THE Memorandum on Economic and Financial Policies signed by Pakistan with the IMF to borrow $6.6 billion from the lender assigns the provinces greater responsibility — commensurate with their increased share in federal tax revenues under the 7th NFC Award — for restoring macroeconomic stability.

Before the end of this fiscal year, the government will begin negotiating the new NFC award, according to the MEFP. “…the new agreement will adjust the terms of fiscal decentralisation to be consistent with the imperatives of macroeconomic stability,” it says.

The document blames the higher provincial share from federal revenues and ‘substantial devolution’ of spending responsibilities and taxation authority in agriculture, property and services to the provinces for the federal budget deficit, which reached 8.2 per cent of the size of the economy during the last financial year.

The present NFC award, finalised in December 2009, raised the provincial share in the federal tax divisible pool from 48.75 per cent to 57.5 per cent.

The federal government thinks that since the bulk of the ‘additional revenue generated by the reform programme under the IMF facility will be distributed to the provinces under the NFC award, an agreement has (already) been reached at the level of the Council of Common Interest (CCI) to assure that it is used for deficit reduction or saved.

In addition, the government has tightened the balanced-budget requirement on the provinces, and provided incentives for them to maintain surpluses.

However, the move to discuss a ‘constitutional matter’ with the lender does not seem to have gone down well with the provinces or economic experts.

The provincial finance bureaucracy admits that they had agreed in the last CCI meeting to produce a surplus of Rs105 billion — up from a surplus of Rs57 billion produced by them during the last fiscal year.

“But the provinces had agreed to this condition only if the Federal Board of Revenue (FBR) collects the targeted tax of Rs2.475 billion, and their promised budgeted share in it is transferred to them,” said a Punjab finance department official. “The same condition will apply next year.”

A Balochistan finance department official said the federal government had not ‘consulted or informed’ the provinces before including this condition in the IMF programme.

“The matter was never raised at the forum of the NFC Monitoring Committee, which oversees the implementation of the NFC award,” he said. He added that the NFC was formed under the provisions of the constitution, and “neither the federal government nor the president could change it during its constitutional life of five years.

If the federal government wishes to assign some additional ‘responsibilities’ to the provinces, it will have to wait for the negotiations for the next award to begin”.

Some suspect that the federal government wants to force the provinces to produce surpluses to help it cut the ‘consolidated (federal and provincial) budget deficit’ from 8.2 per cent last year to 3.5 per cent of GDP over the life of the IMF programme, because it cannot reduce the provincial share in the federal tax divisible pool in the subsequent awards.

“The present award guarantees that the provincial share will not be reduced from the current level in the subsequent awards. Since the federal government cannot change this arrangement, it wants the federating units to use the anticipated rise in their revenues resulting from the increase in tax-to-GDP ratio (in the coming years) under the IMF programme to produce surpluses,” commented an economist.

Economists like Asad Sayeed felt that the demand from the provinces to throw up surpluses to pare down the federal deficit could prove a ‘disincentive for them to mobilise their own provincial resources’. He was of the view that the federal government would not succeed in controlling its deficit without substantially raising its tax revenues.

Others are furious for the ‘surrendering of national sovereignty’. Economist Hafiz Pasha, who served the previous Nawaz Sharif government as its advisor on finance, was furious that the finance managers of the country had included the constitutional arrangement of the NFC award as part of the loan agreement with the IMF.

“The NFC award is a constitutional matter. The government should not be discussing it with the Fund. By doing so, it has in effect compromised (national) sovereignty. On how many matters shall we surrender our sovereignty,” he asked.

He did not agree with the government’s point of view that the reduction in the federal share and the increase in the provincial share in the federal tax divisible pool had caused the ‘fiscal imbalance,’ as claimed in the MEFP.

“The provinces can damage macroeconomic stability only if they engage in substantial borrowing. It is only a ruse being used by the bureaucrats to shift the blame (for their bad policies and failure to raise the tax-to-GDP ratio) on the provinces. I am disappointed with the (federal) finance ministry for this, and with the provinces for not protesting the attempt (by the federal finance ministry) to sully them,” said Pasha.