The controversy about the population census is making the issues in fiscal federalism more complicated and challenging to resolve as policymakers have been stuck with the 7th National Finance Commission (NFC) award for over a decade.

The majority decision by the Council of Common Interest (CCI) to validate the 2017 Population Census and hold a fresh consensus for the next general elections has been rejected by Sindh, one of the country’s four federating units.

Chief Minister Syed Murad Ali Shah has made a pertinent point: in the past, CCI decisions were taken by the consensus of all stakeholders and not by a majority decision.

In democratic federalism, autonomy cannot be substituted by majority rule where the rights of a federating unit are involved. The majority decision is a deviation from CCI’s mandate of upholding ‘Common Interest’ defined clearly in its nomenclature.

Quoting Unicef survey on the number of persons per household, Mr Shah said Sindh’s population stood at 61.04 million, not 47.8m as shown in the 2017 Census. On that basis, he said the share of Sindh in the national resources would go up from about 24 per cent to 29pc.

Instead of improving the formula for removing the level of regional disparity in development, the NFC is bogged down on the issue of provinces’ sharing federal expenditure

The comparative 2017 census figures and Shah’s own estimates based on Unicef survey (bracket) for three other provinces were as follows: Punjab 109,989,655 (107,098,016), Khyber Pakhtunkhwa 30,508,920 (28,887,950) and Balochistan 12,335 129 (13,444,154).

Under the 7th NFC award, the highest weight — 82pc of the total resources for horizontal distribution — is shared according to the population ratios of various provinces. And a sub-federation gets a mere 5pc of revenue collection/generation from its territorial jurisdiction.

For the first time, the 7th NFC award included multiple indicators for horizontal distribution of resources among the provinces: poverty and backwardness (10.3pc), revenue collection/generation (5pc) and inverse population density( 2.7pc.).

Instead of improving the formula for removing the level of regional disparity in development, the NFC is bogged down on the issue of provinces’ sharing federal expenditure. It is mandated to give a new award every five years.

The NFC is also continuing to face a deadlock under the PTI government because of the instability in the finance ministry. Mr Shaukat Tareen is the fourth finance minister appointed by the prime minister after Asad Umar, Hafeez Shaikh, Hammad Azhar in less than three years.

Mr Tarin is reported to have told Imran Khan that the only solution to the economic problems is to bring GDP growth to at least 6-7pc.

However, pushing up economic growth is a very challenging job. “The economy will stay in its present state of low growth, low exports, and close to default” as heavy external borrowing eats a bulk of government revenues and leaves very little for economic development and productive investment,“ says the Institute of Policy Reforms, a think tank, headed by PTI leader Humayun Akhtar.

The report emphatically observes “Pakistan’s case shows there is no relationship between foreign credit and growth.”

The study recommends that the government must develop home-grown policies instead of pursuing donor-driven ones and must have guidelines for the use of foreign loans.

Any home-grown policies cannot ignore a robust model of fiscal federalism that can play a vital role in revitalising the economy by utilising resources and manpower at three different representative and autonomous levels of government.

Mr Tarin was the PPP finance minister when the 7th NFC award was finalised and the accord signed on December 30, 2019, bears his signature. With the transfer of sales tax to the sub-federations under the said award, the annual growth rate of overall tax revenue in relatively developed Punjab and Sindh now outpaces the growth rate of the Federal Board of Revenue’s (FBR) collection. However, the provinces need to significantly increase the low level of agricultural income tax.

It would be interesting to see whether Mr Tarin succeeds where his predecessors have failed in finalising a new NFC award.

Mr Tarin also wants a public sector-led economic growth with a much higher development spending. International Monetary Fund (IMF) representative in Islamabad Teresa Daban Sanchez says there is no constraint from the Fund on this count. But then it is the fiscal deficit that is the problem.

While the Income Tax Ordinance has targeted Rs140 billion from the withdrawal of tax exemptions by end of this fiscal year, FBR officials have been informally telling the media that the additional revenue would be in the range of Rs30-40bn.

To meet the targeted consolidated fiscal deficit — estimated by the IMF at 7.1pc of GDP — the federal government has persuaded the provinces to provide a budget surplus of Rs440bn in 2021-22 against Rs210bn this fiscal year.

On the other hand, the prime minister has unveiled a Rs446bn federal package for the uplift of backwards areas of Sindh.

The plan includes the restoration of 200,000 acres of agricultural land, construction of Nai Gaj Dam to irrigate around 28,800 acres and a 306-kilometre Sukkur-Hyderabad Motorway and the provision of annual 30,000 new power connections in the neglected districts.

The package also envisages skill training to 100,000 youths in 14 selected districts and the facility of business loans for them.

Whether the provinces will be able to fulfil their commitment of targeted budget surplus will depend on tax revenue collection by the FBR as targeted for the next fiscal year and the level of NFC fiscal transfers to them.

But it would definitely impact adversely the already falling provincial development spending. According to the IMF, the provinces’ development allocation of Rs784bn has been reduced to Rs650bn, dropping from 2.5pc of GDP in 2017-18 to 1.5pc this fiscal year and would remain almost at that level for the next five years.

And the latest World Bank’s Pakistan Development Update says the poverty in rural areas has increased from the pre-Covid-19 level of 28.1pc to 30.6pc.

Fiscal federalism has also suffered a serious setback because of the denial of political, financial, legislative and administrative authority and responsibility to local bodies — the third tier of government — as provided by the Constitution.

“The local body elections are the lifeline of a democratic system sans which governance remains an incomplete project, says policy analyst Durdana Najam based in Lahore. “ No country can tackle the complex governance and public service delivery issues in the absence of a strong, functional local democracy,” says another analyst with insight on the subject.

Without robust fiscal federalism, the rapid development of social and physical infrastructure needed for high growth will be difficult to manage for a cash-strapped federation.

Published in Dawn, The Business and Finance Weekly, April 26th, 2021


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