Budget Process Pakistan

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Understanding the

Budget ProcessA Handbook for Parliament2014


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Improving Parliamentary Performance in Pakistan

This project is funded bythe European Union

IP3 is Implemented By

Improving Parliamentary Performance in Pakistan (IP3), Islamabad, Paksitan

T: +92 (0) 51 831 8209, F: +92 (0) 51 2821315, [email protected] www.ip3.org.pk


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Budget Guide for Parliamentarians 1

TABLE OF CONTENTS

Purpose of this Guide .................................................................................................................................... 3

CHAPTER 1: THE BASICS ............................................................................................................................. 4

1. What is a Governments Budget? .............. .............. .............. .............. .............. .............. ............... ..... 4

2. Why is the Governments budget important? ............. .............. .............. .............. .............. .............. ... 4

3. Principles of a good Budgeting System ............ .............. .............. .............. .............. .............. ............. 5

4. Budget Transparency ............. .............. ............... .............. .............. .............. .............. .............. .......... 9

5. Budgetary Management Processes ............. .............. .............. .............. .............. .............. .............. . 10

CHAPTER 2: LEGAL REQUIREMENTS AND ROLES ................................................................................ 11

1. Role of the Executive and Legislature in Budgeting .............. .............. .............. .............. ............... ... 11

2. The Constitution of Pakistan and Budget Management System .............. .............. .............. ............. 12

3. Rules and Regulations of the Federal Government .............. .............. .............. .............. ............... ... 17

4. Rules of Procedure of the National Assembly and Senate .............. .............. .............. .............. ........ 18

CHAPTER 3: BUDGET MANAGEMENT ...................................................................................................... 20

1. Budgetary Management Processes ............. .............. .............. .............. .............. .............. .............. . 20

2. Spending reviews ............ .............. ............... .............. .............. .............. .............. .............. .............. . 20

3. Strategy, policy and formulation of plans ............. .............. .............. .............. .............. .............. ........ 21

4. Budget preparation processes .............. ............... .............. .............. .............. .............. .............. ........ 21

5. Presentation of the budget The Budget Books ............ .............. .............. .............. ............... .......... 25

6. Presentation of the budget The Budget Classification System .............. .............. .............. ............. 30

7. Budget Execution Processes .............. .............. .............. .............. .............. .............. ............... .......... 34

8. Accounting, reporting and audit ............ ............... .............. .............. .............. .............. .............. ........ 35

CHAPTER 4: BUDGET RELATED MATTERS ............................................................................................. 37

1. Macroeconomic framework .............. .............. .............. .............. .............. .............. .............. ............. 37

2. Intergovernmental fiscal relations .............. .............. .............. .............. .............. .............. ............... ... 39

3. Assessing public financial management system in a country .............. .............. .............. ............... ... 41

4. Managing Public Debts .............. .............. .............. .............. .............. .............. .............. .............. ...... 44

5. Managing Public Procurements ............ ............... .............. .............. .............. .............. .............. ........ 45


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Budget Guide for Parliamentarians2

CHAPTER 5: BUDGETING AND LEGISLATURE ........................................................................................ 46

1. Budgeting and Legislature Examples of other countries .............. .............. .............. .............. ........ 46

2. Timeframe for Budget passage in other countries ............. .............. .............. .............. .............. ........ 48

3. Parliamentary review and approval .............. .............. .............. .............. .............. .............. .............. . 48

4. Role of Parliamentary Standing Committees .............. .............. .............. .............. .............. .............. . 49

5. Process of Cut-Motions ............. .............. .............. .............. .............. .............. .............. .............. ...... 51

GLOSSARY OF TERMS ............................................................................................................................... 54


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PURPOSE OF THIS GUIDE

This guide is prepared to provide a reference for Parliamentarians on the Federal Governments

budgetary systems. Since the budget occupies a central position in Parliamentary democracy, it is

important for Parliamentarians to have a clear understanding of how budgets are prepared,

executed and monitored to enhance their oversight role.

The budgetary management processes does not only include preparation and presentation of the

annual budget. Equally important are processes that precede budget preparation i.e.

policymaking, planning, and determination of priorities and allocations. Also important are

processes that follow budget preparation i.e. budget execution, accounting, monitoring &

reporting, and auditing.

This guide is divided into chapters.

Chapter 1 presents the basic understanding of what is a government budget and why it is

important. In this chapter an overview of budget processes is provided together with other

concepts that are necessary for understanding budgetary management system. This chapter also

highlights principles of good budgeting systems for the reader to understand international

practices that form the foundation of good budgeting mechanisms.

Chapter 2presents the legal framework and roles of the Executive, Legislature, and Government

institutions of Pakistan in budgeting. This chapter also highlights the important role of Standing

Committees in budgeting.

Chapter 3 provides an understanding of how budgets are prepared, presented, executed,

accounted, and monitored in Pakistan. This chapter also provides an overview of budget books

that are presented by the Executive each year at the time of the budget speech. Also included in

this chapter is a basic understanding of the budget classification system the codes and format of

budget presentation.

Chapter 4discusses broader aspects of the Federal Governments budgeting system. The chapter

provides a brief understanding about macroeconomic frameworks, managing public debts, and

public procurements. This chapter also provides some details related to an assessment of a

countrys budgetary management system.

Chapter 5discusses the role of Parliamentary Standing Committees, and describes the process of

cut-motions undertaken as part of the budget discussions in the National Assembly. It also

includes budgetary processes in other parliaments.


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CHAPTER 1: THE BASICS

1.WHAT IS A GOVERNMENTS BUDGET?

The budget is the Governments most important economic policy tool. Government budgets

translate a Governments policies, political commitments, and goals into decisions. Decisions

such as; how much revenue to raise, how to raise it, and how to use these funds to meet the

countrys competing needs, from bolstering security to improving health care to alleviating

poverty.

International Budget Partnership

2.WHY IS GOVERNMENTS BUDGET IMPORTANT?

In a modern economy, the government budget plays a key role in the maintenance of economic

stability and growth, and the achievement of national objectives. A poorly managed budget canlead to economic instability and national decline.

The budget is one of the most tangible expressions of how a government intends to govern the

state. In many countries, the government is the largest spender of resources. Hence the choice of

allocations through distribution of wealth and income can determine what type of development

outcomes a country intends to achieve.

The government budget also occupies a central position in any system of parliamentary

democracy. The budget is essentially an agreement or contract between the Executive and the

Legislature. It is an expression of no taxation without representation. Through the appropriation

of the budget the Legislature empowers the Executive to raise the revenues and other fundsrequired to finance the delivery of public services. The Executive, for its part, undertakes to

deliver the agreed services and discharge the agreed functions in an economic, effective and

efficient manner.

The budgetary process is inherently and necessarily political in nature as it is driven by the

policies of the Government and involves making choices between alternatives, within limited

resources.


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In a modern democracy accountability and transparency are essential attributes of the budget as

they generate confidence in the political process and the rule of law.

3.PRINCIPLES OF A GOOD BUDGETING SYSTEM

Government should maintain a sustainable fiscal discipline

Fiscal discipline means that government expenditure remains within the limit of its revenues. If

government expenditure exceeds its resources than it either raises debt or prints more money

resulting in a budget deficit. If continued unabated, both of these options are unsustainable.

Governments normally have fiscal responsibility laws to check on the level of borrowings. In

Pakistan, the Fiscal Responsibility and Debt Limitations Act of 2005 provides borrowing limits.

Effective allocation of resources to departments, sectors, and services

Public money should be allocated on the basis of evidence of effectiveness and in furtherance of

the priorities of government. This requires moving away from incremental budgeting (a method

under which a percentage is added to the previous years budget to arrive at the next years

budget). The Government should have the capacity to evaluate activities, which are not

contributing to the achievement of its goals, based on which resources can be shifted to more

efficient use.

Efficient provision of public servicesThe Government should achieve value for money in delivering public services and should be

attentive to the quality and accessibility of services.

Value for money means that the Government should have the capacity to spend resources in such

a manner that results in achievement of objectives with minimum resources (e.g. cost, materials,

people, etc.)

