It is reported in the press that the planning division has surrendered Rs 24 billion from a block allocation for a technical supplementary grant in favor of cabinet division for use in Sustainable Development Goals Achievement Programme (SAP), which is euphemism for development schemes for the parliamentarians. Prior to that, cabinet division has an allocation of Rs.5 billion for SAP.
The tradition of providing development funds for the schemes recommended by parliamentarians was started by the Junejo government in 1985, as part of a Five-Point Agenda and called Prime Minister's Special Local Development Project. The PPP government called it Peoples' Works Program PWP), PML (N) called it Tameer-e-Watan Program (TWP) and Musharraf government named it Khushal Pakistan Programme (KPP). The programme was finally taken up by the Supreme Court after it took a suo motu notice in 2013. The Supreme Court finally held that the discretionary funding by the Prime Minister, re-appropriation of budgeted allocations and supplementary grants cannot be done without the parliamentary approval. This caused great hardship to the federal government as it was of the view that these matters were explicitly allowed under Article 84 of the Constitution. A review petition was therefore preferred in the Court. The Court allowed request to restore the re-appropriation and supplementary grant authorities of the federal government whereas the issue of discretionary grants remained sub judice.
After some time, an ingenious way was crafted to skirt the implications of court decision by naming the program as SAP. Some new procedures were evolved to avoid direct allocations to parliamentarians. District Committees were formed to coordinate the schemes and monitor their implementation. Yet, it was known to all that this program was nothing more than the proverbial 'old wine in a new bottle'.
Curiously, no political leader except Imran Khan had the temerity to call the program what it really meant: pandering to the desires of parliamentarians, who shouldered no responsibility to undertake such development schemes. It was in the backdrop of such clarity in his thinking that after becoming Prime Minister, within less than ten days, in a cabinet meeting on 27 August 2018, it was decided to abolish the SAP. Alas, it is back with a renewed zeal.
Undoubtedly, this is the result of politicking. The PML (N) Government did not start the program for nearly two years, taking refuge behind Supreme Court decision, but then it succumbed to the pressure, despite a strong majority, into designing the modified program. Therefore, we may not take too hard a stance on present government's reversal of the announced policy. Our concern is fiscal space.
The fiscal year 2018-19 may go down as the most challenging year. At the federal level, in the first six months Jul-Dec, the deficit was 3.2%, which was significantly higher than for the same period in 2017. If we now assume that there would be a repeat performance for the next six months as during the last year then there would be an additional about 4 percentage points increase in the deficit taking the annual deficit to 7.2%. There are three reasons why this is the most likely outcome. Tax and Non-tax revenues are roughly about 1.5% of GDP short of the budgetary target. The debt servicing would be rising significantly over the revised estimate given in the first mini-budget because of a 4% increase in the policy rate. The defense expenditure, which was already up in the first six months, would face additional pressures under the current tensions on the border. Taking all these factors together, on the expenditure side, this would mean at least 1 percentage point increase over the budgetary targets. The budget deficit target was given at 5.1% in the mini-budget. Adding 2.5% points over runs would take the deficit to 7.6%. Finally, there would be no provincial surplus to lower the federal deficit and hence it would be the overall fiscal deficit.
This is a crisis like situation. Even more alarming is the fact that there is simply no fiscal space to waste. Actually, the fiscal situation warranted that no such expenditures should be approved. A large number of such schemes are related to expenditure responsibilities which have been devolved to provinces together with a much larger share of federally collected taxes assigned to them.
Since 2010, the leaders of successive governments have failed to truly appreciate how vastly the federal government's ability to fund, in the old fashioned style, development schemes relating to provincial subjects have been eroded. Consider the last completed fiscal year 2017-18. The gross revenue (tax and non-tax) was Rs 4,696 billion, of which Rs 2,217 billion was transferred to provinces leaving Rs 2,479 for the federal government. On the expenditures side, debt servicing and defense together amounted to Rs 2,594 billion. This was more than the net revenues of federal government by Rs.115 billion. This is almost consistently the position since 2010 (the year of devolution and last NFC) that the federal government is unable to fund its debt servicing and defense from its share of revenues. Nearly 50% of gross revenues have been transferred to provinces, significantly weakening the financial position of the federal government.
To further appreciate the weak financial position, consider the full fiscal account. The current expenditure was Rs 3,814 billion which was higher than net revenues by Rs.1335 billion. This means that such is the level of borrowing to finance current expenditures (such as salaries of employees). Beyond this, if we made even a single rupee worth of development spending that would only add to the level of borrowing. Last year the level of borrowing at the federal level was Rs 2,243 billion. This is an untenable and unsustainable level of fiscal deficit. What is implicit in this high level is an explosive growth in public debt. There is a huge task ahead of us to restore the fiscal health of federal government. Every single expenditure requires careful scrutiny for its desirability and efficiency together with a dispassionate assessment of revenue sharing arrangements under NFC. In the meanwhile, wasteful expenditures should be avoided.
This, then, is the state of fiscal affairs. The current year would only be worse than last year as the process of economic adjustment has been sporadic and not supported by a rigorous IMF program. When the Fund program would be put in place around the budget time, there would be major belt-tightening.
(The writer is former finance secretary)
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