Zafar Iqbal
Pakistan has encountered formidable obstacles in creating a balanced distribution of power and financial obligations between its federal and provincial governments. The Eighteenth Amendment Act of 2010 marked a pivotal moment in this ongoing struggle, as it aimed to decentralize governance by empowering provincial administrations. This legislative reform intended to enhance provincial autonomy, bolster democratic governance, and facilitate the establishment of local governments endowed with political, administrative, and financial authority to address the socio-economic challenges experienced at the grassroots level.
Despite the noble aspirations underpinning the 18th Amendment—specifically the expectation that provinces would gradually minimize their financial reliance on the federal government by tapping into their local revenue resources—the reality has diverged sharply from this vision. Over a decade since the amendment’s enforcement, Pakistan’s provinces have not significantly lessened their dependency on federal funds. Instead, they continue to rely heavily on allocations dispensed through the National Finance Commission (NFC), which was initially designed to promote a fair distribution of fiscal resources among the provinces.
This persistent dependence has placed immense pressure on the federal government, straining its resources and compelling it to resort to considerable borrowing, leading to an unsustainable fiscal trajectory. As the fiscal responsibilities remain disproportionately distributed, there is an escalating discourse on the urgent need for comprehensive institutional and structural reforms to recalibrate this imbalance.
In response to these challenges, the Pakistani government is currently formulating a National Fiscal Pact (NFP). This new framework aims to reformulate the financial relationships between the federal and provincial governments. The primary goals of the NFP are twofold: to establish clearer protocols for fiscal accountability and resource allocation, and to enhance the provinces’ capacity to generate revenue, thereby contributing effectively to fiscal stability. A key aspect of this reform is the use of technology to improve tax collection and financial management.
As a part of its commitments under the $7 billion Extended Fund Facility (EFF) agreement with the International Monetary Fund (IMF), the Pakistani government has pledged to take significant measures to restructure fiscal responsibilities between itself and the provinces. This plan includes the provincial governments assuming additional responsibilities in key areas such as higher education, health, and regional infrastructure development, aligned with the contributions stipulated in the 18th Amendment.
Moreover, the provinces have committed to intensifying their tax collection efforts, particularly in sectors such as agricultural income, property, and services. A crucial element of the NFP focuses on the reform of agricultural taxation, a sector largely untouched by the tax system. The aim here is to boost provincial revenues and meet fiscal consolidation objectives while ensuring that tax policies accurately reflect the economic realities of agricultural production.
However, implementing agricultural tax reforms poses significant challenges, primarily due to the informal nature of the sector. To effectively tackle this issue, provinces will need to invest in enhancing tax administration, promoting transparency, and harnessing technology to track income better and integrate farmers into the formal tax framework. Simplifying registration processes and incentivizing participation in the formal economy could significantly improve compliance rates within this sector.
Broadening the tax base is essential for increasing overall revenue, ensuring equitable distribution of tax burdens, and incorporating a wider array of economic activities into the public finance system. In addition to agricultural reform, there is an opportunity for provinces to expand their sales tax regimes to encompass more services, thus tapping into higher-growth sectors and increasing tax intake.
On the expenditure side, the NFP encourages provinces to augment their contributions to federally supported programs, such as the Higher Education Commission (HEC). It envisions a progressive increase in spending on health and education, necessitating enhanced coordination between federal and provincial governments for optimal resource alignment. Moreover, the pact calls for a thorough review of existing social protection programs to eliminate redundancies and ensure efficient allocation of public funds to meet the needs of vulnerable populations.
The success of the NFP hinges on strong political will. The endeavor is fraught with challenges, notably the potential for entrenched political interests to obstruct progress and the necessity for consensus across multiple governance layers. Moreover, attention must be directed towards the political economy of fiscal decentralization, particularly in provinces susceptible to political instability, which could disrupt effective revenue mobilization and public spending efforts. There are also concerns about the capacity of local governments to effectively manage the increased responsibilities and resources.
Additionally, the process will require streamlining functions within government structures to eliminate redundancies. Ensuring that devolved responsibilities lead to localized, efficient service delivery will be critical in maximizing the benefits of fiscal reforms.
In tandem with fiscal reforms, Pakistan is exploring the legalization of digital currency—an initiative that could revolutionize its financial landscape. Historically, the State Bank of Pakistan (SBP) had expressed apprehensions regarding digital currencies, citing concerns over their volatility and the potential for illicit activities. The bank has previously cautioned against virtual currencies, which were deemed to offer little legal safeguard against financial risk and facilitate obscured transactions.
However, a pivotal shift has occurred with recent amendments to the State Bank of Pakistan Act, 1961, which now authorize the SBP to issue a digital currency as legal tender. This development not only allows currency to exist in both physical and digital formats but also establishes a subsidiary within the SBP focused on developing digital payment systems—a clear indication of a transformative direction for Pakistan’s financial infrastructure.
Despite promising potential, the proposal for digital currency has encountered skepticism, particularly concerning a robust regulatory framework to manage its implementation. Critics argue that Pakistan’s current financial framework may lack the necessary provisions to mitigate risks such as cybersecurity threats, fraud, and money laundering, which could emerge from the integration of digital currencies into the economy.
Conversely, proponents argue for the substantial benefits that digital currency could present, including enhanced financial inclusion, reduced transaction costs, and greater efficiency in payment systems. Digitizing currency could particularly benefit rural areas where traditional banking channels are limited, while a well-regulated virtual currency environment could streamline economic activities and improve transaction transparency, combating underlying issues such as corruption and tax evasion. This potential for positive change should inspire optimism about the future of Pakistan’s financial landscape.
For Pakistan to fully leverage the potential benefits of digital currency, a comprehensive regulatory regime must be developed. This regime should address security concerns while ensuring accessibility for disadvantaged populations. Emphasizing the importance of this aspect should make the audience feel the gravity of the task at hand.
In summary, Pakistan’s proposed fiscal and digital reforms aim to modernize its economic and financial systems. While the National Fiscal Pact holds promise for improved financial management and heightened revenue generation, it will face inherent political and logistical hurdles. Similarly, the legalization of digital currency presents exciting opportunities for financial innovation, requiring meticulous planning and regulation to address the associated risks.
Ultimately, the success of these reforms will hinge on the government’s capacity to navigate the intricate political, economic, and technological landscapes. However, if executed effectively, these fiscal and digital strategies have the potential to foster long-term stability and wealth for Pakistan, instilling a sense of hope for the future.
