Each province of Pakistan finds itself with different resources and different challenges. Despite persistent problems of water-and revenue-sharing, the provincial economies have recorded modest growth and diversified production.
In recent years, Pakistan has moved towards reducing the fiscal deficit, pursuing a stabilisation programme, bringing about structural changes in the economy, promoting investment, expanding exports, reducing poverty and augmenting GDP growth. However, these efforts have been marred by the fallout from the events of 11 September 2001. Pakistan’s 2002-03 federal budget has a total outlay of PNR 742 billion, with debt servicing reduced to PNR 290 billion from PNR 320 billion the year before.
Estimates of gross revenue receipts for the new fiscal year stand at PNR 675 billion, with the overall budget deficit fixed at 4 percent of the GDP as compared to 5.7 percent in the previous year. Under constitutional mandate, all four provinces – Punjab, Sindh, North Western Frontier Province (NWFP) and Balochistan – receive budget shares from the federal divisible pool under the terms of a formula embedded in the National Finance Commission (NFC) Award agreement of 1996. This year, the federal government has earmarked PNR 193.5 billion for such provincial allocations against last year’s total of PNR 190 billion – a net increase of more than 3 billion rupees but less than what the provinces had demanded. The NFC Award system has not been working to the satisfaction of Pakistan’s provinces.
Likewise, the water-sharing plan has recently met with resistance in provincial capitals. because of surface water shortages, allocations to irrigated areas have diminished over the past three years to an estimated 47 percent of their originally expected volumes, and drought is now affecting Sindh, Balochistan and parts of Punjab and NWFP. With dam capacity expected to drop by 25 percent by 2010 due to enormous amounts of sedimentation brought in by feeding rivers, the water problem is expected to become only more acute.
Under the plan to devolve power, provincial governments are required to adopt new systems of administration, the implementation of which will require new sources of revenue at a time when they are still adjusting to the elimination of district taxes in 1997. This, in turn, has forced provinces to either generate revenue on their own or to seek additional revenue grants and ever-larger portions of the federal economic pie. In addition to their NFC awards, the provinces also get 2.5 percent of general sales tax (GST) revenue. However, to streamline their economies the provinces have also demanded revenue generation through royalties on power production, oil, gas, food and minerals.
Punjab’s economy is mainly agricultural, although industry also represents a significant portion. It contributes about 68 percent of the country’s food grain production, and Punjabi cotton and rice are important cash crops for the national exchequer. Drives for self-sufficiency in agriculture have shifted the focus to small and medium farming, barani (rain-fed) areas, farms-to-market roads, electrification for tube-wells and control of water-logging and salinity.
The total cultivated area in Pakistan is estimated at 51 million acres, out of which 39 million acres are in Punjab. Sowing of wheat in canal-irrigated areas dropped by 4.03 percent between the autumns of 2000 and 2001, largely because of water shortages and the late harvesting of crops. Drought-like conditions, acute water shortages and pest attacks on crops cast a shadow over the agriculture-dominated economy of Punjab which is already beset by resource constraints. Industrial activity, which had already been depressed for some time, suffered a setback after 11 September when many overseas traders refused to buy Pakistani products, including textiles and leather items. Hopes of increasing the agricultural growth rate of 4.4 percent were abandoned after the dry spell set in. All of Punjab’s main crops, including cotton, rice, wheat and sugarcane, require extensive irrigation, and the province faced an unprecedented water shortage of 51 percent during the rabi season. The situation had deteriorated during the early kharif, when water shortages led to a row with Sindh over Indus water distribution.
Though Punjab leads Pakistan’s agricultural production, it is the second most heavily industrialised province after Sindh. According to the industrial census of 1984-85, Punjab held 33.7 percent of the country’s fixed industrial assets and produced 38.9 percent of its gross industrial output. These proportions are likely to have risen significantly in the intervening period as the deteriorating security situation in other conflict- prone provinces has prompted an increasing shift in both domestic and foreign investment to Punjab. The province produces a wide range of goods, including food and beverages, textiles and garments, leather and wood products, and furniture, chemicals, metallic goods and machinery.
