Taliban`s obstinacy

 2021-04-26
IN the backdrop of the postponed Istanbul peace talks on Afghanistan put off for the time being
because the Afghan Taliban refused to attend the foreign ministers of Pakistan, Turkey and
Afghanistan have issued a call to the armed group not to let this opportunity pass them by.
Speaking under the banner of the `Pakistan, Turkey, Afghanistan trilateral,` the trio called on all
parties, `in particular the Taliban` to reaffirm their commitment to the peace process. The
Taliban had said they would not be participating in the Istanbul meeting, which was scheduled
for this month, until all foreign forces leave their country, referring to the American decision to
delay the withdrawal of troops from Afghanistan till September. The Turkish foreign minister
said the meeting would likely be convened after Eid.

The fact of the matter is that the Taliban are an integral part of the Afghan puzzle, and without
their participation, the peace process is unlikely to succeed. The Western-backed government in
Kabul, supported by Nato`s firepower, has tried to defeat the militia for decades militarily and
has not achieved encouraging results.

Therefore, the only way out of the Afghan quagmire is a negotiated settlement in which all
stakeholders political, tribal, ethnic, religious have representation. However, the Taliban must
realise that while they have managed to survive for around 20 years, a war without an end will
do little to pull their people out of misery and poverty. Even more virulent actors, such as the
local chapter of the militant Islamic State group, are ready to grab ungoverned spaces in
Afghanistan to implement their violent agendas.

Therefore, to end the `forever war`, Afghan stakeholders need to show vision and maturity.

As has been suggested previously in these columns, other regional Muslim states must support
Pakistan`s and Turkey`s efforts to convince the Taliban to attend the Istanbul peace process.
Moreover, the three foreign ministers in their statement reiterated the need for an immediate
ceasefire to create `a conducive atmosphere` for peace parleys, while they also deplored the high
level of civilian casualties in Afghanistan. From here on, the burden is on the Taliban: they can
either prolong the decades-long Afghan nightmare, or they can choose to participate in the peace
process and arrive at a compromise with their rivals to help usher in an era of stability in their
country. Foreign adventurers from the Soviets to the Americans have played a major role in
destabilising Afghanistan. But now it is for the main Afghan players, specifically the government
in Kabul and the Taliban, to take responsibility for their country and help start the process of
rebuilding. If whatever little semblance of order that remains in Afghanistan collapses, the worst
sufferers will be the people of that country who have watched a variety of local and foreign
actors play violent power games in their beleaguered land.

Centre-Sindh ties
 2021-04-26
POLITICAL polarisation in the country extracts a cost from governance. It is therefore
heartening to see the governor and chief minister of Sindh making an effort to reduce tension and
form a constructive working relationship. The two top office holders of the province met recently
to discuss important issues pertaining to governance. Similarly, President Arif Alvi also met
Governor Imran Ismail in Karachi and stressed the need for dialogue to resolve Sindh`s issues.
This is the right approach to adopt at a time when the government and opposition are unable to
form a functional working relationship. There are various bones of contention between the
federal government of PTI and the Sindh government of PPP that require sustained engagement
between officials from both sides. The islands issue, in which the federal government wants to
develop two islands off the coast of Sindh through bringing in foreign investment, remains
unresolved.

Prime Minister Imran Khan has been taking a personal interest in this issue but the Sindh
government maintains that the federal government has no jurisdiction over the islands. Both
sides should take advantage of the relative lowering of political temperatures to engage with each
and try find a solution. Similarly another issue pertaining to the ownership of hospitals in
Karachi also requires a constructive approach so that the citizens do not suffer because of a tussle
between the two governments. Even in terms of the ambitious Karachi package that was
announced last year, there remains a lack of coordination that is adversely affecting its proper
implementation. Governance in Sindh has remained a challenging issue in the past due to the
split mandate between the PPP and parties such as the MQM. Since the 2018 elections, the PTI
has also become an important stakeholder in the province. It is therefore all the more important
that the PPP and PTI forge a good working relationship that can facilitate governance in the
province.

