Re: A critical look at the Pak economy
ehtasab: And yes .. please read this article too. Its a good read :). I am putting it here because it is relevant to what we are discussing and tells a lot about this injustices.
http://www.dawn.com/2003/09/15/ebr1.htm
NFCs impoverishing provinces
By Syed Shahid Husain
The last National Finance Commission (NFC) award given in 1997 by a care-taker government (CG), continues to govern the present ad hoc arrangement of sharing taxes and duties between the federation and the provinces.
The CG had acted in great haste in its anxiety to pre-empt consideration of this crucial issue by the elected government. CGs are an extension of the by-now-well-known establishment.
The award drastically changed the sharing ratios in favour of the federation and against the provinces from 20:80 to 37.5:62.5.
Although harmful to the interests of Sindh, her care-taker chief minister, Mr. Mumtaz Bhutto, who would otherwise like to be known as “Dahesar (the lion) of Sindh,” meekly accepted the award bartering away Sindh’s interests. This unconstitutional award based on 1981 population rather than 1998 population — Sindh’s population having increased from 23 to 25 per cent— hurts doubly.
According to MAH - by now a well known name among the serious readers of Dawn- who has contributed seven articles recently and whom I have the privilege of knowing quite well and who for inexplicable reasons insists on guarding his anonymity ferociously, long after his illustrious career in the civil service, “the very establishment of an NFC by a care-taker government violated one of the basic principles of good governance - an interim or care-taker government fills the gap between the dissolution of the National Assembly and fresh elections.”
Not only that, the terms of reference, according to him, too were unconstitutional when other unspecified taxes were incorporated in breach of Article 160 of the Constitution, which specifies the taxes to be distributed. A third unconstitutional act of the CG was the mixing of direct and indirect taxes.
In 2000, an NFC was constituted, but before it could submit its award, ‘real’ democracy was ushered in. And in spite of nominations by all the Provinces, the ‘real’ democracy hasn’t had the time or the will to reconstitute it. The devolution of finances of the nation - mostly inverse from the provinces to the federation- are left in state of animated suspension. Because of serious differences among the provinces on revenue sharing formulae, the NFC 2000, in its meeting held on 9th July 2001 constituted a working group ‘to study international practices on fiscal federalism and revenue sharing.’ Mr. Abdul Hafeez Sheikh, now Chairman, Privatization Commission, headed the group. The group studied seventeen countries. After a detailed review, the group reached the conclusion that Pakistan is the only country using population as the sole basis for revenue sharing. The most commonly used criteria besides population, of course, are: tax collection, fiscal efforts of the province/state, area, backwardness, development gap, inverse population density, equal share, income distance method, fiscal discipline.Different countries have assigned different weightage to different criteria.
The group indicated the following six options to pick from. None has been chosen. Instead of being the sole criterion, population was assigned a weightage ranging between 55 to 65 per cent.
The provinces did not agree on any of the above. Sindh supported any of the multiple indicators formula given above, because it contributed more to the divisible pool. Going by the figures for 1997-98, Sindh contributed 58.2 per cent to income tax, 29.6 per cent to sales tax, 18 per cent to federal excise, and 64 per cent to customs. It may come as a surprise to some, that Punjab, a much larger province in area, population and resources, and claiming the lion’s share in expenditure, both direct and indirect, contributed a meagre 17.7, 10.9, 18 and 10.8 per cent respectively. On an average basis, Punjab contributed 22.9 per cent against Sindh’s contribution of 67.5 per cent.
Terms of reference for the defunct NFC 2000 were almost the same as the one in 1997, and were characterized by MAH as unconstitutional and not covered by Presidential specification. The President has to specify which custom duties would be divisible. They include wealth tax, capital value tax and any other tax, which may be levied (in future) by the federal government.
There is a continuing constitutional violation, further compounded by inclusion of a new item “GST on services”. Similarly the inclusion of all taxes and duties in the award is unconstitutional because except income tax and sales tax no other tax can be included. According to MAH, the wholesale inclusion of federal excise taxes in the divisible pool is unconstitutional. Such wholesale breach of the Constitution should not surprise us, long since used to their frequent subversion, 1958, 1969, 1977 and 1999.
The Constitution has presented no serious problem to the rulers of this blighted country. Whereas in India the Finance Commission has been constituted every five years with clock-like regularity, in Pakistan it has been an on-and-off affair. There have been fewer than eleven NFCs or their illegal imitations, during our chequered history. When Pakistan came into being, it inherited Raisman Award under the 1935 Act. That continued until 1954 when Otto Niemeyer Award came, which held the field until 1962, when ‘Field Marshal’ Ayub Khan appointed a committee under Hafiz Abdul Majeed, the then finance secretary, who delivered an award within a month, giving 46 to per cent to East Pakistan and 54 per cent to West. To the credit of Ayub Khan, he reversed the ratios to accord with the population.
