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

2. 2 India  Fiscal Responsibility and Budget Management Act (FRBMA) of 2003 * fiscal deficit 9%; debt GDP ratio 87% * fiscal deficit 9%; debt GDP ratio 87%  Procedural rules and numerical targets Transparency requirementsNumerical targets - Mid-term fiscal policy statement (contain three year rolling targets) - Fiscal policy strategy statement - Macro-economic framework statement - Quarterly reports on fiscal development to Parliament - Revenue deficit eliminated by 2009 (originally by 2008) - Annual reduction in revenue deficit at least 0.5% of GDP -Caps on government guarantees and total liabilities - Prohibit government borrowing from reserve bank after 2006

3. 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) * current balance: -3.6% (2003), -4.0% (2009) * government debt: 68.4% (2003), 64.1 (2008) * 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. 4 Pakistan  Fiscal Responsbility and Debt Limitation Act (FRDL) of 2005 * eliminate revenue deficit and reduce of government debt * eliminate revenue deficit and reduce of government debt  Procedural rules and numerical targets Transparency requirementsNumerical targets - Mid-term budgetary statement (three year rolling fiscal estimates, key fiscal measures and risks) - Fiscal policy statement (to contain key fiscal indicators and performance) - Debt policy statement - Presented to the parliament and available to the public free of charge - Revenue deficit to be eliminated by 2008 (and maintain a surplus thereafter) - Total public debt to be reduced to 60% of GDP by 2013 -Every year debt-to-GDP ratio to be reduced by at least 2.5% of GDP. - New guarantees cannot exceed 2% of GDP

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 5

6. 6 Sri Lanka  Fiscal Management Responsibilty Act (FMRA) of 2003 * overall balance -7.8%; public debt ratio 100.6% * overall balance -7.8%; public debt ratio 100.6%  Procedural rules and numeral targets Transparency requirementsNumerical targets - Fiscal statement (4-year fiscal goals, short-term objectives, key fiscal measures) - Mid-year and final fiscal position reports - Central government overall deficit not to exceed 5% of GDP by 2006 -Total public debt should be reduced to 85% of GDP by 2006, 60% by 2013 - Government guarantees cannot exceed 1% of GDP during 1 FY

7. Sri Lanka Sri Lanka’s experience with FMRA has been less satisfactory 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 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 Reliance on reputational sanctions and loosely defined escape clauses have been proved problematic 7

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 8

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

10. 10 Thank you yjin@imf.org Thank you yjin@imf.org