The president can use his good offices to push for greater coordination between these
stakeholders. The fact that he himself hails from Karachi, and served as an MNA in the last term,
means that he is fully acquainted with the problems and issues that affiict the province as well as
the way it is governed. He has done well to send a positive message and he should remain
engaged in order to help the PTI and PPP worl( together. Sindh deserves no less.

Tokyo Games countdown

 2021-04-26
WITH the 100-day countdown to the Tokyo Olympics commencing a few days back, the
organisers and the Japanese government are putting up a brave face and reiterating their resolve
to hold the Games as planned. However, they know that this is easier said than done. The recent
spike in coronavirus cases worldwide is posing a huge challenge to their goal while opinion polls
in Japan reveal that most of the population would like to see the Olympics either cancelled or
postponed. The Games, already a year late, are set to be held from July 23 to Aug 8. The Tokyo
2020 chief Seiko Hashimoto recently said that cancellation is not an option and that the
Olympics will, in fact, be a celebration of solidarity, unity and resilience. As one might expect
from the world`s third-largest economy, the venues and stadiums are ready to host various
disciplines in the mega affair, but the spike in infections has disrupted several events leading up
to the Olympics including the torch relay. Australia`s diving team on Friday withdrew from the
Diving World Cup scheduled for May 1-6 in Tokyo, saying it was `not safe` to travel to Japan.
Among other events scheduled for next month, the marathon swim Olympic qualifier has been
moved to Portugal and the artistic gymnastics test event has been cancelled because of
restrictions on international travellers.

The Games organisers have already announced strict measures for spectators and athletes, which
include reducing the size of Olympics delegations, adhering to strict standards of hygiene, social
distancing, testing, etc. It was quite incredible then that they said vaccinations were not
mandatory for participants against the advice of many experts. Overall, there are 33 sporting and
339 medal events that will be contested at the Tokyo Games which are being billed as the best in
the history of the modern Olympics. But despite the Games being just three months away, the
fate of the biggest sporting spectacle on earth still hangs in the balance.

State Bank independence

BY N A D I R C H E E M A  2021-04-26
THE last few weeks have seen a proliferation in the public debate on central bank independence
(CBI), triggered by the government`s submission to parliament of proposed amendments to the
State Bank of Pakistan (SBP) Act. While some have sought to contribute an evidence-based
discussion, the broader debate has been marred by unsubstantiated assertions.

Consequently, some basic questions necessary for an informed discourse remain unanswered:
what is the distilled economic wisdom regarding CBI? How does Pakistan compare with other
emerging economies on CBI? Are the specific amendments proposed to the SBP Act appropriate
or not? This article seeks to address these questions.

On the first question, contrary to what some have asserted, the jury is no longer out. After the
high inflation episodes and debt crises of the 1970s and 1980s, a broad consensus emerged
among macroeconomists on the need for central banks to focus on maintaining price stability,
which was seen as the best way for them to promote long-term economic stability and
employment; insulate them from political interference and the attendant pressures of electoral
spending; and mal(e them more transparent about their thinking on monetary policy, to help
anchor inflation expectations.

The ensuing decades saw legislative and institutional reforms that clearly enhanced CBI in both
advanced and emerging economies. The reforms ushered in a period economists call `The Great
Moderation`. From 1990-2007, the global economy saw a dramatic decline in inflation and
business cycle volatility, despite a multiplication in crossborder capital and trade flows. No
robust evidence of a long-term loss in economic activity could be isolated. A preponderance of
studies has confirmed these effects.

Where the economic debate is still ongoing is the extent to which de facto CBI will survive in the
future. Central banks in advanced economies have come under increasing government pressure
to keep interest rates low (eg Trump`s pressure on US Fed chairman Powell last year), while
authoritarian leaders more generally (eg Erdogan, Modi), seek to limit the `unelected` power of
central banks. However, very few economists are enthused by the prospect of a broad reversal in
CBL On the second question, ie where Pakistan stands among emerging market economies on
CBI, the answer is: pretty low. On overall CBI, Pakistan ranks fifth lowest among 47 countries.
That India ranks below Pakistan is hardly comforting. Markets were rolled in 2018 with the de
facto firing of India`s central bank governor after here fused to handover some of the country`s
international reserves to the Modi government, while warning, `governments that do not respect
central bank independence will sooner or later incur the wrath of the financial markets`. (The
online version of this article carries cross-country charts on CBI indices).

