NFC shortfall puts K-P's IMF pledge on a fiscal cliff

The Khyber-Pakhtunkhwa (K-P) government has warned that the continued shortfall in federal releases under the National Finance Commission (NFC) and against other commitments has posed a serious risk to meeting Rs157 billion cash surplus target agreed with the International Monetary Fund (IMF).

Muzzammil Aslam, Finance Adviser to K-P chief minister, has cautioned Finance Minister Muhammad Aurangzeb after the province received Rs76 billion less than the estimated share under the NFC due to the Federal Board of Revenue's (FBR) failure to meet its first-half year target.

In spite of taking billions of rupees undue income tax and sales tax advances, slowing refunds payments, the FBR missed the original tax target by a margin of Rs545 billion and the revised target by Rs330 billion. It is the consecutive second year of Prime Minister Shehbaz Sharif-led government when it is falling behind the tax targets despite providing full support to the FBR.

"It is evident that continued shortfalls in federal releases pose a serious and immediate risk to the achievement of the budgeted surplus of Rs157 billion", wrote the finance adviser this week. The spokesman of the Finance Ministry did not respond to a request for comments.

The development comes amid rising tensions between the provincial and federal governments over K-P chief minister's claims of withholding Rs4.5 trillion past dues and the Pakistan Tehreek-e-Insaf's (PTI) decision to observe strike on February 8 against alleged "rigging in elections".

For the current fiscal year, four provincial governments have committed to providing Rs1.46 trillion in cash surpluses, which is equal to 1.1% of the size of the national economy. Meeting the cash surplus target is critical to comply with another critical IMF condition of showing a primary budget surplus target of Rs2.1 trillion.

However, the provinces say that they can only provide the money, if the FBR achieves its target. The government had assured the IMF that it would achieve 20% growth in taxes but so far the FBR has hardly attained 10% growth rate.

President Asif Ali Zardari has constituted the 11th NFC to deliberate on a new award. The first meeting had been held last month and all the stakeholders decided to hold the second meeting by the second week of January.

The provincial finance adviser said that the revenue-side constraints on account of NFC, straight transfers and allocations for the merged districts "have been further aggravated by unavoidable expenditures, including Rs28 billion incurred on flood response and rehabilitation".

The adviser further wrote that the provincial government has also spent Rs7 billion on internally-displaced persons (IDPs), placing further strain on the budget.

Aslam urged the federal finance minister to take urgent corrective action, including timely and predictable realisation of federal transfers in accordance with budgeted assumptions.

The K-P's share in the federal tax assignments for the first six months was Rs643 billion, including the 1% on account of war on terror share, but the actual receipts amount to Rs567 billion, claimed the finance adviser.

Aslam further said that the budgeted cash surplus of Rs157 billion for the current fiscal year had been calculated strictly on the assumption that all federal transfers and releases would be made fully and in accordance with approved budgetary timelines. Any deviation from these assumptions directly undermines the province's ability to achieve the surplus target and maintain fiscal discipline, he added.

According to the correspondence with the federal government, the K-P government had allocated a total Rs292 billion for the merged districts. This includes Rs143 billion for current expenditure, Rs40 billion under the Annual Development Plan (ADP), Rs50 billion under the Accelerator Implementation Programme (AIP), Rs17 billion for TDPs, and Rs43 billion representing the 3% NFC share.

Against the Rs292 billion allocations, actual releases to date amount to only Rs56 billion, representing one-fifth of the annual provision and severely constraining development activities and the delivery of essential public services in these historically underserved areas, according to the finance adviser.

The adviser underlined that against zero federal release under the AIP, the province has released Rs26.4 billion. Similarly, for the current expenditure of merged districts, Rs63 billion has been spent till date whereas the federal government has released only Rs46 billion.

The K-P government said that the releases under straight transfers present an equally serious concern. Against an annual budget provision of Rs115 billion, actual releases to date amount to only Rs19 billion, it added. Similarly, Net Hydel Profit (NHP) budget is Rs106 billion but only Rs18 billion has been released during the first six months.