Coronavirus has shone a light on difficulties faced by local government in Pakistan

1 Jul 20

The Covid-19 pandemic has highlighted structural problems in the financial relationship between Pakistan’s federal and provincial governments, according to Muhammad Afnan Alam.

 

Governments around the world are operating in a context of radical uncertainty, faced with difficult trade-offs given the health, economic and social challenges raised by the Covid-19 crisis. More than half of the world's population has experienced a lockdown, with strong containment measures – the first time in history that such measures have been applied on such a large scale.

In Pakistan, with coronavirus cases reaching 200,000, the crisis is affecting critical drivers of growth, including migrant remittances, exports, and the service sector. Relatively undiversified structures of production and exports, along with the high level of informality in the economy, have exacerbated several challenges that arise as the country responds to the crisis, putting pressure on public finances.

After the eighteenth constitutional amendment, which brought in massive fiscal and administrative devolution, Pakistan's four provinces remain crucial players in the fight against the severe healthcare, economic and social predicament of the pandemic.

Provincial governments had to expand the capacity of their healthcare sectors hurriedly, prevent the spread of the virus (including screening, population monitoring, crisis communications, coordinating care for vulnerable and homeless populations, enforcing confinement, curfew and ensuring public order, etc.), and cushion the economic effects of containment policies. This has an acute "scissors effect" on the provincial governments' rising expenditures and declining revenues – a combination that widens fiscal deficits.

Federal government's budgetary estimate, published on 12 June, predicted that the four provinces will build a cash balance of 242.72 billion Pakistani rupees (£1.17bn) in the financial year 2020-21. However, the provincial government's fiscal forecasts for the year challenge these economic assumptions.

The provinces will start 2020-21 with an estimated negative cash balance of PKR 80bn. The expectation of provincial budget surpluses in future points to a broader problem with the fiscal landscape of the country. With the provinces taking a substantial share of national revenues, and the federal government responsible for almost the entire national debt, the structural fiscal balance has become lopsided.

The situation is unsustainable unless an appropriate adjustment occurs in the structural budgetary balances of federal and provincial governments.

The coronavirus crisis is taking a significant toll on the country's economic activity. Likely scenarios for gradual quarantine relaxation indicate a probable slow recovery in the following months.

This, in turn, can have a long-term effect on revenues of all provincial governments in Pakistan, which will require current resources and investments to jump-start the economy. This context can provide an opportunity to re-launch fiscal federalism reforms to clarify expenditure responsibilities between different government levels and strengthening existing tax bases.

At the same time, to return to a path of financial and economic recovery, it will be necessary to sustain the momentum for revenue mobilisation efforts, improve the technical and allocation efficiency of expenditures, and introduce new fiscal responsibility frameworks suited to a post-coronavirus world.

In this sense, promoting a subnational digital agenda can be a strategic move to boost efficiency in the supply of services such as telemedicine, distance learning, administrative procedures, government procurement and revenue collection.

Finally, it is also crucial to analyse the lessons learned from this crisis, so the provinces are better prepared should the pandemic strike again.

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Islamabad, Pakistan's capital city

Islamabad, Pakistan's capital city

 

Khyber Pakhtunkhwa – a case study

In the midst of this crisis, when the coronavirus severely impacted the provincial governments' public finances, the government of Khyber Pakhtunkhwa presented a "balanced-budget" for the financial year 2020-21. In the outgoing fiscal year 2019-20, KP witnessed a 15% drop in intergovernmental transfers and revised the figure to PKR 326bn from original estimates of PKR 385bn.

The provincial receipts (which include a broad range of 54 revenue streams collected by provincial departments and include for instance agriculture income tax, tobacco development and infrastructure cess and land revenue) were down by 22%, and the original budgetary estimates of PKR 45bn had to be revised to PKR 35bn. Also, the net hydel profits (money paid back to provinces from hydropower generated locally and sold to the national grid) estimates were revised from the original budgetary figure of PKR 49bn to PKR 16bn.

The KP government has termed the next year budget as "resilient", focusing on investments in healthcare infrastructure, economic risk reduction and offering fiscal incentives to vulnerable people.

Also, the province development budget focuses on public investment in areas that can improve service delivery, generate employment and maintain fiscal discipline through the application of output-based budgeting in development spending for the next three years.

This manifests the provincial government's priority to achieve the fundamental objectives of economic efficiency, achieving budget sustainability and generating sustainable management of fiscal space in the forthcoming financial year.

Relying on evidence from other sub-national governments around the world, the provincial government is expected to have increased capacity to create fiscal stimulus with a strong positive impact on stimulating growth, once the ongoing situation improves.