It is also useful to look at the evidence on key sub-components of CBI. Here we find SBP ranks
eighth lowest on the autonomy of appointment, dismissal, and tenure of the governor. Indeed, the
average tenure of SBP governors has been around two years, unacceptably short and indicative
of strong political interference.

Next, SBP ranks the lowest on autonomy to pronounce and pursue its own objectives. An
obvious example of this is SBP`s inability to adjust the exchange rate during 2015-17 despite a
surging current account deficit. This reinforces the need to set clear objectives for the central
bank, and empower it to pursue those objectives.

Finally, SBP ranks second lowest on lack of formal limits on central bank financing to the
government. In Pakistan, such financing has contributed to a delay in fiscal reforms (eg raising
the tax-toGDP ratio) and 1(ept Pakistan`s inflation rate relatively high among emerging
economies (inflation, remember, is a tax on the poor). Rather than have zero central bank
financing limits set in the context of IMF programmes, the government should think of its own
formal rules to contain such financing within prudent limits, which need not be set strictly at
zero.The foregoing positions us better to answer the third question, le on the appropriateness of
the proposed amendment to the SBP Act.

The amendments broadly seek to address the gaps identified here. However, there are two main
areas of concern.

First, will the proposal to make price stability a primary objective result in depressed growth
(which is mentioned as a tertiary objective)? If the response of independent central banks to the
2008 global financial crisis and the Covid pandemic crises is any guide, this concern is
overblown. Central banks have arguably done too much, not too little, to support weak
economies in the wake of these crises. This said, there may be scope to reframe SBP`s objective
as: maintain price stability and financial stability, while pursuing maximum employment over
the long-term, a kind of blend of the US Fed and Bank of England objectives.

Second, why should SBP staff be protected from accountability by NAB? The motivation for this
is the recognition that central banks have to take difficult decisions under uncertainty and should
feel empowered to take them without the fear of being taken to court. The key here is the `good
faith test`, which is mentioned in the amendments, but which needs to be fleshed out. On the
question of equitable treatment across public institutions, it might be better to extend the
proposed protections to other institutions than drop them for the SBP.

Also, the elements of accountability that, arguably, deserve greater attention in the Act, are: (i)
how to assess if SBP has met its price stability objective and what sanctions would apply if it has
not met it; and (ii) the right of the parliamentary finance committee to ask questions of the SBP,
akin to the rights of the US Congress.

Countries grow on the back of strong and independent institutions; and it was the gradual erosion
of our institutions that has broken our back. This provides an additional important reason to not
dismiss lightly calls for strengthening the independence of SBP, one of our most important
economic institutions. • The writer teaches economics at SOAS and is a research fellow at
Bloomsbury Pakistan.

Complicated Afghan endgame

BY M A L E E H A L O D H I  2021-04-26
THE postponement of the US-orchestrated Afghan peace conference marks an early setback for
renewed efforts to expedite talks on a political settlement of the conflict. It leaves the nascent
peace process in disarray at least for now. The conference co-hosted by the UN, Turkey and
Qatar was scheduled for April 24-May 4 in Istanbul.

Announcing its postponement until af ter the end of Ramazan, Turkey`s Foreign Minister Mevlüt
Çavusoglu said that in view of the Taliban`s nonparticipation it was `meaningless` to press ahead
especially as there was `no clarity about the formation of delegations and participation`.

The conference was being calibrated by Washington with its plans to completely withdraw from
Afghanistan. Announcing this in his muchanticipated address on April 14 President Joe Biden
boldly acknowledged that nothing more could be achieved by retaining US troops in the country
and all would be pulled out by Sept 11. He said once Al Qaeda had been degraded and Osama
bin Laden eliminated a decade earlier, the US goal was achieved but its presence in Afghanistan
continued for another decade for increasingly unclear reasons. Rejecting the Pentagon`s
preference for a conditions-based drawdown, Biden said: `We cannot continue the cycle of
extending or expanding our military presence in Afghanistan hoping to create the ideal
conditions for our withdrawal, expecting a different result.

