SINDH IS moving ahead with caution and care towards the financial and administrative devolution in the province.

The Sindh Finance Minister, Abdul Hafeez Sheikh, while explaining the salient features of 02-03 budget, rightly took the credit of being the first province to take initiative in setting up a provincial finance commission (PFC) that came out with an interim award of resources distribution early this month, only a few days before the presentation of budget.

“This devolution has far reaching consequences on how the government will function, how political authority will be balanced, how services will be delivered and how the financial resources will be divided and utilized”, the finance minister said during his budget speech.

A few months earlier before these words were uttered, the Sindh government in an official document, “Budget Analysis: 2001-02” was more than blunt in pointing out that “decentralization without adequate resources may pose a serious challenge for the sustainbility of the sub-state governments and may strain the fiscal space of the provincial government further”.

Financial devolution was partly introduced in the current fiscal year’s budget when out of the revised current expenditure budget of Rs77.66 billion, a sum of Rs16.35 billion was transferred to the 16 district governments. This amount included more than Rs15 billion for salaries of mostly local bodies employees and a sum of Rs1.34 billion was the non salary component that was used to keep the departments operational and in functional conditions.

Simultaneously, a sum of Rs6.63 billion development funds were transferred to the 16 districts. These funds included Rs3.11 billion non-SAP funds, Rs721.31 million SAP funds and Rs2.80 billion Khushhal Pakistan Programme.

How did these district governments function in last one year? How judiciously the allocated funds well over Rs23 billion, particularly the development funds were utilised? These are the questions that the finance minister should have answered in the 02-03 the budget speech. There was no opportunity to put these questions to the finance minister in the post budget press conference.

These questions are relevant and very pressing because Sindh happens to be the only province with a sharp urban-rural divide. There is unfortunately a history of some bitterness in past 30 years. There are other distortions. And also because, from July next the local bodies institutions will start functioning as virtual self-government entities with financial and administrative powers and authorities.

The PFC has already announced an interim award for resources distribution which is well reflected in the 02-03 budget. Province is retaining 60 per cent of the resources needed to meet the revenue expenditure and 40 per cent is being passed on to the 16 district governments. The distribution of these resources among the districts is formula based. Population as counted in 1997 census will claim 50 per cent share. Backwardness will be another factor to which 17.5 percent weightage points have been assigned. Income generation capacity will claim another 7.5 per cent share in the funds. The fourth factor is of interim nature on the basis of which 25 per cent funds will be given as special subvention for next one or two years.

Districts will get 70 per cent of the development funds and the provincial administration will handle only 30 per cent. The distribution of development funds are also formula based. Population will be given 50 per cent consideration while backwardness will claim 30 per cent and an interim arrangement for 20 per cent funds have been worked out.

Accordingly, the Rs 99.23 billion revenue expenditure and development budget for 2002-03 reflects the implementation of the resource distribution formula worked out by the PFC. Perhaps, realising the problems that could be encountered in the operation of PFC formula based budget, the Sindh finance minister announced that the interim award would be reviewed again in the next quarter.

Next quarter of the coming fiscal year means sometimes in September-October when the promised elections of the national and provincial assemblies are due. Probably by then, the Sindh Government would have taken stock of the situation, monitored the working of the PFC formula based budget and would be in a position to portray a financial and administrative picture for the next elected government of Sindh. If necessary, the PFC may amend the interim award.

Sindh’s next budget has to be viewed in context of the devolution process, the coming elections and of course the changes that are being brought about in administration and financial operations. The coming elections due next October have probably prompted the Sindh government to come out “for the first time in history” (of course last 32 years history since Sindh re-emerged as provincial entity again in 1970) with a surplus budget of about Rs 94 million.

An attractive development outlay of Rs 14.48 billion—almost 15 per cent of the total budget outlay of Rs99.23 billion—is other election ploy. The development outlay includes Rs 7 billion annual development programme. The Sindh government will finance Rs 6.97 billion for this ADP while a meagre amount of Rs 22.50 million will come as Japanese assistance. Then there are development schemes of Rs 2.88 billion to be funded from foreign assistance, Rs2.80 billion Khushhal Pakistan to be funded by Sindh’s share in 2.5 per cent GST collection and Rs 1.8 billion Drought Emergency Relief Assistance (DERA) to be financed by the same 2.5 per cent GST share.

To finance more than Rs 92 billion (Rs 64.80 current expenditure and Rs 7 billion ADP budgets), the dependence is on the availability of about Rs 50 billion funds from Islamabad. Of this over Rs 37 billion will come from federal divisible pool of taxes. It will largely depend if the Central Board of Revenue manages to collect Rs 460 billion taxes. More than Rs 37 billion is expected from the oil and gas surcharges and from excise.

Business and market activities get affected by the electioneering and political heat which has the potential to suppress revenue generation. Elections are 13 or 14 weeks away from now and there is already an element of uncertainty setting in. It is yet to be seen what finally emerges but then market watchers and financial analysts have their own views on electioneering and on the post-election scenario.

But all said and done, the budget described as a ‘budget of continuity’ has focussed on tax reforms, financial discipline and debt reduction. For the first time IDA has offered a virtually interest free loan of 100 million dollars (Rs 6 billion) which will be available in next two budgets also. The government wants to retire federal government’s expensive loans of Rs 2 billion from this amount which will relieve the exchequer of Rs 400 million interest liability.

Sindh and all other provinces are agitating for lowering of the interest rates on the federal loans given for development. Sindh got a total of Rs 43 billion. It has paid back more than Rs 56 billion but still has to pay Rs 36 billion. Now the demand is that the federal government should link loans with the prevailing bank rates when they were advanced if Islamabad cannot write off the accumulated interests.

With more than half of the rural population living below poverty line, the financial managers have taken up a few programmes within limited resources to provide some relief. These are Khushhal Pakistan, DERA and rural development.

But then the focus is also on education. More than Rs 18 billion have been given. Sindh took a big step forward by declaring education upto matric free in government schools.

It is now offering text books to the students in primary classes and a monthly stipend of Rs 100 a month to a girl student who passes the primary and joins middle class. A proper monitoring to ensure judicious utilisation of the allocated funds become necessary. Beyond the budget, Sindh faces tough challenges of controlling lawlessness, improving business environment and the rehabilitation of the totally broken down infrastructure.