Despite claims of having signed an agreement with the provinces to generate revenue surplus of Rs423 billion this fiscal year, Sindh, Khyber Pakhtunkhwa, and Baluchistan failed to chip in what was required, so the very basis of budget-making process stands done for.
Despite claims of having signed an agreement with the provinces to generate revenue surplus of Rs423 billion this fiscal year, Sindh, Khyber Pakhtunkhwa, and Baluchistan failed to chip in what was required, so the very basis of budget-making process stands done for.
Only Punjab generated the required surplus in the budget but it was much lower than the overall estimated figures presented by the federal government on the eve of budget FY20. On other hand, there is a long-standing wish to move ahead by tinkering with the National Financial Commission (NFC) Award and subsequently the 18th Constitutional amendments because this guarantees the share of provinces could not be reduced than the one in the last award.
The condition of generating throw-forward surplus is directly linked with the performance of Federal Board of Revenue (FBR) because all the provinces presented their budget on the basis of revenue collection target of Rs5,550 billion. In the event of revenue shortfall, the possibility of generating any revenue surplus by provinces including Punjab could simply be termed as a far cry.
In the Memorandum of Financial and Economic Policies (MEFP) signed by Pakistan’s Advisor to PM on Finance and Revenues Dr Abdul Hafeez Shaikh and Governor State Bank of Pakistan Dr Reza Baqir and forwarded to IMF for making request to provide $6 billion under 39 months Extended Fund Facility (EFF), Pakistani authorities stated that fiscal consolidation and revenue expansion by the provinces will be a key component of our fiscal strategy.
The fiscal adjustment strategy would imply large provincial surpluses. Therefore, we have signed a formal written agreement with the provinces on the fiscal strategy and the required provincial surpluses, including revenue and fiscal surplus targets by FY2020 and implications in case of missed targets.
This agreement has been made public to ensure accountability and measure progress and performance. Progress toward these goals will be assessed in quarterly meetings of the Fiscal Coordination Committee (FCC), and we will aim to strengthen the FCC's legal basis to make its decisions binding.
To rebalance intergovernmental relationships, in the context of the ongoing NFC we have engaged with provinces with a view to make progress on the following measures such as passing on additional spending responsibilities from the federal to provincial governments, including additional contributions for higher education, health, social protection, agricultural subsidies, and regional public infrastructure investment. There is need for creation of a jointly funded contingency fund for economic shocks and natural disasters, to reduce federal/provincial structural fiscal imbalances.
The provinces will take steps to increase their tax collection efforts in sales tax on services, property tax, and agricultural income tax, and harmonise the tax system to eliminate fragmentation.
Reforming the revenue sharing formula to improve interprovincial equity for better horizontal equity is critical for reducing the scope of divisible pool in the context of the ongoing NFC award.
Pakistan is a federal democracy. In order to maintain intergovernmental fiscal relationship, Article 160 of the Constitution provides for setting up of a National Finance Commission (NFC) with intervals not exceeding five years. The mandate of NFC is to make recommendations to the President of Pakistan for the distribution of resources between the federal and provincial governments.
The recommendations of the NFC are given legal cover through a Presidential Order.
Presently, 7th National Finance Commission (NFC) Award is in force. Through this Award, the financial autonomy of the provinces has been ensured by increasing their share in the Federal Divisible Pool (FDP) from 46.5 percent to 57.5 percent from 2011-12 onwards. Earlier, the resource distribution formula provided center 62.5 percent, while remaining 37.5 percent were meant for provinces. During Pakistan People’s Party led regime, for the first time share of provinces was jacked up phenomenally and they were doled out 62.5 percent out of total FDP.
For the first time in history, multiple indicators were adopted for distribution of provincial shares (horizontal distribution) in the divisible pool, whereas in all the previous awards, population remained as sole criterion for distribution of provincial share with special grants (subventions).
The NFC is a constitutional body and any effort of tinkering with it will have far reaching negative consequences for Pakistan. The NFC is bound to take all decisions unanimously so the wish of getting overriding powers over NFC could not be materialised under 1973 Constitution.
With this lingering fiscal crisis, there is need to adopt two pronged strategy whereby the center must transfer all ministries/divisions that were devolved under 18th constitutional amendments. The duplications of ministries and departments will serve no purpose so restructuring will have to be done at federal levels. What are the justifications of keeping ministries/divisions, which were devolved, at federal levels? The center will have to reduce its footprint where it is required to undertake real austerity otherwise the fiscal imbalance will continue to persist.
Secondly the provinces will have to scramble to raise tax-to-GDP ratio as one percent contribution in percentage of the GDP is just peanuts at a time when agriculture income tax and general sales tax on services are in the domain of the provinces.
The reversal of NFC and 18th Constitutional amendment is not a solution. There is a need to move forward with one step as the center devolved its powers to provinces but now time has come when the provinces must move ahead by devolving their powers to districts under effective local government system. The Provincial Finance Commission needs to be strengthened in order to achieve equitable resource distribution and effective local bodies’ system can be introduced in the country for improving service delivery at gross roots levels.
The writer is a staff member
