Selected Issues

Abstract

Selected Issues

Fiscal Decentralization and Macroeconomic Challenges in Pakistan1

This chapter discusses economic aspects of Pakistan’s fiscal decentralization which followed the 18th Constitutional Amendment and the 7th National Finance Commission Award. The chapter does not discuss the optimality of the 18th Amendment itself, nor does it take a position on the optimal division of resources between various fiscal authorities. The chapter argues that the resulting fiscal framework is unbalanced in several ways and is not sufficiently flexible, which makes macroeconomic management more difficult and may have implications for overall socio-economic outcomes in the long run. In this context, the chapter discusses possible options to increase efficiency, flexibility, and responsiveness of the fiscal framework within the current legal framework for the consideration of policy makers and the next National Finance Commission.

A. Introduction

1. In 2010, Pakistan embarked on a path of significant fiscal and administrative decentralization.2 The 18th Constitutional Amendment significantly curtailed the responsibilities of the federal government and expanded the legislative and executive domain of Pakistan’s four provinces—Balochistan, Khyber Pakhtunkhwa (KPK), Punjab, and Sindh. At the same time, it gave a more prominent role to the Council of Common Interests (CCI) in coordinating joint federal-provincial tasks, and tasked provincial governments with further devolution of key functions to local governments, i.e. lower tier governments such as municipal authorities (Box 1). Besides setting the stage for significant fiscal decentralization, this devolution was made more permanent by a stipulation that the revenue share of the provinces in each National Finance Commission (NFC) Award cannot be less than the share given in the previous Award.3

2. Implementation of the 18th Constitutional Amendment was enabled by the Seventh NFC Award, which significantly expanded the provincial share of public finances.4 Key features of the 7th Award were: (i) increasing the provincial share in the divisible tax pool from about 47.5 percent in FY2009/10 to 56 percent in FY 2010–11 and to 57.5 percent from FY 2011–12; (ii) expanding the divisible pool of federally collected taxes by reducing the federal government’s collection charge from 5 to 1 percent; and (iii) moving the General Sales Tax (GST) on services from the divisible pool to the exclusive domain of the provinces.5 Based on the end-FY 2009/10 budget and GDP outcome, these provisions (ignoring the transition year) corresponded to an additional resource transfer of 1.1percent of GDP.6

Main Aspects of Pakistan’s Fiscal Framework Post-18th Constitutional Amendment

Division of Responsibilities. The 18th Amendment significantly reduced the list of functions under federal jurisdiction and abolished the list of functions under joint jurisdiction, moving most of the functions to the exclusive domain of the provinces. Several functions from these lists were put under the legislative power of Parliament, but with policies and regulations entrusted to the Council of Common Interests (see below). Among other things, these functions include railways, mineral resources, industrial development, all federal regulation, national planning and economic coordination, electricity, and supervision of public debt management. Finally, the 18th Amendment prescribed to the provincial governments to devolve political, administrative, and financial responsibility to the local governments (Article 140A).

Governance structures.

The eight-member Council of Common Interests (CCI), to be appointed by the President, consists of the Prime Minister (Chair), four provincial Chief Ministers, and three members of the federal government, nominated by the Prime Minister. CCI reports to the National Assembly and submits annual reports to both Houses of Parliament. Its primary responsibility is to regulate policies and exercise supervision of institutions under its purview. CCI is to have a permanent Secretariat and to meet at least once every ninety days. Decisions of the CCI are expressed by a majority and any disputes or disagreements can be resolved through a joint session of Parliament.

A twelve-member National Economic Council (NEC) consists of the Prime Minister (Chair) and four other federal government appointees, four provincial Chief Ministers and one member from each province to be nominated by its Chief Minister. NEC reviews overall conditions of the country and advises federal and provincial governments by formulating plans with respect to financial, commercial, social and economic policies to, among other things, ensure balanced development and regional equity. NEC is to meet at least twice a year or if convened by the Prime Minister or one half of its members. NEC is responsible to the National Assembly and submits annual reports to both Houses of Parliament.

