According to experts, at present external imbalance is the biggest macroeconomic challenge the economy is facing, and all the focus at this point is to finance the gross external funding. This task is of utmost importance in immediate term; but the key to the whole problem is fiscal deficit. Fixing fiscal woes is what we need to set the economy on course. But the main issue in fixing fiscal house is that inflexible expenditures are with the federal government while the major share of revenues is with provinces. The political economic reality after the 7th NFC award and 18th amendment is now becoming a difficult puzzle to solve, even for the IMF.
In FY02-10, prior to 7th NFC award, the federal share in total revenue collection was, on average, 93 percent while its share in revenues was 63 percent. Thereafter, federal revenue contribution is still on average at 93 percent while it share in revenue has gone down to 50 percent. The additional 13 percent which has gone to provinces leaves little room at federal level to adjust fiscal imbalances. Any change in the vertical distribution requires another NFC award or constitutional changes, which is next to impossible given political polarities amongst provinces. And the problem of corruption in provinces like Sindh has further exacerbated the fiscal indiscipline.
The question that we face is: what limited avenues federal government has and how smartly it can use small chunks of funds to marginally enhance revenues share. First is to enhance the FBR tax revenues; but for every additional rupee, 50 paisa goes to provinces; so federal government has to think out of the box. One way is to adjust the taxation on petroleum products. There are two major components of petroleum taxes - GST and PL. The former is shared with provinces while latter is not part of divisible pool. The government should enhance the PL and reduce the GST proportionately to keep petrol and diesel prices unchanged. But this needs fresh legislation.
The petrol and diesel consumption is roughly 20 billion liters and government gets around Rs150 billion in PL from it. The PL is Rs10 per liter for petrol and Rs8 per liter for diesel, while the latest GST is 17 percent and 25.5 percent respectively on petrol and diesel. The government should double the PL and lower the GST accordingly to keep prices same and then vary GST with change in international prices to check consumption. In this way, while having overall same tax collected on petroleum products, the federal share increases at the cost of provincial divisible pool.
The federal government can also work on reducing grants and subsidies which are currently at 1.1 percent of GDP (Rs352bn). These are mostly in energy sector; the government should revise up the gas and electricity prices after resolving the existing stock of circular debt. It then can leave it to provinces to subsidize customers through their own fiscal kitty. This will give some room to reduce the deficit. The advantage of clearing up circular debt amid raising tariff is also on getting higher dividends for state owned companies in federal chain, which is again not part of divisible pool.
OGDC's dividend payoff was Rs41 billion in FY08 which has reduced to Rs26 billion in FY17. Similar is the story of PPL, GHPL, SNGP, and SSGC. These companies' dividend used to be a good source of non tax revenues; but circular debt has made them cash strapped and their dividend flows fell substantially. These are some of the ways that can help reduce the deficit marginally. But these won't be enough to bring consolidated deficit below 4 percent of GDP on sustainable basis.