State of provincial finances

The four provincial governments combined play an important role in the public finances of the country. They account for 38 percent of the current expenditure and over 50 percent of the development spending. They have the prime responsibility for the delivery of education and health services. However, they collect only 8 percent of the national revenues and rely to the extent of 77 percent on federal transfers under the 7th NFC Award for financing their expenditures.

The information on fiscal operations for the first three quarters of 2020-21 has been released recently by the Federal Ministry of Finance, with a statement of the financial position of each provincial government. The four Governments combined appear to be in a relatively comfortable position.

They had a cash surplus of Rs 417 billion on the 31st of March, equivalent to almost 1 percent of the GDP. This has contributed significantly to keep the consolidated budget deficit of Federal and provincial governments combined at 3.6 percent of the GDP in the first three quarters of 2020-21.

The basic question is how have the provincial governments been able to generate a relatively large cash surplus? Is it due to fast growth of transfers from the Federal Government? Is it due to buoyancy in own revenues or because of containment of expenditures?

Federal transfers to the provincial governments have shown little growth. They have aggregated to Rs 1986 billion, representing 43.5 percent of total Federal revenues. The growth rate is less than 3 percent. Total divisible pool tax revenues have grown by over 10 percent. Therefore, there may be some delay in the full remittance of the due transfers.

There has been some growth in provinces’ own revenues. They have increased by Rs 52 billion, with a growth rate of 13 percent. However, the absolute magnitude of the increase is small and can make a marginal contribution to the generation of a relatively large cash surplus.

Therefore, the only likely explanation for the cash surplus is the containment of expenditure. Overall, for the four Provincial Governments combined, there has, in fact, been only a modest growth of 2 percent in total expenditure. Much of the containment has fallen on development spending with near zero growth. In fact, if adjustment is made for statistical discrepancy in the reporting of expenditure, the first nine months have seen a very unusual attempt by the four provincial governments to strongly limit the growth in expenditure. Consequently, the cash surplus has exceeded Rs 400 billion.

There is need to focus on the behaviour of each government to identify differences in the rate of revenue generation and expenditure control. There are, in fact, significant differences. The growth rate in own revenues has varied from 47 percent in Balochistan with a small tax base to less than 7 percent in the case of Punjab. The other two Provincial Governments of Sindh and Khyber Pakhtunkhwa have achieved relatively high growth rates in revenues of over 23 percent.

Similarly, there is variation in the growth of total expenditure. The fastest growth in spending is by the government of Khyber Pakhtunkhwa of 19 percent, followed by Balochistan and Sindh with growth rates of 14 percent and 11 percent, respectively. The big surprise is that in Punjab there has been a decline of 5 percent in total expenditure, due particularly to a quantum fall in development spending.

Why has the Government of Punjab slashed its Annual Development Plan (ADP)-related expenditure? Is it because of lack of resources? The answer is a big no. In fact, the Provincial Government has ended up with a large surplus of Rs 244 billion as of 31st March, double the level of surplus in the corresponding date of last year.

There are indications of some governance failure in the ability of line departments to spend adequately on development projects. This may be due to delays in approvals or reluctance to spend out of fear of being subjected to accountability. The lack of adequate development spending has probably reduced the growth momentum in the province of Punjab at a time when a stimulus should have been provided to counter the negative impact of Covid-19.

The target for the combined provincial cash surplus as of the 30th of June 2021 is Rs 242 billion. This target is likely to be achieved, despite significantly lower than budgeted transfers to the Provinces, unless Punjab gets its development act together in the last three months of 2020-21.

The provincial governments’ budgets for 2021-22 will be presented by the middle of June 2021. What form are they likely to be? The IMF Staff Report prepared after the completion of the second to fifth reviews of the Extended Fund Facility to Pakistan contains some ambitious targets for provincial governments, presumably agreed with the federal government, as follows in 2021-22:

(i) Provincial governments combined are expected to show a growth rate in own revenues of over 24 percent.

(ii) Current expenditure to increase by 13 percent and development spending by 20 percent. This is, of course, conditional on the growth in transfers from the Federal Government of over 26 percent.

(iii) The combined cash surplus to be raised by a massive 266 percent, given the big growth in transfers of 26 percent.

Presumably, the Provincial Governments are aware of these targets and preparing their respective budgets for 2021-22 accordingly. We look forward to these budgets to see the innovative proposals that will be put together for resource mobilization, the sectoral priority and type of new projects in much bigger ADPs.

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

Copyright Business Recorder, 2021