NFC Award 'distorts fiscal architecture'

Finance Secretary Bosal urges review of allocations

ISLAMABAD:

The current National Finance Commission Award has distorted Pakistan's fiscal position and the federal government has to pay higher interest rates of up to 8% on foreign loans to meet its funding requirements, said a top federal bureaucrat on Wednesday.

In a briefing to the Senate Standing Committee on Finance, the economic managers also said that Pakistan had taken the new International Monetary Fund (IMF) loan at a nearly 5% interest rate and the country still could not venture into international capital markets to raise debt due to low credit ratings.

"After the 7th NFC, the federal fiscal architecture has been distorted and my considered opinion is that it should be revisited", said Imdad Ullah Bosal, the Federal Finance Secretary, in a briefing to the Senate Standing Committee on Finance.

He updated the parliamentary forum on the IMF's conditions including the transfer of some major spending responsibilities to the provinces. Senator Saleem Mandviwalla of the Pakistan Peoples Party (PPP) chaired the standing committee meeting.

Bosal said that the Centre was in discussions with the provinces to transfer the responsibility for education, health and the Benazir Income Support Programme (BISP) to the provinces. He maintained that the federal government would still contribute to BISP spending.

Under the 7th NFC award, the federal government increased the provincial share in federal taxes from 47.5% to 57.5% but it failed to close ministries dealing with the subjects that had been devolved to provinces. This caused a huge fiscal imbalance, leaving the Finance Ministry at the mercy of the local and foreign lenders.

Bosal said that, since 2009-10, there had been a disproportionate increase in the public debt. He maintained that there was no direct IMF condition to revisit the NFC.

"The National Fiscal Pact is about the revision of the NFC whereby the federal government is transferring the expenditure responsibilities to the provinces", said Senator Sherry Rehman of the PPP.

Chairman Saleem Mandviwala recommended that work on a new NFC award should begin immediately. He proposed that a new consultation process between the federation and the provinces should be initiated to review the distribution of resources under the next NFC award.

The committee also took a briefing on the interest rates that Pakistan was paying on the foreign loans.

The Finance Secretary told the committee that the $7 billion IMF loan had been taken at an interest rate of 4.87% and would be repaid over a period of 10 years.

The country has also taken $7.4 billion in foreign commercial loans at an interest rate ranging from 7% to 8%, said Finance Minister Muhammad Aurangzeb. He said that these loans had been taken in the past at different rates, depending upon the economic conditions at the time.

Shehbaz Sharif's government took a $200 million commercial loan from the Bank of China in September this year at an interest rate of about 8.5%, according to the information that the Finance Ministry shared with the standing committee.

The Finance Secretary said that the Bank of China loan was taken at three-month Secured Overnight Financing Rate (SOFR) plus 3.15%. In September the average SOFR rate was 5.33%, which brings the total interest rate to 8.5%.

For this fiscal year, the IMF had identified a $2.5 billion external financing gap, which has to be filled with new loans.

But the Finance Minister said on Wednesday that "the external financing gap is covered and we will now borrow on our own terms at very competitive rates", said the Finance Minister.

On a question about a proposal to take the most expensive commercial loan in Pakistan's history, the Finance Minister said that the media report was based on the engagement with the bank but whenever any loan would be signed its details would be shared with the standing committee.

Pakistan has also budgeted a $1 billion Eurobond loan but so far it has not entered the global markets.

At a CCC plus rating Pakistan cannot access the international capital markets to float sovereign bonds, said the Finance Minister. He said that the government was constantly engaged with the three international credit rating agencies for an upgrade.

Pakistan will begin non-deal roadshows either later this or next fiscal year, as in the present circumstances the country will not get good interest rates, said the Finance Minister.

"If we get a rating enhancement, the government will try to tap the Chinese capital markets and float the Panda bonds", said Aurangzeb.

Pakistan has requested the IMF to review the possibility of extending another $1 billion to $1.5 billion programme to meet the financing requirements for long-term reforms for mitigating the impacts of climate change.

The Finance Minister said that Pakistan had requested the IMF for a new programme-the Resilience and Sustainability Facility (RSF). He said that further discussions will take place during the IMF's staff level negotiations that will take place in March.

The Finance Minister said that after the recent inflation reading of 4.9%, there was room for further interest rate cuts. He said that the six-month Kibor rate was already slightly above 12% as against the policy rate of 15%.

Clean recruitment

Rashid Langrial, Chairman of the Federal Board of Revenue (FBR), rejected the claims by the Senate Deputy Chairman that the FBR had inducted people in violation of merit. Rashid Langrial instead said that there was pressure on the FBR to recruit people in violation of merit but the organization had not accepted any such pressure.

"The problem is that the FBR has recruited staff without any fear or favour, which has aggrieved a few people", said the chairman. He said that the FBR had stopped the hiring process for Grade 1 to 4 positions due to extreme pressure to accommodate people.

196 people had been recruited for Grade 5 to 15 positions and not one employee had been hired in violation of merit, said the chairman.