Under the Doha agreement between the US and Taliban, forged in February 2020, American
forces were to fully withdraw by May 1 in exchange for the Taliban commitment to prevent
Afghanistan`s soil from being used by terrorists and agreeing to intra-Afghan talks. Even before
Biden`s announcement the Taliban had declared they would not participate in the Istanbul talks
and threatened `consequences` if the withdrawal deadline was shif ted.

Washington probably hoped that by giving a final and unconditional deadline for its departure
the Taliban would accept the decision. But the Taliban maintained a tough posture and
responded to Biden`s speech by reiterating their position that delay in the pullout was a breach of
the Doha agreement for which `necessary counter-measures`would be taken. They refused to
attend the Turkey conference and said that creating expect at ions this would yield a peace deal
was an effort `to push the Taliban willingly or unwillingly, to a rushed decision which was
needed by America`.
Plans for the `Istanbul Conference on the Afghan Peace Process` had been set in train by the US
weeks before its withdrawal announcement. A leaked letter from US Secretary of State Antony
Blinken to President Ashraf Ghani laid out key elements of the American proposal. They
included a UN-led peace conference in Turkey attended by regional and other `partners` to
mobilise a consensus to support the peace plan followed by a meeting between the Afghan
parties to finalise a peace deal. A joint statement by the UN, Turkey and Qatar cast the aim of the
conference in ambitious terms: `The Conference will focus on helping the negotiating parties
reach a set of shared,foundational principles that reflect an agreed vision for a future
Afghanistan, a roadmap to a future political settlement and an end to the conflict.

Driving this effort with a sense of urgency was, of course, the US in the hope of accelerating the
peace talks into making significant progress ahead of its withdrawal deadline. Intense shuttle
diplomacy by its special envoy Zalmay Khalilzad in the region was aimed at persuading the
Afghan parties to attend the Istanbul Conference and give an impetus to the peace process.

The postponement raises many questions. Is the Turl(ey peace conference stillborn? Can the
peace process be revived? If so, can progress be made to reach a settlement before the US
withdrawal? Will the US leave without a peace deal? Will the Taliban wait for the departure of
American/Nato forces to strengthen their hand in peace negotiations afterwards? The answer to
all of the above turns principally on the Taliban`s calculation as well as to how much leverage
and interest the US has to push the peace effort. Indications are that the Americans willremain
engaged in diplomatic efforts and seem serious in wanting a peace deal or at least progress
towards it before their departure. This would be an important element of face-saving for
Washingtonand also enable an orderly and `honourable` exit.

That is why behind the scenes talks are also focused on negotiating a 90-day reduction of
violence with the Taliban. As for leverage, while the effectiveness of coercive pressure has been
diminishing with the withdrawal underway, the UN sanctions process remains a source of
leverage as de-listing is among the Taliban`s main demands. In any case, the Doha accord
committed Washington to begin this process once intra-Afghan talks commenced.

The US along with the international community can also use economic incentives by holding out
the promise of assistance after September. This is also the hope expressed by top US diplomats
as well as Pakistani officials.

The Taliban while adopting a tough posture have nonetheless kept space open for engagement
and significantly refrained from announcing their spring offensive. The thinking among field
commanders may be that all the Taliban need to do is wait it out for the US to depart and there is
little value in engaging in peace talks where they will have to make concessions.

However, the leadership`s calculation may be different. They may feel they have more to gain
from resuming the peace dialogue than abandoning it especially as they would not want to risk
losing the international recognition and legitimacy they now have. Release of their prisoners and
removal from UN sanctions can only be secured through diplomatic engagement.
They may also see an opportunity after two decades of military struggle to secure their goal
through negotiations an option that would help them elicit international support and assistance
needed in post-America Afghanistan and importantly, offer a better chance of achieving lasting
peace.

