Case for provincial autonomy

THE federal minister for inter-provincial coordination struck the right note when he called for maximum autonomy to enable the provinces to run their own affairs. Mr Saleem Saifullah Khan was speaking in the context of Balochistan after his visit to Quetta. But it is not Balochistan alone which needs and has been demanding greater provincial autonomy. Other smaller provinces, too, would do better if they are not too tightly controlled by Islamabad. Ever since Pakistan came into being, inter-provincial relations and autonomy have figured as key contentious issues. In fact, the federal government’s failure to resolve them has undermined national harmony and even led to the break-up of the country in 1971. The on-going conflict in Balochistan and its implications should make the government wake up and address the provincial autonomy issue in right earnest.

The disparity in the size and resources of the provinces has created the feeling in the smaller units that they are being dominated and even exploited by the larger province. A way out of this throbbing point is to allow all the provinces sufficient autonomy so that they can frame their own policies and run their own affairs as they think fit within the broad framework of the federation. The 1973 Constitution, which was approved by a consensus, provides a small measure of autonomy for the provinces. Even much of this has been siphoned away by the amendments and distortions that have changed the Basic Law beyond recognition. For instance, the changes brought about in the structure of the local government by the military-led government have enhanced the centre’s hold on the administration at the grassroots level. The provinces have been unable to assert their authority and will in many such matters because of their dependence on Islamabad for their financial resources. Their taxation powers are limited and, according to one estimate, they cannot generate more than 10 per cent of their revenue needs. To meet the shortfall, the provinces rely on the federal divisible pool, subventions and grants from the centre. There is also the interference which comes from Islamabad in the shape of appointments of senior officers in the provincial administrations.

Before any step can be taken to rectify the situation, it is important to look at the Basic Law which tilts heavily in favour of the centre. In the absence of a provincial list, the federal government has the virtual monopoly of lawmaking. The subjects are drawn up in two lists — the federal and the concurrent list. The federation technically frames laws on all these subjects. If a provincial law dealing with a subject in the concurrent list is inconsistent with a federal law, the latter will prevail. Since these lists are so comprehensive (67 items in the federal list and 47 in the concurrent list), the provinces find their powers severely restricted. The government apparently understands the significance of this issue and even set up a constitutional committee under Mr Wasim Sajjad to look into the matter. But nothing has come out of it because sufficient political will appears to be lacking. It is important that the concurrent list is severely shortened and the federal list is cut down to the minimum. Also, several sources of taxation need to be provincialised so that the provinces are not excessively dependent on the centre for funds. Many of the grievances the Baloch have expressed in recent days pertaining to jobs, gas royalties and federal control would not have arisen if Balochistan enjoyed greater autonomy.

Gwadar’s rich potential

THE government’s plan to set up an export processing zone in Gwadar with a 15-year tax holiday as an incentive for potential investors is a step in the right direction. The deep-sea port is set to become operational by June 30 this year, opening up new opportunities for trade, import and export as well as transit trade facilities for Afghanistan and beyond. This can serve as the shortest route to sea for the land-locked Central Asian republics at a time when Pakistan is considering importing gas and electricity from these countries via Afghanistan. The opening of international trade through Gwadar can create new stakeholders in Afghanistan who will become beneficiaries of the transit trade to Central Asia. This in turn can be expected to act as an incentive for normalising the situation in the war-torn country, and also remove the existing misgivings between Kabul and Islamabad. Gwadar thus presents a good opportunity for fostering good neighbourly relations between Pakistan and the region to its immediate northwest. The government is right in offering incentives such as tax holidays to potential investors to set up industry alongside the deep-sea port; this will help realise the mega-project’s economic potential.

Any incentives offered to investors in Gwadar must also include a provision for training and employing the local people, not only as skilled labour but also at higher, management and allied professional levels. This is necessary to remove the sense of deprivation among the people of Balochistan who remain among the poorest in the country and who in the past have been largely bypassed by development. Besides the proposed export processing zone, there are also plans to set up a special industrial development zone near Gwadar. Similar incentives coupled with a promise of employment for the local people must also be considered for this project. More important, the government should build vocational training institutes to prepare a skilled manpower for employment in the emerging industrial sector in this underdeveloped area. Unless these factors are given the priority they deserve, the problem of deprivation and grievances will remain an obstacle in the way of the integration of Balochistan with the rest of the country.