Alignment of policy planning, budgeting and monitoring systems

Budgets should reflect plans and policies of departments. Budgets and plans should be monitored

on a periodic basis and lessons learnt from monitoring should be used to improve the next roundof policy planning.


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Policy / performance based budgeting

Traditionally budgets are made by inputs (i.e. financial, material and human resources). While it

is important to present resources required, it is even more important to present a budget by

outputs (i.e. public services) to understand government priorities and plans.

Budget by Inputs Budget by Outputs

Pay and allowances 100 Primary health care services 50

Operating expenditure 20 Secondary health care services 40

Physical assets 10 Tertiary health care services 55

Repairs and maintenance 25

Total 155 Total 155

In the above example, the health budget is presented by both inputs and outputs. It is easy to

provide expenditure limits on a budget by inputs. Similarly, it is easy to link policy planning,

priorities and performance with budget by outputs.

The Output-based budget introduces results-orientation to budget. This means not only resource

requirements, but the government budget also, presents the expected results that will affect the

beneficiaries.

Medium-Term budgeting and predictability of resources

The budget needs to have a medium term, e.g. 3 years, perspective. Each year the budget should

be made on a rolling-basis (i.e. each year the budget should be presented for the next 3 years)

Economic circumstances may change and so can plans of the Government. It is therefore,

necessary to understand medium term implications of those decisions.

Since government policies are normally of a longer duration (e.g. 5 years), it is also important to

have a medium term perspective in budgeting.

Each year departments must be communicated with medium term ceilings (budget limits) so as

to allow them predictability of resources for better policy planning.

Harmonised Recurrent and Development Budgets to focus on delivery of

services

Effective integration of current and development budgets is one of the hallmarks of a good

budgetary system. Moving to a unified budget, however, can be difficult as it involves legislative,

institutional, budget presentation and expenditure management issues.

From the legislative perspective, presenting a single vote (Demand) for each Principal

Accounting Officer, instead of two votes (Demands); one for recurrent and one for development

may require legal changes and significant consultants within the Parliament. There may also be a


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revision of roles of the Finance Division, and Planning, Development and Reforms Division.

Similarly, the line Ministries may undergo restructuring to focus on a policy-based budget as a

unified activity.

Therefore, countries have adopted stepwise progress. Initially both the recurrent and development

budgets are presented through a unified system of budget classification.

Presenting the budget by Functional classification (as developed by the IMF to provide a list of

standard government functions - e.g. defence, health, education, etc.) can unify the presentation

of the two sides of the budget.

In addition, presenting the budget by services (also known as outputs) can also act as a means to

unify the presentation of the two sides of the budget.

In this regard, output-based budgeting is also seen as an important step to enhance unified

budget preparation, review, reporting and approval.

Delegation of financial authorities and straightening of internal controlsystems

Budget owners (e.g. Secretaries) should have the authority to allocate resources to the areas of

priority. In parallel, Ministries / Divisions should strengthen their internal control systems - to

ensure that:

! Laws and regulations are adhered to

! Financial information is analysed and reported on a regular basis

! Organisations objectives are addressed including performance and value for money

goals, and

! Organisational assets are safe guarded.

Ministries / Divisions should have a dedicated finance function (e.g. office of the Finance

Director) with formalised responsibilities and an internal audit function.

Budget Laws

Organic budget laws are common in Parliamentary democracies. Through budget laws, roles and

responsibilities of different institutions are prescribed. In addition, budget laws contain provisions

of how the budget should be prepared, presented, executed, monitored and reported. Also

important are legal provisions related to changes in limits (also known as virement a processthrough which the budget is shifted from one Demand to another, or an additional budget is

agreed) and purpose of the budget during the year.

The following diagram presents examples of countries with written and unwritten constitutions.

In most of the situations, the Executive rules and regulations are subservient to either one or

many budget laws.


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Control over SupplementariesIt is of course impossible to fully predict the future needs of the Government, and for Parliament

to provide for them. However, budgeting requires that the system of supplementary funding be

controlled. This is done in two ways:

Provision of contingency funds. In this way, Parliament provides additional funds in the

budget based on its expectation of the minimal amount of additional supplemental funds that

may be provided. Parliament may, if it wishes place constraints on the use of this contingency

fund. However even when this is done, the system should require an immediate report to

Parliament when the funds are accessed to inform it of how they are to be used.

Transfer authority. Parliament may provide limited transfer authority to government, also

possibly with constraints, permitting the Government to use funds provided for one purpose

or another. For example, many U.S. appropriations permit one percent of funds to be

transferred to other purposes. Any such transfers should, of course, also generate a report to

Parliament.

Mid-session review of the budget. A system of a mid-session review of the budget can be

established. This review is an updated Government report to the Parliament both on the

economic situation and the budget execution. Most provision of supplementary funding

should be provided pursuant to a request made with the mid-session review, with provision

for emergency supplementals to be requested outside this structure.

Transparency and public participation

Governments should be transparent on how budget numbers relate to issues that affect peoples

daily lives. Participation of public and civil society organisations in the Governments budgeting

processes is increasing globally.


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Role of Parliamentary Standing Committees

A vibrant committee structure creates a reservoir of legislative expertise that can inform

Parliaments budget process. Most national budget processes contain a formal system of

committee review and comment on budget proposals. This committee role would be facilitated by

the support of the legislative staff agency described above, but would also require adequate

training of key members and staff. It may also suggest to the Assembly and Senate the value of

consolidating committee comments, and perhaps committees.

In most Parliamentary democracies considerable time is allocated to the Parliament for review

and oversight of budgetary proposals of the Executive. In this case, the Speaker of the House

refers the Demands for Grants to the sectoral standing committees that review the budget and

provide a comprehensive report to the House for general debate.

4.BUDGET TRANSPARENCY

International Budget Partnership (an international research organisation that has developed an

assessment tool for determination of openness and transparency in a countrys budgeting system)

has developed criteria through the Open Budget Index initiative.

As per the criteria, their following documents should be available for public consumption:

A Pre-Budget Statement

This is the budget policy document of the government presenting the overall economic and fiscal

forecasts, key budget policies (e.g. tax policy, sectoral expenditure policies, etc.), and should be

available to the public at least 2 months before the budget is presented in the Legislature.

In Pakistan, while the government produces a Budget Strategy Paper (a pre-budget statement) it

is not shared with the public.

Governments Budget Proposals

Governments budget documents should be made available to the public as soon as they are

presented to the legislature.

Enacted Budget

In case where the Governments budget proposals are changed, the Government should provide

information to the public on the changes incorporated during the budget debate and the

appropriation process.


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A Citizens Budget

An easy to understand document for the public to understand outlining the Governments budget

that should also provide information on the Governments policies and plans and how the budget

numbers are shaped, should be produced. This document should be part of the budget documents

that the Government produces each year.

In Pakistan the Government does not produce a citizens budget.

In-year Reports

Monthly or quarterly reports on the use of the budget presented to the Parliament and shared with

the public.

In Pakistan quarterly fiscal operations (actual expenditure) reports are uploaded on the Finance

Divisions website. However, the information is not very user friendly.

Mid-year Report:Comprehensive update on the implementation of the budget, including a review of the economic

assumptions underlying the budget and an updated forecast of the budget outcome for the current

budget year

Year-end Report:

The year-end report is the governments key accountability document. It should be audited by the

Supreme Audit Institution (Auditor General). It should include the original budget, any changes

made by the Government during the year and the actual expenditure together with performance

planned and delivered

Audit Report:

Audited financial statements of the Government by the Supreme Audit Institution (Auditor

General) should be made available to the public within 2 years after the end of the financial years.

5.BUDGETARY MANAGEMENT PROCESSES

Budgetary management processes of a government comprise of the following different stages:

These stages are explained in Chapter 3.

Spending reviewsStrategy, policy,and formulation

of plans

Budgetpreparation and

presentation

Budgetexecution

Accounting,reporting and

audit

Monitoring andevaluations


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CHAPTER 2: LEGAL

REQUIREMENTS AND ROLES

1.ROLE OF THE EXECUTIVE AND LEGISLATURE IN

BUDGETING

Experiences from parliamentary systems of governments from around the world suggest that the

following stages are observed in the budgetary processes:

First Stage Budget Preparation

First the Executive prepares a draft budget and submits it to the legislature. This is usually a two-

step process: The Ministry of Finance prepares a draft budget that incorporates the Governments

expressed budget orientation; the draft budget prepared by the bureaucrats is then approved by the

Cabinet of Ministers. This budget is submitted to the legislature for possible amendment and

approval.

