Provincial surplus

The budgetary behaviour of the four provinces has a substantial impact on the overall fiscal position of the country. A consolidated surplus in their budgets could reduce the overall budget deficit of the country and vice versa. Mercifully, the FY20 has opened on a very positive note in this respect. Fiscal data released by the Finance Ministry indicates that the cumulative revenues available to the four provinces amounted to Rs 791 billion during the first quarter of FY20. This amount included their joint share of Rs 612.5 billion out of the federal revenues and about Rs 104.5 billion worth of provincial taxes. Against these available resources, the provinces spent only Rs 589 billion, including Rs 70.6 billion on their development schemes, leaving behind a huge surplus of Rs 202 billion. The provincial development spending, therefore, remained less than 9 percent of their available revenues. Province-wise, Punjab had a cash surplus of Rs 75.4 billion - almost 21 percent of its total revenues of about Rs 366 billion and its development spending at Rs 43 billion was less than 12 percent of its available resources. The KP government could spend only Rs 54.3 billion or about 38 percent of its available resources out of which Rs 8.4 billion or less than 6 percent was for development spending. Balochistan had a surplus of Rs 37.3 billion out of its total revenues of Rs 86 billion. In contrast, Sindh came out with the lowest surplus of Rs 35.3 billion accounting for less than 18 percent of its total cash resources and Rs 16 billion or 8 percent of its resources were spent on development schemes.

It may be mentioned here that Pakistan is a federation and Article 160 of its Constitution provides for setting up of a National Finance Commission (NFC) with intervals not exceeding five years. The NFC makes recommendations to the President for the distribution of resources/Divisible Pool between the federal and provincial governments which is given a legal cover through a Presidential Order. Presently, the 7th NFC Award is in vogue in which the provincial share of the Divisible Pool was increased from 46.5 percent to 57.5 percent from 2011-12 onwards. The percentage share of Balochistan was determined at 9.09 percent, of KP at 14.62 percent, of Punjab at 51.74 percent and of Sindh at 24.55 percent. The multiple indicators and their respective weights were also revised on the new basis of population (82.0 percent), poverty or backwardness (10.3 percent), revenue collection or generation (5.0 percent) and inverse population density (2.7 percent). The 8th NFC Award was constituted on 21st July, 2010 but did not give any Award as the latest Award was just completed. After the general elections of 2018, the 9th NFC was also constituted after consultation with the provincial governments. It is expected that the upcoming NFC Award would be announced as soon as a consensus among all the provinces is achieved, which appears difficult due to increasing tensions between the political parties. However, the 7th NFC Award would remain operative till a new Award is concluded. It may be stated that after the 7th Award in which the provincial share of Divisible Pool was enhanced by as much as 11 percent in one go from 46.5 percent to 57.5 percent, it was expected that the provinces would now be able to generate surpluses year after year due to a major increase in their resources and contribute to the improvement in the overall fiscal balance of the country. This seems to have happened but the level of improvement has usually been less than the targets. For instance, during 2018-19, provincial surpluses were projected at Rs 285.6 billion but these could not exceed the Rs 59 billion mark. The situation during FY20, however, seems to be quite different. Provinces were projected to earn a cash surplus of Rs 423 billion during the whole year but ended up with a surplus of Rs 202 billion in the first quarter. This means that the provinces have to earn a surplus of Rs 221 billion in the remaining part of the year which should not be a difficult task. Such a fiscal outcome would not only be consistent with the IMF conditionalities but would also soften price pressures on the economy by containing demand. As per the IMF programme, the government has stated that fiscal adjustment strategy will imply large provincial surpluses and fiscal consolidation will be a key component of its fiscal strategy. It is also noteworthy that Sindh where the PPP is in power is also cooperating with the federal government to contain the fiscal deficit within the limits agreed with the Fund. The fulfilment of the IMF's fiscal criteria would of course auger well for the success of the programme.

However, the negative aspect of this fiscal development is that provincial governments are curtailing their development programmes. Their strategy, therefore, is causing a negative impact on employment creation, poverty level and living standards of the common people. In order to reduce this negative impact, the federal government as well as the provincial governments are required to mobilise higher levels of revenues which should be sufficient to meet both the current and development expenditure and also enable the country to remain within the parameters set by the IMF. Overall, it seems that at least the federal government is very much aware of the prevailing situation and also trying to persuade the provincial governments to join its efforts towards fiscal consolidation.