THE International Monetary Fund (IMF) is advising Pakistan to create a contingency fund to be financed jointly by the centre and the provinces to absorb large and unexpected shocks to expenditure of national importance.

The utilisation of the fund is also subject to mutual consent of both federation and provinces or sanctions by the Council of Common Interests (CCI). If the IMF proposal is accepted, the federating units would have some say in the centre’s policies while releasing money from the Fund.

Apart from creation of a contingency fund, IMF proposals include: (a) setting up of a technical council under the aegis of the CCI to develop and agree on broad fiscal rules; (b) establishment of a permanent national tax commission for widening tax net in areas of joint jurisdiction with checks and balances.

In such an arrangement the final decision will rest with the representative governments at the federal and provincial levels. So far, demonstrating the spirit of federalism, the provinces have helped the centre to contain the consolidated fiscal deficit with their budget surpluses.

The provinces’ own revenues are rising much faster than the federal tax receipts and they have not been able to develop the capacity to fully absorb funds made available to them under the 7th National Finance Commission (NFC) award.

The share of the provinces has risen from 7 per cent to 16pc in the overall national tax revenue as the 7th NFC award continues for the ninth year instead of five years mandated under the 1973 Constitution.

Given the deadlock at the NFC witnessed in evolving 8th and 9th NFC awards, it would be apt to prioritise the maximisation of tax revenues at all levels of government while the economy is on a growth trajectory

Keeping in view the federal financial needs, the IMF has suggested changes in what it describes as an ‘unbalanced and less flexible’ 7th NFC award. It is now stressing upon the need for flexibility in the financial system to remove the ‘threat to federal finances and macroeconomic stability from ‘possible economic shocks in the near-term’.

Recognising that the ‘constitutional parameters’ limit the options, the Fund says the ‘changes it proposed were within the existing legal framework’ although ‘the initial feedback from provinces indicated a potentially challenging road ahead’.

Flexibility has been curtailed by the constitutional safeguard that the share of the provinces in vertical distribution cannot be reduced below 57.5pc of the divisible pool prescribed by the 7th award.

Achieving a broad consensus on specific improvements and modalities of strengthening the fiscal framework, according to the IMF, will require extensive dialogue to balance the provinces’ concerns about their autonomy, and the need for more coordination and flexibility to improve overall economic outcomes.

This would not be possible without give and take between the federation and the provinces that are unlikely to reduce their share in the vertical distribution. There are already a wide range of unresolved issues between the federation and the provinces that are holding up the finalisation of the new award.

Khyber Pakhtunkhwa wants the share of provinces in Divisible Pool to be raised to 80pc; Punjab and Sindh want sales tax of goods to be transferred to the provinces without changing the current resource distribution formula.

Officials in the Sindh government also claim that it is the right of the provinces to levy and collect capital gain tax on immovable property as the levy has been devolved to them after the 18th Constitutional Amendment.

Some fiscal experts also point out that the federal government has imposed a number of taxes in the form of advance tax and withholding tax on provincial tax base that curbs the potential revenue from provincial taxes.

And experience has shown during the tenure of 7th NFC award that the taxes which have been assigned by the Constitution can be better collected at the sub-national level.

The flexibility defined under the memorandum of the 7th award is best suited to Pakistan. That it is the rationale for an NFC award every five years. In this framework, there is room to address IMF’s concerns.

The document records that all stakeholders reciprocated the spirit of accommodation to reach an amicable agreement on vertical and horizontal distribution of resources under the 7th NFC award. But this consensus has evaded most NFCs formed.

Officials say the inter-government federal relationship is complex and contentious owing to uneven development between and within the provinces, varying sizes of their populations and geographical areas, and disparity in resource mobilisation and gaps.

Given the deadlock at the NFC witnessed in evolving 8th and 9th NFC awards and with no hope of an early breakthrough, it would be in the fitness of things to prioritise the maximisation of tax revenues at all levels of government while the economy is on a growth trajectory.

jawaidbokhari2016@gmail.com

Published in Dawn, The Business and Finance Weekly, February 19th, 2018