Reasons traced behind ballooning fiscal deficit

18th Amendment, 7th NFC sow seeds of perpetual fiscal imbalance

ISLAMABAD: As record Rs1.863 trillion budget deficit during the last fiscal year has once again exposed pitfalls of fiscal decentralisation under the 18th Amendment, the country’s top economist seeks linking transfer of resources to the federating units with improvement in social indicators.

The 18th Amendment and the 7th National Finance Commission award have sowed the seeds of perpetual fiscal imbalance in the country, putting the federal government at disadvantageous position.

Under the existing fiscal decentralisation arrangement, having budget deficit below 6% of Gross Domestic Product is impossible. Any number which is below 6% of GDP was the result of either deferring liabilities or selling state assets to reduce the gap between expenditure and revenue.



Pakistan closed the last fiscal year at record Rs1.863 trillion budget deficit which was equivalent to 5.8% of GDP.

The budget deficit was 2% of GDP or Rs654 billion higher than the target approved by parliament in June last year.

Instead of maintaining revenue surplus of about Rs339 billion, the four federating units have spent Rs163.2 billion more than their total income during FY2016-17.

This created serious problems for the federal government that was already on its toes due to steep fall in tax and non-tax revenue and its uncontrolled current expenditure.

Under the 7th NFC, 57.5% of the revenue collected at the federal level is transferred to the provinces, which is significantly higher than the previous award.

There is a general consensus among experts and federal policymakers that the 18th Amendment, which also gave protection to the 7th award, significantly curtailed the powers and resources of the federal government.



The award expired in June last year and the centre and the four provinces made some attempts to renegotiate the terms of revenue sharing but the federating units are not willing to give back what they had obtained seven years ago.

However, the results of the 6th population census have provided a new base for renegotiating the terms of the NFC.

One of the reasons behind the reckless spending spree during the last fiscal was the next general elections. The four federating units had spent Rs852.2 billion on development during the last fiscal year, which was slightly lower than their annual development budgets.

But the Rs852.2 billion spending was 34% or Rs217 billion higher than the estimates of the finance ministry and the International Monetary Fund.

The federal government also spent Rs733.3 billion under the Public Sector Development Programme during the last fiscal –lower than its annual budget – but 22% or Rs133 billion higher than the IMF’s assessment.

Pakistan’s top economist and fiscal expert, Dr Hafiz Pasha, supports public development spending that, according to him, is necessary for providing an impetus to growth. But he is also worried about the quality of spending.



“The real issue is that social indicators are still very poor despite transfer of huge resources to the provinces under the 7th NFC award,” said Dr Pasha.

“The literacy rate is still below 60% and the quality of health and education also remained very poor,” he added.

He argued that there was a need to link transfer of resources to provinces with better results in the social sector – which was one of the key reasons behind massive increase in the shares of the provinces under the 7th NFC award.

“The Council of Common Interests should have some kind of monitoring mechanisms to check the quality of spending,” Dr Pasha said, adding, “This kind of arrangement is also present in other countries where there is fiscal federalism.”

He also said that the federal government should also restrict itself to its primary areas of responsibilities – defined in the Federal Legislative List–I – and should not venture in youth and health programmes that fall in provincial domains.

“The federal government has tried to reclaim some of the lost share by imposing petroleum levy and gas infrastructure development cess.

“Both these sources of incomes are non-tax revenues and do not become part of the federal divisible pool that is shared between the Centre and its federating units.”

The federal government has also amended the Fiscal Responsibility and Debt Limitation Act by bringing in some fiscal sanity.

The FRDL Act, as amended in 2016, imposes a limit on the federal government budget deficit of 4% of GDP from thereon and thereafter 3.5% of GDP.

There is also a limit to restrict public debt to 60% of GDP on the general government debt (excluding guarantees) until FY2017-18, and adopts a 15-year transition path toward 50% of GDP.

However, like in the past, these two goals would remain ambitious until fiscal imbalances caused by the 18th amendment are addressed.

During its last report on Pakistan, the IMF has also highlighted the issue of fiscal decentralisation and its implications for the country.

“The 7th NFC award has increased the vertical asymmetry, with the provincial share in general government revenue at 50% substantially higher than the expenditure share of only 35%,” it said.

The IMF added: “This has reduced flexibility in economic management by narrowing the range and effectiveness of fiscal policy instruments at the federal level.”