According to a Business Recorder exclusive, the aide-memoire sent to the Minister of Finance Dr Hafeez Sheikh by the International Monetary Fund (IMF) mission highlighting the agreements between the two during the recent talks emphasised the need for the provinces to undertake measures designed to increase revenue, inclusive of raising stamp duties and vehicle registration fees.
In addition, the aide-memoire emphasises the need for a memorandum to be signed between the federal government and the provinces, setting levels of provincial surplus/deficit for the current year, as well as the introduction of a mechanism to implement binding limits on a provincial surplus/deficit.
Last year, the World Bank report noted that limits on provincial borrowing (overdraft equal to six weeks of respective provincial wages) were established in October and in end-June, provincial overdrafts outstanding were converted into loans to be amortised over four years. Thus the issue of provincial profligacy has been identified and accepted during the federal government's negotiations with the Fund staff.
One of the biggest defaulters in terms of overdrafts has been the province of Punjab which borrowed to finance its 'sasti roti' scheme, a programme that should have targeted for the poor, but is highly subsidised for all, including the rich and is, therefore, financially unsustainable. Even the actual stock of wheat held by the provincial government is under question by the banks financing commodity operations to the provinces.
In their defence the Punjab government points out that the 50 percent increase in salaries of government servants, proposed and approved in the Federal Budget, has compromised its ability to balance its books. It may be recalled that the Leader of the Opposition in the House, Chaudhry Nisar Ali, had lamented this decision imposed by the federal government in a fiery speech. However, since this is regarded as his usual pattern of behaviour, never followed up on his reservations. Be that as it may, the Punjab government needs much explaining in terms of its heavy reliance on overdraft.
Measures designed to deal with provincial deficits were once again noted in the Letter of Intent submitted by the Finance Minister to the Managing Director of the IMF dated September 10, 2010: "Our budget for the fiscal year 2010-11, set before the floods, targets a deficit of 4 percent of GDP - a federal fiscal deficit of 5 percent of GDP, combined with a provincial surplus of 1 percent of GDP. To achieve this target we have raised the general sales tax (GST) rate by 1 percent and increased some excise and other direct taxes...we have also worked closely with the provinces to ensure they run the desired surpluses. The share of tax revenues distributed to them increased significantly under the 7th National Finance Commission (NFC) award. Since spending responsibilities have not yet been transferred to the provinces, as envisaged following the 18th constitutional Amendment, so the provinces were expected to save the additional funds and run surpluses. They have agreed to revise the initial budget figures and scale back spending plans."
Two months later, on 15th November, the IMF website in a press release stated that "the fiscal outcome in the first quarter of 2010-11 was weaker than expected, and the government continued to borrow from the SBP. With low revenues and large outlays for the provinces and energy subsidies, the deficit reached near 1.6 percent of GDP... Achieving the budget deficit target (4.7 percent) will be challenging and will require an agreement with the provinces on binding limits on provincial fiscal positions consistent with the overall target." The problem clearly remains.
For decades provinces have demanded a higher degree of autonomy. This demand was supported by the PPP and its allies at the hustings but was conveniently forgotten when in power, in Islamabad. The passage of the 18th Amendment finally recognised the legitimacy of the demand as it is in line with a Federal set-up, in sharp contrast to a unitary form of governance in vogue ever since the Fall of Dhaka. Giving a larger share of the financial pie to the provinces under the NFC award, was a logical concession of acceptance of this demand.
In addition, as noted in the IMF press release, the 18th Amendment laid the groundwork for the transfer of some key ministries to the provinces. What has been inexplicable in recent days is the delaying tactics being employed by the provinces to accept the transfer of these ministries. One would hope that the provinces would seize the opportunities for greater financial autonomy, as agreed in the NFC that they have fought long and hard for. The federating units must now stop looking towards Islamabad for bailouts and instead build capacity within for planning and execution.
This involves beefing up the requisite resources for budget making, revenue collection, expenditure allocation and audit. With the devolution of power to the provinces, the size of the Federal government needs to be reduced and federal employees need to be given the option to be absorbed by the provinces. When one unit, comprising West Pakistan, was abolished in 1969 - a similar exercise was undertaken to distribute the West Pakistan bureaucracy amongst the four provinces. So far, there appears to be no progress in capacity building, at the provincial level. The provincial leadership are more involved in firefighting and day to day activity with no foresight to develop in-house expertise. Blaming Islamabad for income disparity and lack of infrastructure may hold for the moment, but not forever.