Huzaima Bukhari & Dr. Ikramul Haq
The biggest challenge faced by the State of Pakistan as defined in Article 7 of the Constitution of Islamic Republic of Pakistan, not merely for governments in centre or provinces, is monstrous rising tide [in the words of Prime Minister Prime Minister “tsunami” ] of debt servicing and burgeoning debt burden, both internal and external. In view of phenomenal increase in debt servicing, the economic viability of State is at stake that also poses a threat to national security. The debt trap, we are caught in, is not only vicious, but pushing the State towards bereavement-trap, for which remedial measures on war footing are required. In these critical days, when businesses and masses are suffering immense difficulties due to economic toll of Covid-19, the political parties in Opposition are at daggers drawn against the ruling coalition government in the centre, whereas the circumstances require unity and political stability to meet challenges on all fronts, especially economic. The data relating to consolidated federal and provincial fiscal operations for the first six months of the current fiscal year, show that after debt servicing, the State lacked even sufficient own resources to meet entire defence spending that was less than the corresponding period of the last fiscal year.
The Ministry of Finance on February 3, 2021 released Summary of Consolidated Federal and Provincial Fiscal Operations, 2020-21, for the first half of the current fiscal year according to which even part of defence spending is now funded by borrowing. It is catastrophic—a serious situation showing extreme weakness vis-à-vis debt sustainability that has reached 87 percent of the GDP. The heavy negative impact of mindless and costly borrowing, both external and internal, resulted in 15% increase in debt servicing, with fiscal deficit going up to Rs 1.4 trillion.
Total tax revenue collection by Federal Board of Revenue (FBR) from July to December 2020 was Rs. 2.2 trillion and after transferring the shares to provinces under 7th National Finance Commission (NFC) Award (Rs. 1280 billion), the net available to federal Government from tax and non tax revenue (Rs. 861.6 billion) was Rs. 1.79 trillion that could not even meet the two major heads, debt servicing (Rs. 1475 billion: domesticRs. 1357 billionandforeign Rs. 118 billion) and defence (Rs. 486.5 billion).
The Ministry of Finance in Annual Debt Review & Debt Bulletin for FY2019-20 issued to comply with section 7 of the Fiscal Responsibility and Debt Limitation Act of 2005 covering the second year of the coalition Government of Pakistan Tehreek-i-insaaf (PTI) admits that the public debt increased from 85% of GDP to 87.2% as against the limit of 60%! According to a Press report: “For a developing country like Pakistan, a debt-to-GDP ratio below 50% is considered sustainable. Anything above this threshold is counted as dangerous in the long-term, according to independent economists”.
The above confirms that the remaining months of the current fiscal year and budget making for fiscal year 2021-22 will pose extraordinary challenges for which all the governments, federal and provincial, need to follow Article 156(2) of the Constitution that says: “The National Economic Council shall review the overall economic condition of the country and shall, for advising the Federal Government and the Provincial Governments, formulate plans in respect of financial, commercial, social and economic policies; and in formulating such plans it shall, amongst other factors, ensure balanced development and regional equity and shall also be guided by the Principles of Policy set out in Chapter 2 of Part-II”.
Unfortunately, none of the political parties in power or opposition is recognising the severity of the situation and idea of ‘Charter on Revival of Economy’ is a mere cliché. This is the worst one can expect from legislators (senators and members of National and Provincial Assemblies). They are completely oblivious of their responsibilities towards citizens and are betraying their voters. They are not at all serious in starting focused parleys on how to overcome difficulties of millions living below poverty line. None of them have produced any plan for overcoming daunting challenges on the fiscal front amid the Covid-19 endemic and global meltdown of economy that is also affecting us as well with rising cost of living and increasing energy/fuel charges in days of misery faced by majority of the population. The tiny number of ultra-rich are least pushed about the stark realities where millions paying taxes are finding it difficult to meet both ends meet.
Those who matter in the land are also showing apathy by not calling emergent meeting(s) of National Development Council (NDC), established by Prime Minister Imran Khan in June 2019 as its head, and Chief of Army Staff as one of its members with the aim of accelerating “economic growth and improve coordination among the provinces and the federation”.
According to a notification issued by the Cabinet Division [which is not available on its website: https://cabinet.gov.pk], the newly formed body “will set policies and chalk out strategies for development and also provide guidelines for improving regional cooperation. The chief ministers will also be invited to the council’s meetings”. It was further said that NDC would also approve long-term planning for national and regional connectivity.