Doctors for rural areas

THE Sindh health secretary’s disclosure that 1,500 posts for doctors have been lying vacant in the rural areas is disturbing. This makes the proposed passing of a bill on compulsory healthcare services in the province even more pressing. If enacted and enforced, the proposed law will address the health needs of those living in the rural areas. But with Saturday’s disclosure on the sheer number of vacant posts, the government must prioritise filling those vacancies as soon as possible. Despite a law that requires medical graduates to serve in rural areas for a fixed period, most of them are reluctant to do so and somehow manage to evade this obligation. The health secretary also acknowledged this problem, adding that pressure from influential circles prevented the department from taking strict action against those who defied the law. This only highlights the government’s inability to strictly enforce the law. This makes it necessary for the health department to address the concerns of medical staff who are reluctant to be posted in rural areas by ensuring that they are properly compensated and the medical centres they are sent to are properly equipped. Above all, the health department cannot allow itself to fall victim to politics as its primary responsibility is to serve people’s medical needs.

As a result of non-compliance with the law, poor people in rural areas have been suffering. Not only are there few hospitals to go to, those that exist have no staff or adequate medical supplies and equipment to treat them. As it is, the doctor-patient ratio in the country is dismally high at one doctor for 1,300 patients. It is far worse in rural areas, which explains people’s reliance on quacks and faith healers.

Long on promises, short on delivery: The budget for 2006-07

THE manner in which the budget speech in the National Assembly was delivered the other day, one was left wondering if it was connected with the budget for the year 2006-07 or an act of mocking at the performance of previous civilian governments with an eye on next year’s election. In this writer’s view the tirade was ill-directed besides being factually incorrect in some instances.

The government should be asking itself why after all the spin on the perceptible increase in the sales of tractors, motorcycles and its favourite indicator, mobile phones, and even the claims of a sharp reduction in poverty, it is, going by its own admission, losing popularity. To this subject one will return another day but for the moment let us review the budgetary proposals for the next year, focusing more on what the speech chose to remain silent on as against the pro-poor announcements made with a lot of fanfare.

The targets for revenues, non-development expenditures (which are, incredulously, expected to actually decline), budgetary deficit, proceeds from privatization (which will, at best, play a one-off role in making finances available) and maintenance of the growth momentum look rather ambitious, given the weak, and hence unsustainable, fundamentals in the form of the massive and growing external trade deficit, the high rate of inflation and the apparent lack of visible effort to raise tax revenues to bridge the gap between resources and the budget’s expansionary tilt.

It is not clear how the government plans to increase allocations for expenditures in spite of both reducing a variety of taxes and maintaining the overall budgetary deficit at this year’s levels (the doubts about the accuracy of this year’s deficit estimates notwithstanding)? Some would argue that this has been achieved by a sleight of hand, unrealism, exaggerated promises, a host of under-funded schemes and announcements meant only to grab headlines. So what value does such a budget have?

In an election year the government chose not to make the tough choices which could have serious adverse implications on account of inflation (which is likely to increase if expenditure is not reined in the face of tax revenues failing to keep pace with targets), with all the negative consequences of this for the poor. In other words, the bulk of the budget will be financed, including the modest pro-poor expenditures, by largely taxing the poor and less so the rich who have the wherewithal to bear the burden of the expansion being planned for 2006-07.

The economy will no longer be able to benefit from a benign interest environment. The macroeconomic situation (especially expectations of a period of high inflation and higher interest rates that would place additional pressures on the cost of government debt) is likely to remain challenging during the course of the year, rendering some of the underlying assumptions overly optimistic, requiring adjustments, especially since more expensive loans will adversely affect lending to the agriculture sector. There are few countries in the world that bank on agriculture to drive the engine of growth or look towards it as the principal source of surplus to the extent that we do.

