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To please IMF, Islamabad plans to rip off Sindh

Yes, it is here. It is happening. The Centre is planning to rip off Sindh. It wants to slash Sindh’s spending on the welfare of its people (schools, hospitals, parks, roads, power projects) because it has to please the International Monetary Fund to secure a fresh loan program. 

You may be wondering what an IMF program has got to do with Sindh’s finances.

Pakistan is in talks with the IMF for a loan package to shore up its dollar reserves so it can repay foreign debt and continue paying for essential imports such as oil, machinery and raw material that keep the economy going.

However, the IMF demands, among other things, that the federal government cut its budget deficit (loss). The Washington-based lender suggests one way to do this is to cut the money Islamabad gives Sindh.

Yes, Islamabad can do this because Sindh gets more than 70% of its revenue from the Centre.

Here is how it works. The government’s main source of revenue is tax, which is collected by all provinces and the center from across Pakistan. This money, called the “divisible pool”, rests with Islamabad. The Centre keeps 42.5% of this money and divides the rest (57.5%) among the provinces according to a formula agreed upon in the 7th National Finance Commission (NFC) Award.

However, the PTI government wants to reduce the share of the provinces in the divisible pool in the next NFC Award. They have already started the process by holding a first meeting in the federal capital earlier this week. The government has not yet decided how big the cut will be but previous finance ministers have proposed to cut provincial shares by 6% to 7% to less than half of the divisible pool. If they reduce provincial shares, they will be able to increase their revenue but deprive Sindh of the provincial autonomy it won under the 18th Constitutional Amendment.

Related: IMF has softened its stance in talks with Pakistan: Minister of State for Revenue

Simply put, Sindh will have less money to spend on schools, hospitals, roads, and other development projects and a host of other direct services to its citizens that come under its jurisdiction because of the 18th Amendment. This should also explain why Chief Minister Syed Murad Ali Shah was in the news recently for making fiery speeches accusing the federal government of choking Sindh’s finances.

In fact, Sindh is already facing revenue cuts from the center. It was Rs104 billion short in transfers from Islamabad this year, Shah said earlier this week, adding he had to stop development projects because of this. This follows a development cut Shah had announced last year while presenting the Sindh budget.

“I want to mention that our provincial development portfolio now faces an allocation cut of Rs24 billion,” Shah had said in his budget speech last September, calling it an unpleasant decision.

Sindh contributes 60% to the federal government’s divisible income pool—courtesy a large amount of tax collection from Karachi—but it gets nearly a quarter of the amount given to provinces. This should also explain Sindh’s fears for the proposed reduction in what it gets. Given that the PTI has its own government in Punjab and KP and is a coalition partner in Balochistan, it is less likely to face any opposition from the other three provinces.

Related: Of the $2.3b borrowed by Pakistan in the second half of 2018, 36% came from China

One may ask why the PTI is doing this in the first place. The simple answer is the federal government is also choked for financing. The center’s deficit is more than Rs2 trillion because it spends more than it earns. Among its biggest expenditures are loan repayments and security costs. About 60% of the federal government’s budget goes to defense and repayment of previous loans.

The federal government can’t do much about debt servicing and defense, so it is trying to increase revenue to reduce its losses (deficit).

Sindh’s CM says the federal government has badly failed to achieve its revenue collection targets and now it is planning to take money away from the provinces—he is not the only one who thinks so.

“Why should I go without dinner if you can’t make your ends meet? If it’s your deficit, you bridge it,” renowned economist Kaiser Bengali told me in a past interview. Bengali, who represented Balochistan in the last NFC, said the federal government has made no attempt to reduce its expenditure in any way, yet it is eyeing to cut the shares to the provinces.

The economist said the IMF team had asked in 2008 for provincial budgets to be in surplus so that federal deficit and provincial surplus, when put together, could reduce the overall deficit. “This doesn’t make sense. If it’s your deficit, you bridge it. Why are you asking me to generate a surplus for you?” he argued.

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