The National Finance Commission (NFC) is constituted by the President at intervals not exceeding five years, makes recommendations on the distribution of resources between the Federation and the Provinces, including tax proceeds, grants-in-aid to provinces, and exercise of borrowing powers. The 18th Amendment has added two new provisions: i) the share of the provinces in each NFC Award cannot be less that the share given in the previous Award; ii) federal and provincial finance ministers shall monitor the implementation of the Award and submit bi-annual reports on its implementation to both Houses of Parliament.

Borrowing powers and limits. Borrowing or extension of loan guarantees by the provincial governments has been allowed within the limits, if any, imposed by provincial legislature (Assemblies). The federal government could also lend to or guarantee loans by provinces subject to its own borrowing/lending limits. However, a province may not raise a loan without the consent of the federal government if there is still outstanding any part of the loan made to the province or guaranteed by the federal government. The 18th Amendment has added a clause allowing provinces to raise domestic or international loans (or extend guarantees) within the limits and conditions specified by the NEC (recently raised from 0.5 to 0.85 percent of GDP).

Source: The Gazette of Pakistan (April 20, 2010) and Constitution of the Islamic Republic of Pakistan.

Resource Transfer to Provinces in the 7th NFC Award1/

(Based on FY 2009/10 budget outcome and GDP)

article image
Source: Pakistani authorities and staff calculations

In the transition year FY2010/11 the provincial share was set at 56 percent of the divisible pool.

Calculation based on 0.45 percent reflecting the federal share transferred to the provinces.

3. The 7th Award contributed to substantial vertical fiscal asymmetry. As of FY 2015/16, the provincial share of general government expenditure stood at 35 percent, broadly in line with, for example, average in OECD countries. However, the provinces’ share in general government revenue was significantly higher-about 50 percent in FY 2015/16, pointing to a significant structural deficit at the federal level.7 In this respect, Pakistan’s fiscal system is somewhat unique compared to other countries. In all OECD countries, for example, subnational governments’ share in revenue is generally lower than their share in expenditure with the resulting gap covered by various forms of transfers. This chapter examines this and other imbalances, as well as economic outcomes following the 7th NFC Award, and proposes a number of recommendations for consideration in the context of the next NFC Award discussions.

uA03fig01

Expenditure and Revenue Shares in Selected Countries, 2015

(In percent of total general government expenditure/revenue)

Citation: IMF Staff Country Reports 2017, 213; 10.5089/9781484309766.002.A003

Source: OECD fiscal decentralization database, Pakistani authorities, and staff calculations.

B. Imbalances in Pakistan’s Fiscal Federalism Framework

4. International experience suggests that the design of fiscal federalism, more than the degree of decentralization, affects social and macroeconomic outcomes.8 In recent decades, fiscal decentralization has been pursued in many countries, often reflecting a desire for more participatory government and greater voice of local constituents in the allocation of budgetary resources, as well as the quest for a more efficient provision of basic services. Among key principles for a successful decentralization, which emerged from these experiences, are: setting clear demarcation of responsibilities between various tiers of government; securing predictable and stable resources for local governments to support increased expenditure responsibilities; building effective and participatory mechanisms (either consensus-based or a more formal institutionalized framework) for coordination and dispute resolution. At the same time, inadequate public finance management systems at the subnational level, moral hazard in the form of weaker incentives to expand provincial tax bases, and procyclical spending patterns by provinces have often resulted in inferior outcomes following fiscal decentralization.

5. The basic design of Pakistan’s fiscal decentralization is in line with many principles of successful decentralization. The 18th Amendment provided a clear division of labor between the federal and provincial government and maintained overall checks on provincial borrowing through the limits imposed by the NEC, while the 7th NFC Award ensured a significant additional pool of resources. The CCI has become more prominent and increasingly effective in reaching consensus, notwithstanding various pending issues (UNDP 2015a and 2015b).

