NFC award reasonable, finance ministry official counters Shaikh

Says centre did its homework before transferring resources to provinces.

ISLAMABAD: Contrary to Finance Minister Dr Abdul Hafeez Shaikh’s outcry over the seventh National Finance Commission Award that according to him has brought the central government to its knees, a senior official of his ministry says the NFC award is reasonable and practical.

Before agreeing to transfer an additional 10% of resources to the provinces, the central government had done its homework about implications of the move, said Rana Assad Amin, Adviser to the Finance Ministry.

Speaking in a meeting of the Senate Standing Committee on Finance and Revenue here on Thursday, Amin said the condition to increase national revenues by one percentage point of gross domestic product (GDP) – the total size of economy – per annum had been made part of the agreement to offset the impact on central government’s finances.

Amin was responding to a question whether the finance ministry had assessed the financial implications of the award.

Committee Chairperson Nasreen Jalil of MQM also referred to Shaikh’s statement in a cabinet meeting in which he criticised the NFC award and termed it the cause of central government’s fiscal woes.

“Even if the minister said that I did not agree,” said Amin, the problem was with implementation of the award, as an important condition – increasing the tax-to-GDP ratio by one percentage point every year and taking it to 15% of GDP by 2014 – remained unfulfilled.

At the time of finalising the award, the tax-to-GDP ratio was below 10% and has still not crossed it.

The five-year seventh NFC award was enforced in July 2010, increasing the share of provinces in federal taxes by 10% to 57.5%. This has led to an additional transfer of Rs1 trillion to the four provinces so far.

Provincial governments and former prime minister Yousaf Raza Gilani were also partly responsible for the central government’s fiscal woes. Provinces refused to take some of the responsibilities and Gilani created 10 new ministries and devolved these to provinces to accommodate allied parties in the ruling coalition.

The standing committee also sought a list of functions that had to be handed over to the provinces, but remained with the central government.

The panel criticised the finance ministry for its flawed economic planning, terming it one of the main reasons behind fiscal and economic woes of the country. It observed that for four successive years all the targets had been missed by wide margins.

The government’s forecasts have become meaningless and sanctity of the budget and economic forecasts has been lost, said Senator Osman Saifullah of PPP. He said the finance minister should neither be optimistic nor pessimistic, but realistic in his projections.

Every year, the government missed its targets and it was high time to discard the economic models that experts had so far been applying, he suggested.

He argued that against projected budget deficit of Rs1.1 trillion in the current year, independent economists were forecasting a gap of Rs1.7 trillion. The government and people should not be kept in the dark by the finance ministry by painting rosy pictures, he remarked.

Defending budget projections, Amin said the budget deficit was always calculated on the basis of certain assumptions. Major reasons for higher-than-targeted deficit were delay in receipt of roughly Rs80 billion through sales of 3G licences, delay in reimbursement of coalition support fund and higher-than-expected subsidies, he said.

Amin said the International Monetary Fund (IMF) also believed that the government would not be able to complete 3G transaction and similarly Etisalat would not pay $800 million in outstanding dues on account of purchase of PTCL shares. The IMF was of the view that this would widen the budget deficit beyond the target of 4.7% of GDP or Rs1.1 trillion.

“But we do not have any reason to exclude these amounts from our calculations,” said Amin.

Published in The Express Tribune, November 16^th, 2012.