Deep concerns about provincial budgets

By M. Sharif

Provincial budgets of four provinces despite being quite generous to help marginalised segments of society through subsidies, pay rise and other cosmetic measures in hard time of food and energy crises and high inflation reflect that their fiscal states are hardly sound to meet even genuine fiscal needs essential for development and welfare of people. They have to look up to Islamabad for their share in the divisible pool to ride over their fiscal woes whose root causes are over centralised fiscal system that favours Islamabad despite the fact that a big chunk of financial resources is generated by the provinces, high provincial debt stocks taken from multilateral organisations and the federal government and limited capacity of the provinces to generate revenue. Total fiscal dependence of the provinces on federal government and inability of latter to come to their rescue particularly of three smaller provinces is a matter of deep concern for any observer of fiscal management in the country.

Thrust of provincial budgets

A profound look at the provincial budgets at first instance explicitly points out that there is a visible shift in budget making this fiscal year over previous years: the budgets are generous to allocate funds to help salaried, poor and marginalised segments of society through 20.0 per cent hike in salaries, subsidies on food items and higher allocations for agriculture, education and healthcare specific projects. This approach is in direct contrast to the demand of foreign donors that are opposed to subsidies of any sort not only to keep federal and provincial fiscal deficits low but also to let market forces operate to maximum according to rules of free market economy that have their own limitations to deliver in a developing country like Pakistan. The provinces have taken a clue from the federal budget that has set such a trend. It became quintessential in the wake of rising expectations of the people because of food and energy crisis and high rate of inflation that has persisted for quite sometime from now. This would obviously increase over all fiscal budget of the economy that the federal government is keen to reduce as its budgetary proposals suggest.

Provincial budget of the largest province of the country, the Punjab is of Rs389.8 billion, 9.0 per cent higher than last year’s fiscal budget. Provincial expenditure is estimated to be Rs257 billion, five per cent higher than last year’s original estimate of Rs243.5 billion. In case expenditure on subsidies is put aside then expenditure is reduced by Rs4.0 billion compared to the estimates expenditure of last fiscal year. It is a surplus budget of Rs1.22 billion and is quite generous to provide pro-poor subsidies of Rs17 billion. Out of it, subsidies of Rs4.0 billion are meant for agriculture and transport in six big cities of the province. Remaining Rs13.0 billion subsidy package includes cash handouts, subsidy on food items and healthcare for poor segments of society. Provincial government employees and pensioner have been provided a relief of 20.0 per cent according to their salary structures and pensions. Allocation for ADP is Rs160 billion that is 6.6 per cent higher than last year’s allocation of Rs150.0 billion. This is in addition to the development projects that the federal government is to take in the province according to its priority in consultation with the provincial government.

The province is highly dependent on NFC award granted by the federal government from the divisible pool. Being the largest province in population, it receives a big share compared to other three smaller provinces. It is to get Rs285 billion, 25.0 per cent higher than last year’s federal transfers because of revised NFC award and projection of higher tax revenue of the federal government. The provincial government is satisfied with this award whereas the smaller provinces have been voicing their concern and demanding that award from divisible pool should be granted taking into consideration three other major factors namely, level of development, revenue generation capacity and area of the province. The federal government remained oblivious to the demand in the past but there is a greater possibility that the political government might take an initiative to satisfy smaller provinces.

The province has limited capacity to collect tax revenue. According to budgetary estimates it is likely to collect Rs40.4 billion in tax revenue, 6.0 per cent higher than last year’s collection and Rs64.5 billion in non-tax revenue. Not with standing the fact that the province of the Punjab is the largest and richest province of the Federation and the largest beneficiary of NFC it is unable to bear its development expenditure and is to do borrowing from the federal government and foreign donors. According to budget documents, the province has thus far stocked debt liability of Rs304 billion including a foreign exchange component of Rs253 billion. The provincial government is conscious of this fact and according to the provincial finance minister, the government is to be financially self-reliant to finance development expenditure, “and it has successfully managed to reduce foreign assistance by Rs23 billion for the current FY.” It is certainly a good beginning but there is a lot more to do in this area of fiscal management.