Second Stage Parliamentary Review

Second, at the parliamentary stage, the budget is generally discussed in Parliamentary

Committees, which may propose amendments. Once amendments are agreed in the plenary

session, the legislature approves the budget. Legal authority is provided to the Executive for

raising revenues if this is not on-going. Formal adoption of the spending proposals means that

legally binding upper limits are established for many expenditure categories.

Third Stage - Implementation

The third stage is the implementation of the approved budget, which is performed by the

Executive and/or Government Ministries. In so doing, the Ministry of Finance monitors the

budget implementation and prepares periodic budget execution reports using a well-defined

accounting system. The Executive may be provided with the power to change the approved

budget in the case of unforeseen emergencies, including major deviations in the macroeconomic

framework underlying the budget law. A supplementary budget may be needed to confirm any

such action by the Executive. The Executive may also be provided with other powers to modify

the approved budget, including powers to change its composition (e.g. by technical


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supplementary / re-appropriations or by using a reserve fund approved in the annual budget) or to

control actual spending to a level below that approved, should economic circumstances dictate.

Fourth Stage - Monitoring

The fourth stage is parliamentary monitoring of budget implementation. This takes place both

during and, especially, after the close of the fiscal year. Parliamentary monitoring is based on

reports provided by the Executive. It is Parliaments prerogative to specify the content and timing

of such reports, which may contain both financial data (annual accounts) and non-financial data

(e.g. attainment of performance targets).

Fifth Stage Audit

The final stage is when an independent external audit office audits the financial accounts. It may

also have a mandate to assess the results of the annual budget in terms of efficiency, economy andeffectiveness.

2.THE CONSTITUTION OF PAKISTAN AND BUDGET

MANAGEMENT SYSTEM

The Constitution of the Islamic Republic of Pakistan provides for a system of budgetary

management. Specific articles and theirsimplifiedexplanation is provided below:

Article 73, 74 Money Bill, and Finance Bill

A Money Bill will originate in the National Assembly.

Money Bill, which also includes the Annual Budget Statement, will contain a

Finance Bill. A copy of Money Bill will be sent to the Senate to make

recommendations to the National Assembly within 14 days.

Recommendations of the Senate are non-binding on the National Assembly.

A money bill can contain matters related to:

! Taxes and duties (Finance Bill)! Government borrowing or government guarantees

! Federal Consolidated Fund (the main bank account of the government)

! Public Account (as defined in Article 78)

! Audit

Only Federal Government can introduce or move Money Bill in the Parliament.

The Speaker of the National Assembly will certify that the bill is a Money Bill and

send it to the President for assent. After assent of the President the bill will be


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called Act of the Parliament (Article 75).

[Authors note: It is a common practice in Pakistan that the Finance Bill contains

information related to taxes that becomes the Finance Act after approval of the

President. For expenditure, the Annual Budget Statement contains statement of

estimated receipts and expenditure (Article 80) and is signed by the PrimeMinister through Schedule of Authorised Expenditure (Article 83)]

Article 77 Levy of taxes

Taxes shall not be imposed without an Act of the Parliament.

[Authors note: This article was introduced as part of the 18th

Amendment to the

Constitution]

Article 78,79: Consolidated Fund and Public Account

A consolidated fund (the main bank account of the government) will include all

revenues received, all loans raised, and all moneys received by the government inrepayment of any loan.

All other monies will become part of the Public Account.

Matters related to Consolidated fund and public account will be regulated through

the Act of the Parliament. If there is no Act of the Parliament, then rules and

regulations made by the President will prevail.

[Authors note: Pakistan does not currently have a law that regulates Consolidated

fund and public account and hence rules (e.g. General Financial Rules, New

Accounting Model, etc.) signed by the President prevail]

Article 80,81,82,83,84: Budgeting

Annual Budget StatementThe Federal Government will lay Annual Budget Statement in the National

Assembly containing statement of estimated receipts and expenditure.

The Annual Budget Statement will show charged, and other than charged

expenditure separately.

The statement will distinguish between revenue and other account.

The Annual Budget Statement will be presented in form of Demands for Grants.

The National Assembly has the power to accept or reject a Demand.

[Authors note: the budget books contain expenditure on revenue account, and

expenditure on capital account separately. The words capital account are

specified in the Audit Code issued by the Auditor General of Pakistan.]

Charged Expenditure

Expenditure of constitutional authorities, e.g. President, Judges, Chief Election

Commissioner, Speaker and the Deputy Speaker of the National Assembly,

Auditor General, will be charged. In addition, loan servicing (including principle

repayment of debt and interest), grants-in-aid to provinces will also be considered

charged.


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[Authors note: While the Parliament can discuss charged expenditure, voting

does not take place on these items (Article 82). The rationale for this is to give

financial autonomy to these institutions, whereas debt servicing is included

because it has the states sovereign guarantee. ]

Schedule of Authorised Expenditure

Once the National Assembly approves Demands, the Prime Minister will sign the

Schedule of Authorised Expenditure which will specify expenditure limits against

each Demand / vote.

Supplementary and Excess Budgets

In case of any insufficiency of funds, or a new service is required to be funded for

which no funds were approved in the Schedule of Authorised Expenditure, the

Federal Government has the power to authorize supplementary budgets.

[Authors note: Pakistan is amongst only a handful of countries where the

Executive can change the budget and enhance budget limits without seeking prior

approval of the legislature. Each year together with the Annual Budget Statement,

the Federal Government also presents Supplementary Budget Statement, and

Excess Budget Statements]

Article 85, 86: Authorising Demands

If the National Assembly is not able to approve Demands by 30th

June each year,

it can authorize the Federal Government to spend funds for up to 4 months of the

financial year.

If National Assembly stands dissolved, then the Federal Government (Cabinet of

Ministers) can authorize spending of funds for up to 4 months.

Article 156: National Economic Council (NEC)

The President constitutes NEC, which will consist of the Prime Minister (who will

be called the Chairman of the NEC), Chief Ministers, one nominated person by

Chief Ministers, 4 other members nominated by the Prime Minister.

The NEC reviews overall economic condition of the country, can advise Federal

and Provincial Governments in formulation of plans in respect of financial,

commercial, social and economic policies.

The NEC will meet at least twice each year.

NEC will present annual report to the Parliament.

Article 160: Distribution of Revenues between Federal Government and ProvincialGovernments

The President constitutes National Finance Commission (NFC), within 6 months,

after every 5 years. The NFC will consist of Minister of Finance for Federal, and

Provincial Governments, and persons appointed by the President after

consultation with Provincial Governors.

The NFC will make recommendations to the President on:

! Distribution of proceeds of taxes between Federal and Provincial


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Governments

! Grants-in-aid to provinces

! Borrowing powers of federal and provincial governments.

Upon agreement, the President will issue an Order on NFC Award.

Recommendations of NFC will be placed before the Parliament and Provincial

Assemblies.

The share of provinces in each NFC Award will not be less than the share agreed

in the previous Award.

The Federal and Provincial Ministers will monitor implementation of NFC Award

twice each year and lay monitoring report to the Parliament.

[Authors note: The duration of the current NFC Award is till the financial year

2014-15]

Article 166,167: Government Borrowings

On security of the Federal Consolidated Fund (the main bank account of the

government), the government can borrow and provide guarantees, within limits

imposed by Act of the Parliament.

[Authors note: Fiscal Responsibility and Debt Limitations Act of 2005 provides

limits on borrowings and issuance of guarantees. The Act prescribes the limit of

60% of GDP on public debts to be observed by 30thJune 2013 and guarantees to

the limit of 2% of GDP each year]

Article

168,169,170,171:

Audit and Accounts

There will be an Auditor General of Pakistan, appointed by the President. The

post will be for 4 years.

