NFC award: Provinces must raise more revenue, says Sheikh

Islamabad attempts to keep fiscal deficit within IMF guidelines.

ISLAMABAD:

In a bid to improve its own fiscal balance, the federal government on Monday began pushing the provinces to increase their revenue collection efforts, particularly in the real estate and agriculture sectors.

At a meeting between the federal and provincial finance chiefs to discuss the monitoring and implementation of the National Finance Order of 2010, Federal Finance Minister Abdul Hafeez Sheikh asked for the provinces’ cooperation in helping keep the overall national fiscal deficit under control by running surpluses of up to Rs120 billion.

The federal government is itself responding to pressure from the International Monetary Fund (IMF) to restrict the national budget deficit to 5.3 per cent of the gross domestic product (GDP), a measure of the total size of the economy. The IMF’s new limit is higher than the 4.7 per cent  constraint it had placed in October 2010. A formal announcement of this new limit is expected in the coming days.

Given the federal government’s projected deficit expected at 6.0 per cent of GDP, Islamabad needs savings from the provinces to make up the gap.

Provincial governments have responded to Islamabad’s prodding by saying that their ability to collect more revenues has been hampered by the devastating floods of 2010 and the impact of the militancy in Khyber-Pakhtunkhwa and Balochistan according to a senior provincial official who was privy to the discussions. However, the provinces did acknowledge their own capacity constraints as a serious issue.

As a result of the 18th Amendment to the constitution, the revenue-collecting authority of provincial governments was greatly enhanced. However, their collection efforts remain abysmal. Total collection of property taxes throughout the country, for example, stood at Rs3.8 billion for the first half of the fiscal year, with 87 per cent of collections coming from Punjab alone.

Over the first six months of the fiscal year ending June 30, 2011, provincial governments ran Rs100 billion in surpluses. But they warned the federal government that their expenses are expected to rise over the latter half of the current fiscal year and thus the size of the provincial surplus is expected to be considerably smaller.

The federal government also formally informed the provinces of a widely expected development: the federal government would be transferring less money to them than promised at the beginning of the fiscal year owing to decreased revenues at the federal level. Islamabad had committed to transferring Rs1,040 billion to the provinces on the assumption that it would collect Rs1,667 billion in revenues. The federal government is expected to fall Rs100 billion short of that target, and hence will be reducing its transfers to provincial capitals by Rs56 billion.

Sindh Finance Minister Murad Ali Shah suggested that the federal government should send the provinces monthly reports on its revenue collection efforts so that they can be better prepared for any potential shortfalls.

At the meeting, the federal government announced that the transfers of royalties on oil and gas development charges are on track to be conducted in accordance with the agreement between the provinces and the central government.

According to an official handout, Shaikh said the provinces can indicate the areas where there is the capacity for the broadening of tax and new avenues can be indicated in this regard. He also said that the NFC releases are mandatory and they shall be made precisely in accordance with the approved formula.

Published in The Express Tribune, March 8^th, 2011.