According to the notification [No. 4-13/2019-Min-1 dated 13th June 2019] from the Cabinet Secretariat, the NDC is to be convened at the Prime Minister’s Office, comprising the following members:
- Prime Minister – Chairman
- Federal Minister for Foreign Affairs-Member
- Federal Minister for Finance/Advisor to the Prime Minister on Finance-Member
- Federal Minister for Planning, Development and Reform-Member
- Federal Minister for Commerce/Advisor to the Prime Minister on Commerce, Industries & Production and Investment-Member
- Chief of Army Staff-Member
- Provincial Chief Ministers, Prime Minister of AJ&K and Chief Minister of Gilgit-Baltistan (on invitation)-Members
- Any additional minister/head of strategic body (on invitation)-Members
- Secretary to the Prime Minister-Member
- Secretary, Foreign Affairs Division-Member
- Secretary, Finance Division-Member
- Secretary, Planning, Development & Reforms Division-Member
- Additional Secretary, Prime Minister’s Office-Secretary Council
According to a Press release of August 8, 2019, the following details are available of the maiden meeting of NDC chaired by the Prime Minister:
“Development plan of Balochistan, Master Plan of Gwadar, Creation of CPEC Authority and Accelerated Development Plan 2019-20 for erstwhile FATA/merged districts was discussed during the meeting. A detailed presentation was made on the development plan of Balochistan that included measures to further improve security environment in the province especially the border management, improving the writ of state and sectoral development of critical sectors for socio-economic betterment of the people of province. The meeting was informed that the past neglect of the province, lack of connectivity and economic integration, security challenges and underutilization and mismanagement of resources contributed towards poverty in the province. A study of utilization of development budget for past 08 years revealed that out of total expenditure made on the development of the province, approximately 45% was wasted due to pilferage. It was decided that every possible effort shall be made to enhance annual development spending of the province over next 09 years enabling the province to overcome development challenges, reduce budget deficit and enhance its revenue generation capacity. Discussing various sectoral development plans, the meeting was informed that communication and infrastructure projects such as completion of M-8 Motorway project, construction of 819 km Chaman-Quetta-Karachi Motorway, Basima-Khuzdar Road and 124 km Awaran-Bela Road project would significantly improve connectivity and communication infrastructure in the province.
On development of coastal areas of the province, the forum approved, in principal, undertaking feasibility studies for port at Gaddani and establishment of Special Economic Zone at Hub. The forum also approved constitution of National Coastal Development Authority for development of tourist resorts and promoting tourism along the coastal areas of the province including Jiwani, Gawadar, Pasni, Makola, Ormara, Kund Malir, Hingol Park and Miani Hor.
On development of ports, the forum endorsed the proposal for development of 08 landing sites and promoting local boat industry including provision of 10,000 Green Boats. On strategy for development of mines and mineral resources of the province, the forum was informed that the province will be divided into four zones (Chagai Zone, Quetta-Duki, Khuzdar-Lasbella and Coastal Zone) and appropriate model will be put in place to encourage private investment in large-scale mining.
On development of Oil & Gas sector, the forum was apprised on efforts being made to develop 4 new blocks i.e., Block-28, Zhob, Zorgarh, Jandran & Kohlu for exploration, in addition to carrying out seismic survey at 30 onshore sites. The meeting was also briefed about various plans for improvement of agriculture and water-management in the province.
The forum approved, in principal, constitution of CPEC Authority for ensuring fast track implementation of CPEC projects. Discussing development of Gwadar and Master Plan of the city, the forum approved, in principal, the conceptual framework of Gwadar Special Economic District. The forum also discussed, in detail, Accelerated Ten Year Development Plan for erstwhile FATA. The forum reiterated the commitment of the Federal Government to ensure availability of allocated funds, timely releases and special dispensation for procurement of specialized execution agencies (NESPAK, FWO, NHA) and facilitation for screened NGOs to operate within merged areas for smooth and uninterrupted development of the merged areas”.
What happened after the maiden meeting of NDC is not made public nor has the progress of projects discussed in the very first meeting been monitored. It has no website and on the website of Prime Minister Office no material other than that of the first meeting is available. Why NDC was formed in the presence of National Economic Council (NEC), a constitutional body under Article 156. Dr. Pervaiz Tahir in his op-ed [Understanding the National Development Council, The Express Tribune, June 21, 2019] explained it succinctly as below:
“National security, as taught at the National Defence University, has three dimensions — economy, diplomacy and defence. Bad economic performance has adversely affected the other two dimensions. The composition and the terms of reference suggest that the NDC’s focus will be national economic security, beginning with a coordinated and forceful state response to tax delinquency. In the medium term, as the frontiers of geo-economic opportunity push forward under CPEC, they encounter geo-strategic threats that require a holistic response. The NDC, it seems, has been conceived in this context. The keyword is connectivity that has to be planned, programmed and projectised. It has also to be secured against sabotage and subversion. Only then will it lead to growth and development. As the economic pulls and pushes of connectivity cannot just be North-South, strategic thinking is required to partake of the East-West flows”.