6. However, in addition to the vertical imbalance mentioned above, the rollout of fiscal decentralization in the 7th NFC Award has been unbalanced in several important areas:

  • Devolution of fiscal resources was not tied to the devolution of expenditure responsibilities. While the 7th NFC Award became effective starting in FY 2010/11, the devolution of public functions and full accounting of its fiscal costs took longer.9 Consequently, the federal government expenditure could not adjust at a pace of the resource transfer, and the NFC Award made no provision for ex post reconciliation of the vertical resource allocation with the actual cost of administrative decentralization. International experience suggests that such an unbalanced devolution of revenue and expenditure generally leads to fiscal difficulties (see Hobdari et al., (2016)).

  • The revenue-sharing arrangement in the 7th NFC Award has posed challenges for fiscal policy-making and may have changed incentives at both federal and provincial levels. First, with 57.9 percent (after accounting for one percent to KPK) of tax revenue shared with provinces, any revenue adjustment for fiscal policy purposes needed to be substantially larger for the federal government since provinces are free to spend their share. This narrowed the range and effectiveness of fiscal policy instruments. Second, although federal tax revenue has increased substantially in the past several years, incentives for the federal government in raising additional revenue may have become skewed toward revenue areas outside of the divisible pool of tax resources shared with the provinces. Third, provincial incentives to raise revenue may have been diminished by increased availability of revenue from the divisible pool.

  • Devolution of fiscal resources was not synchronized with strengthening public financial management (PFM) frameworks at the provincial level. Although basic elements of budget formulation process were in place, PFM frameworks, cash management practices, commitment control, and fiscal reporting practices in the provinces varied significantly in their quality and transparency, although provinces have been making effort to improve their efficient spending capacity. Similarly, there is scope to improve the transparency and budgeting practices of quasi-fiscal operations and the operations of provincial public enterprises. The limited and uneven capacity to absorb additional resources and use them efficiently has likely contributed to limited success with improving the provision of basic services and may have increased disparity across provinces.

  • As a multi-year revenue framework the NFC Award did not adequately account for contingencies. The NFC Award does not include a strategy to counter unexpected fiscal shocks. The NFC report recommendations include a possibility of federal assistance to provinces in times of unforeseen calamities, but no such provision was made in case of a need for reverse assistance in times of national emergencies (e.g. security-related expenditure). This leaves the federal government more vulnerable to fiscal shocks, especially if affordable borrowing options are limited.

  • The Award is largely silent about sharing the burden of financing joint responsibilities. The NFC’s report did not consider critical functions of national importance which fall under the jurisdiction of the CCI-and hence joint responsibility of the federal and provincial governments-after the 18th Amendment. Most importantly, such areas include public debt and the electricity sector which pose considerable claims on public finances. By default, these functions continue to be financed by the federal government.

  • Ensuring a consistent fiscal stance across the layers of government has also been a challenge. The NFC Commission’s recommendation that the federal and provincial governments develop and enforce a mechanism for maintaining fiscal discipline at both levels remains to be fully implemented. The recently established Fiscal Coordination Committee (FCC), comprising the provincial and federal finance secretaries, helps to synchronize policy coordination and budget implementation, but its decisions are legally non-binding and have not always been implemented.

  • Fiscal decentralization still did not trickle down to local governments. Implementation of the Article 140A of the Constitution, prescribing to the provincial governments to devolve political, administrative, and financial responsibility and authority to the local governments remains largely incomplete, notwithstanding some progress with provincial finance awards and local government finance legislation adopted in some provinces.

C. Macroeconomic Outcomes Since the 7th NFC Award

7. The original NFC Report laid out an optimistic macroeconomic framework, likely reflecting the intended outcome of the award.10 After an initial transfer of resources in FY 2010/11, and the corresponding worsening/improvement of the federal/provincial fiscal positions, the framework envisaged:

  • Continued fiscal adjustment with increased space for development expenditure by the federal government. By FY 2014/15, the federal government was expected to bring down its fiscal deficit from 5.5 percent of GDP to 4.1 percent of GDP, on the back of gradual but continuous rationalization of current expenditure and strong revenue growth. Federal development expenditure was expected to increase by 0.6 percent of GDP per year over the next five years.