For these reasons the Afghan peace process is far from being dead even if it faces daunting
challenges ahead. All stakeholders, and above all, the Afghan parties know that if the path of
negotiation is abandoned Afghanistan will descend into chaos and strife from which no one will
benefit.• The writer is a former ambassador to the US, UK & UN.

Covid outbreak sways charity trends

By Afshan Subohi  2021-04-26
FARIDA, 50, a housemaid, insists on taking a 15-day break in Ramazan even if it means
sacrificing half of her monthly salary. Ignoring pandemic warnings, she is all set to scout across
the city to capitalise on the generosity of her past employers and check distribution points of
charities.

`It takes stamina to run around and patience to wait in long queues. For the persistent ones, the
end justifies the trouble. I collect edibles, clothes and cash collectively worth more than my
twomonth salary enough to afford some festivity at Eid,` she told Dawn.

Farida, a widow is a mother of seven and grandmother of 12. Her husband, a construction
worker, fell from a multi-storey and died a long time back. Only one of her three sons works as a
kabari (trash dealer). One son died in a road accident and the eldest is mentally unstable. Three
of her daughters are married. She supports the widow and two kids of her son, her firstborn and
an unmarried daughter.

More generous giving is expected this Ramazan to provide relief, even if temporary, to the
growing poor class and mobilise extra resources to fund charitable organisations and causes. The
pie of total donations is projected to expand by about 10 per cent to Rs165 billion this year from
Rs150bn last Ramazan.

`The fear of death haunts and the experience of loss in close quarters evokes empathy. The
pandemic has touched everyone,` reasoned Ahsan Saleem, Chairman of The Citizen Foundation
(TCF), discussing the spike in donations.

Bashir Ali Muhammad, a leading businessman felt `the current situation demands compassion`.
He was referring to the Covid 19 fallout. `There is a definite increase in donations. The
cumulative collection this year may turn out to be higher than everbefore. Inflation and poverty
have hit the common man hard. It`s our responsibility to support them as much as we can`.

Historically, charity peaks in Ramazan in Pakistan. Philanthropists say that about half of the
annual giving in the country is concentrated in this one month. It explains the aggressive
advertising campaigns by competing causes in a bid to reach out to potential donors people
looking for options to disburse Zakat. It is compulsory faith-based giving that Muslims are
obligated to comply with. Those who can afford are ordained to share 2.5 per cent of their
accumulated wealth with the less fortunate.

Understandably, in the midst of the pandemic, a big chunk of donations is expected to flow
towards the health sector. `Many tycoons and firms are supporting vaccination programmes for
their employees. Indus Hospital has started a campaign to visit factories and inoculate workers
with the single-dose Cansino vaccine at Rs2,500 per person. Interloop of Faisalabad was the first
to inoculate workers. Naveena Group and EBM names also pop up among several others,` said
Majyd Aziz, a prominent business leader.

He did not rule out the possibility of the share of giving to individuals increasing at the cost of
institutions as people may now be more inclined to directly help the growing number of needy
that surround them.

Ahsan Saleem of TCF did not contest the logic but felt that the support base of credible
institutions pursuing causes other than health has not shrunk. `We are lucky that our supporters
believe in education and continue to back us. The Covid-19 fallout on poor families has exposed
girl students to higher drop-out risk. They are the first ones to be withdrawn when stress mounts
on poor families. We are engaging with communities to check it. Besides, our students` and
teachers` teams help chari-ties in the distribution of essentials in their communities`, he added.

Haroon Qasim, a businessman active on the charity circuit in Karachi, had a different take. `This
year it`s quieter. People are not asking for Zakat as aggressively as they used to. The tightening
of Federal Board of Revenue regulations on donations must also have suppressed the demand. I
find Zakat collection drives somewhat mellow this year around.

`Good corporate results lifted spirits of the business community. I think the asking will intensify
in the next few days and expectations are for higher payouts.

Dr Abdul Bari Khan, CEO, The Indus Hospital told Dawn, `Being at the forefront of Covid-19
containment measures we didn`t experience a dip in donations last year. Yes, the thrust of charity
was directed towards the health sector and charities providing instant relief such as food, soaps,
sanitizers, face masks were supported more liberally. Some educational or vocational training
projects might have mobilised less than their targets. Besides people last year opted for personal
charity to support people they know.