Punjab also has more than 48,000 industrial units and 39,033 small-scale and cottage industrial units. The textile sector represents an important field with 11820 units, while ginning industry units amount to 6778 and agricultural raw material processing units total 6355. Lahore and Gujranwala serve as the primary hubs for light engineering, while Sialkot specialises in sports goods, surgical instrument and cutlery products and Faisalabad is home to most of the province’s textile mills. Punjab is also a mineral-rich province with extensive deposits of coal, rock salt, dolomite, gypsum and silica, and the Punjab Mineral Development Corporation runs over a dozen projects.
The Punjab budget for 2002-2003, which has a record outlay, of PNR 131 billion, aims to strengthen business confidence and promote development and economic growth. Although showing an on-paper surplus of over PNR 13 billion, it scarcely provides any relief to the common people groaning under an unchecked price hike. While no new tax has been imposed, the rates of some levies have been revised upwards and the scope of professional tax widened to include lawyers, jewellers, departmental stores, electronic goods, cable operators and stock exchange members. While motor vehicles are the main target of the tax changes, their impact will be quickly passed on to the public at-large, escalating the vicious circle of poverty.
Scant effort has been made to tap the potential of agriculture sector taxes, presumably out of deference to the powerful farming lobby, which has strongly resisted efforts to tax agricultural income. Revenue generation should have been a key concern in view of the increased dependence on federal transfers. Punjab will receive PNR 85.2 billion from the divisible federal pool against a revised estimate of PNR 82 billion for 2001-02. Other federal transfers are estimated at PNR 5.5 billion, with provincial tax receipts totalling PNR 12 billion and property and enterprises estimated at PNR 1 billion. However, these benefits are largely neutralised by the jump in the non-development expenditure, which has gone up from PNR 101 billion to PNR 117 billion. Only debt servicing, amounting to PNR 25 billion, takes away a major chunk of the budget.
A record allocation of PNR 12 billion made for law and order is driven by investment concerns and business- friendly objectives. Included in the budget is a plan to advance soft loans of PNR 1.2 billion for small industries and a self-assessment scheme for social security. Up to 16,000 jobs are expected to be created during the first phase of the plan, and companies and individuals covered by the professional tax will pay it at the same rate next year. Training facilities are being improved and export-processing zones in major industrial centres are on the anvil. However, greater attention should have been paid in the budget to the agricultural sector in view of the province’s economic structure. PNR 656 million is, however, allocated for 40 farming development projects during the new financial year, aimed at improving per acre yield, achieving food security and reducing edible oil imports. PNR 2.3 billion will come from the federal government to mitigate the impact of drought. Improving irrigation is also an objective, though in view of high input costs, relief should have been given to farmers along with steps to improve production infrastructure and the marketing of crops to meet the WTO challenge.
Like Punjab, Sindh’s economy is also largely dependent on agriculture, although industry together with forestry, mining, fishing, shipping, and livestock also play important roles. The province’s agricultural productivity increased substantially after 1961 thanks to agricultural research and an improved irrigation system that relieved water-logging and salinity. More recently, however, the public and political leadership of Sindh has warned of water shortages and the discriminatory nature of new and proposed water-related projects, such as the controversial Kalabagh mega-dam and the military government’s recently launched Thal Greater Canal project. The soil of Sindh is plastic clay deposited by the Indus that develops into a rich mould with water but degenerates into desert without it.
Wheat (2.7 million metric tonnes), cotton (2.3 million metric tonnes), rice (1.8 million metric tonnes) and sugarcane (16 million metric tonnes) are the most important cash crops of Sindh, with secondary crops including barley, gram, pulses, rape-seeds, mustard and maize. The province accounts for a substantial part of the country’s entire raw cotton production and is home to many cotton factories. The irrigation system in Sindh is well developed and relies on Indus water.
