Huge defense outlays hit funding for Pakistani provinces

Prime Minister Imran Khan’s new government in Pakistan is under immense pressure to change the distribution of resources and generate funds for defense-related spending.

The country requires a defense and security budget of roughly Rs 1.7 trillion (US$13.8 billion) annually but the government has run out of money. Pakistan has been facing a major economic crisis and is close to defaulting on payments, while the value of the rupee has been plunging.

Pakistan’s defense outlays have been rising by an average of 25% a year. Over the last eight years, spending has grown by a huge 200%, rising from around Rs 350 billion ($2.8 billion) in 2009-10 to Rs 1.1 trillion ($8.9 billion) in 2018-19.

The defense budget does not include Rs 164 billion ($1.3 billion) allocated for military pensions, which is paid under another budget. The military has also been getting Rs 165 billion ($1.34 billion) under a contingent liability and Rs 98 billion ($800 million) under the Coalition Support Fund (CSF), but the Trump administration suspended that funding because of lack of action against terror groups, which have enjoyed immunity in Pakistan.

The total direct and indirect defense allocations make up over 34% of the country’s annual budget. The economy, on the other hand, has not performed well, so virtually nothing has been left for big-ticket purchases by the military.

The former caretaker finance minister, Dr Shamshad Akhtar, suggested in a recent interview that the Pakistan Tehreek-e-Insaf (PTI)-led coalition government needs to cut the predetermined share for various administrative units by 8% so make funds are available for defense and development budgets in the next fiscal year. That would hit four provinces – Balochistan, Khyber Pakhtunkhwa, Punjab and Sindh. The tax and nontax revenue of each state is calculated at the end of a financial year to determine the divisive pool of revenue which is then divided among the federal and provincial governments.

Currently, the federal government gets 42.5 % of the divisible pool while provinces receive 57.5 % under the National Finance Commission (NFC) Award announced in the year 2010.

Proposed changes

Dr Shamshad, who served as the governor of the State Bank of Pakistan (SBP) and performed an advisory role in the World Bank and United Nations, said an 8% cut would reduce the share for the provinces in the federal divisible pool by Rs 212 billion ($1.7 billion). So, the four federating units, which get Rs 2.59 trillion ($21 billion), would receive Rs 2.38 trillion ($19.4 billion) instead, to create a surplus of Rs 212 billion ($1.7 billion) for defense and development requirements.

Once the elected government’s term is over in Pakistan, an interim caretaker government steps in for two months to create an environment for free and fair elections. Before Imran Khan’s government came to power, the caretaker government proposed to do away with a ‘special payment’ allocated to Pakistan’s Khyber Pakhtunkhwa province. This allocation, amounting to 1% of the total size of the divisible pool, was proposed to meet part of the costs caused by the ongoing “war on terror”. They also recommended increasing the “cost of revenue collection” from 1 to 2% to compensate for the additional flow of funds to provinces.

The caretaker finance ministry formulated these and other recommendations for the next government to steer the country out of its economic quagmire.

Another key recommendation was shifting funds for higher education and vertical health programs to the federating units from the federal government. A policy paper prepared by Dr Shamshad under the interim government suggested that through the Council of Common Interests (CCI), the federal government could create a mechanism to deduct an estimated provincial surplus of nearly Rs 215 billion ($1.75 billion) from the National Finance Commission Award.

Strong opposition

The policy paper, followed by statements by the interim government, caused resentment among the smaller provinces and nationalist forces. They vehemently opposed the move and threatened that the federating units would revolt against such tactics, which may damage the federation.

“The proposals floated by the caretakers and a few state ‘organs’ suggested that they wanted to roll back the 18th Amendment, which is a conspiracy against the federation. The provinces derived legitimate rights from these constitutional amendments and if they tried to usurp these rights, the forces hatching conspiracies against 18th Amendment would be responsible for the consequences,” Zahid Khan, spokesperson and senior leader of Awami National Party (ANP), told Asia Times.

Last week, Pakistan’s Senate took a serious view of Dr Shamshad’s policy paper and warned that any revision in provincial shares from the National Finance Commission Award would tantamount to rolling back the landmark 18th Constitutional Amendment. The 18th Amendment Act was incorporated in the Pakistan constitution on April 20, 2010. It reduced the sweeping powers of the president and enhanced provincial autonomy.

The Pakistan People’s Party (PPP) and other opposition senators vociferously contested the proposed cut on the provinces’ share and described it as unconstitutional. PPP Senator Mian Raza Rabbani referred to Section 3-A of Article 160 of the Constitution and claimed that a reduction in the provinces’ share of divisible pool revenue would be a violation of the Constitution.

Senator Saleem H. Mandviwalla, PPP’s deputy chairman in the Senate, said that treasury benches had confirmed in the Senate that the government wasn’t going to implement the caretaker government’s proposal. “It is unlikely that Pakistan Tehreek-e-Insaf will succeed in commanding the required majority in the parliament to effect changes in the mechanism for resource distribution set in the NFC Award,” Mandviwalla claimed. He said a two-thirds majority was required to amend the NFC formula spelling out the share of the federation and all the provinces from national revenue.

Aside from the poor economic situation, the Pakistani army has been busy upgrading its weaponry and defense system. Currently, 14 extra planes from the Pakistan Aeronautical Complex /Chengdu Aerospace Corporation (PAC/CAC) are being added to a fleet of 150 new JF-17 aircraft. Last year, the army received four Russian-made Mi-35M and three US-made Bell AH-1Z Viper twin-engine attack helicopters for an estimated cost of $1.1 billion. Pakistan will also get three new Saab 2000 airborne early warning & control (AEW&C) aircraft by 2020 at a cost of $155 million.

Moreover, the Pakistan army has signed two contracts with Ukraine to overhaul and upgrade 300 T-80UD Main Battle Tanks. The army is also working on an upgraded variant of Al-Khalid tank and plans to build as many as 600 of them in coming years. And by 2023, the Pakistan Navy will start receiving the first batch of eight Chinese-made diesel-electric attack submarines with a total cost of $5 billion, bought via a low-interest long-term loan from Beijing. Meanwhile, the Army has also earmarked $1 billion for missile programs and advanced nuclear weaponry.

Whether any of these defense purchases can be deferred or put on hold – given the country’s dire economic plight – is something the new government may need to explore.