ISLAMABAD: The provincial governments have declined to contribute to a proposed contingency fund aimed at absorbing unexpected fiscal shocks of national importance, like security emergencies and liabilities of the power sector.

The provinces have expressed reluctance to provide the money in response to calls made by the International Monetary Fund to review the responsibilities to be fulfilled by the federal and provincial governments that have tilted against the central government following the approval of the Seventh National Finance Commission (NFC) award and the 18th constitution amendment, according to the IMF.

As part of its consultations with the federal and provincial authorities, the IMF had highlighted that devolution of powers of 2009-10 had resulted in an “unbalanced fiscal framework” and curtailed flexibility, which had long-term implications for socioeconomic outcomes.

IMF proposed fund aimed at absorbing big, unexpected fiscal shocks

“The provincial authorities expressed reluctance to co-finance joint tasks. Some provinces argued that the tasks falling under the jurisdiction of the Council of Common Interests [CCI] are not joint [tasks] in that they remain in the legislative domain of the federal government and, therefore, should not be co-financed from provincial resources,” the IMF said after interacting with the provinces.

The provincial governments did not agree that unexpected and big shocks should be absorbed using money from a jointly funded contingency fund. “The provinces’ key concern in this area was the potential misuse of such a fund, which required a robust institutional and operational framework,” the IMF explained.

It said the NFC award did not include a strategy to counter unexpected fiscal shocks. The NFC recommendations included a possibility of federal government assisting the provinces in times of unforeseen calamities, but no provision was made in case of a need for reverse assistance in times of national emergencies involving high expenditure, like security-related emergencies.

This left the federal government more vulnerable to fiscal shocks, especially if affordable borrowing options were limited.

Also, the IMF found that the award was largely silent about sharing the burden of financing joint responsibilities as it did not consider critical functions of national importance which fell under the jurisdiction of the Council of Common Interests and hence joint responsibility of the federal and provincial governments after adoption of the 18th constitution amendment.

Most importantly, it said, such areas included public debt and the electricity sector which posed considerable claims on public finances. By default, these functions continued to be financed by the federal government.

The arrangement was already leading to higher-than-budgeted fiscal deficits in the country, slower structural reforms and limited incentives for enhanced revenue collection.

The federal government’s ability to respond to unexpected expenditure needs of national importance was limited as was its ability to assist provinces in times of natural disasters, the IMF said.

To address such challenges, it proposed establishing a jointly funded contingency fund to help enhance the fiscal framework’s ability to absorb large and unexpected shocks of national importance.

Authorisation for the use of such a fund could be subject to mutual consent of the federal and provincial authorities and sanctioned by the CCI to preserve the participatory approach of the existing federal-provincial relations.

The IMF advocated that macroeconomic risks from federal borrowing could be reduced by narrowing the vertical imbalance, for example, through assumption of additional expenditure responsibilities by the provinces or a burden-sharing arrangement with respect to joint areas of responsibility.

Published in Dawn, July 15th, 2017