Islamabad continues to remain determined to keep more and more resources for itself, and not share them with the provinces. The skewed distribution of resources will ensure that the federal government implements more than 70 per cent of the development programme. Islamabad remains opposed to giving the provinces more money (through the NFC Award) by pleading that it is squeezed for funds, since it has a number of obligations relating to defence (with the balance between defence and development expenditures still not addressed), debt servicing and administration. The reality is that our rulers are simply unwilling to give up activities that the Constitution places squarely on the provinces.

We now have an absurd situation of Islamabad constructing provincial roads and implementing schemes in rural areas, simply because it is not prepared to share with the provinces a portion of the increasingly larger share of the cake that it is keeping for itself. While the federal government denies provincial governments and local populations any direct participation either in identifying and prioritising their needs or in the execution of the schemes that it has designed, it naively expresses surprise, if not contempt, at the Balochs not being happy with all the development work being done for them by Islamabad.

In this context, it is also bizarre to read that having privatised National Refinery the government is planning to set up a coastal refinery.

Whereas the PSDP has been increased from Rs. 272 billion this year to Rs. 370 billion, for the next, it is not quite clear how this allocation will be utilised, since much of the increase in resource flows to the provinces will be absorbed by the salary and pension increases announced in the budget. That the much touted expansion in the PSDP includes houses for federal ministers, speaks volumes for the quality of the PSDP and the intention of the federal government to continue to maintain its huge size.

Looking at some of the budgetary proposals, to begin with, let us not forget that efficient financial intermediation increases gains from trade and releases resources for the provision of other goods and services. By levying a five per cent excise duty on financial services like brokerage, commissions, L/Cs and guarantees, money transfers and insurance, the government has made intermediation more costly, impaired financial markets, and raised the cost of doing business, thereby affecting industrial competitiveness. The 15 per cent excise duty on all types of communication will also raise the cost of doing business because unlike GST which is an input tax adjustable against the GST liability on outputs, excise duty will be unadjustable, and yet another cost of production.

Moreover, that Islamabad took this route to mobilise resources rather than introduce a GST on such services are also not surprising since GST on services is a provincial tax under the Constitution whose proceeds accrue entirely to the federating units, an outcome simply unacceptable to an bloated federal government that only has contempt for the concept of federation.

Pakistan is in many ways a unique country where two principal sources of income and wealth creation in the last two to three years — capital markets and real estate — had escaped taxation until the slapping of the two per cent capital value tax (CVT) on real estate transactions in this budget, although rather late in the day with property prices already on the slide.

While many would welcome this two per cent CVT on real estate transactions (it is still unclear if it would be applied in DHA and Cantonment areas), the reality is that: (a) it would encourage splitting of plots of 500 sq.yds. and above into smaller parcels for the purposes of transactions to avoid the two per cent CVT; and (b) most of the land-related speculative transactions are through powers of attorney, whose volume will only increase after the introduction of this tax. Moreover, such taxes, combined with the five per cent excise duty and the increase in the withholding tax on cash withdrawals from banks represent a further extension of the presumptive tax regime that was supposedly being phased out over time.

The decision to increase the withholding tax on cash withdrawals was partly prompted by the need to promote documentation of the economy. However, it is not quite clear how this objective is consistent with the decision to introduce the 5,000 rupee note.

Public sector employees whose salaries and pensions have been raised by 15 per cent represent roughly seven per cent of the total workforce, while EOBI and minimum wage legislation cover less than five per cent of the remaining workforce. Admittedly, the minimum wage has been increased from Rs3,000 to Rs4,000. However, considering that the government has not been able to implement even the former, it is not quite clear how it will enforce the revised figure, especially considering its own inability to force contractors executing its construction schemes to pay their workers the minimum wage.

Finally, the benefits of the huge continuing subsidy on electricity and the new subsidy on cement, instead of being targeted specifically to the poor, will also be available to the most affluent households.

Moving on to the areas that the budget speech chose not to dwell upon, it is noticeable that it was silent on what the government plans to do with the deficit on the external trade account. It is expected to cross $11 billion, with consumer goods imports making up almost 40 per cent of the non-oil and non-food imports, adding close to five billion dollars to the import bill.

This sharp growth in imports of consumer goods has taken place largely because of the consumer binge made possible by (a) the lowering of import duties in recent years; (b) the decision of the government and the State Bank to advance credit liberally beyond the capability of the economy to absorb (given the expansion in national productive capacity) and their decision to artificially maintain the value of the rupee (which is now overvalued by at least five per cent); and (c) the continued high rate of inflation combined with low interest rates on deposits — the latter has discouraged savings (and incentivised consumerism instead).

