PTBP Web Desk
The Senate Standing Committee on Finance and Revenue has raised concerns over increasing distortions in resource distribution under the 7th National Finance Commission (NFC) Award. During a meeting chaired by Senator Saleem Mandviwalla, the committee urged Finance Minister Muhammad Aurangzeb to convene a meeting of the NFC to address resource allocation issues and plan for the next award.
Senator Syed Shibli Faraz pointed out that following the merger of the erstwhile Federally Administered Tribal Areas (FATA) with Khyber Pakhtunkhwa, the resources were not adjusted proportionally. This discrepancy, he argued, led to significant fiscal distortions, particularly considering population-based criteria.
The Finance Secretary clarified that the 7th NFC Award currently allocates 60% of resources to provinces and 40% to the federal government. However, this arrangement has increased fiscal and debt pressures on the federal government. He emphasized that no conditions from the International Monetary Fund (IMF) mandate revisions to the NFC Award, adding that Rs66 billion had been allocated to the erstwhile FATA in the current fiscal year’s budget.
Finance Minister Aurangzeb noted that the government had initially decided to withdraw tax exemptions for the erstwhile FATA, including sales tax and income tax. However, the Prime Minister intervened to reverse this decision. The minister assured the committee that any conditions imposed by the IMF related to fiscal policy or the NFC Award would remain transparent.
The Finance Division highlighted plans for a National Fiscal Pact to improve fiscal management between the federal government and provinces. The proposed pact would aim to enhance tax revenues, including the implementation of Agriculture Income Tax (AIT) by provinces, while shifting provincial development projects to federating units to create additional fiscal space.
Senator Mandviwalla recommended initiating consultations between the federal government and provinces to expedite work on a new NFC Award.
IMF Loan Terms and Borrowing Details
The committee received a detailed briefing on the terms of IMF loans and other commercial borrowings. Finance Minister Aurangzeb confirmed that the IMF agreement is extensive and includes new conditions. Talks with the IMF regarding climate financing have also been progressing, with specific projects being identified for potential funding since October.
According to the Finance Secretary, the current IMF programme includes a grace period of 4.5 years, with repayment over 10 years in 12 equal semi-annual instalments. The interest rate comprises the Special Drawing Rights (SDR) rate plus 1%, with an additional 0.5% service charge. The SDR rate currently stands at 3.37%.
The committee learned that Pakistan borrowed $7.4 billion from foreign commercial banks over the past two years. Key details include:
- Bank of China:
- $200 million for balance of payments and budgetary support at an interest rate of 3-month SOFR + 3.15% (September 2024).
- $300 million at 3-month SOFR + 3.5% (June 2023).
- China Development Bank:
- $700 million at overnight SOFR + 2% (February 2023).
- $1 billion under similar terms (June 2023).
- Industrial and Commercial Bank of China (ICBC):
- Multiple loans totaling $1.3 billion at overnight SOFR + 2.95% (March-April 2023).
- Other Borrowings:
- RMB 7.26 billion (4.5% interest, June 2024).
- RMB 15 billion from a syndicated loan facility (6-month SHIBOR + 1.5%, June 2022).
Finance Minister Aurangzeb rejected claims that Pakistan was pursuing expensive external commercial loans. He assured the committee that future loans would only be obtained under favorable terms. Discussions with international banks for new loans are ongoing, but no decisions have been finalized.