`This year, however, there is a dip in the collection. It can be attributed to the economic impact
of Covid-19 scores of people lost jobs, many businesses suffered and uncertainty during the third
wave has made people hold on to their liquidity. The problem is compounded by the growing
needs of the institutions potentially causing donor fatigue` Zubair Tufail, former president
Federation of Pakistan Chamber of Commerce and Industry concurs with the dominating
narrative. `Zakat donations this year will be higher. Some business people from Punjab
announced big donations like Gohar Ejaz (of Lake City repute) and Din Group one billion rupees
each for Indus Hospital. US Apparel pledged to give 20pc of their annual profit, running in
billion, for charitable causes. No wonder Indus Hospital has announced to build a new facility in
Lahore.

`In Karachi, medium establishments, particularly drug makers are donating generously but big
boys of cement, steel and textiles have yet to come forward in a big way`. He said that Saylani
Trust is coIIecting about Rs40 million daily in Karachi, touted to be the donation capital of
Pakistan.

Anjum Nisar said a little more may trickle in donations but he did not see a major spike in
quantum of giving this year. Many other charitable organisations thought it`s still too early to
judge the scale of donations this Ramazan. •

Needed: A new domestic debt order

By Mohiuddin Aazim  2021-04-26
TWO years ago the federal government decided to offer long-term Pakistan Investment Bonds
(PIB) on floating rates. It took the decision because banks had started redeeming in bulk fixed-
rate PIBs as rising interest rates in the country had made them less attractive.

The offering of PIBs on floating rates turned the tables. Banks and non-bank institutions both
started purchasing the bonds in large volumes.

Greater sales of these long-term, floating-rate bonds helped the government keep the stock of its
short-term domestic debt low and enabled banks to park surplus funds with peace of mind.

Interest rates on these bonds were tied to shortterm treasury bills rates and banks could decide
with greater accuracy whether they should invest in the bonds during a particular time of the
year.

At the end of June 2018, the stock of investment in fixed-rate PIBs had fallen to Rs3.4 trillion
from about Rs4.4tr at the end of June 2017.

Floating-rate PIBs launched in May 2018 became so popular among banks and non-bank
financial institutions that the stock of investment in PIBs surged to Rs10.933tr in June and then
to Rs12.886tr by the end of June 2020. The latest stats released by the State Bank of Pakistan
(SBP) show that at the end of February 2021, the stock of investment in PIBs reached a new
height of Rs14.272tr.

This dramatic rise in investment in long-termbonds (of three-year to 30-year maturity) after
offering floating interest rates on them clearly shows that floating rates can work wonders in the
development of the bonds market. That is because when yields on long-term debt instruments are
tied up with the most recent yields of short-term instruments the investors class banks, non-bank
financial institutions or even the corporate sector and individuals all have less to worry about
locking funds for three, five or ten years or even for longer periods.

Why then the government does not consider floating interest rates on national saving schemes
that it uses to generate non-bank debts from ordinary Pakistanis, including senior citizens and
widows? To make these floating rates more relevant to people the government can consider
linking them with the headline consumer inflation or food inflation. It is easy to create awareness
about and acceptability for inflation-protected saving products for hundreds of millions of
Pakistanis who experience inflation first-hand.

Within the entire regime of National Saving Schemes (NSS), inflation-protected certificates of
investment can initially be introduced for certain segments of prospective investors like farmers
or factory workers.

It is true that NSS products not being tradeable contribute less to the deepening of the bonds
market in the country in the manner that PIBs or treasury bills do. But since banks remainmajor
holders of PIBs and market treasury bills, the debt raised through them constitutes the
government`s borrowing from banks. This means overexposure of banks in them crowds out the
private sector. And that, in turn, affects the private sector`s efficiency and overall economic
growth.

At the end of December 2020, banks held 78.5 per cent of the entire stock of the
government`smarketable debt securities including PIBs, T-bills, ljara Sukuk or Islamic bonds,
the latest available SBP stats reveal.