Terms and conditions of service of the Auditor General shall be regulated by the

Act of the Parliament. Until the time an Act is promulgated the terms and

conditions will be regulated by the Order of the President.The accounts of Federal and Provincial Governments will be kept as per the

principles and methods prescribed by the Auditor General with the approval of the

President.

The Auditor General will conduct audit of audit of Federal and Provincial

governments, and public entities.

The reports of the Auditor General will be presented to the President who will lay

these before the Parliament.

[Authors note: Two ordinances were promulgated in 2001 to separate the

functions and powers of the audit and accounts functions. These were called: 1)

the Auditor General's (Functions, Powers and Terms and Conditions of Service)

Ordinance, 2001, and 2) the Controller General of Accounts (Appointment,Functions and Powers) Ordinance, 2001]


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3.RULES AND REGULATIONS OF THE FEDERAL

GOVERNMENT

The government has prescribed rules and regulations for budgetary management mechanism.

These rules and regulations include:

General Financial Rules (GFR)

The GFR contains provisions related to revenues, sanctioning powers, budgets, grants and

appropriations, establishment, contingencies, debts, etc.

Federal Treasury Rules (FTR)

The "Treasury Rules of the Federal Government" primarily deal with the procedure, which shouldbe followed in treasuries including offices or agencies of the State Bank conducting the cash

business of treasuries. These rules also provide vital principles and important safeguards of

general applicability for the departments, which generally deal with the receipt, custody and

disbursement of government money.

New Accounting Model (NAM)

In the year 2000 the Auditor General of Pakistan issued the New Accounting Model, which

prescribes budgeting, accounting, and reporting rules and regulations. The NAM includes 7

books:

1) Accounting Policies and Procedures Manual provides detailed policies and

procedures of budgeting, accounting, bookkeeping, and reporting (for example the

manual includes procedures for certifying, recording, and reporting pensions,

amongst others.)

2) Book of Forms provides a format of forms that are used to capture data (for example

one of the forms is used for payment of bills)

3) Chart of Accounts provides structure of chart of accounts (accounting codes on which

accounting transactions are recorded for example A01101 is a code for basic pay of

government officers)

4) Manual of Accounting Principles provides main principles guiding the new accounting

model (for example one of the principles is that double-entry bookkeeping will be

followed under this system at the time of payment of a claim both the value of the claim

and the bank account from where money is transferred is recorded in accounting books)

5) Handbook of Accounting Guidelines provides a general introduction to the accounting

model (for example the guideline amongst other provides overview of legal framework)


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6) Financial Reporting Manual provides detailed formats of financial reports that are

produced by accounting offices (for example the manual provides amongst other

specimens for consolidated monthly accounts)

7) Accounting Code for Self-Accounting Entities provides accounting framework for Self-

Accounting Entities (such as Pakistan Railways).

System of Financial Control and Budgeting, 2006

The procedure manual provides guidelines on duties and responsibilities of Principal Accounting

Officers, Chief Finance and Accounting Officers, delegation of financial powers, and the role of

the Financial Adviser Organisation of the Finance Division. In addition the procedure manual

provides guidelines for budgetary procedures (including formulation, releases of funds,

supplementary grants, etc.).

In addition to the above, the Finance Division issues procedures, from time to time, related to

releases of funds, financial discipline, procedures of assignment accounts, etc.

4.RULES OF PROCEDURE OF THE NATIONAL

ASSEMBLY AND SENATE

Rules of Procedures and Conduct of Business in the National Assembly, 2007 provides rules

related to budgetary processes. These rules are mentioned in Rule 182 to Rule 197.

The following table provides the rule number and what it relates to:

Rule Relate to

Rule 182 Budget presentation date and time

Rule 183 How the Demands for Grants are shown

Rule 184 Who presents the budget?

Rule 185 There will be no discussion on the budget day

Rule 186 Stages of discussion on the budget

Rule 187 Days allocated for discussions

Rule 188 General discussion on the budget as a whole

Rule 189 Cut Motions


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Rule Relate to

Rule 190 Conditions for admissibility of Cut Motions

Rule 191 Speaker will decide on admissibility of Cut Motions

Rule 192 Notice of Cut Motions

Rule 193 Amendments to Cut Motions

Rule 194 Voting on Demands for Grants

Rule 195 Schedule of Authorised Expenditure

Rule 196 Vote on Account

Rule 197 Procedure for dealing with supplementary and excess demands


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CHAPTER 3: BUDGET

MANAGEMENT

1.BUDGETARY MANAGEMENT PROCESSES

Budgetary management processes of the Government comprises of the following different stages:

These processes are explained below:

2.SPENDING REVIEWS

Once a fiscal year (July-June) ends, the Accountant General of Pakistan Revenue (AGPR)

compiles a statement showing total expenditure against the allocated budget. This report is called

Appropriation Accounts, which is verified by the Auditor General of Pakistan and presented to

the President.

At the Executive level the Planning Commission undertake quarterly reviews of projects, while

the Financial Advisers in the Finance Division undertake regular reviews of budget and

expenditure related to the current expenditure.

The Ministry of Finance has recently started an annual monitoring exercise under which

expenditure and performance information is compiled.

Spending reviewsStrategy, policy,and formulation

of plans

Budgetpreparation and

presentation

Budgetexecution

Accounting,reporting and

audit

Monitoring andevaluations


25/68


3.STRATEGY, POLICY AND FORMULATION OF

PLANS

The policymaking process of the government starts at the level of Ministries / Divisions. After

undertaking research of the current situation, a Ministry / Division formulates policy which is

shared with different stakeholders and endorsed by the Federal Cabinet. At policymaking level,

inputs from the Planning Commission and Ministry of Finance are taken in order to ensure that

the policy is in-line with the greater economic objectives of the country and required funding can

be made available.

For development projects generally referred as the Public Sector Development Programme

(PSDP), the Planning Commission has issued a Planning Manual that provides for processes

related to:

! Project development, appraisal and selection

! Approval processes and sanctioning power of approving forums

! Project implementation, monitoring and evaluations

! Financing of development projects.

The Planning Commission formulates the following list of plans:

! Vision currently the Planning Commission is in the process of formulating Vision 2025

! Medium-Term Development Plan / Five-year Plan

! Annual Plan.

4.BUDGET PREPARATION PROCESSES

The Federal Government follows the following budget preparation process:

Step 1:

The Finance Division and Planning, Development and Reforms Division prepare a Medium-Term

Macroeconomic Framework in consultation with various Government Ministries / Divisions and

the State Bank of Pakistan.


26/68


Step 2:

Based on the macroeconomic environment, the Finance Division articulates its policy priorities

and prepares a Medium-Term Fiscal Framework (budget for the 3-years forecasting revenues,

expenditure, borrowings, and debts).

Within the governments policy priorities the Finance Division and Planning, Development and

Reforms Division work out medium-term Indicative Budget Ceilings for each Principal

Accounting Officer (PAO). These are expenditure limits that each Principal Accounting Officer

(Secretary of a Division) receives. The ceilings are indicative in nature and discussed in detail in

a wider forum called Priorities Committee (as mentioned in step 6).

Step 3:

Fiscal framework, policy priorities, and forecasted ceilings are presented in the Cabinet through a

paper called Budget Strategy Paper. The Cabinet debates on policies, priorities, and allocationfor different Ministries / Divisions.

Step 4:

In the next step, the Finance Division issues a Budget Call Circular and forwards 3-years

Indicative Budget Ceilingsfor recurrent and development budgets separately to line Ministries.

A Budget Call Circular includes forms that are filled by Ministries / Divisions. Based on these

forms, the budget books are compiled.

Step 5:

Based on the Indicative Budget Ceilings, Ministries / Divisions prepare their detailed budgets that

are quality assured by the Finance Division, and Planning, Development and Reforms Division.

From the Finance Division, the Financial Adviser Organisation quality assures budgets. From the

Planning, Development and Reforms Division the Sector Chiefs discuss and agree allocations for

projects.

Step 6:

The Secretaries of Finance, Planning & Development, and Economic Affairs Divisions jointly

chair the Priorities Committee meetings. These are weeklong meetings held in the Finance

Division. The meetings discuss policy, budget allocations and priorities, and any additional

budget demands with each Principal Accounting Officer.