Then came Ayub’s Constitution. The first NFC under it was appointed in 1964 under the then Finance Minister. It gave its award towards the end of 1965 and distributed revenues on the basis of population between the two provinces. The second military dictator, General Yahya Khan, constituted National Finance Committee (not a Commission) on April 17, 1970 with the Federal Finance Minister as the Chairman and West and East Pakistan Finance Ministers as members, completely ignoring the new Provinces of West Pakistan, about to come into being in two and a half months.
This committee, instead of examining the basic principles governing the award, followed the recommendations of One Unit Reorganization Committee giving 46 per cent to West Pakistan and 54 per cent to East Pakistan- obviously on population basis. The share assigned to West Pakistan was to be distributed among the new provinces on the basis recommended by One Unit Reorganization Committee, in an entirely different context. After East Pakistan emerged as an independent state in 1971, the Federal Government appropriated her share too.
Then in 1974 came the first NFC soon after the first elected government adopted the 1973 Constitution, that in spite of its mutilation at the hands of several adventurers, most pernicious of all being Ziaul Haq, has survived in name. The Chief Martial Law Administrator appointed the next one in 1979.
Then in 1990, the Benazir government appointed the NFC but before it could deliberate the government was sent packing. . Benazir delayed the constitution of the NFC, simply because she did not like the nominee of Mian Muhammad Nawaz Sharif, who headed the Punjab government. The sixth NFC was constituted in 1996-97 by the CG of the famous Batch of 1964.
Composition of the Finance Commission is another important issue. It comprises officials who cannot be independent because they are the Finance Ministers of the five governments. ‘The stake holders, interested parties and claimants become the judges’ to quote MAH. In case of India the President constitutes it, and its recommendations are subject to the approval of government. In case of Pakistan, the award of the NFC is mandatory.
Indian Finance Commissions have enjoyed a reputation for integrity and independence and have never generated any controversy, in spite of more than two-dozen states. We couldn’t manage two of them and are trying to impose our experience on the remaining four. What is crucial is the quality of men more than the letter of law. According to Ashoke Chanda, a Chairman of 3rd Finance Commission of India: “It (Finance Commission) is intended to assure the states that the scheme of distribution will not be made by the Union arbitrarily but will be based on the recommendation of an independent Commission - and would command spontaneous respect.”
Sindh has got a raw deal not unlike erstwhile East Pakistan. Its legitimate share in the divisible pool has been denied to it whether the government is military or ‘civilian’ Out of Rs189 billion it contributed in 1999-2000 it received only Rs30 billion. It is being subjected to substantial resource transfer to other provinces and the federation. The other two smaller provinces too have suffered as a result of iniquitous dispensation. But that is another matter. They have been partly compensated by subventions.
If the formula had not been changed in 1997, and the 1990 formula continued, the provinces would have received Rs192 billion more. **Conversely Punjab contributes much less than it receives. It appears satisfied, more so, because bulk of the federal government expenditure mostly on the military and the civilian outfits, occurs in that province. Besides, it controls all the levers of power. **Sindh is not allowed even its own province to rule. For that a special concoction had to be put in place after real democracy was ushered in.
Sindh contributes one-third of the national GDP compared to its one-fourth population. In agriculture it contributes one fourth of the GDP, in large-scale manufacture its share is 43 percent and its share of services substantial. Its share in oil production is 62 , in gas 48, in coal 31 and in electricity 39 per cent.
Sindh also faces mounting debt servicing liabilities, provision of subsides, law and order, at source deductions of disputed Wapda utility bills, etc. Debt servicing in Sindh is equivalent to 80 of provincial receipts, and 16 per cent of current revenue expenditure in 2000-01.If oil and gas income were not available to Sindh, the Award could not meet even the wage bill of the government. Sindh is able to raise the highest per capita revenue of Rs321, and has the second highest per capita expenditure.
Since 1974 NFC Award, population has been the sole criterion for revenue sharing among the Provinces in Pakistan. Before 1971, this principle was an anathema and parity was the rule. As soon as we rid ourselves of our ‘colony’, we went back to population basis. If a different basis is applied, Punjab would stand to lose.
To make the award acceptable to the reluctant provinces, highly inflated targets are set forth in the NFC to create a hallucination of plenty. Expenditures are under estimated and revenues over-estimated and the Provinces are left high and dry when ‘sudden’ and certain shortfalls occur with death like regularity. The provinces have to bear the cost of federal government’s inefficiency. Lack of resources at their disposal adversely affects development expenditure.
Sindh has been denied its historical share in octroi collection as well as in current GST collection. The octroi and zila tax, which sustained the local governments, was suddenly taken over by the last elected federal government. This act virtually crippled the local governments. One would have hoped that the present government, so audaciously espousing the cause for devolution, would have restored the taxes to the devolved local governments. But that was not to be. Based on the calculations of audited figures and applying the average growth, actual collection during three years, (1999-2002) would have been Rs26 billion against which Sindh was paid a sum of Rs15 billion. Buoyancy of taxes has been replaced by a freeze and a farce.
