Having failed in its concerted efforts to persuade the provinces to share federal expenses as it faced a financial crunch, the centre is now mulling the transfer of development projects related to subjects devolved to the sub-federations under the 18th Amendment.

The lure of centralisation of authority and resources has created a deadlock in the National Finance Commission (NFC) on the eighth award, freezing the evolution of the horizontal distribution of resources among the federating units that was stipulated to reduce regional income disparities.

The 7th NFC award initiated a formula for allocating a part of the NFC divisible resource pool to speed up regional socio-economic development. The award also placed a cap on the ratio of the vertical distribution of resources between the federation and the provinces.

We are stuck now with the 7th NFC Award 2010, much beyond its five-year constitutionally mandated period.

Prime Minister Shehbaz Sharif is reported to have advised the Planning Commission to refrain from including provincial projects of devolved responsibilities in the Publis Sector Development Programme (PSDP) 2023-24.

The way forward lies in boosting domestic value-added commodity production

Provincial projects of compelling significance, which would need to be funded on a 50:50 basis by the centre and the provinces, are an exception. Provincial development projects are to be capped forever by the centre.

Owing to the provincial burden, the Planning Commission says the federal mega projects of national importance are suffering because of cost overruns and delays. As a result of the resource crunch, the PSDP dropped from about Rs1 trillion in FY18 to less than Rs600 billion in FY23.

The World Bank also recently suggested that the government should rationalise its spending by about Rs2.5tr, starting with the diversion of Rs710bn worth of provincial project financing to federal priority areas starved of funds.

The prime minister wants to focus on funding five strategic sectors —exports, energy, equity, e-Pakistan and environment.

Hit by shortages and unaffordable electricity rates, the two relatively developed provinces of Sindh and Punjab have also decided to generate and distribute power at the provincial level.

To curb unsustainable imports, the federal government has decided that imported fuel will not be allowed for new electricity generation projects in the country. The government has also committed to avoiding installing power projects that consume imported coal.

As international economic literature illustrates with abundant evidence, we are now in a great moment of evolution triggered by an upsurge in human ingenuity, creativity, talent, skills and expertise. Human inventiveness in developed economies like the US is accelerating, and the trend shows how much more forceful the power of human inventiveness is relative to everything else, says an eminent researcher.

It also brings productivity improvements and wider dispersal of incomes and wealth though not so aggressively owing to cyclic bumps.

Fortunately, we see some fresh thinking among a segment of corporate executives who recognise the need for a marked shift in the wage policy. They believe the minimum wage system has become outdated and want to substitute it with a fair living wage and decent jobs. The 1973 Constitution provides that workers should be paid based on their abilities.

Analysts argue that those who are intensely preoccupied with tackling problems of routine businesses miss the big-picture patterns and cycles and the broader interrelated things driving them. This results in a stagnant status quo.

Pakistan’s gross capital formation is 15 per cent of its GDP (2021), or half that of India and Bangladesh at 31pc of GDP and below the Asian average of 28pc. And according to the latest report of the Ministry of Finance, the government spent an overall Rs3.582tr on both external and domestic debt servicing in nine months of FY23. Pakistan ranks 87th out of 132 countries (2022) in the Global Innovation Index (GII), which uses 80 indicators to rank innovation among countries.

As in the case of the distressed federation in Pakistan, the provinces should not centralise authority and resources at the provincial level and devolve rights and responsibilities to district governments and community organisations.

In these hard times, one can appreciate the ingenuity of big companies to survive or even thrive. But they need to find ways to put the country’s imbalanced economy on an even keel.

Facing the risk of costly borrowing from banks at prohibitive interest rates in the current phase of stagflation, the corporate sector prefers retaining its earnings instead of distributing dividends to the minority shareholders.

Critics point out that dividends are drying up, notwithstanding the growing corporate earnings despite the tough economic conditions. The company’s majority shareholders are building cash reserves and using their surplus funds to buy back their own shares from the open market. As a result, the break-up value and profit per outstanding share go up.

But no less important, cash reserves are also used for self-financing or inter-corporate financing to reduce dependence on costly debt.

The Pakistan Stock Brokers Association says the thinning of dividend payments has hurt the interests of the minority shareholders, eroded investors’ confidence and decreased investments.

Industries are stated to have been badly hit by the foreign exchange crisis, import curbs and rising input costs, resulting in the closure of factories and a surge in unemployment.

The way forward lies in boosting domestic value-added commodity production, as agriculture provides raw materials for manufacturing and (rural) markets for industrial goods. The simultaneous increase in agriculture and manufacturing production will allow the domestic demand to be met by indigenous production and facilitate a boost in exports.

Published in Dawn, The Business and Finance Weekly, May 5th, 2023