federal Fiscal Monitoring Committee, with assistance from PIFRA, is addressing reconciliation; a system interface between EAD and AGPR is being prepared to reconcile debt-related data.
  - Debt Policy Statement produced by DPCO will rely on available data and provide a sharper focus for resolution of data issues.

*13 Assessment in this area is based on World Bank analysis.*

*Source: _cr08129 - INTRODUCTION*

### 17. Tax expenditure reporting has been established but could be further

### _cr08129 - 17. Tax expenditure reporting has been established but could be further

### Tax expenditure reporting
- Tax expenditures are now reported regularly in the Economic Survey (Annexure 2 of the budget) and these estimates are being used by the Central Board of Revenue in its consideration of tax policy changes.
- Not all exemptions are considered to be tax expenditures. Exemptions designed to encourage foreign investment are not included in the tax expenditure report and absence of this data limits the possibilities for a comprehensive review of tax policy.

### Quality and timeliness of fiscal data
- Data comparing original budget with actual outcomes is not readily available on a timely basis.
- Available data indicates that, in recent years, revenue and grants have substantially outperformed the original budget forecasts, permitting increases in spending through supplementary appropriations during the year.
- An underlying factor cited by the authorities has been the “soft budget constraint” strategy used to manage budget demands.
- Lack of reliable forecasts reduces the transparency of government fiscal policy and will make implementation of an effective MTBF more difficult.

### External audit reforms and capacity
- Under the PIFRA project, the Auditor General of Pakistan (AGP) has introduced modern, risk- and system-based audit methodology and is applying this to all levels of government (including state-owned enterprises) under AGP jurisdiction.
- A financial audit manual has been produced and distributed and some 370 staff have been trained.
- The program is on track to apply these techniques to the finance and appropriation accounts for federal and provincial governments FY 2005–06 (during audit year 2006–07), and for district and self-accounting entities in audit year 2007–08.
- Risk- and system-based techniques will improve audit efficiency, effectiveness and quality and will emphasize examination of the effectiveness of agency systems of internal controls.

### Audit timeliness, access, and follow-up
- Audit of the federal, provincial, and district accounts for FY2005–06 is targeted for completion by June 2007.
- The 2004–05 accounts have just been presented to the president; presentation of audited accounts to the national and provincial assemblies within 12 months or less is expected to become standard.
- After certification, the AGP presents the certified accounts to the president, who places them before parliament for consideration by the assembly and its Public Accounts Committee (PAC). Immediately upon tabling in parliament, the audited accounts become public documents.
- PAC meetings to discuss audit findings with principal accounting officers are open to the public. The AGP reports enhanced authority to ensure follow-up of PAC directives.
- PACs were not operational for two years from 2000, creating a backlog of audit reports yet to be reviewed. Subcommittees have been set up within the PAC to take action on all audit reports now tabled for PAC review.

### Legal and operational audit limitations
- Under the Auditor General's Ordinance, the AGP is prevented from auditing government bodies or authorities if their own ordinance requires audit by bodies other than the AGP. This has limited audit scope in agencies such as the National Highways Authority.
- Operational factors previously limited scope: because of differences in approach to valuation of liabilities between AGPR and the EAD, the AGP has in the past not audited the stock of debt, but has only audited borrowing and repayment flow data. The AGP is examining measures to remedy this.

### IMF staff commentary — overall assessment
- PFM reforms have resulted in significant improvements against each of the four main fiscal transparency code principles since the 2004 ROSC update.
- Notable improvements: the FRDL clarifying fiscal management roles; implementation of the new accounting model and computerized accounting under PIFRA; statements on fiscal policy and debt policy under the FRDL; regular reports on tax expenditures and contingent liabilities annexed to the Economic Survey; AGP strengthening quality and timeliness of external audit.
- Significant weaknesses remain in three main areas:
  - Internal controls and management capacity within line ministries are weak.
  - Inherited systems of planning, budgeting, and reporting need progressive modification to meet MTBF, FRDL, and international standards.
  - Cooperation among main stakeholders in implementing PFM reforms has been limited.

### Immediate and short-term recommendations
- Ensure fully GFS-compliant reports are generated by the SAP system; map the chart of accounts classification against GFSM 2001.
- Develop a comprehensive manual specifying application of the economic (object) classification code to elements of expenditures.
- Establish a well-trained unit within CGA/AGPR responsible for review of classification, advice, and training to federal and provincial accounting staff; consider giving full operational fiscal reporting responsibility to a single organization (CGA/AGPR) with MOF review.
- Incorporate economic (object) classifications fully in the monthly Civil Accounts; SAP rollout and PIFRA emphasize consolidated detailed monthly reports.
- Strengthen reporting on off-budget activity and fiscal risks:
  - a. Identify other exemptions for specific activities (such as industry-specific exemptions to encourage investment) in addition to currently defined tax expenditures, and provide estimates of revenue foregone; these could be separately identified under “structural exemptions.”
  - b. In the contingent liabilities annexure, extend estimates of cost of implicit contingent liabilities to cover the full cost of the quasi-fiscal activity for which the subsidy is given.
  - c. Make government holdings of equity and policies toward its enterprises more explicit and include up-to-date data on government holdings as part of the Economic Survey.
- Issue a fiscal risk statement as part of the budget papers covering explicit and implicit contingent liabilities, macroeconomic risks from changes in price, interest, or exchange rate, and control risks based on original budget versus actual outcomes.
- Replace PLAs and assignment accounts with NAM compliant alternatives as soon as possible.

### Medium- and long-term recommendations
- Develop a program classification, based on subdetail functions, covering all ministries as part of the full MTBF rollout to:
  - Unify development and recurrent budget processes.
  - Eliminate crossover problems when development phases complete and recurrent costs transfer to the revenue budget.
  - Provide a framework for phased establishment of effective budget management by line ministries.
  - Coordinate cross-government programs, particularly those included in the PRSP.
  - Set a basis for redefinition and harmonization of the roles of the Planning and Development Division (PDD) and the Budget Wing of the MOF.
- Include actual outcomes as well as forward estimates in the MTBF presentation; show actual outcomes for two years previous and provisional data for one year previous to the budget year and include summary tables showing original budget versus actual outcomes over several years.
- Specify methodology for preparing MTBF out-year estimates with clear technical specifications (such as price) and policy parameters to improve efficiency, transparency, and accountability.
- Prepare a road-map for organizational change associated with major reforms and monitor implementation at a high level; redefine roles of PDD and MOF, improve coordination between Budget and Expenditure Wings, and change responsibilities between central agencies and line ministries as MTBF and internal controls are implemented.
- Accelerate action on filling internal control posts and give clear appointment authority to PAOs; implement CFAO or equivalent positions in ministries, resolve ambiguities on CFAO relationships to central agencies, and favor giving full responsibility for selection of appointees directly to the PAOs, subject to appropriate qualifications.
- Maintain and link procurement practice reforms to present PFM reforms; use SAP platform to monitor procurement and link to contract-tracking software.
- Encourage the AGP to amend the legal framework for audit to permit all areas of risk to the public finances to be audited under the AGP’s direction.

*Source: _cr08129 - 17. Tax expenditure reporting has been established but could be further*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2008/_cr08129.pdf_