It is not understandable why NDC has not been playing the role for which it was notified and why no meetings are being held to combat the emergent economic challenges highlighted above.
It is worth mentioning that planning, in the period following Constitution (Eighteenth Amendment) Act, 2010, received assent of President on April 20, 2010, should have been federalised rather than centralised. But even after lapse of 10 years and seven months, nobody has raised this issue, what to speak of implementing it in letter and spirit. The Constitution (Eighteenth Amendment) Act, 2010 [commonly called the 18th Amendment] has redefined NEC on the pattern of Council of Economic Interests (CCI). The NEC forms part of Chapter 3 of the Constitution entitled ‘Special Provisions’. In view of Article 167(4), the role of NEC has become very important though it has yet not been realised by the centre and provinces. Debts needed by provinces and their servicing plus repayment should be borne by provinces to relieve the Federal Government of the enormous amount that takes away more than 75% of tax revenues and 65% of total revenues (tax and non-tax). Article 167 after addition of clause (4) by the 18thAmendment reads as under:
Borrowing by Provincial Government.—(1) Subject to the provisions of this Article, the executive authority of a Province extends to borrowing upon the security of the Provincial Consolidated Fund within such limits, if any, as may from time to time be fixed by Act of the Provincial Assembly, and to the giving of guarantees within such limits, if any, as may be so fixed.
(2) The Federal Government may, subject to such conditions, if any, as it may think fit to impose, make loans to, or so long as any limits fixed under Article 166 are not exceeded give guarantees in respect of loans raised by, any Province, and any sums required for the purpose of making loans to a Province shall be charged upon the Federal Consolidated Fund.
(3) A Province may not, without the consent of the Federal Government, raise any loan if there is still outstanding any part of a loan made to the Province by the Federal Government, or in respect of which guarantee has been given by the Federal Government; and consent under this clause may be granted subject to such conditions, if any, as the Federal Government may think fit to impose.
(4) A Province may raise domestic or international loan, or give guarantees on the security of the Provincial Consolidated Fund within such limits and subject to such conditions as may be specified by the National Economic Council.
[bold and underlined by us for emphasis]
The 18th Amendment gives provinces equal rights over their natural resources. Article 172(3) confers 50 percent ownership of hydrocarbon petroleum resources to the provinces. The subject was earlier held by the federal government. There still exist legal and administrative bottlenecks for implementing this provision.
Presently, many economists and politicians are arguing that 7th NFC Award and 18th Amendment are harming fiscal stability of federation. Their argument needs consideration. The issue of NFC Award vis-à-vis provisions of 18th Amendment must be examined holistically. The performance of provinces in collecting tax from the rich and mighty e.g. agricultural income tax is extremely appalling. This is a common issue both at federal and provincial levels arising from absence of political will to collect income tax from the rich—the meagre collection of agricultural income tax—less than Rs. 3 billion by all provinces and Centre in fiscal year 2019-20—is lamentable.
It is imperative that right to collect tax on income, including agricultural income, should be given to the Centre through dialogue and in a democratic way under Article 144 of the Constitution which says:
“144. Power of Majlis-e-Shoora (Parliament) to legislate for one or more Provinces by consent.—(1) If one or more Provincial Assemblies pass resolutions to the effect that Majlis-e-Shoora (Parliament) may by law regulate any matter not enumerated in the Federal Legislative List in the Fourth Schedule, it shall be lawful for Majlis-e-Shoora (Parliament) to pass an Act for regulating that matter accordingly, but any act so passed may, as respects any Province to which it applies, be amended or repealed by Act of the Assembly of that Province”.
In the same manner, the Centre and provinces should levy harmonised sales tax on goods and services. The division should be strictly according to formula agreed under Article 160 of the Constitution so collection will be efficient and citizens/taxpayers will have a single window facility. This will help the State to collect taxes of nearly 12 trillion as per actual potential—details are available in ‘Towards Flat, Low-rate, Broad and Predictable Taxes’ (PRIME Institute, Islamabad, 2016, now its revised and enlarged version is published in December 2020 is available free at: https://primeinstitute.org/towards-flat-low-rate-broad-and-predictable-taxes/). This is the only way to meet the emergent economic challenges faced by the State and achieve fiscal stabilisation in Pakistan without disturbing the 18th Constitutional Amendment.
The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)