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