Sindh government presented a budget of Rs267.7 billion with a deficit of Rs14 billion. The government plans to partially meet the fiscal deficit by adopting austerity measures and transfer of gas development surcharge from the federal government. Budget estimates reflect a current revenue expenditure of Rs189.9 billion and a development expenditure of Rs77.31 billion. The government has granted 20.0 per cent increase to its employees and pensioners that are to cost provincial exchequer Rs10.0 billion. Like the Punjab province, Sindh province has limited capacity to generate tax revenue. According to budget estimates, it is to generate Rs30.0 billion under this head and is to meet fiscal needs from NFC award of Rs177.5 billion. The province has accumulated substantial amount of debt that includes foreign loans as well. It is looking up to ADB for loan to implement its development projects for current fiscal year. The provincial government is overtly keen to expand revenue base and approached the federal government to let it impose GST on ever expanding service sector particularly its those sub-sectors that have not been taxed thus far but centralised fiscal management done by the federal government did not oblige.

Sindh government has remained in the forefront for revising NFC award formula and giving substantial weight to revenue generation capacity of a province. It is confident to earn a better NFC award if this factor is given its due weight. Karachi is the financial capital of the country that should fetch better NFC award to enrich financial resources of the province for better fiscal management and meet its expenditure on maintaining law and order in the province whose cost is ever increasing.

NWFP presented Rs170.9 billion budget with surplus amount of Rs345.5 million. Current expenditure is projected to be Rs67.3 billion and ADP expenditure is projected to be Rs45.5 billion with external component of Rs4.6 billion. The province will get Rs59.684 billion under NFC award in addition to getting Rs7.4 billion from collection of GST, Rs6.0 billion in net hydel profit and Rs4.5 billion in royalty on crude oil and gas. The government has increased expenditure on education and healthcare by around 10.0 per cent and allocated Rs21.7 billion Rs6.4 billion respectively. It has also increased salary of its employees and pensioners and allocated huge funds to provide subsidy on food items to manage food crisis to which the province is quite vulnerable and suffered quite a bit.

NWFP is faced with serious law and order problem and needs huge funds to maintain satisfactory law and order situation. It also needs huge funds for development for which it is highly dependent on NFC and the hydel profit to which it is entitled according to AGN Qazi commission. The provincial government claims outstanding hydel profit of Rs110 billion that the federal government has not paid thus far. It wants to negotiate. It is doubtful if the federal government would be in a position to pay such a huge amount.

Balochistan presented a budget of Rs71.1 billion with a deficit of Rs8.80 billion. It is the most cash stared province of the federation. It last FY’s development expenditure of Rs13.0 billion could not be met because of resource gap of Rs10.0 billion. Resource gap for development expenditure for current fiscal year has been partially met by a special grant of Rs3.0 billion given by the PM. The resource gap now stands at Rs5.8 billion. It is to be seen if the province will be in a position to fill in the resource gap or not. By the end of last FY it had accumulated an overdraft of Rs19.0 billion that it wanted the federal govt to write off.

The province has least capacity of generating tax revenue resources because of practically no industrial and extremely low agriculture out put. It has therefore, to depend upon receipts of gas surcharge, NFC award and loans or special grants from foreign donors and the federal government. Because of low level insurgency that has been going on over past a few years, foreign investors are reluctant to come forward to explore its mineral wealth. Gwader port project despite huge investment has not picked up and is unlikely to pick up in near future. Consequently, the province is seriously handicapped to execute limited number of development projects that it envisages to execute during a financial year.

According to the provincial finance minister, the province is likely to get foreign assistance of Rs4.62 billion, Japanese cash assistance of Rs11.50 million, revenue collection of Rs2.30 billion, NFC award of Rs48.05 and special grant form the PM to manage its fiscal commitments during current fiscal year. The province like the provinces of Sindh and NWFP has been demanding review of NFC award. It asserts rightly that because of over centralised fiscal system that has been prevailing in the country since its inception, the province has suffered the most. There is a strong feeling among the leaders and general public in the province that by refusing reasonable royalty on gas to the province, the federal government has been, since long doing development in other parts of the country at the cost of Balochistan province.

Conclusion

Federal and provincial governments being coalition governments have brought a visible shift in the budget making that have pro-poor bias. Huge allocations have been made for providing subsidies to help poor and marginalised segments of the society. These popular measures despite having some benefits are not the solution to the problems that arise because of centralised fiscal system. In order to resolve fiscal problems of the province, the federal government should overhaul the existing over-centralised fiscal system. It must execute devolution of fiscal powers to the provinces, review NFC award formula in accordance with the wishes and needs of the provincial governments and should focus on cross-provincial projects rather than executing the projects at its own where some sort of discriminatory treatment is meted out to the provinces. Finally, the claim of smaller provinces to their natural resources should be respected and they should be given financial advantage to enable them to give impetus to development projects.