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Step 7:

The Annual Plan Coordination Committee (APCC) discusses the public sector development

projects with the Federal Government and Provincial Governments. This a daylong meeting

chaired by the Minister / Deputy Chairman of the Planning Commission. The meetings discuss

projects, allocations, and Ministerial developmental priorities.

In the APCC, the Planning Commission provides total size of the PSDP (Public Sector

Development Programme), and macroeconomic context including projected growth rate,

investments, and savings.

Step 8:

The Finance Division shares the broad contours of Budget Strategy Paper with the

Parliamentary Standing Committees on Finance & Revenue.

Step 9:

The National Economic Council (NEC) approves the Public Sector Development Programme

(PSDP) of the Federal and Provincial Governments.

Step 10:

The detailed budgets for recurrent and development sides are consolidated in a computer system

available with the Finance Division. Through the computer system, information for the budget

books is prepared.

The finalized budget is presented in the Cabinet for endorsement and Parliament forappropriation.

PUBLIC SECTOR DEVELOPMENT PROGRAMME (PSDP)

Key document:

The Planning Commission has prescribed the following 5 documents during different stages of

project management:

! PC2:Feasibility study for Rs.1 billion and above projects giving long-term perspective, rationale,

brief description

! PC1:Details about a proposed project detailed objectives, rationale, finances, phasing,

measurement criteria, project plan etc.

! PC3:Quarterly review report of projects being implemented undertaken by project directors

consolidated by Planning Commission

! PC4:Project completion report developed by project directors consolidated by Planning

Commission


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! PC5:Sustainability report has rationale been achieved?

Approval Forums:

! DDWP:Departmental Development Working Party up to PKR.60 million Chaired by concerned

Principal Accounting Officer (Secretary)

! CDWP:Central Development Working Party up to PKR.1 billion Chaired by Deputy Chairman /Minister for Planning

! ECNEC:Executive Committee of National Economic Council above PKR.1 billion

! NEC:National Economic Council approves ADP / PSDP

How to include a PSDP project in the annual budget?

1. Planning Commission issues PSDP proforma based on which PSDP budget proposals are

invited

2. Based on this information Planning Commission undertakes Mid-year review for on-going

projects (in January each year)

3. Finance Division forwards Indicative Budget Ceilings (single-line) to Principal Accounting Officers

(PAOs) to provide guidance to Ministries on their resource availability4. Ministries compile their proposals for the upcoming year including on-going and new projects -

Sector Chiefs in Planning Commission undertake technical review

5. Proposals are discussed in Priorities Committee chaired by Secretary Finance, Secretary

Planning & Development, Secretary Economic Affairs Division

6. Federal and provincial projects are then discussed in Annual Plan Coordination Committee

(APCC) chaired by Deputy Chairman Planning Commission / Minister

7. Project Directors prepare New Item Statement (NIS) which specifies budget required and

submit to Computer Section in Finance Division based on which Demands for Grants as

required in the Constitution is prepared

8. The Planning Commission prepares PSDP (list of projects), and Annual Plan (macroeconomic

situation, sectoral policies, etc.) approved by the National Economic Council chaired by the

Prime Minister

9. Cabinetapproves Demands for Grants, PSDP and Annual Plan, etc. and forwards the budget to

the Parliament.

Process of release of funds for PSDP projects:

! Projects prepare quarterly Cash Plans and forward to Planning Commission

! Planning Commission reviews these plans and forwards these to Finance Division

! Finance Division undertakes ways and means clearance based on which Planning Commission

gives authorisation to project directors to spend funds

! A quarterly release strategy 20:20:30:30 guides releases

! Project Director opens up an Assignment Account (bank account) with approval of Finance Division

Monitoring of PSDP projects:

! Monitoring and Evaluation units exists in Ministries that have PSDP projects

! An Implementation and Monitoring section in the Planning Commission monitors projects on a

regular basis

! Planning Commission also undertakes evaluations


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5.PRESENTATION OF THE BUDGET THE BUDGET

BOOKS

Together with the Budget Speech, the Federal Government presents the following budget books.

Each book and brief explanation of what it contains is provided below:

Demands for Grants and Appropriations (also

known as the White Book)

Demands for Grants is shown separately for each Ministry /

Division. Each grant includes:

! Demand number

! Demand name

! Total amount, and

! Detailed estimates divided into items.

The items are of two types; 1) Functional Classification, and 2)

Object Classification. Functional classification specifies the

function to which a Demand relates.

The book is divided into current and development grants.

Each current and development grant is further subdivided intorevenue account and capital account. The capital account

contains investments, and loans and advances.

Each Demand is labelled either voted or charged.

Details of Demands for Grants and Appropriations

(also known as the Pink Book)

Similar to the White Book, this book presents details of each

Grant by spending units (a spending unit is an organisation that

consumes the budget for example, PIMS Hospital in Islamabad

is a spending unit).

!"#"$%& ()#*"+

DEMANDS FOR

GRANTS AND

APPROPRIATIONS

GOVERNMENT OF PAKISTAN

FINANCE DIVISION

ISLAMABAD

BUDGET YEAR

!"#"$%& ()#*"+

DETAILS OF DEMANDS

FOR GRANTS AND

APPROPRIATIONS


FINANCE DIVISION

ISLAMABAD

BUDGET YEAR


30/68


Budget in Brief

This book provides extracts of the budget with some explanation.

The book contains:

! Review of the current years budget

! Salient features of the next years proposed budget

! Summary of revenue resources

Tax Revenues

Non-Tax Revenues

Net Capital Receipts

Estimated Provincial Surplus

Transfer to Provinces and Net Revenue available to

Federal Government

External inflows

! Federal Transfers and Provincial Shares

! Current Expenditure by Functional Classification and details! Details of Subsidies and Grants

! Details of Loans and Investments

! Summary of allocations to Public Sector Development

Programme

! Medium-Term Budgetary Framework

! Working of the Fiscal Deficit and Deficit Financing

Annual Budget Statement

This book contains summary level:

! Details of revenue resources

Tax Revenues

Non-Tax Revenues

Net Capital Receipts

Estimated Provincial Surplus

Transfer to Provinces and Net Revenue available to

Federal Government

External inflows

Public Account Receipts

! Summary of Expenditure by functional classification

! Demand Number, Demand Name, Total Amount for:

Current Expenditure divided into revenue and

capital account

Development Expenditure divided into revenue

and capital account

! Public account expenditure

!"#"$%& ()#*"+

BUDGET IN BRIEF


FINANCE DIVISION

ISLAMABAD

BUDGET YEAR

!"#"$%& ()#*"+

ANNUAL BUDGET

STATEMENT


FINANCE DIVISION

ISLAMABAD

BUDGET YEAR


31/68


! Schedule I schedule summarizing Demands and their

proposed budget

! Schedule III schedule summarizing budget by object

classification

[Authors note: The Annual Budget Statement and the Budget in

Brief are two essential books that parliamentarians should keep

with them for reference throughout the year].

Estimates of Foreign Assistance

This book provides details of assistance that the Government will

acquire for plan and non-plan purposes from foreign sources. The

plan purposes relate to projects.

This book contains:

! Loans for projects, divided into:

Loans for Federal ProjectsLoans for autonomous bodies

Loans for Provinces

! Grants for projects, divided into:

Grants for Federal Projects

Grants for autonomous bodies

Grants for Provinces

! Loans other than projects, divided into:

Loans for Federal Government

Programme loans for provinces

! Grants for other than projects, divided into:

Grants for Federal Government

Grants for provinces / NGOs

! Summary of external loans and grants by country / agency

For plan loans

For non-plan loans

For grants

!"#"$%& ()#*"+

ESTIMATES OF

FOREIGN ASSISTANCE


FINANCE DIVISION

ISLAMABAD

BUDGET YEAR


32/68


Explanatory Memorandum on Federal Receipts

This book provides details of receipts divided into:

! Tax receipts

! Non Tax receipts

! Miscellaneous receipts

! Provincial share in revenue receipts

! Capital receipts

! Recoveries of loans and advances

! Public debt

! Public accounts

! Privatisation proceeds

! External flows

! Self-financing of Public Sector Development Programme by

provinces

! Province-wise development assistance to provinces

Federal Medium-Term Budget Estimates for

Service Delivery (also known as MTBF Green

Book)

This book is produced as per the Medium-Term Budgetary

Framework (MTBF) reform initiative of the Federal

Government.

