ISLAMABAD: The International Monetary Fund (IMF) on Thursday urged Pakistan to reopen discussions on the National Finance Commission (NFC) award in a bid to resolve the persistent imbalance in the distribution of fiscal resources between the federal and provincial governments.
During the initial round of discussions on the $1.1 billion loan tranche, Nathan Porter, the head of the IMF’s mission in Pakistan, raised concerns about the distribution of resources and responsibilities, stressing the need for a fairer arrangement. Pakistan was represented in these talks by Finance Minister Muhammad Aurangzeb.
The current formula, introduced in 2010, has seen provincial shares rise from 47.5% to 57.5% of total federal taxes, with no proportional transfer of additional responsibilities. This led to persistent fiscal imbalances and a rise in public debt.
Pakistani authorities have informed the IMF that provincial shares cannot be reduced without submitting a constitutional amendment and all provinces agreeing to the new formula.
The 2010 NFC award was agreed for five years, but there has since been no agreement to renegotiate it.
Solving the challenge of garnering provincial support for reforms, especially in a politically diverse environment, presents a formidable task for the coalition government.
Despite having the two-thirds majority needed for constitutional amendments, securing agreement from all four provincial governments remains uncertain, with parties such as the Pakistan People’s Party (PPP) strongly advocating for the NFC award. The Khyber-Pakhtunkhwa government is run by the Pakistan Tehreek-e-Insaf (PTI).
The Special Investment Facilitation Council (SIFC) has also tried to shift some responsibilities to the provinces with little success.
Sources said the IMF’s request to reallocate resources is for the new program because the country has already met the conditions set for the latest $3 billion review of the arrangement.
The IMF has also raised the issue of excessive spending by provincial governments, which may undermine the primary surplus target of Rs 400 billion for this fiscal year. The IMF was assured that the Chief Secretary of Punjab would keep the IMF informed about fiscal developments and the corrective measures taken to correct the overspending.
Despite the federal government’s success in achieving its primary surplus target, its spending continues to spiral out of control, primarily due to high debt service costs. As a result, the overall budget deficit for the first seven months (July-January) of this fiscal year remained at Rs 2.7 trillion even as provincial governments generated a cash surplus of Rs 432 billion.
During the first quarter of this fiscal year, the province’s current spending increased by 57%, while development spending increased by 61%. Subsequently, the provincial governments amended their memoranda of understanding (MoU) signed with the federal government to include estimated federal revenue, annual provincial revenue and total expenditure plans in line with the agreed cash surplus.
The Punjab provincial government, through a supplementary memorandum of understanding, has committed to cut its expenditure for the remainder of this fiscal year by Rs 115 billion to achieve a surplus of Rs 336 billion as set out in the memorandum of understanding related to this budget.
The IMF team also met separately with Energy Minister Musadik Malik. Nathan Porter advised the government to continue on a price correction course by making timely tariff adjustments based on monthly, quarterly and annual base tariff adjustments. The IMF also raised the issue of power purchase agreements signed with electricity generating firms that are about to expire.
