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Financial management has to be conducted with great sincerity, integrity, imagination, skill and care. A prudent limit or amount of borrowing for countries is that the borrower can generate, with the help of borrowed funds, additional income adequate for repayment and interest without any new burden and yet get a net increase in net income. Net increase in income means improved standard of living of the people and per capita income.
A constitution is an organic whole. All its articles have to be interpreted in a manner that its soul or spirit is given effect to by harmonising various provisions. Therefore, it is for the leadership to decide for the masses by constitutional means and by constitutionalism.
Revenue sharing: The National Finance Commission (NFC) is a supreme body initially responsible for financial stability, economic progress and social development. It is constituted by the President, under Article 160 of the Constitution, to make recommendations to him as to:
The distribution between the federation and the provinces of the net proceeds of the following taxes:
(i) taxes on income, including corporation tax, not including taxes on income consisting of remuneration paid out of the federal consolidated fund (FCF); (ii) taxes on the sales and purchase of goods, imported, exported, produced, manufactured or consumed; (iii) export duties on cotton and such other export duties as may be specified by the President; (iv) such duties of excise as may be specified by the President; and (v) such other taxes as may be specified by the President. (The term taxation does not include “surcharge” as it is an illegal tax).
After receiving the recommendations of the NFC, the President shall, by Order, specify, in accordance with the recommendations of the commission, the share of the net proceeds of the taxes which is to be allocated to each province.
The recommendations of the NFC, together with an explanatory memorandum as to the action taken thereon, are laid before both the houses of Parliament and the provincial assemblies. The mandate of Article 73(2)(a) is that an Act of the parliament has to regulate the imposition, abolition, remission, alteration or regulation of any act. Thus, the parliament on the basis of the NFC recommendations as laid, shall enact the “net proceeds of the taxes”. For the purpose of transfer of resources, the following steps as laid in the Constitution, shall ensure the federalism the federalism in revenue sharing:
A. Government deposit accounts:
Existing law:- Under section 21(1) of the State Bank of Pakistan Act 1956, the SBP is authorized to accept monies for account of the federal government and provincial governments and to make payments up to the amount standing to the credit of their accounts respectively.
Article 79 of the Constitution which pertains to the Federal Government accounts, is reproduced as under:- 79. Custody, etc., of FCF and the Public Account:
The custody of the FCF, the payment of moneys into that Fund, the withdrawal of moneys therefrom, the custody of other moneys received by or on behalf of the federal government,the payment into and withdrawal from the public account of the federation, and all matters connected with or ancillary to the matters aforesaid, shall be regulated by an Act of Majlis-e-Shoora (Parliament).
The Article 119 of the Constitution which pertains to the provincial governments accounts is reproduced as under: 119. Custody, etc., of Provincial Consolidated Fund (PCF) and Public Account: the custody of the PCF, the payment of moneys into that fund, the withdrawal of moneys therefrom, the custody of other moneys received by or on behalf of the provincial government, their payment into, and withdrawal from the public account of the province, and all matters connected with or ancillary to the matters aforesaid, shall be regulated by an Act of the provincial assembly.
A study of the above articles shows that monies relating to the consolidated fund have to be kept separate from public account monies. Further, each and every transaction originates either from the payment of monies into the consolidated fund or the withdrawal of monies therefrom. Thus, transactions cannot be brought into the account through adjustments. In addition to above, under Article 160(4) of the Constitution the monies in respect of the share of net proceeds which is to paid to the governments of the province concerned do not form part of the Federal Consolidated Fund. Therefore, the constitutional nomenclature of governments deposit account as kept in the SBP would be as under:
Divisible pool deposit account:
Federal government: Federal consolidated fund deposit account and public account of the federation deposit account.
Punjab: Punjab consolidated fund deposit account and public account of the Punjab deposit account.
Sindh: Sindh consolidated fund deposit account and public account of the Sindh deposit account.
NWFP: NWFP consolidated fund deposit account and public account of the NWFP deposit account.
