ISLAMABAD: The International Monetary Fund (IMF) has expressed dissatisfaction over Pakistan’s poor performance in reforming the fiscal federalism through the National Finance Commission (NFC).

The 7th NFC award notified in 2009 transferred substantial, from 50pc to 57.5pc, fiscal resources from the centre to the provinces. This was based on the promise that provinces would bring additional areas like agriculture and real estate under the effective tax net so as to increase tax-to-GDP ratio from less than 10pc to 15pc by June 30, 2015.

“Little progress has been made in reforming the fiscal federalism system,” said the IMF in its latest report under compulsory Article IV consultation.

The fund said the country’s overall fiscal policy had achieved substantial consolidation as fiscal deficit excluding grants declined by 3.1 percentage points of GDP from 8.5pc in 2012-13 to 5.4pc last year. In the meantime, despite a sustained improvement over the past three years, tax revenue is still very low at 11pc of GDP and widening of the tax net remains a challenge.

The IMF said the 7th NFC award granted 57.5pc of revenues to the provinces. “And although some expenditure responsibilities have been devolved as well, the existing fiscal federalism system remains unbalanced and tax revenue collection under provincial authority, GST on services as well as agriculture and property taxes, is very low”.

The fund said going forward it will be important for the government to seek a better balance in the demarcation of revenue and expenditure responsibilities and encourage improvement in provincial revenue collection. Therefore, the IMF “urged the authorities to reduce fragmentation in tax administration and improve cooperation with provincial tax authorities”.

This was despite Finance Minister Ishaq Dar’s explanations that the government “would continue to manage budgetary spending prudently and strive to achieve the contribution of provinces to fiscal consolidation”.

To this end, additional budgetary spending as result of the reclassification of some non-plan loans (0.1pc of GDP) will be made through reallocation of existing capital expenditure plans, including at the provincial level. The additional budgetary spending related to the new agricultural spending package (0.1pc of GDP) will be absorbed within recurrent spending.

“To assure achievement of our fiscal targets in 2015-16 and beyond, the provincial finance secretaries have agreed in writing to increase provincial budget surpluses consistent with the programme,” the finance minister said and explained how this would be done.

To this end, total provincial spending will be maintained at 6.5pc of GDP in 2015-16, with total provincial own tax and non-tax revenues standing at 1.1pc of GDP. “We are intensifying our interaction with provincial authorities at a higher level to arrive at a mechanism to strengthen the provinces’ fiscal commitment for 2015-16,” he said.

The minister said the quarterly meetings were being regularly held among the federal and provincial finance secretaries to review fiscal performance and coordinate spending priorities to correct any slippages in a timely manner.

Moreover, the finance minister also gave an assurance to better balance devolution of revenue and expenditure responsibilities between the federal government and provinces. “In the new round of NFC negotiations, we will seek an agreement to balance devolution of revenue and expenditure responsibilities in a way that allows for macroeconomic stability,” the finance minister added.

On top of that, the federal government will encourage provinces to improve provincial revenue collection by modernising agriculture taxation and improving taxpayer compliance with a particular focus on identifying mis-declarations in this area. The centre will also start working closely with provincial governments to establish a centralised electronic fiscal cadastre to better record transactions and assess real estate tax for each property based on periodically updated market valuation.

Published in Dawn, January 21st, 2016