THE World Bank has asked the government to address the gaps in its financial management structure. Management structure in the implementation of National Finance Commission (NFC) award has also not been developed and hence there is no transparency in the distribution of revenues between the federation and the provinces.

The (non sovereign) loan liability of Pakistan up to June 30, 2006 works out at a Rs5,042 billion (a Rs2,747 billion foreign loans and a R.2,295 billion domestic loans). Its employment is represented by a Rs1,097 billion loans invested in capital outlay, on lending to corporations, autonomous bodies, provinces and others, while a Rs3,945 billion loans wasted on paying off the expenditure on debt servicing. The Rs3,945 billion expenditure on debt serving consists of a Rs1,770 billion on account of revaluation of foreign loans as a result of devaluation of the rupee and a Rs2,175 billion due to payment of interest on debt from loans. It is a loss of interest bearing loans and is due to not implementing the President's Order on National Finance Commission award in accordance with the procedure laid in Article 160 of the Constitution.

The Presidents Order in respect of the National Finance Commission (NFC) award authorises the sharing of, between the federation and the provinces, the net proceeds of taxes. Under Article 260 of the Constitution, the 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.

A study of these constitutional provisions shows that monies relating to 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, under Article 160(4) of the Constitution, the monies in respect of the share of net proceeds which is to be paid to the governments of the province concerned do not form part of the Federal Consolidated Fund. Therefore, the constitutional nomenclature of governments deposit accounts as kept in the State Bank would be as under:

Divisible pool deposit account.

Federal government: Federal consolidated fund deposit account, Public account of the federation deposit account.

Provincial governments: Punjab consolidated fund deposit account, Public account of the Punjab deposit account; Sindh consolidated fund deposit account, Public account of the Sindh deposit account; NWFP consolidated fund deposit account, Public account of the NWFP deposit account: Balochistan consolidated fund deposit account, Public account of the Balochistan deposit account.

The provisions of the Constitution are not mathematical formulae having their essence in form, they are living institutions. Their significance is vital, real and not formal.

In order to secure fairness and accuracy in the receipts and disbursements of moneys and to save the moneys from wastefulness, the Constitution has kept federal government moneys separate from moneys which are either divisible between the federal government and the provincial governments or are held in trust with the governments. (At present all the three sorts of monies are mix up by State Bank under, "Non- food Current Account").

Before transfer of monies to the consolidated funds of the respective governments according to their share, as notified in the award, the following steps are required to be taken to ascertain the net proceeds of taxes: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 up to that date along with withdrawals made from the "Divisible pool deposit account" for the expenditure both direct and indirect incurred on their collection.

iii). The State Bank shall supply to the Auditor General moneys available as on that date in the "Divisible pool deposit account.".

iv). On the basis of the award, 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 State Bank 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) Baloachistan consolidated fund deposit account.

The Constitution, thus, kept the ascertainment and the transfer of net proceeds of the taxes to the federal and provincial governments out of the control of federal government. Contrary to the provisions of the constitution, the net proceeds of taxes and duties are neither ascertained nor certified by the Auditor General. The federal government appropriates total proceeds of taxes and duties towards its own expenditure, leaving no balance for provincial share in federal taxes, vide table A.

The share of each provincial government in the proceeds of divisible federal taxes is allocated by Finance Division. The funds for transfer to provinces are arranged vide Table "B" out of loans, privatization proceeds, money printing and change in provinces cash balance. It is against President's Order, which requires transfer of net proceeds of taxes and not the transfer of other monies. It is misapplication of resources. It deprives the provinces of their due share, because the provincial share in federal taxes is reduced by the amount of "Change in provinces cash balance".

Grants-in-aid: The distribution of the net proceeds of the taxes is effected on certain clearly defined principles by the NFC on a more or less permanent basis with a view to secure financial stability, economic progress and social development. The share in the net proceeds is determined by the President on the recommendations of the Commission. The recommendations of the Commission are based on the scrutiny of a financial plan laid before the Commission by each government. These payments are transferred to the provinces out of the "Divisible Pool" and have been taken out of the control of National Assembly as well as the federal government.

For an equitable settlement on distribution of resources between the federal government and the provincial governments, the Article 160(7) of the Constitution empowers the President to make, out of the federal consolidated fund, grants- in- aid of the revenues of the province in need of assistance. These grants- in- aid do not require the vote of the Parliament.