  • A significant scaling up of development expenditure by the provinces. Provincial revenue, from both own and federal sources, was expected to increase by 4 percent of GDP between FY 2009/10 and FY 2014/15. The bulk of this increase (3 percent of GDP) was to be used for development expenditure with only a modest increase in current spending (by 0.5 percent of GDP) and balanced budgets.

8. In part linked to the imbalances of Pakistan’s decentralization, fiscal outcomes differed markedly from the NFC’s vision, despite significant revenue-driven fiscal consolidation during the 2013–16 EFF-supported program and better-than-expected growth of nominal GDP (Figure 1). Specifically:

  • Federal budget deficit was higher than in the NFC framework despite being on a downward trajectory in the past three years. Federal current expenditure adjusted more slowly than envisaged, owing to delayed and partial transfer of expenditure responsibilities to provinces, slow implementation of key structural reforms, and difficulties in coping with new fiscal shocks. Alongside, growth of tax revenue also underperformed in the initial years. Coupled with additional expenditure shocks, these factors delayed fiscal adjustment at the federal level and, in the absence of automatic stabilizers built into the Award mechanism, kept the budget deficit significantly higher throughout the period.

  • Provincial revenue growth was substantially below expectations, owing both to challenges at the federal level, and the provinces’ own tax efforts (Figure 2, Box 2). Reflecting changed incentives and tax reform challenges, federal revenue increase initially was slower than expected. Meanwhile, provinces’ own tax efforts seemed to have focused on improving the collection of GST on services. However, tax collection from other key potential sources (such as real estate and agriculture) largely remained flat in percent to GDP. Having jurisdiction over agriculture and services-which account for 80 percent of Pakistan’s GDP-provinces collected a mere 1.3 percent of GDP in taxes in FY2 015/16.

  • The provinces’ increased resource envelope went disproportionately into current spending, whereas the expected scaling up of public investment did not materialize. In the five years of the Award, provincial public investment expanded by only 0.3 percent of GDP, in part reflecting limited absorptive capacity of the provincial governments and PFM-related constraints, and in part owing to slower revenue mobilization.

  • Ultimately, these outcomes translated into very different balance sheet effects. On one hand, they led to faster increase in public debt despite sizable consolidation efforts. On the other hand, provinces accumulated cash balances of over PRs 600 billion, or 2 percent of GDP during the period of the 7th NFC Award.

  • Alongside, progress with respect to basic service delivery-one of the key economic justifications for fiscal decentralization-has been mixed. Notwithstanding some improvements, notably with respect to child immunization rates, overall social outcomes with respect to basic services in some cases did not improve amid gradually increasing but still low levels of spending in these areas (Figures 2 and 3). There were also notable differences across provinces in these outcomes. These observations point to capacity constraints in public administration and public finance management systems which vary across provinces.

Figure 1.
Figure 1.

Macroeconomic Framework in the NFC Report and Actual Outcomes

(In percent of national GDP, unless indicated otherwise)

Citation: IMF Staff Country Reports 2017, 213; 10.5089/9781484309766.002.A003

Source: Pakistani authorities, NFC Commission (2009), and staff calculations. Federal revenue receips are net of transfer to provinces.
Figure 2.
Figure 2.

Social Outcomes Before and After the 7th NCF Award

Citation: IMF Staff Country Reports 2017, 213; 10.5089/9781484309766.002.A003

Source: Pakistan Social and Living Standards Measurement Surveys, FY2008/09 and FY2014/15
Figure 3.
Figure 3.

Federal and Provincial Expenditure on Health and Education

(In percent of GDP)

Citation: IMF Staff Country Reports 2017, 213; 10.5089/9781484309766.002.A003

Provincial Revenue Mobilization

The 7th NFC Award has assigned the General Sales Tax (GST) on services—a buoyant tax base—to the provinces, in addition to their other tax assignments, which include agricultural income tax, taxes on immovable property, capital gains tax, estate and inheritance tax, motor vehicle tax and charges on services such as water supply, drainage and lighting. Despite significant taxing powers, provinces have collected only 8 percent of the national fiscal revenue in FY 2015/16.

