Financing provinces

Published December 15, 2021

THE decision in principle to stop federal development financing for provincial projects, mostly those pertaining to subjects transferred from the centre to the federating units under the 18th Amendment, may have some unintended political implications for the federation, besides increasing the smaller provinces’ developmental backlog. The intention itself is understandable as the cash-strapped centre is under enormous pressure from the IMF to scale down development spending to ensure positive primary balance, or fiscal balance adjusted for net interest payments on federal debt, to eventually reduce its debt burden. Additionally, Islamabad wants to refocus its limited resources on large national infrastructure schemes by restricting its investment to areas of federal responsibilities and ensuring that the provinces take full fiscal charge of all the devolved subjects. But can it justify the decision?

Technically, the federal government has the right to withdraw from the responsibility of supporting provincial development. That was the primary objective of increasing the provincial share in federal tax receipts under the seventh NFC award before the devolution of 16 federal ministries to the provinces. However, it was contingent upon the federal and provincial tax agencies to create adequate fiscal resources for both the centre and the federating units. That hasn’t happened yet. Actually, the FBR’s failure to attain its tax collection targets, let alone raise the tax-to-GDP ratio, means a widening resource gap for provincial development programmes. The drastic surge in the current spending of the provinces, mainly the smaller ones, on account of their fast growing pay and pension bills, and other expenditures has further squeezed their capacity to implement their development agenda. So, in a way, Islamabad has an obligation to support them by cutting down its own unnecessary expenditure, particularly on the ministries it has devolved to the provinces.

Politically, the decision will intensify the friction between the federation and its units. For example, the move is being seen as an attempt to put a squeeze on Sindh being ruled by the PPP. The PTI has been at loggerheads with the PPP administration in the province, with its ministers and leaders picking up unnecessary fights with the provincial government. The PPP government is accused of corruption and wasting the resources it gets under the NFC. So the move will likely be seen in the context of the relationship between the PTI and PPP at a time when the new elections are approaching. But these centre-province tensions will not be limited to Sindh. Balochistan largely depends on federal money for its development since its scanty financial resources fall far short of its large development needs. The wiser course for the PTI leadership will be to take all provinces on board before making a final decision and gradually restrict its role in provincial development. More importantly, it must focus on increasing the tax base and revenue collection; expenditure cuts cannot be a long-term solution.

Published in Dawn, December 15th, 2021

Opinion

Editorial

Banning PTI
Updated 16 Jul, 2024

Banning PTI

It appears that the govt and its backers within the establishment have still not realised that they are in uncharted territory.
Nato at 75
16 Jul, 2024

Nato at 75

EMERGING from the ashes of World War II, and locked in confrontation with the Soviet-led Communist bloc for over ...
Non-stop massacres
16 Jul, 2024

Non-stop massacres

Netanyahu is cunningly pretending to talk peace while mercilessly pounding Gaza. What is clear is that a return to pre-Oct 7 status quo is impossible.
Afghan challenge
Updated 15 Jul, 2024

Afghan challenge

Foreign states must emphasise to the Afghan Taliban diplomatic recognition and trade relations all depend on greater counterterrorism efforts.
‘Complete’ justice
15 Jul, 2024

‘Complete’ justice

NOW that the matter of PTI’s reserved seats stands resolved, there are several equally pressing issues pertaining...
Drug fog
15 Jul, 2024

Drug fog

THE country has an old drug problem. While the menace has raged across divides of class and gender, successive ...