Provinces to be convinced to generate cash surplus

ISLAMABAD: Amid possibility of obtaining multibillion dollar package from the IMF, the government is making plans to convince the provinces to generate maximum cash surplus and accepting responsibilities of BISP and HEC on their shoulders in order to create fiscal space of Rs500-Rs700 billion in favour of the Center.

With the existing constitutional arrangement under National Finance Commission (NFC) award, the share of provinces cannot be slashed from the Federal Divisible Pool (FDP) so the government is presenting plans before the provinces to generate cash surplus in the range of Rs320 billion, Rs120 billion from Benazir Income Support Program and Rs80 billion from Higher Education Commission (HEC) through shifting the responsibility on provinces.

Under the possibility of striking agreement with the IMF as there will be condition of achieving condition of primary balance targets just on pattern of Egypt where the IMF-sponsored programme had turned the primary balance from negative into surplus, however, the relevance of poverty had gone up.

The primary budget balance is the government fiscal balance excluding interest payments. Pakistan’s primary balance was negative 2.2 percent of GDP in the last financial year 2017-18 and it might further go up in the wake of massive shortfall being faced by the FBR and expenditure overrun especially in interest payment and defence budgets.

“Now a few options are left as the government will have to either further shrink the development budget or force the provinces to generate maximum cash surplus and accept transfer of BISP and HEC on their shoulders and third is to maximise both tax and non- tax collection in substantial manner,” official sources confirmed to The News here on Thursday.

When one of the renowned economists was contacted for seeking his comments, on the condition of anonymity he stated that the IMF and government should never agree to implement any condition which is not attainable. He said how the provinces could generate cash surplus when there will be massive shortfall in the revenue collection of the FBR. When such condition will become part of the performance criteria of the IMF programme, it will result in landing the Fund programme in trouble zone and it will become suspended after one or two reviews.

The IMF guidelines for fiscal adjustments illustrates that given the size and complexity of most government budgets, it becomes important to develop broad indicators that convey a sense of the impact of fiscal policy on domestic demand and financial resources. Ideally, such indicators should reflect a comprehensive coverage of the government's activities and be easily derived from budget documents and other available statistical sources.

A commonly used indicator to assess the stance of fiscal policy is the overall balance, which measures the difference between revenues and grants, and expenditure and net lending.

This balance may be in surplus or deficit. As a starting point for analysis, an overall deficit (surplus) would suggest an expansionary (contractionary) fiscal stance on the basis that the negative impact of taxes and other revenue on aggregate demand is more (less) than offset by the positive effects of government spending. Developments in the overall balance over time, particularly when related to GDP (or GNI), provide an indication of the changing impact of the government sector on the economy.

When contacted, renowned economist Dr Kaiser Bengali on Thursday, said that the Center had agreed to jack up tax to GDP ratio up to 15 percent under the last NFC arrangement and then certain ministries which needed to be abolished but it was never done.

In his detailed paper on NFC, Dr Bengali stated that the abolition of the Concurrent List by virtue of the 18th Amendment required abolition or curtailment of the relevant ministries and administrative divisions, which would have seen actual reductions in expenditure. This does not appear to have happened. There are about 16 federal administrative divisions that are clearly questionable in the light of the 18th Amendment and in the context of economising on non-development expenditure, he said and concluded that five of these divisions deal with exclusive provincial subjects and need to be abolished.