On December 31, 2009, the federal government and finance ministers from Pakistan’s provinces signed the 7th award of the National Finance Commission, a development that was widely regarded as a positive step in Pakistan’s political and economic progress. Below, Bilquis, a consultant from Lahore, assesses the NFC award and whether it should actually be considered a success:
In December 2009, rallies were held all over Pakistan to celebrate the approval of the 7th National Finance Commission (NFC) Award. In March 2010, President Zardari officially signed and approved the award. Numerous critics applauded the NFC award as a major accomplishment and a product of the democratic process. However, I’ve often wondered if it really is a silver lining.
The NFC is a government body that is responsible for redistributing tax funds that are collected by the government to all provinces. As per Article 160 of the 1973 Constitution, it is mandatory for the government to meet every five years and present a NFC award that allocates resources among the federal and provincial governments (PGs). Provinces then re-distribute revenues amongst themselves, through a revenue-sharing formula.
The 7th NFC award was an enormous success for numerous reasons:
In horizontal distribution (distribution of resources among the provinces), it introduces the landmark multiple-criteria formula for redistribution. The multiple-criteria replaces the single criterion ‘population density’ formula that has been in place since the 1st NFC award in 1974. The single criterion was not only an outdated way of distribution of income, but it also unfairly favored Punjab province at the cost of Baluchistan, NWFP [Khyber-Pakhtunkhwa] and Sindh. Although, these provinces fought for a fairer distribution, a positive conclusion was never reached in horizontal distribution of funds. There was a lack of political will from the federal government and Punjab province to a) relinquish their share and/or b) to hold tangible talks that would resolve the matter. Hence, the multiple criteria is a commendable step forward as it indicates that actual effort was made by the government, especially Punjab, to settle a four decade old debate. Now, distribution is based on 82% weightage to population, 10.3% to poverty, 5% linked to revenue generation and collection and 2.7% to other areas.
Another major accomplishment of 7th NFC award is that the federal government recognizes the rights of the provincial government (PG) over their resources and has agreed to compensate NWFP and Baluchistan for past arrears especially from hydropower profit and on gas surcharges and royalty. NWFP will receive Rs.110 bn. for arrears of hydel profits and Baluchistan will receive Rs. 10 bn. for arrears of GDS. This is one of the main reasons why the 7th NFC was a success. Previously, the government’s refusal to either recognize or offer any type of compensation to the two provinces usually led to a deadlock in discussion and embittered feelings toward the federal government. The 7th NFC award also accepts the right of PGs to retain 5% of their provincial sales tax collection.
Moreover, in the past, when spending funds from the divisible pool, the federal government has been accused of demonstrating an expenditure bias towards Punjab, which continuously disillusioned the other provinces. To address the issue, in vertical distribution (distribution of resources between the Centre and the provinces), the 7th NFC allocates a higher percentage of funds to the provincial governments (PGs) from the divisible pool than to the federal government. As a result:
- PGs total share from divisible pool has increased from 47% to 56%.
- The award removes the grants and other special awards taken by the federal government. This was a substantial amount—10% out of the total divisible pool.
- It has decreased the revenue collection charges taken by the federal government from 5% to 1% and this amount would also be added to the divisible pool.
By providing higher revenue to provinces through increased share and reduced charges, the 7th NFC award directly addresses the past grievances of smaller share in revenue, especially that of Baluchistan and Sindh. It also indicates a move towards provincial fiscal autonomy as PGs will more efficiently allocate resources that best serve and closely represent the provincial wants and needs than the federal government.
On paper, expansion of revenue to provinces in both vertical and horizontal and recognizing rights over resources is a fantastic deal, as it ticks all the correct boxes and appeases old animosities. However, the federal government has taken a substantial cut in its revenue and has overestimated its revenue generation. With rising debt servicing and defence and security-related expenditures, a reduction in its share will result in a large budget deficit for the federal government. Dr. Ashfaque H Khan points out that, “the total expenditure of the federal government on these four items (defense, security, public debt and civil administration) alone will rise from Rs 1,540 billion to Rs 2,075 billion, while resources are projected to rise from Rs 1,337 billion to Rs 2,146 billion.
If other expenditure such as pensions, subsidies, grants and development programmes are added, it is quite apparent that federal government resources will not be sufficient. Secondly, for the NFC to successfully deliver, the federal government needs to add further clarity on defining expenditure assignments to PGs and the PGs need to drastically develop their capacities to spend their resources efficiently and effectively. Otherwise it may lead to the failure of the IMF program which depends on fiscal prudence.
Overall, the 7th NFC award is historic because it succeeded in eliminating an approx 15 year deadlock in discussion and bringing around positive and tangible changes within our federal and provincial revenue distribution. It also highlights the strategic role played by the federal government as it tried its best to ease mistrust between itself and the four provinces. Shaukat Tarin, ex-finance Advisor, stated during the NFC award inauguration speech in Baluchistan, “We asked the provinces to bring forth all of their grievances—such an open house/table of mitigated previous grievances that often resulted in deadlock.” Nevertheless, the success of the NFC depends on the ability to overcome the challenge of fiscal discipline by the federal government and PGs. If the current spending patterns of the PGs are not changed, Pakistan will land in a more difficult fiscal situation, with the country’s debt burden further worsening the situation.
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