Sardar Ahmad, a bureaucrat, opted for a political career after his retirement from a government job. The reason for the minister’s outburst was that the provincial budget depends on 85 per cent on funds from the federal government. He pointed out, “we generate hardly 15 per cent of our budgetary resources’’.
Business leaders too want greater fiscal space at provincial level so that there is a healthy competition among the four provinces to invite investment and for growth of trade and industry. As the federal government offers incentives on tax rates and levieses to attract investment in any particular segment, the provinces should have such fiscal controls to capitalise on their advantages.
The President of the Lahore Chamber of Commerce and Industry, Mr Shahid Sheikh told a private television channel that provinces did not have enough fiscal space and were not in a position to offer much to the business. Majyd Aziz, President of the Karachi Chamber of Commerce and Industry, wants greater fiscal empowerment for the provinces. He even wants participation of provinces in the Central Board of Revenue at the policy and operational level. The KCCI Chief wants that provinces be allowed to negotiate foreign loans.
Foreign loans are now acquiring a significant position in the provincial budgets. The Sindh government carries a burden of Rs71 billion foreign loans. Of these, Rs63.79 billion worth of foreign loans are in grace period for repayment. The Sindh Senior Minister Sardar Ahmad indicated in his budget speech (June15) the mounting pressure of servicing these loans on the provincial budget. But then, despite this pressure, the Sindh government is still banking on finalisation of one billion dollar loan agreement with the Asian Development Bank (ADB) in 2007-08 to plug its Rs12.34 billion deficit in 2007-08 budget.
It also wants to use foreign loan to repay a substantial amount of more than Rs26 billion federal government loans carrying an interest rate of 16 to 18 per cent a year. In the last five years the Sindh government has utilised foreign loans to retire more than Rs15 billion which has helped budget makers to get some fiscal space. Obviously, the provincial government is caught up in a syndrome where it has to borrow for paying old outstanding loans. How long this is going to be sustainable is anybody’s guess.
Reports emerging from close government circles indicate that there is a sharp division within the ranks of coalition government on acquisition of foreign loans. The provincial government adviser on finance abstained himself from budget-making process and was conspicuous by his absence on June 16 post-budget briefing. Media reports suggested that he had resigned but it was denied.
An outline of the 2007-08 budget gives the fiscal limitations. Out of a total of Rs176.60 billion revenue income estimated for Sindh, the province will generate only Rs20.30 billion from its own resources. The remaining--about Rs151 billion--will come from Islamabad. What makes the budget makers in Sindh or other provinces tentative in their assessment and projection is the uncertainty on release of these budgeted funds. There is neither any schedule nor any modality for release of these funds. This mainly affects the implementation of the development schemes.
“Implementation of more than 90 per cent of our development schemes is delayed because of late releases of funds from Islamabad and bureaucratic procedural hurdles in provincial government,’’ a young engineer of the Planning and Development Department said.
Then there are abrupt deductions at source on funds being released from Islamabad for the provinces. Sindh went through a painful period of these unlimited deductions at source during the decade of eighties and nineties when the federal government arbitrarily deducted from the provincial share of the federal pool of taxes for Wapda electricity bills. “A small town Kandkot was found to be consuming more electricity than Lahore and the bill amount was deducted at source during nineties,’’ a source in government recalled.
In the outgoing year 2006-07, the federal government indicated Rs18.60 billion for the districts as compensation amount given on abolition of octroi and zila tax. More than Rs1.7 billion was withheld and only Rs16.90 billion was passed to districts directly. In the year 2007-08, the districts are set to get Rs20.38 billion plus under Provincial Finance Commission award.
The provincial government is taking up responsibility of Rs40 billion development plan next year. Of this Rs12.5 billion funding is coming from the carry over cash balance which probably represent unspent money either from the 06-07 development budget or current expenditure budget. The provincial government is committed to provide Rs16 billion fund that may come from surplus of current revenue budget and there are federal grants of over Rs14 billion. What are these grants? The budget is silent. Hopes are pinned on foreign loans and on expected grants. The indicated assured foreign assistance for 2007-08 budget is Rs5.6 billion.
In this election year, the budget presentation for 2007-08 has brought again into sharp focus the fiscal relationship between the federation and the provinces, the stalemate of the National Finance Commission that warranted an interim award by the president in 2005 and is now a controversial issue.
The opposition parties have prepared a long list of the projects promised in budgets speeches of last five years. These projects still lie deeply buried in the budget documents and have not seen light of the day. These include setting up of a microfinance bank of the provincial government, a state of art dairy village and an export processing zone near the Ghaggar Phatak near Karachi, small dams corporation for water management, desalination plants, an agro export zone.