In addition to farming and agriculture, livestock and cattle breeding and poultry farming are also important economic activities in Sindh. In Thar and Kohistan, the population depends on livestock, and the province plays an important role in the inter-provincial trade of cattle.
At the time of Pakistan’s independence, Sindh had virtually no manufacturing industry except for one large cement factory, a textile unit and a few odd manufacturing plants. Large-scale manufacturing began in the early 1950s with the imposition of quantitative controls on imports, which at that time consisted predominantly of manufactured consumer goods. Due to its location, investment in energy production, development of port facilities and improvement of infrastructure, Karachi witnessed vigorous growth in the fields of manufacturing, textiles, chemicals and pharmaceuticals, helping to convert Sindh into an industrialised region. Cement, automobiles, steel and most of Pakistan’s other industrial output are today still produced in the factories of Karachi, Hyderabad and Sukkur. Pakistan Steel, the country’s only steel mill, is also located in Sindh.
The industrial census of 1984-85 showed that Sindh, excluding Karachi, accounted for only 10.6 percent of Pakistan’s fixed industrial assets and 12.7 percent of its gross manufacturing output. The latest available data on industrial distribution indicates that 45 percent of Pakistan’s fixed industrial assets are located in Karachi and account for 40 percent of the country’s gross manufacturing output.
Sindh’s geology is composed primarily of sedimentary rock alluvium and desert sands, and there are only a few minerals of economic importance. There are, however, some oil and gas fields in Sindh. Four oil fields in Badin under a joint venture with the UTP Inc company account for about half of the total quantity of domestically- produced oil in Pakistan. Sindh also has coal deposits near Thar, which the provincial government intends to develop for power generation.
The economy of Sindh has suffered from the aftermath of 11 September, the drought and the resultant fall in agricultural production, the recurring sectarian violence and the declining trend in trade and investment. Administrative corruption was set to make the life of the common people of Sindh miserable before the government of Sindh imposed fairly successful financial discipline on itself. Unpaid dues to the tune of PNR 20 billion were recovered in 2001-02 and the province’s debt to the State Bank was repaid in full. Proper financial management has helped the government draw up a PNR 93 million surplus in its 2002-03 budget.
The revenue expenditure of PNR 84.9 billion for the new fiscal year signifies an increase of 9 percent over the outgoing year’s revised estimates. What is more significant is that the development outlay of PNR 14.4 billion shows a jump of 44 percent over last year’s figures. These increases are much more than the figures announced in June 2001, suggesting that economic activity is picking up. The main problem facing all province, is the inelasticity of their revenue base and their over-dependence on federal grants and of the divisible pool. Sindh is certainly no exception. Out of this year’s projected revenue receipts of PNR 64.4 billion, PNR 55.9 billion will come from the Federal Tax Assignments, which 11,1\ grown at a modest rate over the years. In 2002-03, the increase will be 6.4 percent. Provincial tax revenues account for only a small part of Sindh’s income. As a result of the slowdown in economic activity, there was a marked decline in revenues under some heads, such as transfer of property taxes, professional taxes, and stamp duties. Surprisingly, the increases came from the motor vehicle tax and the higher collection from health services.
Although social justice demands that agricultural income be taxed, the big landowners have been let off lightly. In fact, the budget estimates for 2001-02 agricultural tax income (PNR 700 million) registered a fall from the revised estimates for this year (PNR 550 million). With land revenue taxes having been abolished in 1999-2000, the landed aristocracy is having a field day. The government has now announced its decision in principle to abolish the motor vehicle tax (though it is shown in the budget), which will be replaced by a “revenue neutral” road user charge on fuel, the plan for which has yet to be announced. No new taxes have been imposed, although indirect taxation has not helped eliminate poverty, which the government claims to be its main priority.
