KARACHI: Big businesses have demanded that the National Finance Commission (NFC) award, which is the basis for resource distribution among federal and provincial governments, should be renegotiated to enable the federation to manage its fiscal account.
The Pakistan Business Council (PBC), which is a policy advocacy platform backed by some of the biggest private-sector companies, said the provinces should be incentivised to raise taxes and adopt cost-efficient spending.
“While the federation incurs an unsustainable fiscal deficit, (the) provinces have a reduced incentive to raise taxes. In most years, they also record a budget surplus,” it said in a detailed report titled Minimum Consensus on Key Economic Reforms on Monday.
The prevailing NFC award sets aside a provincial share of 57.5 per cent in the so-called divisible pool, which consists of income and corporate tax, sales tax on goods, and excise and import duties collected by the federal government. The remaining 42.5pc funds under the divisible pool stay within the federal government.
Citing the budget numbers for 2021-22, the PBC said the prevailing award “cannot sustain the federal government”. For example, the federal government is left with Rs2.5 trillion after distributing Rs3.3tr among the provinces out of the total tax collection of Rs5.8tr.
Accounting for Rs2tr under non-tax revenue, total funds available with the federation amount to Rs4.5tr on Day 1 of the new fiscal year.
After deducting the unavoidable expenses of debt servicing (Rs3tr), defence budget (Rs1.4tr), public-sector development programme (Rs0.9tr), pensions (Rs0.48tr), civil service expenses (Rs0.48tr), subsidies (Rs0.68tr) and grants (Rs1.2tr), the federal government is left with a deficit of Rs3.64tr.
“It is estimated that Rs750bn additional revenue can be raised by (the) provinces through agriculture and property taxes,” it said while making a case for the provinces to mobilise their own tax revenues instead of relying solely on funds from the divisible pool.
As for the four immediate priorities for ensuring Pakistan’s solvency, the PBC said the government should secure liquidity by expediting and enhancing the current International Monetary Fund (IMF) programme by factoring in the impact of floods.
The policy paper repeated the PBC’s already published recommendations on managing the external and fiscal accounts with a positive impact of up to $18.9 billion on the former and more than Rs1tr on the latter.
As the second priority, the PBC asked the government to seek the re-profiling of debt through advice from sovereign debt advisers. Of the $100bn external debt, $75bn is payable in 2023–2025, which cannot be met by the $3bn of the central bank’s current reserves and $5bn expected from the IMF and friendly nations.
The government’s third priority, according to the PBC, should be to motivate the public to conserve energy through effective communication. The government should lead by example in conservation and by adopting an austerity programme, it said.
Lastly, the government should develop a cross-party consensus on at least the key reforms to address the immediate challenges.
The PBC said substantial resources are required to carry out the reforms, which will be possible only through broadening the tax base, restructuring the energy sector, reducing the burden of state-owned enterprises’ losses and renegotiating the NFC award.
“Food security, affordability and self-reliance are essential for health and wellbeing, and together with exports and regional trade, these will also help balance the external account,” it added.
Published in Dawn, February 14th, 2023