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Slum in Lahore, Pakistan

A slum in Lahore, Pakistan. Provincial governments have tried to cushion vulnerable populations against the worst effects of the pandemic.


Khyber Pakhtunkhwa province in 2020-21 will make the most significant healthcare investment in the province's history. Health has received a 13% allocation of the development expenditure (PKR 124.3bn) against previous year expenditure of PKR 85bn.

Salaries and pension payments of public sector employees on the province's stand frozen to create room for the coronavirus and healthcare investments in the forthcoming year. The provincial government annual salary and pension bill for 2020-21 stands at PKR412bn.

Public sector employees and pensioners normally get an incremental increase of 5-10% yearly. If this rise had been implemented, the government would have incurred an additional expenditure of PKR 41.4bn.

The freezing of salaries and pensions allows the government to invest PKR 24.4bn in healthcare development expenditure and PKR24bn for putting in place aggressive measures to restrain public health and economic fallout from the coronavirus.

The government will be spending PKR 24 billion earmarked for coronavirus on cash transfers, procurement of protective equipment, relief and rehabilitation measures. Also, there is an increased budgetary allocation to improve health infrastructure and buy medical equipment and medicine.

The province has also deployed an additional 10,000 temporary and permanent workers to enhance service delivery in the health sector.

The government of Khyber Pakhtunkhwa expects an increase in revenue in the financial year 2020-21. The Khyber Pakhtunkhwa Revenue Authority registered an 81% growth in its respective streams of revenue collection.

The provincial revenue authority forecasts it will collect PKR 17bn in 2019-20 compared to PKR 10bn in 2018-19. This gives an additional assurance to the policymakers that revenue growth is possible with the new model of tax collection.

The government deployed a data-driven revenue mobilisation strategy which paid dividends in the shape of 38% growth in 2019-20 in first eight months (July 2019 -February 2020) from the last financial year 2018-19 and before the outbreak of the coronavirus in the country.

Second, the government expects the expenditure to remain in line with the rationalisation imperatives set in the new Annual Development Plan Policy. The policy eventually helped the government in setting up a predictable spending pattern, thereby establishing a course for the full use of the total development envelope for the outgoing financial year.

Third, the government has identified additional revenue streams from the mandatory fiscal transfer, including the identification of missing indexation of hydel power tariffs for five previous financial years.

Also, the government anticipates the realisation of outstanding payments after the establishment of an efficient Payment and Settlement mechanism by the Central Power Purchasing Agency, further improving the government's cash flow.

The fourth primary factor providing reassurance to the provincial government for presenting a balanced budget is the increase in fiscal transfers from the federal government, which account for 51.7% of the provincial revenue receipts.

Khyber Pakhtunkhwa is to receive PKR 478bn in the forthcoming financial on account of its share in the divisible pool of taxes, and straight transfers.

Straight transfers include net hydel profits and excise duty and revenue from oil and gas and a specific allocation to cushion the economic impacts of the war on terror.

These budgetary estimates are contingent, however, on the increase in revenue collection of the federal government, which unfortunately witnessed a massive short collection in the revenues.

Federal Board of Revenue, the federal government’s major tax body, reported a 13.4% drop in receipts in March and April 2020 during the lockdown period.

Pakistan's economy entered into a recession as GDP contract to 0.4% in 2019-20.

The government expects economic growth at 2.1 per cent in 2020-21, and there are fears of a prolonged recovery cycle in domestic markets.

Following the coronavirus outbreak, the federal government had to revise its budgetary estimates for bringing down Khyber Pakhtunkhwa's share of federal government receipt transfers to PKR 377bn against the original budget figure of PKR 533bn.

Other provinces

Pakistan's other three provinces have adopted different budgetary approaches for the next financial year.

These have centred on the assumption of economic recovery in the second half of the fiscal year.

Punjab, the country's largest province with a population of 110 million, has envisaged a surplus budget of PKR 125bn and plans to make a PKR 285.4bn investment in healthcare.

The province, like Khyber Pakhtunkhwa, has frozen salaries and pensions to the previous year budget.

Sindh province has a deficit budget of PKR18.9bn, although the total outlay of budget for next fiscal year is 0.4% higher than the current financial year.

Healthcare investments are 16% higher from this year - PKR114.4bn to PKR132.8bn - for the next fiscal year.

Balochistan too has a deficit budget and has allocated 36% higher allocation of PKR 31.39bn against the outgoing financial year 2019-20 allocation of PKR 23.1bn.

  • Muhammad Afnan Alam

    Muhammad is a career federal government civil servant from Pakistan

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