The book contains budget by Principal Accounting Officers. For

each Principal Accounting Officer the book contains:

! Executive Authority (the Minister)

! Goal

! Outputs (services to be delivered)

! Outcomes (affects of services on target population)

! Past actual expenditure, budget for current year and proposed

budget for the next year, and forward estimates for 2 years

by:

Outputs

Inputs (object classification)

! Key Performance Indicators and Targets for each output

! Personnel plan

! Selected projects for each output their cost, date of

completion, expenditure up to previous financial year, budget

!"#"$%& ()#*"+

EXPLANATORY

MEMORANDUM ON

FEDERAL RECEIPTS


FINANCE DIVISION

ISLAMABAD

BUDGET YEAR

!"#"$%& ("#)*(+

,"$( -*#.",

"/,)(%,"/ !0$

/"$1)2" #"&)1"$3


FINANCE DIVISION

ISLAMABAD


33/68


for current year and next year, and forward estimates for 2

years

Annual Plan

This book is tabled in the Parliament by the Planning

Commission. Broadly it contains macroeconomic framework for

the budget year.

The macroeconomic framework is presented in form of policy

and estimates. The macroeconomic framework contains

information of growth and investments, balance of payments,

fiscal and monetary sectors.

In addition developmental policies are provided as per the policy

documents of the Government (e.g. 5 years plan, Vision 2025,

medium-term development framework, etc.)

Public Sector Development Programme (PSDP)

also known as the PSDP Green Book

For each of the sector, this book presents details of projects. The

project details include approval status (usually containing date of

approval and approving authority), total cost of the project,

expenditure to date, budget estimates for the budget year divided

into local currency, and foreign currency components.

Medium-Term Budgetary StatementThis book is presented in compliance with the requirements of

Fiscal Responsibility and Debt Limitations Act of 2005.

It presents Medium-Term Budget (revenues, expenditure and

debts), and growth and inflation forecasts.

This is also a statement through which the Government provides

medium-term policy on public debt reduction.

!""#!$ &$!"


PLANNING COMMISSION

MINISTRY OF PLANNING,

DEVELOPMENT AND REFORMS

BUDGET YEAR

!"#$%& ()&*+,

-).)$+!/)0*

!,+1,2//)


PLANNING COMMISSION

MINISTRY OF PLANNING,DEVELOPMENT AND REFORMS

BUDGET YEAR

!"#"$%& ()#*"+

MEDIUM-TERM

BUDGETARY

STATEMENT


FINANCE DIVISION

ISLAMABAD

BUDGET YEAR


34/68


6.PRESENTATION OF THE BUDGET THE BUDGET

CLASSIFICATION SYSTEM

The Government presents the budget as per a system of classification. The system of

classification classifies budget as per the following main categories:

Object Classification

This represents line items of revenue, expenditure, asset, liabilities and equity. Each line item

is represented with a code. An example is provided below:

Element Major Object Minor Object Detailed Object

A Expenditure A01 Employeerelated expenditure

A011 Pay A01101 Basic Pay

On the revenue side, the budget books provide information up to the Detailed Object level.

For expenditure side, in order to reduce size of budget documents, the budget books provide

information up to the Minor Object level.

Another example of codes of Non-Tax Revenues is reproduced below. For detailed objects

Chart of Accounts can be downloaded from PIFRA (Project to Improve Financial Reporting

and Auditing) website: (www.pifra.gov.pk/chart-of-accounts.html).

MajorObjectCode

DescriptionMinorObjectCode

Description

C01 Income from Property andEnterprise

C010 Profits

C012 Interest on Loans and Advances to Provinces

C013Interest on Loans to Local/ AutonomousBodies

C019 Dividends

C02 Receipts from CivilAdministration and OtherFunctions

C022General Administration Receipts - FiscalAdministration

C023General Administration Receipts - EconomicRegulation

C025 Defence Services Receipts

C026 Law and Order Receipts

C027 Community Services Receipts

C028 Social Services

C029 Social Services Miscellaneous


35/68


Functional Classification

Represents functions of the Government. An example is provided below:

Major Function Minor Function Detailed Function

03 Public Order and

Safety Affairs 031 Law and Order 03101 - Justice

List of the major functions is provided below. For minor and detailed functions Chart of

Accounts can be downloaded from PIFRA (Project to Improve Financial Reporting and

Auditing) website: (www.pifra.gov.pk/chart-of-accounts.html).

Function Code Description

01 General Public Service

02 Defence Affairs & Services

03 Public Order and Safety Affairs04 Economic Affairs

05 Environment Protection

06 Housing and Community Amenities

07 Health

08 Recreation, Culture and Religion

09 Education Affairs and Services

10 Social Protection

Entity Classification

This represents organizational hierarchy of the Government. An example is provided below:

Government Ministry and Division Attached Department Spending Unit

F - Federal Government

F012 Cabinet

Secretariat

Establishment Division

CSA1 Civil Services

Academy

LO005 Civil Services

Academy Lahore

Fund Classification

This represents structure for Demands for Grants. An example is provided below:

Fund Sub Fund

FC - FederalFC11 Voted current

expenditure (capital)


36/68


Example of how to read the Classification System in the Budget Books

EXAMPLE 1

In the book called Demands for Grants and Appropriations for year 2013-

14, the following information is presented on Page 44:

Example

Demand No. 030 (FC21P03) PAKISTAN MINT

(Pakistan Mint is an attached department of Finance Division, responsible

for minting coins. Currently coins of Re.1, Rs.2 and Rs.5 are minted there)

As per Entity Classification: Pakistan Mint is part of the Ministry of Finance /

Finance Division.

As per Fund Classification Pakistan Mint will be paid out of Federal

Consolidated Fund.

Voted Amount: Rs.401.7 million. This demand will undergo voting.

Functional Classification: 011 Executive and Legislative Organs,

Financial and Fiscal Affairs, External Affairs

Object Classification:

Code Object ClassificationBudget 2013-14

Rs. Millions

A01 Employees Related Expenditure 252.3

A02 Project Pre-investment Analysis 20.0

A03 Operating Expenditure 105.4

A04 Employee Retirement Benefits 1.0

A05 Grants, Subsidies, and Write off Loans 3.6

A06 Transfers 0.1

A09 Physical Assets 10.2

A13 Repairs and Maintenance 8.9

Total 401.7

In this example, Pakistan Mint is proposed to be provided Rs.401.7 million

rupees of budget against which 63% relate to resources for employees.

!"#"$%& ()#*"+

DEMANDS FOR

GRANTS AND

APPROPRIATIONS


FINANCE DIVISION

ISLAMABAD

BUDGET YEAR


37/68


Example of how to read the Classification System in the Budget Books

EXAMPLE 2

In the book called Demands for Grants and Appropriations for year 2013-

14, the following information is presented on Page 270:

Example

Demand No. - (FC24E08) ELECTION

(This demand is a charged demand and relates to Election Commission of

Pakistan. Since it is a charged expenditure, it does not have a Demand

Number and hence is not open for voting)

As per Entity Classification: Budget of Election Commission of Pakistan is

shown in the hierarchy of Ministry of Law and Justice.

As per Fund Classification Election Commission of Pakistan will be paid out

of Federal Consolidated Fund.

Charged Amount: Rs.1,843.4 million. This demand will not undergo voting.

Functional Classification: 018 Administration of General Public Service

Object Classification:

Code Object ClassificationBudget 2013-14

Rs. Millions

A01 Employees Related Expenditure 881.4

A02 Project Pre-investment Analysis -

A03 Operating Expenditure 1,004.4

A04 Employee Retirement Benefits 1.6

A05 Grants, Subsidies, and Write off Loans 5.0

A06 Transfers 1.6

A09 Physical Assets 3.8

A13 Repairs and Maintenance 15.5

Total 1,843.4

In this example, Election Commission of Pakistan has demanded Rs.1.8

billion out of which it intends to undertake operations worth Rs.1 billion.