The claim of the government that other than the impact of the rising bill of oil imports a good deal of imports relate to plant and equipment that should result in higher exports in the future is exaggerated. Not only have some consumer goods imports like motor cars and mobile phones been wrongly categorised as capital goods a substantial proportion of the imports of plant and machinery will not enhance the production capacity of the export sector, required for bridging the widening gap. Meanwhile, the quality of the lending portfolio of banks is also a worrying factor with private credit growth, as already explained above, growing at more than double the rate of the growth of the economy.

This year the government will be able to bridge a major part of this gap from remittances of $4.3 billion, foreign capital inflows of around $3.5 billion from new investments, especially in the energy and telecommunications sectors, and the proceeds of privatization (in particular PTCL), $800 million from the floatation of dollar bonds, net external debt inflows and, external assistance for earthquake relief efforts leaving a nominal deficit on the current account that could be easily financed by running down reserves a little.

However, such a strategy is simply unsustainable and the correction requires an adjustment in the value of the rupee, since in a globalised world, and given WTO regulations, the option to raise import tariffs no longer exists. This has become all the more necessary if Pakistan’s exports of textiles are to remain competitive after the import controls placed on Chinese goods by the EU and the US are withdrawn by the end of next year.

Moreover, there are also the purchases of defence hardware in respect of F-16s and fighter jets from China, airborne warning and control systems and some Chinese frigates for the navy that will have to funded, requiring an additional five billion dollars over the next two to three years.

The domestic savings rate has declined further, widening the gap in investment that can be financed from domestic savings. And if domestic savings do not rise, investment for propping up the growth rate will have to be funded from abroad. There are obvious implications of pushing up growth using borrowed money, since this was the same strategy that was operational for much of our history, which had brought the country to the point of bankruptcy, only to be saved by Osama bin Laden on 9/11.

Moreover, what defies laws of economics and common sense is that a country with close to half of its population illiterate, dependent on foreign technology and confronted with a serious shortage of even the most basic skills is managing to achieve such high growth rates with such low levels of investment, which even countries like China and India, with all their well known advantages over us, are unable to achieve. And we are expected to believe the annual growth and investment rates announced by Islamabad, especially numbers pertaining to small-scale industry and livestock which appear to have been pulled out of a hat.

Even if by strange unexplained phenomenon these figures are credible, this strategy is clearly unsustainable. Investment rates need to rise to beyond 25 per cent of GDP (at least a six percentage point increase on the present levels of under 19 per cent — a highly ambitious target) and national savings need to grow in the same proportion, otherwise the average growth rate of the economy for the next five years is likely to hover between five to six per cent notwithstanding the contribution to savings and investments by the informal/black sector not picked up by official statistics.

The residents of hallowed palaces in Islamabad are crying themselves hoarse from rooftops that the population below the poverty line, after the “introduction of an improved methodology, the existing one being flawed”, has dropped to 23.9 per cent against the previously announced 25.6 per cent. The veracity of government compiled data continues to be doubtful since the raw data and the procedure adopted for “cleaning this data” have not been made available in the public domain.

It is comical to see the poverty numbers changing by the hour simply because the 2000-01 poverty numbers were massaged by Islamabad, just to show that the poverty situation was less worrisome than what commentators had been claiming at that time, forcing government functionaries to rely on wizardry to lend substance to poverty numbers with dubious parentage. Such is the credibility of the decision-makers in Islamabad that the population at large does not believe their data and the spin they put on it. Moreover, these numbers mask the widening disparities in income and wealth which is damaging social harmony.

Long on promises and short on delivery has been the hallmark of Pakistani budgets. Therefore, the significance of the present budget could be turned to an advantage if it could be used to introduce an element of accountability of government. This could happen if it is made mandatory for the government to present a document — say titled Implementation of budget Announcements — that also gives achievements on quantitative targets for each programme announced and results of indicators on the basis of which success or failure is to be assessed in future budgets.

The writer is a former finance minister of Punjab.