Pakistan`s central bank is about to begin inflation-targeting. It has already stopped the
government from making fresh borrowing from it, compelling it to borrow either from banks or
expandthe scope of non-bank borrowing. The government is, therefore, in the need of
diversifying its sources of non-bank borrowing and start the process as soon as possible. Because
the government`s bank borrowing keeps growing thus crowding out the private sector and
affecting economic growth.

In 2019-20, when the economy experienced a 0.4pc recession, the federal government borrowed
about Rs2.47tr from banks. Obviously, such huge borrowing played little or no role in economic
growth; it rather enabled it to meet domestic and foreign debt servicing requirements and meet a
large gap between revenue generation and huge expenses of defence and the day-to-day running
of the government. On the other hand, the private sector got just Rs196 billion from banks partly
because the economic recession had depressed credit demand to some extent but largely because
banks were busy lending massively to the government.

In more than nine months of this fiscal year (between July 1 and April 9), banks have already
lent Rs1.821tr to the government by continued net fresh investment in debt securities. In
contrast, they have lent only about Rs400bn to the private sector the main engine of economic
growth in Pakistan. This clearly indicates that banks in Pakistan badly need to boost private-
sector lending and limitinvestment in debt securities.

The government, on the other hand, needs to roll out new and innovative schemes to borrow
from non-bank sources including individuals and companies. That is where inflation-protected
saving products, whether short-term certificates of investment or long-term bonds, emerge as a
possible option. And, that is where the scope of generating non-bank borrowing from targeted
groups lies.

Offering PIBs on floating rates was a smart move. And, its results are good. But the results could
have been far better, in terms of diversifying the sources of borrowing or making a gradual shift
from bank borrowing to non-bank borrowing had SBP ensured accelerated sales of PIBs to non-
bank entities.

In regular auctions of PIBs, non-competitive bids are invited from the corporate sector and even
individuals but their share in total bids remains frustratingly low. Why? Banks do not want to
create mass awareness about this fact not even after oft-repeated reminders by the central bank.
Insurance companies and other non-bank financial institutions mostly purchase PIBs from the
secondary market i.e. when banks start trading them. It is time for the government to come up
with more debt securities exclusively designed for non-bank entities. But does the government
have the grit required to do this? Can the government afford to annoy banks? •

Murky outlook for fiscal federalism

By Jawaid Bokhari  2021-04-26
THE controversy about the population census is making the issues in fiscal federalism more
complicated and challenging to resolve as policymakers have been stuck with the 7th National
Finance Commission (NFC) award for over a decade.

The majority decision by the Council of Common Interest (CCl) to validate the 2017 Population
Census and hold a fresh consensus for the next general elections has been rejected by Sindh, one
of the country`s four federating units.

Chief Minister Syed Murad Ali Shah has made a pertinent point: in the past, CCI decisions were
taken by the consensus of all stakeholders and not by a majority decision.

In democratic federalism, autonomy cannot be substituted by majority rule where the rights of a
federating unit are involved. The majority decision is a deviation from CCI`s mandate of
upholding `Common Interest` defined clearly in its nomenclature.

Quoting Unicef survey on the number of persons per household, Mr Shah said Sindh`s
population stood at 61.04 million, not 47.8m as shown in the 2017 Census. On that basis, he said
the share of Sindh in the national resources would go up from about24 percentto29pc.

The comparative 2017 census figures and Shah`s own estimates based on Unicef survey
(bracket) for three other provinces were as follows: Punjab 109,989,655 (107,098,016), Khyber
Pakhtunkhwa 30,508,920 (28,887,950) and Balochistan 12,335 129 (13,444,154).

Under the 7th NFC award, the highest weight 82pc of the total resources for horizontal
distribution is shared according to the population ratios of various provinces. And a sub-
federation gets a mere 5pc of revenue collection/generation from its territorial jurisdiction.
For the first time, the 7th NFC award included multiple indicators for horizontal distribution of
resources among the provinces: poverty and backwardness (10.3pc), revenue
collection/generation (5pc) and inverse population density(2.7pc.).

