No more than ten days after the announcement of federal budget FY15, the lack of coordination between Pakistans provinces and the centre has been shamefully exposed.
Over the weekend, Punjab and Khyber Pakhtunkhwa declared a balanced budget for FY15 whereas Sindh showed a marginal deficit. With only Baluchistan left to announce its budget, one wonders how on earth the federal government will generate a surplus of Rs289 billion from provinces in FY15 when, in fact, the three budgets signal a collective deficit from the provinces.
Effectively, the federal fiscal deficit for FY15 can now be expected to slip by another 1 percentage point of GDP - making us revise our FY15 forecast to 7.7 percent of GDP against 4.9 percent budgeted by the government. (For details, see BR Research column: "Creative accounting at the best" published on June 9, 2014).
Those at the helm of federal finance ministry naively assumed provincial surpluses from the snapshot of provincial cash balances with the central bank on a random day, which was well in surplus, and used the same number for calculating deficits for the year ending June 30, 2014. And based on that Rs183 billion provincial surplus in FY14, they inflated the budgeted number for provincial fiscal balance for the upcoming year.
The reality, however, is much different. High provincial cash balance with the SBP at the start of June was due to delayed transfers from the centre while the provinces were in the process of allocating funds. Later, the provinces passed on the funds to their respective departments, as Punjabs revised estimates are showing a balanced budget for FY14. This implies fiscal deficit for FY14 is surely going to slip from revised estimates of 5.8 percent of GDP and may fall below the budgeted number of 6.3 percent of GDP.
One would have thought that since the same political party is ruling Punjab and the centre, there may be some understanding in the budget-making process. But much in line with what happened in the previous regime, when there was no meaningful coordination between PPPs governments in Sindh and Islamabad, history has repeated itself this time around as well.
Ever since the 7th NFC Award, the provincial share in revenue pie has been enhanced and the federal government has started showing surpluses from the provinces, completely disregarding that the federating units have either shown deficit or balanced budgets at best. Irrespective of who is governing at the centre and who is running the units, the story of bad coordination has been the same for five years straight.
Provincial economic advisors claim, and rightly so, that the incremental share awarded to them in the 7Th NFC award is to cater to their own growing needs and there is no rationale for the centre to expect surpluses from them. Its ironic that on one end, Islamabad is releasing funds to provinces for incurring development and on the other it expects them to save it.
The IMF took a notice of this exception and has incorporated the qualitative criteria of institutional arrangement for strengthening the Council of Common Interests in the new extended facility. But the CCIs efficacy has largely remained absent in the budget-making processes.
The sad part is that with the PML-N coming in power and improvement in a few macroeconomic indicators, the budgeted gap between the provinces and federal surpluses/deficits is widening - from tens of billions rupees to close to Rs300 billion (FY15) in five years time. The federal government must deviate from its clever accounting treatment to resolve these gaps and chart down a workable plan for the 8th NFC Award due in the coming year.
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