ISLAMABAD: The International Monetary Fund (IMF) on Friday urged Pakistan to spend more on development as the combined spending by federal and provincial governments in the first quarter remained less than one-tenth of the annual allocations.
The lower spending on development than the allocated budget during the July-September quarter has also undermined the economic growth prospects in this fiscal year.
The savings by the four provincial governments were more than the amount they spent on development in the first quarter.
IMF Mission Chief Ramirez Rigo Ernesto held meetings with the federal and provincial authorities aimed at aligning fiscal and taxation policies of the Centre and the four federating units.
Adviser to the PM on Finance Dr Abdul Hafeez Shaikh chaired a meeting to review the implementation of the fiscal policies in the provinces under the IMF Programme, according to the finance ministry.
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The IMF mission chief, Punjab Finance Minister Hashim Jawan Bakht, Khyber-Pakhtunkhwa Finance Minister Taimur Saleem Khan Jhagra and Balochistan Finance Minister Zahoor Ahmed Buledi attended the meeting. Ernesto separately met with Federal Planning Minister Khusro Bakhtiar.
Ernesto stressed the need for fully using the development budget to achieve development goals, the finance ministry said.
During the first quarter, the federal and provincial governments spent around Rs140 billion on development against their annual total allocations of Rs1.6 trillion.
The federal and the provincial governments have massively slowed down development spending to meet the overall fiscal commitments made under the IMF programme.
The IMF has allowed a primary deficit of only 0.6% of the GDP or Rs272 billion in this fiscal year as against Rs1.3 trillion or 3.3% of the GDP in the last fiscal year.
This has adversely affected the ability of the governments to spend on development.
During the first quarter, the overall budget deficit remained less than 1% of the GDP or below Rs400 billion on the back of around Rs150 billion provincial cash surpluses, according to the finance ministry officials. The IMF programme encourages fiscal discipline in federal and provincial governments but at the same time it also seeks spending on development.
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However, if the government allows development spending, it will either have to impose more taxes on the people or cut the defence budget to meet the primary deficit target given by the IMF.
Both these options are costly in the given overall economic and political environment of Pakistan, according to sources.
During his meeting with the federal planning minister, Ernesto said the primary deficit target should not be achieved at the expense of cutting down development spending, said an official who attended the meeting.
However, the planning minister was of the view that his ministry was timely releasing funds for development projects, but the finance ministry was not allowing the spending to meet its targets, the official said.
The planning ministry has so far given approval to release around 34% of the annual budget, the IMF was informed.
Ernesto is also said to have urged the government to work to end the fear among investors that the government might reverse its economic policies.
The planning minister thanked the IMF mission chief for reinforcing the need for higher public sector development spending in providing stimulus to economic growth, according to a planning ministry handout. The minister highlighted the contours of the development budget and mentioned that the focus of the uplift outlay was early the completion of ongoing projects.
During the meeting with the federal and provincial finance heads, the IMF official discussed the alignment of taxation policies, provincial cash surpluses and distortions in the system that created hurdles in these alignments.
Ernesto said he was impressed by what he described as “good financial and fiscal management” and “maintenance of expenditure within the budget”, according to the finance ministry.
He also emphasised on the harmonisation in the tax system and the creation of a single tax base as it directly impacted the ease of doing business and went a long way in creating an enabling business environment and boosting the confidence of the investors and businessmen.
Prime Minister Imran Khan has approved a deadline of June 2020 for the creation for the Pakistan Revenue Authority and harmonisation of the federal and provincial sales tax on goods and services.
But so far the provincial governments are reluctant to hand over their authority to collect sales tax on services to the Federal Board of Revenue (FBR).
The finance adviser said the federal and the provincial governments were engaged in continuous talks to improve coordination and create harmony on issues related to fiscal and budget management, multiplicity of tax rates and reconciliation of input adjustment.
Shaikh also pointed out that the harmonisation of taxation and other fiscal issues within the constitutional framework was a challenging process.
He said a continuous dialogue and coordination between the centre and the provinces and between the provinces themselves had resulted in better budget and expenditure management while definitional issues related to what constituted a service and what rate of tax applied to it in different regions were also being resolved in a spirit of mutual understanding and accommodation.
Ernesto said Pakistan had a continental size economy, much like western Europe where everybody had the same definition of the tax rate and services, and the same could be achieved in Pakistan through uniform tax rates and a single tax administration instead of two or three tax authorities in each province.
He appreciated the current level of understanding between the centre and provinces and hoped such efforts would continue to build consensus and bring about greater harmony through a mechanism.
The provincial ministers from Punjab, Khyber Pakhtunkhwa and Balochistan shared their experiences and briefed the IMF mission chief about various measures and strategies put in place in their respective provinces to achieve better fiscal and budget management.
The K-P finance minister told the participants of the meeting that his province had saved Rs1 billion by enhancing bureaucrats' retirement age from 60 to 63 years.
The planning minister said despite budget constraints, the incumbent government was allocating additional resources for the socio-economic uplift of underdeveloped areas through a regional equalisation programme. He said focus was being paid on enhancing productivity by investing more in knowledge economy, education and water resources and correcting transmission lags.