Instead of improving the formula for removing the level of regional disparity in development, the
NFC is bogged down on the issue of provinces sharing federal expenditure. It is mandated to
give a new award every five years.

The NFC is also continuing to face a deadlock under the PTl government because of the
instability in the finance ministry. Mr Shaukat Tareen is the fourth finance minister appointed by
the prime minister after Asad Umar, Hafeez Shaikh, Hammad Azhar in less than three years.

Mr Tarin is reported to have told Imran Khan that the only solution to the economic problems is
to bring GDP growth to at least 6-7pc.

However, pushing up economic growth is a very challenging job. `The economy will stay in its
present state of low growth, low exports, and close to default` as heavy external borrowing eats a
bulk of government revenues and leaves very little for economic development and productive
investment,` says the Institute of Policy Reforms, a think tank, headed by PTl leader Humayun
Akhtar.

The report emphatically observes `Pakistan`s case shows there is no relationship between foreign
credit and growth.

The study recommends that the government must develop home-grown policies instead of
pursuing donor-driven ones and must have guidelines for the use of foreign loans.

Any home-grown policies cannot ignore a robust model of fiscal federalism that can play a vital
role in revitalising the economy by utilising resources and manpower at three different
representative and autonomous levels of government.

Mr Tarin was the PPP finance minister when the 7th NFC award was finalised and the accord
signed on December 30, 2019, bears his signature. With the transfer of sales tax to the sub-
federations under the said award, the annual growth rate of overall tax revenue in relatively
developed Punjab and Sindh now outpaces the growth rate of the Federal Board of Revenue`s
(FBR) collection.

However, the provinces need to significantlyincrease the low level of agricultural income tax.

It would be interesting to see whether Mr Tarin succeeds where his predecessors have failed in
finalising a new NFC award.

Mr Tarin also wants a public sector-led economic growth with a much higher development
spending. International Monetary Fund (IMF) representative in Islamabad Teresa Daban Sanchez
says there is no constraint from the Fund on this count. But then it is the fiscal deficit that is the
problem.
While the Income Tax Ordinance has targeted Rs140 billion from the withdrawal of tax
exemptions by end of this fiscal year, FBR officials have been informally telling the media that
the additional revenue would be in the range of Rs30-40bn.

To meet the targeted consolidated fiscal deficit estimated by the IMF at 7.1pc of GDP the federal
government has persuaded the provinces to provide a budget surplus of Rs440bn in 2021-22
against Rs210bn this fiscal year.

On the other hand, the prime minister has unveiled a Rs446bn federal package for the uplift of
backwards areas of Sindh.

The plan includes the restoration of 200,000 acres of agricultural land, construction of Nai Gaj
Dam to irrigate around 28,800 acres and a306-kilometre Sukkur-Hyderabad Motorway and the
provision of annual 30,000 new power connections in the neglected districts.

The package also envisages skill training to 100,000 youths in 14 selected districts and the
facility of business loans for them.

Whether the provinces will be able to fulfil their commitment of targeted budget surplus will
depend on tax revenue collection by the FBR as targeted for the next fiscal year and the level of
NFC fiscal transfers to them.

But it would definitely impact adversely the already falling provincial development spending.

According to the IMF, the provinces` development allocation of Rs784bn has been reduced to
Rs650bn, dropping from 2.5pc of GDP in 2017-18 to 1.5pc this fiscal year and would remain
almost at that level for the next five years.

And the latest World Bank`s Pakistan Development Update says the poverty in rural areas has
increased from the pre-Covid-19 level of 28.1pc to 30.6pc.

Fiscal federalism has also suffered a serious setback because of the denial of political, financial,
legislative and administrative authority and responsibility to local bodies the third tier of
government as provided by the Constitution.

`The local body elections are the lifeline of a democratic system sans which governance remains
an incomplete project, says policy analyst Durdana Najam based in Lahore. ` No country can
tackle the complex governance and public service delivery issues in the absence of a strong,
functional local democracy,` says another analyst with insight on the subject.

Without robust fiscal federalism, the rapid development of social and physical infrastructure
needed for high growth will be difficult to manage for a cash-strapped federation.