Pakistan's 5%-plus current-account deficit has started to improve with the 30% depreciation in the real exchange rate over the past two years. Photo: iStock

Pakistan’s frenzy over the Saudi investment of over $20 billion will not scuttle the government’s plan to squeeze provincial budgets. This is deemed necessary to enable Islamabad to foot its bulging security bill and allocate funds for the Federally Administrated Tribal Area (FATA) reform program. The move will also diminish the power of the provinces to tax services, agricultural income, and returns on landed properties.

Initiated last year, the FATA reform process to merge the tribal areas with the North West province of Khyber Pakhtunkhwa (KP) stalled due to the government fiscal deficit, which reached a record of 2.26 trillion rupees (US$15.3 billion) for the year ending June 2018.

The first-ever meeting of the National Finance Commission (NFC) held under the Pakistan Tehreek-e-Insaaf (PTI) government in early February this year failed to convince the provinces on the “reallocation of fiscal resources” to make a cushion for the revenue shortfall of 173 billion rupees ($1.25 billion) in the first half of the current financial year. The provinces also opposed surrendering taxation power back to the federal government and vowed to resist any move that could violate Article 160(3A) of the 1973 Constitution. The article guarantees that the share of the provinces in each award of the National Finance Commission shall not be less than the share given under the previous award. Pakistan’s provinces have refused to provide funds for security and for the FATA mainstreaming process and demand that the central government apportion funds for such needs from its own resources instead of cutting provinces’ funds.

Zahid Khan, spokesperson of Awami National Party (ANP), a KP based right-wing nationalist party, told Asia Times, “This government is imposed on the masses by the establishment for the only purpose to roll back the 18th Constitutional Amendment which guarantees certain financial and constitutional rights to the federating units.” Khan went on to add that during caretakers set up and earlier in a meeting of the corps commanders, the Pakistan army chief categorically stated that through the 18th Constitutional Amendment, the provinces got the lion share of the resources leaving virtually nothing for defense-related requirements.

Last month the federal finance minister set up a high-powered Tax Commission to “review and rationalize” direct and indirect taxes, customs tariffs, and the autonomy and administrative structure of the Federal Board of Revenue (FBR). The commission will also recommend a border force to deal with the illegal movement of persons and goods across international borders.

Economic analysts claim that this commission will facilitate the transfer of taxation powers from the provinces to the federation. The central government will now collect GST on services, agricultural tax, and property tax, previously the domain of the provinces under the 18th Constitutional amendment. They claim that the government has also decided to put in place a Medium Term Tax Policy Framework that will review the existing tax structure and recommend structural changes in the tax policy for the next three-year period.

“It was earlier decided by the federal government that three percent of the pooled revenue would be diverted for FATA development from the federal account and not from the share of the provinces,” Zahid said. He added that it was the responsibility of the central government to provide for the development and security of the citizen. The provinces, he said, has nothing to do with the revenue shortfall or FATA allocation. “No one admits where Pakistan’s foreign loans have gone? The astronomical loans worth $97 billion did not go for social sector development but a big chunk of these loans have in fact (been) expended on acquiring defense capability in nuclear warheads, ballistic missiles, tanks, and ammunition,” Khan added.

The projection for Pakistan’s economy during the current fiscal year is not encouraging. The Fitch Rating downgraded Pakistan’s long-term foreign currency issuer default rating to ‘B-’ from ‘B’ due to external financing risk, higher foreign debt repayments, and a deteriorating fiscal position. The Fitch Solution, a subsidy of Fitch Rating, projected the country’s fiscal deficit at 6 % of the GDP for the current financial year. In a report released last month, the research agency warned that the widening current accounting deficit, weakening currency and sliding foreign exchange reserves were unsustainable and showed the current fiscal trend of expenditures outmatching revenue growth.

Out of the total financial commitment of $8 billion from Saudi Arabia, the United Arab Emirates (UAE) and China, Pakistan has so far received $4 billion from Saudi Arabia and the UAE. Although China has pledged $2 billion, funds have not yet been transferred to the country’s State Bank. The financial account inflows from bilateral donors failed to cover the widening gap of trade deficit. The foreign reserves fell to its lowest level since November 2014, at just $9 billion, enough for less than two months of import cover. This situation prompted the government to approach the International Monetary Fund with a high-level delegation headed by Prime Minister Imran Khan earlier this month in Dubai.

Dr. Farrukh Saleem, a former government advisor on the economy and an Islamabad-based political scientist, economist, financial analyst and journalist told Asia Times, “In October last year I suggested during my interview with the New York Times that the government should approach the IMF because a successful conclusion of ongoing negotiations with (the) IMF could help stabilize the external finances.“ He said that Pakistan needs $1.8 billion per month to meet its external account commitment. “The inflow from the bilateral donors has already been (and) gone,” Saleem said, adding that distribution of resources through the NFC Award needed to be realigned keeping in view of the fact that 1.1 trillion rupees ($7.9 billion) go to defense and 2 trillion rupees ($14.3 billion) for debt-servicing. “It makes the federal government hard pressed to allocate funds among the provinces in terms of the NFC Award,” he added.

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