Following the 7th NFC Award, most provincial authorities have established own revenue authorities tasked with the collection of GST on services. These authorities have had some success: tax bases were increased to include a wider range of previously untaxed services and improving administration. As a result, collection has nearly doubled since the NFC award.

At the same time, revenue mobilization from other promising bases such as agriculture and real estate has not shown marked improvement relative to GDP and, in some cases worsened. Tax administration at the provincial level remains fragmented, often with different agencies collecting various taxes. Diminished incentives to expand tax bases following the allocation of higher revenue through the 7th NFC Award may also play a role. Building on the success of revenue authorities and bringing other tax collection responsibilities under “one roof” would help reduce the cost and increase effectiveness of administration. Alongside, building coordination and information-sharing mechanisms both across provinces and with the Federal Bureau of Revenue will be important to make use of complementarities in tax administration (e.g., a nation-wide cadaster of real estate) and promote easier compliance, as well as reduce confusion and resolve disputes in taxation of services traded across provincial borders (such as transport or telecom).

uA03fig02

Provincial Tax Revenue

(In percent of national GDP)

Citation: IMF Staff Country Reports 2017, 213; 10.5089/9781484309766.002.A003

Source: Pakistani authorities and staff calculations.GST on services includes collection by the federal government.

D. Considerations for the Next NFC Award

9. Overall, the 7th NFC Award has resulted in an unbalanced and less flexible intergovernmental fiscal framework. In this context, economic management in addressing macroeconomic imbalances and vulnerabilities has become more constrained. Important revenue sources have been underexploited, fewer instruments are at the disposal for any near-term fiscal policy response to economic shocks, and there is scope for improving the coordination mechanisms between the federal and provincial governments. Overall efficiency of public expenditure and social outcomes were mixed due to a generally lower and uneven quality of PFM frameworks at the provincial level. In more turbulent times, these vulnerabilities could undermine macroeconomic stability.

10. These factors require careful consideration in the next NFC Award. The 18thConstitutional Amendment not only emphasizes the need for greater autonomy of the provinces, but also calls for a more participatory and coordination-based approach to managing aspects of the national economy. Therefore, considering the design aspects of the fiscal framework outlined above in the context of the next NFC Award will be necessary to achieving a well-functioning and effective fiscal system.

11. The next NFC should aim to strengthen macroeconomic stability and increase efficiency, flexibility, and responsiveness of the fiscal framework. Although the Constitutional nature of some parameters of Pakistan’s fiscal decentralization framework constrains near-term options, improvements can be considered within the current legal framework. In this context, the NFC may better account for the anticipated consequences of the next Award on public debt, the effectiveness of fiscal policy, nation-wide efficiency of public expenditure across all levels of government in light of the uneven quality of PFM frameworks, as well as strategies to cope with unanticipated shocks. In addition, emphasis could be placed on better incentives and coordination in the area of tax revenue mobilization and overall fiscal stance across all layers of government To this end, a number of options could be considered, either in the context of the NFC Award or as a subject matter for the CCI:

  • Effective mechanisms for fiscal discipline and coordinating fiscal stance. International experience with securing fiscal discipline and synchronizing overall fiscal stance varies significantly, from administrative controls (e.g. Greece, Turkey) to reliance on financial market forces (e.g., Canada and the United States).11 Pakistan’s political structure calls for effective institutions of coordination and cooperation, which works best in environments of significant political decentralization (e.g. in Germany). Toward this end, one option is to establish a technocratic fiscal council under the CCI to develop and agree on broad fiscal rules for all levels of governments, with explicit links to a realistic macroeconomic framework, as well as transparent enforcement procedures. Alongside, a uniform framework for transparency, reporting, and accounting of quasi-fiscal liabilities (including public enterprises, public-private partnerships, liabilities from wheat purchases, and special purpose vehicles at all levels of government) will be critical to properly assess the fiscal discipline.

