IMF proposes sweeping changes for next NFC award

Proposes setting up of technocratic financial council under CCI, contingency funds under watch of federal govt and provinces

ISLAMABAD: Pakistan has been directed by International Monetary Fund (IMF) to make substantial changes to the National Finance Commission (NFC) award.

The Washington-based lender said it recommended these measures due to severe pressure on the governments finances and major macroeconomic imbalances arising due to its enforcement, reported Dawn.

IMF suggested the authorities to establish a technocratic financial council under supervision of Council of Common Interest (CCI). Also, it recommended the setting up of contingency fund under aegis of provincial and provincial governments.

Also, the Washington-based lender sought the establishment of a permanent national tax commission which would help in increasing the tax net. All these proposals have been put forth in IMF’s Article-IV review of the country’s economy which will hopefully be approved next week by its executive board.

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The forthcoming IMF Article-IV report once approved has criticized the 7th NFC Award for having been lopsided and less flexible, which restricted the governments ability to resolve macroeconomic imbalances and vulnerabilities.

Because of this, the government failed in fully exploiting the revenue sources which caused the government in getting any cushion to address any probable economic shocks in the short-term.

IMF cautioned in tumultuous situations, these weaknesses could impact macroeconomic stability and advocated for design aspect modifications in financial framework of the 9th NFC award.

It added the forthcoming NFC award should focus on reinforcing macroeconomic stability and improve efficiency, responsiveness and flexibility of financial framework.

IMF’s report said constitutional parameters restrict the options for change, but improvements can be examined in existing legal framework. It added, these improvements must take into consideration the expected outcome from the expected 9th NFC award on public debt, nation-wide efficiency of public expenditure across all levels of government and effectiveness of fiscal policy.

IMF’s report envisages a uniform framework for reporting, accounting, transparency of public-private partnerships, public-sector enterprises, liabilities from wheat procurement, special purpose vehicles (SPVs) at all levels of government would be paramount to financial discipline.

It recommended the setting up of a contingency fund which will be financed both by provinces and the federal govt to cushion from an exorbitant amount of unexpected expenditure of national significance, whose use will be sanctioned by CCI and with the consent of both parties.

According to the report, the 7th NFC award which is in its 9th year had failed to give any incentives to provinces or the centre for widening tax net. It recommended for establishment of an incentive-based national framework to boost tax revenues without over-taxing compliant taxpayers and work in conjunction for widening of fiscal space for much needed social spending and development.

The report suggested forthcoming NFC award should reduce federal borrowing needs by decreasing vertical imbalance or enter into a burden-sharing agreement for the impact of its design on public debt, since provinces were running financial surpluses.

It advised provinces to be a part of power distribution sector reforms and shoulder the weight of liabilities due to delays.

The IMF report also urged for decentralization of expenditure and revenue to local governments over medium-term to majorly improve provision of basic services taking the large sizes of provinces into context.

It advised this should be carried on a timely basis to ensure enhancing of administrative capacity and public finance systems of local administrations. This would allow transfer of service delivery functions and required resources from provincial to local governments to deliver on socio-economic aspect of decentralization.

 

 

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