Taxes and duties are imposed by the Parliament under Article 73(2)(a) of the Constitution. Taxes and duties so imposed are collected by the federal government. Provinces have no say either in their imposition or collection. Provinces have few sources to tap for their revenues.

Therefore, the provinces are always in need of assistance either due to some special need or when the share in the net proceeds of taxes of a province fall short of its requirements.

Additional income is required for the making of both grants- in- aid and loans to provinces. Appropriating these payments (under the cover of change in provincial cash balance) out of provincial share in federal taxes contradicts the Constitution and the President's Order.

The Constitution treats these sums an expenditure and not an investment. Accordingly, federal government cannot recover interest on these sums from the provinces. The recovery of interest made federal government's contribution to the development of provinces in negative vide table "C".

Borrowing power. The NFC serves as an expert body to make recommendations to the provincial and the federal governments in the exercise of the borrowing powers granted to them by the Constitution. The Commission exercises technical control over borrowings by recommending the quantum of the debt to be contracted and the sources which should be tapped for the defined re- productive projects. It also has the power to recommend that the particular sources should not be exploited.

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. Accordingly, the President's Order authorises the exercise by the federal government and the provincial governments of the borrowing powers conferred by the Constitution.

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. Single entry system of book keeping is a system in which personal accounts in respect of creditors and debtors are kept.

Federal consolidated fund transactions up to ledger are recorded on double entry system of book keeping. In the ledger both personal and impersonal accounts are kept. While closing the account for each financial year, the balances of impersonal accounts as existing in the ledger i.e. revenue receipts, charged expenditure, expenditure on revenue account, capital outlay outside the revenue account, cash and other impersonal accounts are closed to "Government Account".

Legally, the lenders, the federal government and the citizens do not have any claim upon the assets created out of loans raised on the security of federal consolidated fund. Therefore, the sale of these assets by the federal government in order to pay off the loan liability is in contravention of the provision laid under Article 81(c) of the Constitution.

Cash basis means to limit the disbursements of cash against an expenditure up to the amount of cash, legally, available in the federal consolidated fund for that expenditure. Therefore, the Rs3,945 billion loss written off to “Government Account” is against the accepted principles of accounts.

The following monies which do not form part of federal consolidated fund, legally, are not available for expenditure:

(a) Divisible pool monies;

(b)foreign loans monies;

(c) foreign aid monies;.

(d) un-funded loan monies;

(e) money printing monies;

(f) public accounts monies;.

(g) privatisation proceeds monies.

Expenditure on revenue account is financed from tax monies with the vote of National Assembly, since taxes are imposed under the Act of Parliament. Capital expenditure is financed from loan monies with the vote of National Assembly because loans are raised under the Act of Parliament. It is 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.

A reproductive project is one which not only bears the cost of interest on capital employed on it, but also contributes towards the repayment or amortisation of capital. Article 81(c) of the constitution bears out that the repayment of capital sums by way of annuities or the wiping out the capital through the creation of sinking funds constitutes debt servicing.

The expenditure on debt serving is described by the constitution as expenditure charged upon federal consolidated fund because the assets created out of loans raised on the security of federal consolidated fund are placed under the administrative control of government for earning income.

Tax is an imposition. Loan is a liability. Both do not form part of "earned income" Thus, the Constitution does not authorise to meet the expenditure on debt servicing either out of tax revenue or from loans raised.

In disregard of the authority delegated in the President's Order, the federal government as well as each of the provincial government exercises borrowing powers in contravention of the borrowing powers conferred by the Constitution.

The federal government exercises unique and unlimited powers to borrow without at all being bothered about the productivity of the uses to which borrowed resources are applied. Expenditure are incurred without regard to the sources of funds. No accounting is done for identifying the liabilities created by on lending of loans to corporations and autonomous bodies at a rate of interest lower than the borrowing rate of interest

Loans are not amortised. Old loans are paid from the proceeds of new loans. Interest on debt is paid from loans. This practice is a violation of the President's Order. The liability in respect of debt servicing as authorised is shown in "Table D", while the source of funds from which this liability is discharged is worked out in "Trade E".