  • Increasing flexibility of the fiscal framework. At present, the federal government’s ability to respond to unexpected expenditure needs of national importance as well as its ability to assist provinces (e.g., in times of natural disasters) is limited. To this end, establishing a jointly funded contingency fund would help enhance the fiscal framework’s ability to absorb large and unexpected shocks to expenditure of national importance. Authorization for the use of such a fund could be subject to mutual consent of both federal and provincial authorities and/or sanctioned by the CCI to preserve the participatory approach of the existing federal-provincial relations.

  • Improving incentives for tax revenue mobilization and coordinated administration. A stronger incentive-based national framework for tax revenue mobilization is needed to avoid over-taxation of compliant taxpayers and facilitate a coordinated expansion of the fiscal space for much-needed development and social spending. A national consensus with specific revenue targets (e.g., set by the CCI) and mechanisms to enforce their attainment could help overcome coordination and political economy issues with respect to policy and administrative aspects of taxation in sensitive areas, such as agriculture and real estate. In addition, improved coordination, both vertically (e.g., in common initiatives to widen the tax net in areas of joint tax jurisdiction) and horizontally (e.g., in harmonizing regulations or implementation of GST on services) will be important to balance the need for increased fiscal revenue and business promotion. To this end, a national tax commission could be established under the CCI.

  • Greater ownership of and burden-sharing with respect to joint tasks. Consideration should be given to the specific role and contribution of the provinces in areas which, after the 18th Amendment, are under joint federal-provincial responsibility, such as public debt and the electricity sector. Although public debt is mostly contracted by the federal government, such a need is, at least in part, a result of the overall fiscal outcome of the nation-wide fiscal framework, including the existing vertical imbalance. Consequently, the NFC Award structure should minimize federal borrowing needs by reducing the vertical imbalance (e.g., through assumption of additional expenditure responsibilities by the provinces) or consider a burden-sharing arrangement for the impact of its design on public debt, especially given the fiscal surpluses at the provincial level. Similarly, provinces’ participation in reforming the power distribution sector as well as sharing the burden of liabilities arising from delays with such reforms should be considered.

  • Improving efficiency of public expenditure. In addition to improving transparency and fiscal reporting, other aspects of public finance management, such as budget preparation process, project selection, prioritization and procurement procedures, and overall governance structures need to be strengthened and made more uniform across the country. To this end, both the federal government and international partners could be involved to a greater extent in the provision of the necessary capacity building and technical assistance. In addition, saving some provincial funds until the PFM frameworks are improved and allow their efficient spending will help with the overall efficiency of resource allocation over time.

  • Further devolution of expenditure and revenue to local governments over the medium term. Given the large size of most of Pakistan’s provinces, achieving a substantial improvement in the provision of basic services will require effective involvement of local governments. To this end, a clear time-bound framework for improving administrative capacity and public finance systems in local administrations, and transferring basic service delivery functions and the needed resources from provincial to local governments will be key in delivering on the socio-economic promise of decentralization.

12. Initial feedback of the provincial authorities suggests a potentially challenging road ahead (Box 3). Achieving a broad consensus on the specific improvements and modalities of strengthening the fiscal framework will require extensive dialogue to balance the provinces’ concerns about preserving their autonomy on one hand, and the need for more coordination and flexibility to improve overall economic outcomes. In this context, closer alignment of provincial and federal economic objectives could help develop common strategies and coordination mechanisms over time.

Provincial Authorities’ Feedback

In their feedback to an earlier version of this chapter, provincial authorities have emphasized their individual achievements in various areas, such as tax revenue mobilization or devolution to local governments. All provinces strongly underscored the need to respect the constitutional protection of their revenue shares, and, in some cases, argued for additional resources needed to help them meet their social development goals. Some provinces challenged the connection between the 7th NFC Award and tax revenue mobilization incentives, and between social outcomes and the quality of PFM frameworks.

