The 18th Amendment: Catalyst For Exponential Increase In Pakistan’s Fiscal Debt – OpEd

In the realm of constitutional reforms, Pakistan’s 18th Amendment stands as a landmark achievement, significantly altering the country’s political and administrative landscape. Passed in April 2010, the amendment devolved substantial powers from the federal government to the provinces, enhancing provincial autonomy. While this move was hailed as a progressive step towards decentralization and democratic governance, it has also been implicated in an exponential increase in fiscal debt. 

The 18th Amendment was a response to the centralized power structures that had dominated the country since its inception. It sought to rectify the imbalances by empowering provinces, giving them greater control over resources and decision-making. Key provisions included the abolition of the concurrent list, which contained subjects over which both the federal and provincial governments had jurisdiction, and the transfer of these subjects exclusively to provincial control. Additionally, the amendment enhanced the role of the Council of Common Interests (CCI), aimed at ensuring cooperation between the federation and the provinces.

The concept of fiscal federalism underpins 18th Amendment, intending to provide provinces with greater financial autonomy and responsibility. However, this shift has exposed several structural weaknesses in Pakistan’s fiscal management. The provinces, now responsible for a broader range of services and development activities, have faced challenges in generating sufficient revenue to meet these demands. Consequently, the federal government continues to provide substantial financial support, exacerbating the fiscal deficit.

One of the core issues stemming from 18th Amendment is the mismatch between revenue generation and expenditure responsibilities. While the amendment increased provincial autonomy, it did not adequately address the provinces’ capacity to generate revenue. Provinces rely heavily on federal transfers through the National Finance Commission (NFC) Award, which allocates a significant portion of federal revenue to the provinces. However, the provinces have struggled to optimize their revenue collection mechanisms, leading to a dependency on federal funds.

This dependency has strained the federal budget, as the federal government must allocate a substantial portion of its revenue to provincial transfers while still managing national-level expenditures such as defense, debt servicing, and federal development projects. The result is an increased fiscal deficit, which the government often bridges through domestic and international borrowing, thereby escalating the national debt.

Another critical factor contributing to the rising fiscal debt is the inefficiency in public sector management at the provincial level. With the devolution of power, provinces assumed control over various sectors, including education, health, and local infrastructure. However, many provincial governments lacked the administrative capacity and expertise to manage these sectors effectively. The transition from a centralized to a decentralized system was not accompanied by adequate capacity-building measures, leading to inefficiencies, corruption, and wastage of resources.

The inefficiencies in public sector management have resulted in higher costs for delivering public services. Provinces, unable to efficiently manage their resources, have often turned to the federal government for financial bailouts, further straining the national fiscal framework. The lack of accountability and transparency in provincial expenditures has exacerbated the problem, with funds often being misallocated or embezzled.

The combined effect of revenue-expenditure mismatches and inefficiencies in public sector management has led to increased borrowing by both federal and provincial governments. Provinces, struggling to finance their expenditures, have resorted to borrowing from domestic market, adding to overall debt burden. Meanwhile, federal government, facing dual challenge of supporting provinces and managing its expenditures, has significantly increased its borrowing from both domestic and international sources.

The debt accumulation has been alarming. Pakistan’s public debt has surged, with a significant portion attributed to the increased financial obligations stemming from 18th Amendment. The debt-to-GDP ratio has risen, constraining fiscal space and limiting the government’s ability to invest in crucial areas such as infrastructure, education, and health.

The burgeoning fiscal debt has far-reaching implications for Pakistan’s economic growth and development. High levels of debt servicing, driven by the increased borrowing, divert resources away from productive investments. Moreover, the uncertainty surrounding fiscal stability affects investor confidence. Domestic and international investors, wary of the country’s debt burden, are reluctant to invest in long-term projects. This hesitation stifles economic growth, limits job creation, and hampers poverty alleviation efforts.

Likewise, provinces must strengthen their revenue collection mechanisms. This can be achieved through tax reforms, improving tax administration, and broadening tax base. Encouraging economic activities that generate provincial revenue, such as industrial and agricultural development, is crucial. Also, implementing robust accountability and transparency measures is essential to curb corruption and ensure efficient resource utilization.

A formula that considers both population and revenue generation capabilities of provinces can help address the imbalances and reduce dependency on federal transfers. Strengthening role of CCI can enhance coordination between federal and provincial governments. Regular consultations and collaborative decision-making can help address fiscal challenges and ensure efficient resource allocation.

The 18th Amendment has inadvertently contributed to an exponential increase in fiscal debt. The mismatch between revenue generation and expenditure responsibilities, coupled with inefficiencies in public sector management, has strained the fiscal framework. Addressing these challenges requires a comprehensive approach that includes enhancing provincial revenue generation, improving public sector management, revisiting NFC Award, promoting intergovernmental coordination, implementing a robust debt management strategy, and encouraging private sector participation.