Balochistan: Balochistan consolidated fund deposit account and public account of the Balochistan deposit account.
B. Certification: The existing law under the Article 260 of the Constitution, “Net Proceeds” means in relation to any tax or duty, the proceeds thereof, reduced by the cost of collection as ascertained and certified by the Auditor General. Accordingly, before the transfer of monies to the consolidated funds of the respective governments according to their share is enacted, the following steps are required to be taken:
i) The moneys of the taxes meant for distributions between the federation and the provinces shall be paid into the “divisible pool deposit account”.
ii) On an agreed dates during a financial year, the Auditor General shall ascertain the taxes as collected by the CBR upto that date along with withdrawals made from the “divisible pool deposit account” for the expenditure both direct and indirect incurred on their collections.
iii) The SBP shall supply to the auditor general, the moneys available as on that date in the “divisible pool deposit account”.
iv) On the basis of the enactment, the Auditor General shall certify the share of net proceeds of taxes of each government.
v) The auditor general certificate is a final authority for withdrawal of moneys from the “divisible pool deposit account” by the SBP for payment into:
(a) Federal consolidated fund deposit account;
(b) Punjab consolidated fund deposit account;
(c) Sindh consolidated fund deposit account;
(d) NWFP consolidated fund deposit account;
(e) Balochistan consolidated fund deposit account;
Its introduction will bring accuracy in accounts.
Debt strategy: Under the Article 160(2)(c), of the Constitution, it shall be the duty of the National Finance Commission to make recommendation to the President as to the exercise by the federal government and the provincial governments of the borrowing powers conferred by the constitution.
The recommendations of the National Finance Commission, (NFC) together with an explanatory memorandum as to the action taken thereon, shall be laid before both the houses of Parliament and the provincial assemblies. The mandate of Article 73(2)(b) of the Constitution requires the enactment of “federal borrowing act” while the mandate of Article 115(2)(b), of the Constitution requires the enactment of “province’s borrowing act”.
Article 166 of the Constitution is reproduced below:
“The executive authority of the Federation extends to borrowing upon the security of the Federal Consolidated Fund within such limits, if any, as may from time to time be fixed by an Act of the Majlis-e-Shoora (Parliament) and to the giving of guarantees within such limits, if any, as may be so fixed”.
The word “extends” means, “to assess: to estimate: to calculate:” Thus, executives authority is limited to assess the amount of loan money required for a financial year. The legislatures on their part are free to accept the amount so assessed or may reduce it or may reject it. The actual borrowing, however, shall be carried out by the executives, within such limits as are fixed by an Act of Parliament.
The assessment of loans originates from the requirement of “other expenditure” as estimated under Article 80(2)(b) of the Constitution. To lend money which has already been borrowed constitutes on-lend. On-lend is not the expenditure. To borrow so as to pay off an old loan is refund. Refund is not the expenditure. The term borrow as defined under Article 260 of the constitution includes the raising of money by the grant of annuities and loans shall be construed accordingly, while debt includes any liability in respect of any obligations to repay capital sums by way of annuities. Thus, interest on debt can not be paid from loans. Therefore, loans can not be raised for:
i. on-lending of loans to corporation, autonomous bodies, provinces and others; ii. repayment of debt; and iii. payment of interest on debt.
The item 10 to the Federal Legislative List PART I reads: “Public debt of the Federation including the borrowing of money on the security of the Federal Consolidated Fund; foreign loans and foreign aid”.
Under Article 166 of the Constitution the raising of moneys from within the country under the Act of Parliament, constitutes public debt. With the use of semicolon before the words” foreign loans and foreign aid”, the federation, accordingly is authorized to stand in opposition to foreign loans and foreign aid as semicolon is used when there is balance or contrast between what is said in a pair of clauses.
Thus, foreign loans and foreign aid, both have been kept out of account from the federal consolidated fund.
