With shortcomings of the devolution of authority and revenues to the provinces under constitution amendment and National Finance Commission award now coming to light, the federating partners are seeking more adjustments.
At the heart of the challenge is the increased financial envelop that is making the provincial governments better off leaving the federation with limited space to cope with ever-increasing debt servicing, defence spending and subsidies on some of the essential commodities, and paying for inefficiencies of the public sector entities.
Those at the helm of affairs in the federal government believe that 7th NFC Award failed in making the provincial governments financially prudent and legally or constitutionally bound to increase taxes to arrest downslide in tax-to-GDP ratio.
The provincial governments, on the other hand, have started making a strong case to have a greater role in running of the federal entities listed in Part-II of the Federal Legislative List that fall under the supervisory role of the Council of Common Interest. In fact, they have been able to take up the issue before the CCI and get a standing committee to formulate policy recommendations.
Under the fiscal devolution, the provinces have been constitutionally empowered to take fresh international loans, although institutional framework is yet to be finalised to enable them issue sovereign guarantees, the responsibility of which ultimately rests with the federation.
Keeping this, and federal borrowing spree in mind, a National Assembly’s special committee is finalising recommendations to make it mandatory on both federal and provincial governments to get approval of their respective assembly’s for contracting foreign loans exceeding a certain limit. The committee is yet to decide whether the parliamentary approval should be required for a sum of $250 million or $500 million.
The committee is also seeking to make it binding upon the provincial governments to increase revenue mobilisation by a certain percentage every year. It is argued that the basic premise of increasing tax-to-GDP ratio to 15 per cent by 2014-15 assumed in the 7th NFC Award did not materialise in the absence of a binding on the provinces to mobilise additional resources.
The tax-to-GDP ration currently stands at a dismal 9.2 per cent.
As a result, over 70 per cent national revenues flowed downstream to the provinces with little effort on part of the federating units to increase their share in federal revenues that currently stands at less than seven per cent. No doubt the 7th NFC award was a landmark move towards strengthening of finances of the provincial governments that required them to provide surplus budgets that never materialised.
According to PML-N member Ahson Iqbal, it should be mandatory on federal and provincial governments to get loan agreements worth $250 million and above with foreign agencies approved by their respective assemblies to avoid unnecessary build- up of loans. He argues that given the fact that federal government provided guarantees for provincial loans, a quarterly report of provincial loans approved by the provincial assemblies be submitted to the national assembly for information so that if a province gets on a borrowing spree without considering its national fallout, the National Assembly could question it.
He also argued that parliamentary oversight committees on fiscal operations should have the powers to engage experts in relevant fields for specific period for independent analysis of the policy steps of the respective ministries to ensure transparency because mismanagement and inefficiencies in the public sector were also playing a key role in the higher fiscal deficit and resultant higher debt creation.
Iqbal said the official data suggest that the total public debt that stood at Rs2.94 trillion at the end of 1998-99 when the PML-N government was replaced through a military coup had gone up to Rs6.05 trillion at the end of 2007-08 when General Pervez Musharraf handed over power to the PPP. The total public debt had now increased to Rs12.66 trillion at the end of fiscal year 2011-12.
According to director general debt of the finance ministry Masroor Ahmad Qureshi, the fiscalprofligacy has been the main underlying cause of macroeconomic instability, which, in turn, has impeded the medium-to-long run economic growth prospects.
In 1990-91, almost 38 per cent of total revenues were consumed to finance debt servicing and by 1999-2000 it reached almost 64 per cent, leaving only 36 per cent revenues to be spent on development in general and social sector in particular; defence, civil administration, etc. It had become difficult to finance developmental activities of the government with such limited resources.
Pakistan entered the 21st century with serious financial constraints as public debt was as high as 83 per cent of its GDP at the end of 2000-01. Mr Qureshi said the current fiscal predicament started in 2006-07 when government extended wholesale subsidies for oil and commodity prices without realising that ‘relief’ would ultimately cause ‘more pain’ for the public.
Such measures actually resulted in pressure on balance of payments, fiscal account (in shape start of circular debt build-up) and banking system liquidity. The economy finally paid the cost in shape of currency devaluation with rupee losing more than a third of its value, inflation reaching multi-decade highs of 25 per cent in second quarter of 2007-08, benchmark interest rates being hiked to 15 per cent and GDP growth falling to 3.7 per cent in 2007-08 and further to 1.7 per cent in 2008-09 from an average of 6.8 per cent during 2003-07.
As a result, Mr Qureshi argued that last four years, beginning 2007-08, started off with inherited backlog of fiscal deficits, energy shortages, power sector circular debt, security expenditure, resettlement of internally displaced persons, low growth, entrenched inflation and multiple adverse shocks of commodity and oil prices. This burden of subsidies along with higher security related expenditure, out of government’s own coffers, exerted continuing pressure on fiscal system.
The decline in tax-to-GDP ratio was despite fiscal deficit contraction as the size of the national economy continued to grow but tax revenue failed to keep pace with GDP growth while defence and debt servicing have been on a decline over the last two decades in relation to GDP.
With provinces seeking 40 per cent share in the boards of the federal entities and perhaps rightly so, it makes reasonable economic and political sense to make them equally answerable for fiscal prudence and increasing revenues. Strengthening of federating units should not be at the expense of a weakening federation.