In case the distribution had been made on the basis of current share in GST collection, Sindh’s share would come to 64 per cent. In case it was done on the basis of its share at the time of take-over of octroi it would be 48 per cent. Sindh is also burdened with wheat subsidy, a foolish hangover and a bequest of the previous federal gove-rnment policy.
The relative backwardness of Sindh has increased over time and no allowance is made in share of federal taxes. Sindh has certain peculiar features like high level of urbanization, heavy influx of population from other provinces (in 1998, 230,000 immigrated into Sindh from other provinces), high poverty, low service provisions, a vast arid zone (48 per cent of the total area) and huge expenditure on law and order. Per capita expenditure on law and order in Sindh is the highest at Rs221 compared to Rs157 for other provinces.
The history of inter- governmental fiscal relations in Pakistan is characterized by deceit and denial.The NFC has played a role only as an adjunct of the federal government. The federation somehow does not consider the provinces as equal or reliable partners.
The federal government is profligate and resorts to pre-empting national resources on the basis of its unjustified needs resulting in ballooning expenditure and a senseless order of priorities. It adopts any ruse, constitutional or unconstitutional, mostly the latter, to impoverish the provinces and their population.
At the heart of the mailaise is the unbridled capacity of the federal government to live beyond its means. In the table below is the income and expenditure as given in the latest Economic Survey.
Revenue and expenditure of the federal government:
A review of the NFC Award 1997 indicates that none of the federal taxes achieved their targeted growth especially in custom and excise duties. Its expenditure always exceeds the income it generates. Simply put, the federal government lives beyond its means, year in and year out. Its excess expenditure over the last seven years ranges from 48 to 30 per cent per annum. Earlier years would tell the same story. Even after cheating the provinces of their legitimate share, it cannot manage its house.
In the name of security, it only secures itself against scrutiny. One line budget takes care of most of our income. This huge expenditure is not even subject to ordinary audit, because they are supposed to have foolproof methods against pilferage. They must be the only self-regulating outfit in the world without having to worry about accountability.
Principles, which should govern the distribution of taxes, must first of all adhere strictly to the constitutional provisions. The same goes for the terms of reference. The composition of the NFC should be changed to include people of competence, independence and integrity whose recommendations carry spontaneous respect. Unless the expenditure of the federal government is controlled, there will not be much left to protect.
The expenditure must be capped before it spirals out of control at a huge cost to the provinces and the people. Any formula that the next Finance Commission adopts must refer to other than population as the basis for distribution of taxes. The World Bank and her sister organizations have no interest in the welfare of the people. They focus on fiscal deficit as a percentage and are more than happy if the poorest and the most vulnerable parts of the society pay the price to arrive at the magical figure acceptable to the IMF etc.
Price of electricity and gas is their favourite target and they don’t have to worry if our industry gets strangulated in the process. They would like to subject our own poor gets pushed further down or the handicapped industry has to face more competition from abroad by lowering import duties. The nexus between the so-called ‘donor’ agencies and the federal government can only be breached by the civil society. They should come together and organize themselves to wrest control from the federal government and hand it over to the provinces and the people who own this country- a simple fact not yet understood or acknowledged by the ruling establishment.
Sindh rulers of whatever hue and colour should shed their complicity in the crime and must rethink their strategy. They must stop carping on Punjab as being the principal object of their ire. Sindh’s salvation lies in making a common cause with Punjab and the other three provinces so as to bring the pressure to bear on the federal government not to deviate from the constitution in either the terms of reference, the composition of the NFC or illegal preemption of the taxes beyond those permitted by the constitution. It is the federal government, which is keeping the provinces and the people poor. Punjab is as sinned against as Sindh. Only that its people are kept in the dark by its rulers.
Present policies cannot be continued without presaging a big disaster. It doesn’t have unlimited resources and therefore instead of living beyond its means it should show better sense in the use of those limited resources by reordering its priorities towards the people away from self-serving security orientation. Unless the people force the government to change its ways, there is no hope for improvement. Provinces will continue to get exploited and the people will be forced to pay a price for the stubborn disregard of their welfare by their rulers even if they wear muftis because they look over their shoulders to their mystical controllers in the military having been anointed by them.
According to Human Development Report 2003, issued by the UNDP, Pakistan has slipped from 135 to 144 in Human Development Index. HDI represents a general decline in all the standards that determine the basis of the Index. It is in the category of Low Human Development countries below Bhutan, Sudan, Bangladesh, Togo, Nepal, etc. It has a lower literacy rate than all these countries except Nepal.
Its education index is lower than Nepal’s although its GDP index is a little higher. Pakistan ranks as the 65th poorest country in the world. Poverty has increased over past three years of IMF/IBRD supervised management conducted through their chosen retainers of Pakistani stripe.