!"#"$%& ()#*"+

DEMANDS FOR

GRANTS AND

APPROPRIATIONS


FINANCE DIVISION

ISLAMABAD

BUDGET YEAR


38/68


7.BUDGET EXECUTION PROCESSES

The budget execution processes include the following key activities:

Cash forecasting and treasury management

On a monthly basis the Finance Division forecasts cash requirements and undertakes treasury

operations to make sure that sufficient cash is available in the Federal Consolidated Fund (the

main bank account of the Government) in order to make payments.

The main funding sources of the Government are:

! Commercial banks

! National Savings Organisation

! State Bank of Pakistan

! Foreign Bilateral and Multilateral Loans

! International and domestic bonds issue.

The main instruments through which the government borrows from the domestic sources include

treasury bills, investment bonds, and national savings instruments such as prize bonds, Bahboodsavings certificates, etc.

Releases of funds

Based on cash forecasting and treasury management the Finance Division issues releases orders

for current and development budgets as per its funds release procedures that it issues from time to

time.

For the current budget, funds are released on quarterly basis. For the development budgets the

release mechanism is as follows:

1) Projects prepare quarterly Cash Plans and forward to Planning Commission

2) Planning Commission reviews these plans and forwards these to Finance Division

3) Finance Division undertakes ways and means clearance based on which Planning

Commission gives authorisation to project directors to spend funds

4) A quarterly release strategy 20:20:30:30 guides releases


39/68


5) Project Director opens up an Assignment Account (bank account) with approval of

Finance Division.

Re-appropriations and Supplementary Budgets

As per the System of Financial Control and Budgeting of 2006 issued by the Finance Division,

the following are key procedures in this area:

1) Re-appropriations from one line item (Object Classification head) to another, other than

obligatory heads (e.g. pay and allowances), can be undertaken by the Principal Accounting

Officers without seeking approval from the Finance Division.

2) For Supplementary Budgets, approval of the Finance Division is required. There are two

types of supplementary budgets:

a. Regular Supplementary Budget this is supplementary budget over and above what

was approved by the Parliament. The regular supplementary budget increases the

overall size of expenditure. The Finance Division is authorized to approve suchsupplementary.

b. Technical Supplementary Budget this is re-appropriation of funds from one

Demand to another. In this type of supplementary the overall size of the budget does

not increase. The Finance Division is authorized to approve such supplementary

appropriation.

8.ACCOUNTING, REPORTING AND AUDIT

Accounting and reporting

The Accountant General of Pakistan Revenue (AGPR) is responsible for:

1) Pre-audit,

2) Payroll, Payment and claims, and

3) Recording of information in the books of accounts.

The processes of accounting are guided by the New Accounting Model.

At present three important reports are produced on a periodic basis by the Controller General of

Accounts:

1) Appropriations Account - lists down the actual expenditure for recurrent and development

budgets and for revenue and capital accounts separately. The presentation of expenditure is

by entity and object classification,


40/68


2) Financial Statements - includes receipts, payments and public accounts balances. Moreover,

balances of assets and liabilities are also included in it along with current year flows, and

3) Combined Finance and Revenue Account - is consolidated Finance Account including all

Accountant Generals and Accountant General Pakistan Revenue and its sub-offices.

These three reports are prepared by the Controller General of Accounts and presented to theAuditor General of Pakistan for endorsement. The Appropriations Account report is presented to

the President and the Public Accounts Committee.

Financial Reporting and Audit

Governments Integrated Financial Management Information System

In the late 1990s, the Government embarked upon an important project to improve financial reporting

and auditing called Project to Improve Financial Reporting and Auditing (PIFRA). In this project theNew Accounting Model was developed as a first step. In the second step a large-scale

computerization exercise was undertaken. More than 120 accounting offices throughout the country

have been computerized and linked to central servers via wide-area-network.

Today, after more than a decade, the financial reporting is being done through the computerized

system. Average cycle time of month-end closing and finalization of annual accounts has drastically

been reduced.

The certification of accounts, and conduct of audit is the responsibility of the

Auditor General of Pakistan

The Auditor General of Pakistans Ordinance of 2001 state that, the Auditor-General shall, on

the basis of such audit as he may consider appropriate and necessary, certify the accounts,

compiled and prepared by Controller General of Accounts or any other person authorized on their

behalf, for each financial year, showing under the respective heads the annual receipts and

disbursements for the purpose of the Federation of each Province and of each district, and shall

submit the certified accounts with such notes, comments or recommendations as he may consider

necessary-to the President or the Governor of a Province or the designated District Authority, as

the case may be.

As per the functions1 of the Public Accounts Committee, it is stated that the Committee shallexamine the accounts showing the appropriation of sums granted by the Assembly for the

expenditure of the Government, the annual finance accounts of the Government, the report of the

Auditor General of Pakistan (AGP) and such other matters as the Minister for Finance may refer

to it. This requirement also requires scrutiny of cash based accounting statements and audit

1National Assembly website: http://www.na.gov.pk/pac/?q=functions


41/68


reports. This requirement also does not preclude preparation of accounts on accruals-basis of

accounting.

CHAPTER 4: BUDGET RELATEDMATTERS

1.MACROECONOMIC FRAMEWORK

The Governments budget has wider economic implications. If a government spends more than its

revenues, then it has to borrow to finance expenditure leading to budgetary deficits. A

government having limited revenue resources can easily fall in debt trap if borrowings continue

unabated. A country enters into a debt trap if interest on borrowings occupies most of its

expenditure. At this stage more loans are taken to repay existing loans. In such a condition,

private sector investment suffers through crowding out. Private investment is important for

increasing productivity and job creation. High government borrowings also result in printing of

money, which causes inflation (i.e. rise in prices of commodities).

It is therefore, important to view the budget in the wider macroeconomic context. A

macroeconomic framework helps in understanding the context.

In a macroeconomic framework four sectors of an economy are considered. These include:

1) Growth a study of economic growth, investments, consumptions, etc.

2) Governments budget a study of revenues, expenditure, borrowings and public debts

3) Balance of payments - a study of foreign exchange movements through imports, exports,

remittances, foreign loans, etc.

4) Monetary a study of the banking sector and inflation.

In order to understand the macroeconomic context the following important ratios can be studied:


42/68


Sector Important ratios What is their importance?

Growth ! GDP growth annual

percentage change

Helps in understanding how much economic

growth will increase or decrease as compared

to last year.

In 2013-14 Pakistans economy grew by 4.1%

as compared to 2012-13. Source: GoP/MoF

! Investment as

percentage of GDP

Higher investments means higher chances of

economic growth and job creation

Pakistans Investment to GDP ratio is around

12% as compared to Chinas Investment to

GDP ratio of over 35%.

! Savings as percentage

of GDP

Higher savings means higher disposal income

that can be used for investment in the future.

Governments

budget

! Tax as percentage of

GDP (to understand thelevel of

To understand the proportion of tax collections

to national income.Pakistan collects around 10% of taxes as

proportion of its national income which is one

of the lowest in emerging economies.

! Interest as proportion of

net revenues

To understand how much funds can be made

available to finance government functions.

In 2012-13 the Federal Government paid

interest equal to 63% of its net revenues (i.e.

revenues available after transfer to provinces).

! Debt to GDP ratio To understand the level of debts and whether

they are sustainable.

In Pakistan the Fiscal Responsibility and DebtLimitations Act prescribes a limit of 60% of

public debt to GDP ratio to be attained by 30th

June 2013. Last year the Government reported

public debt to GDP ratio as 62.7%.

Balance of

Payments

! Current account to GDP

ratio

Balances of exports, imports, and remittances.

If the current account is in deficit then it means

that the government has to rely on external

assistance to balance its reserves.

! Reserves months of

import cover

How many months of imports can foreign

reserves finance? Ideally a country should have

reserves to cover at least 3 months of imports.

Monetary ! Inflation annual

percentage change

To understand rise or fall of prices.


