The Experiences of India, Pakistan and Sri Lanka with FRLs

1. The Experiences of India, Pakistan and Sri Lankawith FRLs Yang Hyun Jin Maldives , April 1, 2010

2. India • Fiscal Responsibility and Budget Management Act (FRBMA) of 2003 * fiscal deficit 9%; debt GDP ratio 87% • Procedural rules and numerical targets

3. India’s experience with fiscal rules has been mixed • FRBMA contributed to India’s fiscal policy framework by strengthening the procedural rules • However, date for achieving current deficit target was postponed repeatedly; off-budget activities increased, and there were significant slippages with deficit target (even before the global crisis) * current balance: -3.6% (2003), -4.0% (2009) * government debt: 68.4% (2003), 64.1 (2008) • Focus on current balance target without clear accounting definition increases incentive for creative accounting • Reliance on reputational sanctions for noncompliance; this does not guarantee consistency between FRBMA and annual budget

4. Pakistan • Fiscal Responsbility and Debt Limitation Act (FRDL) of 2005 * eliminate revenue deficit and reduce of government debt • Procedural rules and numerical targets

5. Pakistan • Pakistan’s experience with FRDL has been reasonably good. • Public debt target was achieved in 2009, which was earlier than the target year of 2013 (58.1% in 2009) • However, revenue deficit target was breached (-3.4% 2008, -1.7% 2009), and new guarantees slightly exceeded target by 2.07% • Annual “fiscal policy statement” and “debt policy statement” has provided clear review of performance target • Well defined sanctions contributed to accountability of fiscal policies

6. Sri Lanka • Fiscal Management Responsibilty Act (FMRA) of 2003 * overall balance -7.8%; public debt ratio 100.6% • Procedural rules and numeral targets

7. Sri Lanka • Sri Lanka’s experience with FMRA has been less satisfactory • Overall deficit target set in FRMA already modified in 2005, and repeatedly postponed thereafter • Quasi-fiscal activities by commercial public corporations and banks have increased significantly • Reliance on reputational sanctions and loosely defined escape clauses have been proved problematic

8. Key Lessons from these three countries’ experiences • Procedural rules should contain: • (ex ante) fiscal policy statements over a medium term period help ensure transparency • (ex post) reports to the parliament and public are needed, to ensure accountability • Numerical rules, if included, should be: • simple and transparent • well- defined and enforceable • Sanctions should be credible and enforceable • Escape clauses should be clear and narrowly defined

9. Key Lessons(continued) • Sufficiently developed PFM systems are pre-requisites for credible FRL implementation • Numerical targets in law can not guarantee success of fiscal policies • Weak institutions and poor implementation capacity may undermine the FRL • Independent monitoring and oversight is necessary • FRLs require broad political consensus and support for prudent fiscal policy

10. Thank you yjin@imf.org