The biggest chunks in the 2002-03 budget will be claimed by the administration (PNR 18.7 billion), debt servicing (PNR 18.33 billion) and the education sector (PNR 18.32 billion). The experiment in devolution, which has involved setting aside 70 percent of development funds for district governments, has yet to prove its efficacy. Given the resource constraints, the government’s task of financial management is undoubtedly challenging. However, the Sindh government has signed a USD 300 million development loan with the World Bank, which has agreed to charge only 1.5 percent interest. The money will be utilised to complete ongoing and new development projects and will give a boost to the agri-economy of the province. Meanwhile, according to the Dawn newspaper of Karachi, nearly 50 percent of rural Sindhis live below the poverty line.
NWFP has large potential for hydroelectric power generation and distribution with its many rivers and streams. In the last week of June, the Water and Power Development Authority (WAPDA) released PNR 4.3 billion net hydel profit share of the province to alleviate economic constraints, thus raising the total amount the NWFP received so far under this head to PNR 6 billion. This is the capped share amount, which the province has been receiving for the last decade.
Agriculture plays a vital role, with 80 percent of the population directly or indirectly dependent on farming. Various provincial agencies are working together to improve living conditions of the farming community by helping it achieve self-sufficiency in food production and export surplus yields. The soil in NWFP is fit for growing seed and plant varieties, and the agriculture extension department of NWFP has established 10 model farms to produce seeds of wheat, gram, paddy, maize, sugarcane, pulses and oilseeds. NWFP’s potential could help save farmers from WTO rules that give monopolies to and favour multinational corporations on the production of seed and plant varieties.
NWFP terrain is suitable for horticulture as the province is blessed with a large number of unique and diverse agro-ecological zones. Fruits and vegetables are produced in bulk in the province and orchard-cultivated areas have increased dramatically in recent years. The production of fruit and vegetables has grown from 256,880 tonnes in 1985-86 to 493,041 tonnes in 1997- 98. The province is also rich in mineral resources, and deposits of about 51 different minerals have been identified in NWFP.
NWFP ranks third among Pakistan’s provinces and territories in terms of industrial development. The 1984- 85 industrial census shows that the province accounted for only 7.5 percent of fixed national industrial assets and less than 7 percent of gross industrial output at that time. However, these shares may have increased modestly in the interim years in response to a number of schemes to promote the development of small and medium enterprises. The most important industrial branches in terms of output value are food and tobacco processing, textiles and garments, non-metallic minerals and cement. The provincial government in Peshawar is keen to attract business from elsewhere into the province and offers various incentives like income tax exemption, duty and sales tax exemption, rebates in electricity tariff, and public-private joint ventures. Special incentives have also been given to investors for the Gadoon Amazai Industrial Zone.
The 2002-03 budget for NWFP is a repeat of previous budgets, and the province appears to have given up hope of reducing its fiscal dependence on the Centre after being disillusioned by Islamabad’s failure to fully honour what is known as ‘the AGN Kazi formula’ of sharing the net hydroelectricity profits from the Tarbela dam in the Indus. A built-in budgetary deficit of nearly PNR 13 billion is included in the budget and the province expects a shortfall of nearly PNR 10 billion in its income from hydropower profit share. An overall deficit of about PNR 3 billion has emerged as a result of an estimated expenditure of PNR 48.6 billion outstripping the estimated income of PNR 46.8 billion. As in the outgoing year, the entire development budget of PNR 13.7 billion was proposed to be financed through borrowed resources, including PNR 5.4 billion of IDA soft loans. It is a matter of great concern that the province continues to. raise as much as 92.2 per cent of its total revenue receipts from federal/ external funding. This is the reason why the province’s debt servicing allocation has risen year after year, and shot up to PNR 8.7 billion in 2002-03 by PNR 440 million over last year’s total.
