ISLAMABAD: Amid a record Rs1.138 trillion fiscal deficit in first half of the current fiscal year, the government has called the inaugural meeting of the 10th National Finance Commission (NFC) on Feb 18 to review overall fiscal position of the centre and the provinces.

The Ministry of Finance on Wednesday said the fiscal deficit as percentage of GDP stood at 2.5pc in first half (July-December) of 2020-21. The country witnessed 2.7pc of fiscal deficit during the same period in 2018-19 — the first year under the PTI government. However, in absolute numbers the deficit had amounted to Rs1.030tr.

In first half of 2019-20, the fiscal deficit had amounted to 2.3pc of GDP or Rs995bn.

The fiscal data released by the finance ministry put the total revenue in first half of FY21 at Rs3.35tr, or 7.4pc of GDP, while tax revenues came in at Rs2.455tr, or 5.4pc of GDP. Non-tax revenue on the other hand amounted to Rs895bn or 2pc of GDP.

On the other hand, total expenditure in 6MFY21 amounted to Rs4.489tr, or 9.9pc of GDP. This included current expenditure of Rs4.029tr, or 8.8pc of GDP. Both current total expenditure and current expenditure were higher than last year even defence expenditure was lower than last year.

The mark-up payments in 6MFY21 amounted to Rs1.475tr against Rs1.28tr of same period last year. The defence expenditure this year amounted to Rs486bn compared to Rs530bn of comparable period last year. Development expenditure has also been lower this year at Rs414bn in first six months compared with Rs464bn of last year.

First NFC meeting convened on 18th

Primary balance (deficit excluding debt servicing) came in at 0.7pc of surplus, or Rs337bn, compared to Rs286bn or 0.6pc of GDP last year.

It is in this background that the centre has set a two-point agenda for the NFC meeting. All the stakeholders have been asked to come up with their latest fiscal positions and the future projections. The first meeting would also be setting the stage for the NFC discussions including formation of various sub-groups on various sectors including the shape of future scope of fiscal arrangements between the centre and the provinces and among the provinces.

Under the reconstituted NFC, Finance Minister Hafeez Shaikh is the chairman of the commission. The NFC has been in limbo for almost two years owing to legal challenges arising out of Mr Shaikh’s portfolio as adviser to the prime minister on finance who has now been re-designated as minister for finance besides controversies of provincial private memberships.

The reconstituted nine-member NFC is now led by the federal minister for finance and comprises four provincial finance ministers, besides non-statutory members Tariq Bajwa from Punjab, Dr Asad Sayeed from Sindh, Musharraf Rasool Cyan from Khyber Pakhtunkhwa and Dr Kaiser Bengali from Balochistan.

The TORs of the NFC suggest that the centre would like the provinces to share the financial burden of national development projects and take some unspecified additional fiscal responsibilities. Three broad ToRs have been included in the NFC notification.

These include issues relating to sharing of financial expenses incurred or to be incurred (i) by the federation in respect of subjects and matters falling within the domain of the provinces and vice versa (ii) by the federation and/or provinces in respect of trans-provincial matters, and (iii) for national projects to be shared by the federation and the provinces.

The ToR relating to clause 2 of Article 160 of the Constitution that required the 10th NFC to distribute between the centre and the provinces the net proceeds of five major tax categories as defined in clause 3 of Article 160, besides making grants-in-aid by the federal government to the provincial governments would remain unchanged.

The NFC will also set powers and conditions for the federal and provincial governments for borrowing, besides any other matter to finance referred to it by the president.

The 9th NFC was constituted on April 24, 2015 and reconstituted a couple of times in 2016, 2018 and 2019 owing to change in governments and replacement of non-statutory members, but it failed to conclude a new award as no meaningful and structured dialogue could be sustained.

As a result, multiple calls from various quarters, including the finance ministry, the armed forces and the International Monetary Fund, to rebalance the transfer of larger chunk of divisible pool resources to the provinces under the 7th NFC award have remained unaddressed.

Also, the 7th NFC award announced in 2009 continued with annual extensions and remains in place even now instead of constitutional term of five years that came to an end on June 30, 2015. As per the Constitution, provincial shares in each NFC award could not be reduced.

The four provinces are collectively entitled to 57.5pc of divisible pool taxes, besides revenue from income tax, wealth tax, capital value tax, general sales tax, customs duties and federal excise under the 7th NFC award.

The provincial governments get their horizontal shares on the basis of population, poverty, revenue collection and inverse population density, allowing Punjab to get 51.74pc, Sindh 24.55pc, Khyber Pakhtunkhwa 14.62pc and Balochistan 9.09pc share.

Published in Dawn, February 4th, 2021