Money Matters

A thorny issue

By Ihtasham Ul Haque
Mon, 10, 16


Overcoming menacing delays, the government seems all set to work out the 9th National Finance Commission (NFC) award before the next budget with a view to offering additional resources to the provinces.

The new resource distribution formula under the 9th NFC award is expected to be finalised before June next year that may also allow the federating units of the centre to generate their own resources through the collection of provincial taxes. The objective is to avoid double taxation aimed at providing relief to the taxpayers and at the same time conceding to the request of the provinces to levy their own taxes.   

While the PML-N government is reportedly agreeing to enhance provincial share in the federal divisible pool, provincial authorities are being asked to lower their increasing reliance on the centre.

However, in the presence of 17 percent reduction in non- tax revenue, the government eventually managed only 11 percent growth in the overall federal revenue compared to 20 percent of last year. There is said to be a serious problem in making additional financial transfers to the provinces.      

“There is only three percent net revenue growth, therefore, I really do not know from where the government will get new resources for the proposed 9th NFC award,” said the renowned economist and former advisor on finance Dr Hafiz Pasha. He believed the government has no option but to rely on the previous award because of the declining federal revenue receipts. “There is no scope for further transfers to the provinces.”

“Under the prevailing financial circumstances only vertical sharing is available and there is no scope for horizontal sharing, and given this situation I am afraid if anybody can work out a new resource distribution formula,” Dr Pasha said.

One of the major issues that can cause serious funding problems in finalising the 9th NFC award is reportedly, a massive Rs170 billion cut in the Coalition Support Programme (CSF) by the United States. The current Obama administration stopped any assistance under CSF and the issue compounded when the centre did not get significant amount from the State Owned Enterprises (SOEs) including the mighty Oil and Gas Development Corporation Limited (OGDCL). This brought down the federal revenues from 20 percent to 17 percent.  

Generally it is said that unless the government decides to do away with the 18th amendment or amend it drastically, it can hardly make increased funds available to the provinces. Population programme and the Higher Education Commission (HEC) together get Rs100 billion annually. Once both the programmes are transferred to the provinces, the centre will face more problems. So far these two programmes are being conducted under the existing laws that override the 18th amendment. Sindh and Punjab have constituted their own HECs, but KP and Baluchistan have not, due to which there is zero transfer to the provinces under this head.    

Now when the three-year IMF $6.67 billion Extended Fund Facility (EFF) bailout package has come to an end, the government plans to float $500-$1 billion Sukuk bonds to manage new external resources. The finance minister will soon leave for Washington to attend the annual World Bank/IMF meetings. He is expected to find new avenues for assistance to shore up the $22 billion foreign exchange reserves, which mainly include $12 billion loans from IMF and other IFIs.  The amount of reserves also includes $8 billion loan acquired by the PML-N government alone, the highest ever in the country’s history by any government.

Previous reports lend credence to the belief that the federal government and the provinces maintained status quo because of being too involved in their pressing political affairs.

One of the major issues was whether any credible new resource distribution formula could be worked out in the absence of fresh population census. But now it has been decided that the 9th NFC would be formulated without waiting for the census.

And now when 4.6 percent fiscal deficit (Rs1.35 trillion) has to be brought down, questions were being asked whether the government could satisfy the agitating provinces with additional financial resources.

According to the consolidated figures of federal and provincial budgetary operation released on September 6, the gap between income and expenses could not be brought down from 4.6 percent to 4.3 percent. Hence, the fiscal deficit target was missed for the second year.

The total revenue in 2015-16 stood at Rs4.446 trillion while the total expenditure remained Rs5.796 trillion indicating the budget deficit of 4.6 percent of GDP. The new close to Rs200 additional taxes, including Rs70 billion through new property tax was insufficient to meet the demand being made by the provinces in the 9th NFC award.

The central government was unable to disburse the entire amount of Rs700 billion Public Sector Development Programme (PSDP) fund in the last financial year, and only Rs593.39 billion were made available to the federal ministries and their allied departments.

Now the question was whether the federal government, which transferred Rs1.862 trillion under the current NFC award to the provinces in 2015-16, would be able to arrange additional resources in the next budget, considering the 4.6 percent fiscal deficit.

When the 7th award was signed and announced on December 30, 2009 in Gwadar, the then PPP Finance Minister Shaukat Tarin had said it was the first step towards the financial autonomy of the provinces and a victory of democracy.

It was a unanimously adopted award, and Tarin had called for increasing revenue collection from 8.8 percent to 13.9 percent, and to cut the government’s expenses from 14.1 percent to 12.5 percent by 2014-15. However, the objective was not achieved because the government failed to take tax-to-GDP ratio to double digits.

Now, the plan was to formulate the 9th NFC award, after the 7th award, and there has been no word about the 8th award. There has been no plausible explanation about it, except that things have merged into various heads due to the delays.

For the first time mistrust and concerns of Baluchistan were removed to some extent when its allocation was increased close to 10 percent providing a hefty amount of Rs83 billion to the province. Under the 7th award, 51.74 percent, 24.55 percent, 14.62 percent were allocated to Punjab, Sindh and KP respectively. Punjab at that time gave a sacrifice of 1.27 percent that helped the PPP government finalise the existing award.

Way forward is to enhance tax-to-GDP ratio and offer additional resources to the provinces. But then the obvious question arises that when the state institutions, including the FBR and NAB were not delivering and were often seen playing in the hands of the rulers, how could there be any hope for improvement.

Sadly corruption worth Rs12 billion took place daily, eating up huge national resources and leaving behind little to plan anything afresh. The status quo suits the politicians and till it breaks, the nation would continue to suffer.

The writer is a senior journalist based in Islamabad