One only hopes that the next NFC Award, which is expected to be based on a new formula of weightages, besides giving due consideration to the population of each province, will offer the smaller and relatively backward provinces of NWFP and Balochistan a larger share in the divisible pool. It would be appropriate for Islamabad to consider, when reviewing the present NFC award formula, emulating the distribution formula it has devised for resource distribution between the provinces and the local governments. This formula assigns a 50 percent share to population, 25 percent to backwardness and 25 percent to the state of infrastructure. It is on this basis that, like in other provinces, the NWFP budget proposes to distribute funds to local district governments out of its Provincial Allocable Amount, which is 60 percent of the total provincial receipts.
Like the other three provinces, agriculture and livestock are the most important economic sectors in Balochistan. Though only 4.6 percent of the total land is cultivated, agriculture has a major share in the province’s economy. Water shortage and drought have hit the province and its people badly, creating food insecurity. Approximately 60 percent of total cultivated area is dry land agriculture, with wheat being a major crop. Off-season vegetables are also grown in some parts, and fruit and dry fruit production plays an important role in the economic activity of the province. Balochistan can be divided into four agro-ecological zones, including the uplands, plains, coastal zone and desert zone. Animal husbandry is the mainstay of Balochistan’s rural economy, with the breeding of sheep being the speciality of herdsmen.
Four major industrial estates at Hub, Winder, Uthal and Quetta have been designed with a view to providing infrastructural facilities to would-be industrialists. A total of 250 industrial units are functioning in these estates. The major industries include textiles, engineering, food chemicals, plastics, leather, power generation, consumer goods, fisheries, fruit processing, minerals and ship building. By most indications, Balochistan is the least industrialised province of Pakistan. It accounts for a mere 2.7 percent of the country’s fixed industrial assets and 2 percent of its gross industrial output, at least at the time of the industrial census of 1984-85.
Balochistan also has substantial mineral, oil and gas reserves which have not been exploited to their full capacity. The province has significant quantities of copper, chromite and iron, and pockets of antimony and zinc in the south and gold in the far west. Natural gas was discovered near Sui in 1952, and the province has been gradually developing its oil and gas projects over the past fifty years.
Balochistan’s budget for fiscal year 2002-03 includes outlays of PNR 29.8 billion, which is 8.6 percent higher than the previous year’s figure of PNR 27.4 billion. No new taxes have been proposed, and the budget has a large deficit of PNR 3.4 billion – almost 11 percent of the estimated revenue receipts. In fact, compared to the previous year, projected revenue receipts for 2002-03 are estimated to fall by some PNR 900 million to PNR 26.4 billion, in part because in 2001-02 seven local taxes were abolished. Nevertheless, the provincial government’s aim of increasing self-reliance does not seem to have been achieved since it continues to be heavily dependent on Islamabad for financing. Around 90 percent of its revenue receipts are made up of federal transfers, including around PNR 6.2 billion coming in the form of subsidies or grants.
For 2001-02, the education allocation was more than doubled in absolute terms – from PNR 542 million to PNR 1.2 billion, but that does not amount to much when illiteracy in the province is considered, especially among women. The provincial finance minister has praised his government’s focus on socio-economic development and said that an increase in development spending from PNR 7.9 billion to PNR 10 billion for 2002-03 was ample proof of that. However, given that this increase is close to the size of the projected deficit for 2002-03, it remains to be seen whether all of the expanded development priorities will be met. The reason for scepticism is that since the deficit is to be bridged by a higher-than- expected allocation from the NFC or by a federal grant, either of these pledges may fail to materialise.
One way of financing development without resorting to handouts from the Centre would be for the provincial government to trim its own expenditures. That, however, has not happened. Compared to 2001-02, what the government plans to spend on its own functioning in 2002-03 shows an increase of over 8 percent. Like GNP statistics, budget figures do not show the quality of the service being provided – they only tell the amount allocated. There have been numerous instances in the past of governments diverting development funds on one pretext or another. This must not happen in the present case.