IMF asks Pakistan to revisit NFC award

The International Monetary Fund (IMF) on Thursday called upon Pakistan to reopen discussions on the National Finance Commission (NFC) award, seeking to address the ongoing imbalance in the distribution of fiscal resources between federal and provincial governments.

During the opening round of discussions for a $1.1 billion loan tranche, Nathan Porter, the IMF Mission Chief to Pakistan, raised concerns over the distribution of resources and responsibilities, underscoring the need for a more equitable arrangement. Representing Pakistan in these talks was Finance Minister Muhammad Aurangzeb.

Government officials disclosed to The Express Tribune that the IMF emphasised the need to reassess the NFC award, citing disparities in resource allocation between federal and provincial authorities.

The current formula, established in 2010, resulted in provincial shares increasing from 47.5% to 57.5% of total federal taxes, without a commensurate transfer of additional responsibilities. This has led to a sustained fiscal imbalance and a rise in public debt.

Read more: Bears tighten grip ahead of IMF review

The Pakistani authorities informed the IMF that the provincial shares cannot be reduced without bringing a constitutional amendment and making all the provinces agree to a new formula.

The 2010 NFC award had been agreed for a period of five years but since then there has not been any consensus to revisit it.

Addressing the challenge of garnering provincial support for reforms, particularly within a politically diverse landscape, presents a formidable task for the coalition government.

Despite possessing a two-thirds majority necessary for constitutional amendments, securing agreement from all four provincial governments remains uncertain, with parties such as the Pakistan Peoples Party (PPP) advocating strongly for the NFC award. The Khyber-Pakhtunkhwa government is controlled by the Pakistan Tehreek-e-Insaf (PTI).

The Special Investment Facilitation Council (SIFC) has also been making efforts to shift some responsibilities to the provinces with little success.

The sources said that the IMF’s demand for the redistribution of the resources is for the new programme, as the country has already met the conditions set for the last review of the $3 billion arrangement.

The IMF also raised the issue of excessive spending by the provincial governments, which can undermine this fiscal year’s primary surplus target of Rs400 billion. The IMF was assured that the Punjab Chief Secretary would brief the IMF about the fiscal developments and the corrective measures that have been taken to fix the excessive spending.

Also read: Pakistan aims for large IMF loan

Despite the federal government's success in achieving the primary surplus target, its expenditure has continued to spiral out of control, primarily due to the high cost of debt servicing. Consequently, the overall budget deficit for the first seven months (July-January) of this fiscal year remained at Rs2.7 trillion, despite the provincial governments generating a cash surplus of Rs432 billion.

During the first quarter of this fiscal year, the provincial current spending increased 57% while development spending increased 61%. Subsequently, the provincial governments amended their memorandums of understanding (MoUs) signed with the federal government to include the estimated federal revenue, annual provincial revenue, and total expenditure plans, in line with the agreed cash surplus.

The Punjab provincial government has committed through a supplemental MoU to restrict its spending in the remainder of the period of this fiscal year by Rs115 billion to achieve a surplus of Rs336 billion as committed in the MoU associated with this budget.

The IMF team also separately met with the Energy Minister Musadik Malik. Nathan Porter advised the government to stay on the course of price correction by timely making tariff adjustments on account of monthly, quarterly and annual base tariff adjustments. The IMF also raised the issue of Power Purchase Agreements signed with the power generation firms, which are near expiry.

A day earlier, the Ministry of Finance announced that Pakistan had met all structural benchmarks, qualitative performance criteria, and indicative targets for the successful completion of the IMF review. This will be the final review of the Stand-By Arrangement, with a staff-level agreement expected afterwards, said the ministry.

The finance ministry said that the second review of the Stand-By Arrangement with IMF is scheduled from March 14 to March 18, 2024, in Islamabad. Once staff-level agreement is reached, the final tranche of $1.1 billion will be disbursed, following the approval of the executive board of the IMF, it added.

An official handout by the Ministry of Finance stated that an IMF mission called on Muhammad Aurangzeb in the Ministry of Finance. The Finance Minister welcomed the mission and expressed the government's commitment towards working with IMF on the reform agenda for economic growth and stability of Pakistan, according to the ministry.

Discussions were held on the overall macroeconomic indicators, the government's efforts on fiscal consolidation, structural reforms, energy sector viability, and SOE governance, according to the finance ministry.

In the meeting with the energy minister, the IMF highlighted the issue of the fate of the privatisation of the power distribution companies and subsidies to the agriculture tube wells.

The Privatization Minister Abdul Aleem Khan said on Thursday that in the present circumstances of the of the economy, 15 to 20 institutions must be privatised immediately.

He added that loss-making institutions are akin to termites for the economy, as they deplete the national capital and exchequer each year without any solution or cure in sight.

Abdul Aleem Khan pointed out that the deficit of PIA over the last 5 years amounts to Rs500 billion, a figure that lacks justification. He emphasised that the privatization of loss-making institutions is not merely about convincing others, but rather it's a critical issue concerning the survival of the country's economy, including the decision regarding Steel Mills.