ISLAMABAD: Pakistan has made commitment with the IMF to seek an agreement among the center and four provinces through NFC Award for balancing devolution of revenue and expenditure responsibilities in a way that allows for macroeconomic stability.
“We will broaden fiscal policy coordination between the federal and provincial governments to provide strategic guidance and oversight,” it was committed by Finance Minister Ishaq Dar by signing Memorandum of Economic and Financial Policies (MEFP) for completing 10th review with the IMF under $6.4 billion Extended Fund Facility (EFF).
The MEFP states that in the new round of National Finance Commission (NFC) negotiations, Pakistan will seek an agreement to balance devolution of revenue and expenditure responsibilities in a way that allows for macroeconomic stability.
The federal government is encouraging provinces to improve provincial revenue collection by modernizing agriculture taxation and improving taxpayer compliance with a particular focus on identifying mis-declarations in this area. The extent of devolution in revenue and expenditure assignments requires deepened inter-governmental fiscal policy coordination.
“To this end, we will submit a proposal seeking approval of the Council of Common Interest for establishment of a Fiscal Coordination Committee comprising all provincial and federal finance secretaries to meet on quarterly basis with the responsibility of coordinating fiscal policy at the national level”, the MEFP states.
However, the IMF staff report says that Pakistani authorities continue to strengthen policy coordination between federal and provincial governments.
Continued efforts to widen the tax net should drive the planned fiscal consolidation. Fiscal performance in the second quarter was strong, and end-year targets are within reach. Amid downside risks to revenue collection, the authorities’ focus on managing budgetary spending prudently, in close coordination with the provinces, is welcome. Likewise, the authorities’ targeted fiscal deficit for FY 2016/17 of 3½ percent of GDP remains adequate. The authorities’ commitment to raise the tax-to-GDP ratio to 14.5 percent in the medium term remains highly pertinent given that, despite progress under the programme, revenue remains much low to allow for sustained increases in infrastructure investment and social spending. To improve fairness of the tax system and mitigate economic distortions, additional revenue should be raised mainly by widening the tax net while avoiding tax amnesty schemes.
Specific priorities include continued removal of GST and customs duty concessions and exemptions, improving taxpayer compliance, and encouraging better tax collection at the provincial level by re-balancing the existing fiscal federalism system and reducing fragmentation in tax administration. Alongside, upgrading of the debt and public finance management frameworks should continue to further reduce fiscal risks. The planned PPP framework and amendments to the fiscal responsibility legislation, along with the authorities’ continued strong focus on tax administration reform, are highly welcomed, the IMF concluded.
