Covid-19 and provincial finances

The focus of the consequences of Covid-19 on public finances has generally been at the Federal level. Some impacts have been identified. First, FBR revenues plummeted by over 16 percent in the immediate aftermath of the pandemic hitting Pakistan. Second, a special support package of Rs 500 billion was implemented to reduce the negative impact on the lives and livelihoods of the people. Third, development expenditure was curtailed by 37 percent in the last quarter of 2019-20 to restrict the Federal fiscal deficit to 8.5 percent of the GDP.

The objective of this article is to identify first the impact of Covid-19 on the state of Provincial finances in the last quarter of 2019-20. Did Provincial revenues also fall? Was there extra spending also on health services and/or social protection? What was the overall impact on the budgetary position?

The focus will then be on the first six months of 2020-21. Is there evidence of a recovery in the level of tax revenues and/or in development spending? What is the deficit/surplus of each Provincial Government as of the 30th of December 2020? Wherever there are differences among the Provinces these will also be highlighted.

The last quarter of 2019-20 did witness some negative impact of Covid-19 on provincial finances. First, with the fall in FBR revenues, transfers from the Federal Government fell by Rs 46 billion or by 7 percent. Fortunately, this was less than the decline in FBR revenues, possibly due to payment of arrears from the previous quarter.

Second, provincial revenue collection did fall substantially by posting a negative growth rate of almost 15 percent, close to the decline in FBR revenues of 16 percent. However, some support was provided by the Federal Government by additional loans and grants of Rs 42 billion.

Third, there is no evidence of an upsurge in current expenditure, which showed the normal growth of 11 percent. Of course, there may have been a reallocation towards health and other Covid-19 related expenditure without leading to a big increase in the overall level of current expenditure. Fourth, unlike the cut in development spending at the Federal level, ADP related expenditure by the four Provincial Governments combined showed an increase, albeit of only 4 percent.

The overall position in terms of the fiscal deficit was adversely impacted. This was primarily due to the fall in transfers compared to continued double-digit growth in current expenditure. The quarter closed with a big deficit of Rs 266 billion, equivalent to over 0.6 percent of the GDP. This was 74 percent above the deficit recorded in the corresponding quarter of 2018-19 of Rs 153 billion.

The impact on growth in own revenues was different among the provincial governments. The two provincial governments with significant own revenues, Punjab and Sindh, both saw a decline of 23 percent and 15 percent, respectively. The two smaller provinces saw a modest increase in their own revenues.

The bottom line, as reflected by the deficit, deteriorated the most for the government of Khyber Pakhtunkhwa, which saw in the last quarter of 2019-20 an increase in deficit of Rs 108 billion, compared to the level in the last quarter of 2018-19. Perhaps surprisingly, Punjab showed a small improvement while in Sindh and Balochistan there was only a minor worsening in the deficit position.

Turning to the outcome in the first half of 2020-21, as the process of recovery from Covid-19 commenced but was somewhat later disturbed by the beginning of the second wave, the overall outcome indicates only a minor improvement. First, there is the unanticipated decline in revenue transfers of 3 percent to the four Provinces combined. With 6 percent growth in FBR revenues. Probably the Federal Government has temporarily held back some transfers.

Second, there has been growth in Provincial own tax revenues of 15 percent. This is significantly above the rate of increase in FBR revenues. In particular, the Provincial sales tax on services has done very well with a growth rate above 28 percent. This raises questions about why FBR revenues have shown growth of only 6 percent.

Third, the growth rate in current expenditure is 11 percent. Here the Federal Government has been able to control the growth in expenditure more to only 7 percent.

Fourth, there has been hardly any increase in development spending by the four Provincial Governments. The level has been maintained whereas development spending of the Federal Government has plunged by almost 26 percent. Both governments have failed to provide a fiscal stimulus for revival of the economy after Covid-19.

The overall budgetary outcome in the first half of 2020-21 for the four provincial governments combined is a fall in the surplus compared to the first half of 2019-20 by 21 percent. It stands at below 0.6 percent of the GDP. Due to the withholding of transfers by the Federal Government, the financial position has been weakened somewhat.

Looking at the performance in each Province, three provincial governments, viz., Sindh, Khyber Pakhtunkhwa and Balochistan, have seen a decline in their surpluses. The only province which has seen an increase in the budget surplus is Punjab with a jump in the size by almost 23 percent.

The four provinces are expected to generate a combined surplus of Rs 242 billion in 2020-21. Already, the surplus stands at Rs 255 billion. The months of March to June 2021 should show a higher growth rate both in transfers and own revenues due to the depressed base magnitudes in 2019-20 in the immediate aftermath of Covid-19. Therefore, the targeted surplus should be more than attained.

However, as the IMF Programme becomes operative once again the provincial government budgets for 2021-22 will have to be much more aggressive. A surplus of almost Rs 500 billion may be asked for at almost twice the level likely to be achieved this year. This will require strong efforts at developing the underexploited Provincial tax system.

(The writer is Professor Emeritus at BNU and a former Federal Minister)

Copyright Business Recorder, 2021