Government accounts are kept in single entry system and on cash basis. Therefore, the question of net worth does not arise. Expenditure classification vide Article 80(2) of the Constitution is regulated with reference to the source of funds as under:-
Charged expenditure is financed from fees received against services rendered or income earned from the employment of loans.
Expenditure on revenue account is financed from the net proceeds of taxes and other taxes (income in this part is taken in reduction of expenditure)
Other expenditure is financed from loans raised from within the country subject to the condition that each and every loan is amortised through the creation of a sinking fund.
Thus, the Constitution permits the raising of loans only from within the country for reproductive projects.
Devaluation: The International Monetary Fund (IMF) was established in 1945. The primary object of its establishment was to promote international trade through increased stabilisation of currencies. It maintained a pool of money on which member country could draw.
The establishment of the IMF was greatly admired for its just and humane approach to international trade. It was seen as a genuine friend of the under-privileged and exploited developing world.
In Article 23(4) of the State Bank of Pakistan Order, 1948 the value of Pakistan rupee was fixed equal to the weight measuring 0.268601 grams of fine gold for one rupee. (This value of the rupee was enacted under Section (2) of Article 30 of the State Bank of Pakistan Act. 1956).
Upon admission to the membership of the IMF on July 11, 1950, the initial par value of the Pakistan rupee equal to the weight measuring 0.268601 grams of fine gold for one rupee or Rs 3.30852 per US dollar was accepted by the IMF.
The IMF works under the control of the Central Bank of America. The Central Bank of America purchased almost all the gold mined from the world gold market. As the sole monopolist in gold, it controls the price of gold in the world gold market.
Money has no intrinsic utility. It acts as a medium of exchange and a measure of value. Under the above agreement the value per rupee was fixed equal to the weight measuring 0.268601 grams of fine gold i.e. Rs. 3.72 per gram. The rate of exchange between the rupee and the US dollar was fixed at Rs 3.30852 per US Dollar. Thus, the value per Us dollar works out at equal to the weight measuring 0.888672 grams of fine gold i.e. US dollars 31.90 per ounce.
The Central Bank of America with little regard for any principles of justice and fair play entered into an unfair practice of creating artificial money out of nothing. This made the real money issued against the reserves of gold insignificant. Accordingly the value of the US dollar went down in proportion to the quantity of artificial money in the total money.
Assuming the price of gold at US dollars 314 per ounce, the US dollar stood devalued upto 89.84 per cent. In order to transfer the loss in the value of the US dollar to other currencies, the IMF came forward with its own agenda of imposing the conditionality of devaluation with each loan.
The IMF, primarily was responsible to secure monetary stability in the currencies of the member countries by keeping the value of US dollar equal to the weight measuring 0.888672 grams of fine gold per US dollar. Instead, the IMF destabilised the currencies of the member countries by imposing the conditionality of devaluation with each loan.
Since December 1958, each and every lending programme as supported by the IMF had been subject to the devaluation of the rupee. On December 8, 1958 the rupee was devalued by 30.52 per cent. On May 11, 1972 it was devalued further by 41.78 per cent. With reference to the market price of gold the rupee had been devalued further by 27.09 per cent (The market price of gold is assumed at Rs 613 per gram).
By virtue of Article 25 of the Constitution, the value of the rupee equal to the weight measuring 0.268601 grams of fine gold for one rupee, enjoys the protection of law. Despite this protection, the rupee had been devalued upto 99.39 per cent, thereby, contradicting the wisdom of the Constitution under the conditionality of the IMF.
Devaluation is a creative device which:
(i) transfers resources to multinational lenders;
(ii) facilitates flight of capital;
(iii) pushes up the debt obligations to unmanageable limits;
(iv) does irreversible damage to monetary, credit and financial systems;
(v) exploits the masses economically and keeps them impoverished;
(vi) threatens the very survival of the country.
Devaluation is a device to make a nation bankrupt financially and morally. Thus, through the creative device of devaluation, the IMF made Pakistan a heavily indebted poor country.
The elimination of devaluation will bring fairness in the financial system.