43/68


2.INTERGOVERNMENTAL FISCAL RELATIONS

The resource allocation and budgetary system in Pakistan is critical in nature. Since the country is

a federation of four Provinces, revenues are collected centrally (mainly by/through the Federal

Board of Revenue) and then distributed between the Federal Government and the Federating

units. This distribution takes place in accordance with a resource distribution mechanism called

National Finance Commission (NFC) Award, which is applicable to resource transfers to the

Federal Government and the four Provinces.

[Note: Transfers to AJK, Gilgit-Baltistan, FATA or FANA are made through the Federal

Governments Budget]

Transfers under the NFC Award constitute the largest resource item in provincial receipts.

Provinces have the authority and power to raise taxes (other than those collected by the Federal

Government and which are covered under the NFC Award).

The Constitution allows the Parliament an authority to raise certain types of taxes. These are

broadly categorised into:

! Income tax and corporation tax (excluding taxes on income consisting of remuneration

paid out of the Federal Consolidated Fund)

! Taxes on the sales and purchases of goods

! Export Duty on Cotton

! Other export duties as may be specified by the President

! Such Excise duties as may be specified by the President, and

! Such other taxes as may be specified by the President.

These taxes are deposited in Federal Consolidated Fund, which is the main bank account operated

by the Federal Government. Therefore, in each financial year a share of the taxes and duties

levied and collected by the Federal Government are shared between Federation and Provinces

based on a predetermined proportion.

The following are the main types of funds transfers from the Federal Government to the

Provinces:

! Revenue sharing from the Revenue divisible pool Tax collected by the Federal

Government is shared with the lower levels of the Government. The divisible pool

includes the pool of taxes that is shared


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! Straight Transfers These include transfers from the Royalties, Excise Duties,

Surcharges etc.,

! Grants-in-Aid These may include special grants extended from the Federal Government

on areas such financing the deficits, arrears, emergency aid etc. ,

! Loans Soft loans may be extended to Provinces by the Federal Government. Thereverse flow from the Provincial to Federal Government may include principal and

interest repayment on the soft loans,

! Development Grants / Loans - specific or block development grants to Provincial

Governments either to raise the overall level of development expenditure or to increase

coverage of a particular service.

7th

NFC Award Salient Features

The 7th

NFC Award was given effect through Presidents Order No. 5 of 2010. Salient features of the Award

include:

! The divisible pool consists of all of the taxes levied and collected by the Federal Government.

These include taxes on income, wealth, capital value, sales & purchase of goods, and duties such

as on export on cotton, custom, federal excise and other taxes which may be levied by the Federal

Government

! The 7th

NFC Award recognises the economic problems of the Government of Khyber

Pakhtunkhwa due to war on terror and provides 1% of net proceeds of divisible pool as special

grant

! The share of provinces in the divisible pool has been increased to 56% for 2010-11 and 57.5% for

the remaining years of the Award which ends in 2014-15

! Multiple criteria for distribution of revenues amongst the Provincial Governments are used

including; population, poverty or backwardness, revenue collection or generation and invest

population density with the ratio of 82%, 10.3%, 5.0% and 2.7% respectively

! The resources will be transferred amongst Provinces on the basis of percentage specified.

Balochistan 9.09%, Khyber Pakhtunkhwa 14.62%, Punjab 51.74% and Sindh 24.55%

Multiple Indicators WeightShare of provinces

Punjab Sindh KP Balochistan

Population 82.0% 57.36% 23.71% 13.82% 5.11%

Poverty / backwardness 10.3% 23.16% 23.41% 27.82% 25.61%Revenue generation and

collection5.0% 44.00% 50.00% 5.00% 1.00%

Inverse population

density2.7% 4.34% 7.21% 6.54% 81.92%

100.0% 57.74% 24.55% 14.62% 9.09%


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! The 7th

NFC Award recognises the economic problems of Balochistan and guarantees Rs.83

Billion as the total revenue transfer (from net proceeds of divisible pool) in 2010-11

! Each of the Provinces will be paid a share in the net proceeds of the total royalties on crude oil in

the proportion as the production of crude oil in the Province to the total production

! Development surcharge on gas will be paid to each of the Province based on average rate per

MMBTU of the respective province. The royalty on natural gas will be distributed in accordance

with clause (1) of Article 161 of the Constitution

! The development surcharge on natural gas for Balochistan with effect from 1 July 2002 will be

reworked out hypothetically on the basis of the formula given in clause (1) and the amount, subject

to maximum of Rs.10 billion will be paid in five years in five equal instalments as grants

! Sindh will receive 0.66% of the province share in net proceeds as Grants-in-Aid as compensation

for losses on account of abolition of octroi and zilla tax

! Sales tax on services is a Provincial subject

! The 7thNFC Award recommends streamlining of the tax collection systems of both the Federal

and Provincial Government so as to increase the tax to GDP Ratio to 15% by 2014-15. Provinces

would initiate steps to effectively tax the agriculture and real estate sectors. Federal and Provincial

Governments may take necessary administrative and legislative steps

! Federal and Provincial Governments would develop and enforce mechanisms for maintaining

fiscal discipline at the Federal and Provincial levels through legislative and administrative

measures

! The meeting of the NFC will be convened regularly on a quarterly basis to monitor the

implementation of the award.

3.ASSESSING PUBLIC FINANCIAL MANAGEMENT

SYSTEM IN A COUNTRY

There are two recognized methods of assessing the state of Public Financial Management

(budgetary management system) in the country:

Public Expenditure and Financial Accountability Review (PEFA)

The Public Financial Management (PFM) Performance Measurement Framework, an indicator-

based assessment tool developed by the Public Expenditure and Financial Accountability (PEFA)

initiative, was launched in 2005 and has been applied so far in over 60 countries. PEFA reports

provide detailed accounts of the performance of PFM systems along various dimensions.


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PEFA assessment system is based on 28 indicators for the Government. Scores on these

indicators can be either A, or B/B+, or C/C+, or D/D+.

Federal Governments PEFA Assessment

The Federal Governments PEFA assessment was carried out in 2008 and in 2012. The results ofthe two assessments are as follows:

ScoresNumber of Indicators

2008

Number of Indicators

2012

A 2 5

B/B+, C/C+ 15 16

D/D+ 7 4

Open Budget Index (OBI)

An initiative by an international non-governmental organisation, the OBI measures budget

transparency and accountability. Through the use of ranks, the OBI provides scores of more than

100 assessed countries around the World. Scores are allotted for the following 8 areas:

1. Pre-budget statement a statement that is prepared and made public at least 2 months

before the budget should show key budget projections, policies, and macroeconomic

context

2. Executives budget proposals should follow a budget classification system, and

proposals should allow sufficient time for discussions

3. Citizens budget amongst other budget books a simple to understand book for citizens

should be prepared and made available to the public

4. Enacted budget the budget approved by the Parliament should become a law

5. In-year reports the Executive should keep the Parliament abreast of the budget

developments including budget vs. actual analysis on periodic basis

6. Mid-year report is a half-yearly report on budget developments, and any changes

made by the Executive during the year. The report should be presented in the Parliament

7. Year-end report should be prepared by the Executive and presented in the Parliament

which should state the expenditure against the enacted budget, performance targets

achievement against plan, reasons for variation, and macroeconomic outcome

8. Audit report the Auditor General should present audit reports and the Public Accounts

Committee should review them on periodic basis.


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Federal Governments OBI Score

The Federal Governments score in OBI was 38 in 2008. The score increased to 58 in 2010 mainly

due to the improvement in budget transparency attained because of the Medium Term Budgetary

Framework reform.


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4.MANAGING PUBLIC DEBTS

Pakistan is amongst many other countries around the World that has promulgated a law to

introduce limits on public debts. Fiscal Responsibility and Debt Limitations Act (FRDLA), 2005

prescribed two fiscal rules:

1. Reduction of revenue deficit to nil by 30thJune 2008

2. Reduction of public debt to GDP ratio to 60% by 30thJune 2013.

Revenue deficit is total revenues less current expenditure. The reason for reducing revenue deficit

to nil was that the Country should be able to meet all its current expenditure from the revenues

(tax and n

Documents

Budget Process Pakistan