With respect to policy, the provincial authorities expressed a general reluctance to co-finance joint tasks. Some provinces argued that the tasks falling under the jurisdiction of the CCI are not joint in that they remain in the legislative domain of the federal government, and, therefore, should not be co-financed from provincial resources. If this interpretation is correct—i.e. that the constitution only empowers provinces with full participation in national-level policy-making without financial responsibility over the outcome of such policies—a consideration of incentive compatibility in Pakistan’s fiscal system is warranted.

Despite some support, there was a similarly reluctant stance by provincial authorities with respect to the financing of large and unexpected shocks out of a jointly funded contingency fund. The provinces’ key concern in this area was the potential misuse of such a fund, requiring a robust institutional and operational framework.

Notwithstanding mixed views, the provincial authorities’ feedback seemed to recognize the need for improved coordination mechanisms with respect to fiscal stance and tax administration as well as continued strengthening of PFM frameworks. At the same time, there was a general sense of unease about the possibility of such mechanisms to limit the provinces’ fiscal autonomy.

References

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1

Prepared by Tokhir Mirzoev and Tasneem Alam.

2

See also Shah (2012) for a comprehensive review of the 18th Amendment.

3

As per the Constitution, a NFC is constituted by the President at intervals not exceeding five years to decide on the division of resources between the federal and provincial governments.

4

See also Usman (2011).

5

Provincial authorities contend that GST on services was a provincial tax even before the 7th NFC Award. However, in practice, most of it was part of the divisible pool and, therefore, is included in these calculations. Additionally, 7th NFC Award altered the framework for horizontal distribution of resources among provinces from population-based to multiple parameters such as population, poverty, revenue collection and inverse population density. Moreover, one percent of the divisible pool was assigned to KPK to compensate losses incurred due to war on terror.

6

In addition, Balochistan was guaranteed its projected share of taxes, which subsequently led to additional transfers of PRs 72.5 billion in the following five years; Sindh was awarded 0.66 percent of the provincial share in the divisible pool for the losses on account of abolition of octroi and zilla tax levied on movement of goods within local jurisdiction (PRs 5.7 bn. In FY 2009/10).

7

Many studies measure provinces’ revenue by taking their own revenue collection (e.g. Martinez-Vasquez (2011)), which stood at only 8 percent. However, shared taxes should arguably be included both for purposes of international comparison (Blöchliger and Petzold (2009)) and measuring vertical imbalances (Shah (2012)).

8

IMF (2009) and Fedelino and Ter-Minassian (2010) provide a comprehensive review of international experiences with fiscal decentralization and IMF’s advice on its key aspects.

9

A Parliamentary Implementation Committee, established to examine the logistical, legal, administrative and international aspects of devolution, completed its work only a year later. Among other things, the new framework of inter-governmental relations abolished 17 federal ministries, which involved reallocating their staff of over 60 thousand, assets, property, etc. as well as establishing effective matching institutions at the provincial level. CCI assigned current expenditure and development projects of devolved institutions to provinces starting FY2011/12 (PRs 49 bn. according to Shah (2012)). Some of the abolished federal ministries did not entirely disappear and still remain in different forms.

10

NFC (2009), Annex IX, Table 1.

11

Joumard and Kongsrud (2003) provide a good discussion of the various approaches.

Pakistan: Selected Issues
Author: International Monetary Fund. Middle East and Central Asia Dept.
  • View in gallery

    Expenditure and Revenue Shares in Selected Countries, 2015

    (In percent of total general government expenditure/revenue)

  • View in gallery

    Macroeconomic Framework in the NFC Report and Actual Outcomes

    (In percent of national GDP, unless indicated otherwise)

  • View in gallery

    Social Outcomes Before and After the 7th NCF Award

  • View in gallery

    Federal and Provincial Expenditure on Health and Education

    (In percent of GDP)

  • View in gallery

    Provincial Tax Revenue

    (In percent of national GDP)