Provinces agree ‘in principle’ to National Fiscal Pact as Pakistan moves to implement IMF conditions

ISLAMABAD: An official from Pakistan’s finance ministry said this week all federating units had agreed “in principle” to a new financial pact that would help bring fiscal discipline, levy new taxes, particularly on agriculture, and streamline expenses for development and welfare projects.

Last week the IMF approved a $7 billion, 37-month loan program for Pakistan, which will require “sound policies and reforms” to strengthen macroeconomic stability and address structural challenges alongside “continued strong financial support from Pakistan’s development and bilateral partners.” 

The IMF package comes with tough conditions such achieving fiscal discipline, abolishing duplication and levying agriculture taxes through provincial governments. 

To achieve this, the federal government is taking all provincial governments on board through the National Fiscal Pact, a ministry of finance official told Arab News, requesting anonymity as he was not authorized to speak to the media on the record. 

He said all federating units had agreed to the National Fiscal Pact (NFP) “in principle,” while its modalities would be finalized in the coming months.

“A ministerial committee will be constituted by the federal government to oversee the implementation of the pact,” the official added.

Muzzammil Aslam, an adviser on finance and inter-provincial coordination to the chief minister of the Khyber Pakhtunkhwa province, called the NFP a “good initiative.”

“Like all other provinces, we [Khyber Pakhtunkhwa] have agreed to the pact as we feel this will help protect rights of the people of KP,” he told Arab News, confirming that the federal government would constitute a ministerial committee in the “coming weeks” to discuss procedural issues and ensure the pact’s implementation.

“It will help bring fiscal discipline, end duplication of projects among the center and the provinces, and streamline the expenses,” he said.

“This pact is not an alternative to the National Finance Commission,” Aslam clarified, referring to a constitutional mechanism of revenue sharing between the federation and provinces. Starting from 1974, seven NFC awards have been announced up till now, with the most recent one in Dec. 2009. 

Under the NFC, the provincial share in federal taxes stands at around 57.5 percent, but the federal government still has responsibilities in areas like provincial road infrastructure, health and education.

“National Fiscal Pact is aimed at introducing synergy among the center and the provinces with respect to revenue collection and spending,” Aslam said. 

Under the new pact, he said, it had been decided that the provincial governments would be empowered to collect taxes on agriculture and other fields, which were otherwise federal subjects.

Apart from this, the provincial governments were running independent welfare projects for the needy, while the federal government was disbursing billions of rupees annually through the national Benazir Income Support Program (BISP), Aslam explained. 

“The focus is to end this kind of duplication through the new pact,” he said.

“Also, there are numerous development projects that are being financed in the provinces through the center which would be transferred to the respective provincial governments.”

The finance adviser said the pact would also help resolve “financial issues, discrimination and discretion” among the center and the provinces to benefit the public equally in all federating units.

The governments of the Punjab, Balochistan and Sindh provinces could not be immediately reached for comment on the new pact.