NationalVOLUME 16 ISSUE # 10

National funds’ review

The Pakistan Tehreek-i-Insaf (PTI) government has decided to review the utilisation of funds by provinces from the divisible pool. Under the National Finance Commission (NFC) award, provinces are required to announce their finance commission for equitable and fair distribution of funds for districts. However, the provincial governments have largely ignored the constitutional requirement and spent funds on their priority areas. On the other hand, the government’s move will lend credence to the opposition parties’ allegation that the Centre wants to repeal the 18th Amendment and undermine provincial autonomy.

Karachi and Lahore are prime examples of selective distribution of funds by the provincial governments. The PPP government has ignored the biggest city and commercial hub of Pakistan because of its tussle with the MQM. On the other hand, the past PML-N government only focused on Lahore and a few big cities of the Punjab, leaving out the South Punjab and rural areas from its development programme. The federal government is justified in asking questions about the unfair distribution of funds from the provincial governments but at a time when the opposition has launched a movement against the PTI government, it could be seen as a revenge attack. It could also be called an assault on provincial autonomy and an attempt to expand federal authority over the provinces, especially those ruled by the opposition. The government’s main focus could be Sindh only, because all other provinces are ruled by the PTI and its coalition partners.

It is unfortunate that all provinces have not held local government elections, which could ensure fair distribution of funds at the grassroots level. In the absence of local polls, the provinces have also not announced their finance commission awards. It allows them unchecked discretionary powers for the allocation of financial resources. However, the federal cabinet has decided to devise a mechanism under which the provinces would be held accountable for how they spent funds given under the National Finance Commission (NFC) award and to improve revenue generation by the provincial governments. According to the government, the cabinet discussed the merits and demerits of the current NFC award mechanism under which funds were provided to the provinces according to their population size. It emerged during the discussion, and following a presentation given by the finance ministry, that there is a fundamental gap between the money that the Centre provides to the provinces and the revenue generated by them due to which the provincial governments do not have any incentive to increase their revenue.

It is obvious that the provincial governments do not have any motivation to raise their revenue locally because they know that they would receive a certain amount from the federal government. The Punjab received Rs1.448 trillion from the Centre and generated only Rs306 billion, Sindh received Rs764b from the federal government but generated Rs314b, Khyber Pakhtunkhwa received Rs602b and earned only Rs50b while Balochistan generated Rs51b against a Rs282b share in the NFC. The basic premise of the 7th NFC award was to increase tax revenue by one percent per annum. If the government had achieved the target, the revenue would have been 20pc of GDP by now. Under the 7th NFC award, the four provinces are collectively entitled to 57.5pc of divisible pool taxes, besides the revenue from income tax, wealth tax, capital value tax, general sales tax, customs duties and federal excise duty. The provincial governments get their horizontal shares on the basis of the population, poverty, revenue collection and inverse population density, allowing the Punjab to get 51.74pc, Sindh 24.55pc, Khyber Pakhtunkhwa 14.62pc and Balochistan 9.09pc.

In the 10th NFC award, a new subject has been added to the list of discussions suggesting that the Centre wants the provinces to bear some additional fiscal responsibilities. It pertains to “exploring ways to reduce losses of state-owned enterprises and agreeing to a mechanism for sharing the losses between the federal government and the provincial governments”, grants-in-aid by the federal government to the provincial governments and set powers and conditions for the federal and provincial governments for borrowing, besides assessing and allocating resources to meet expenditures relating to Azad Jammu and Kashmir, Gilgit-Baltistan and erstwhile FATA’s merged districts of Khyber Pakhtunkhwa.

The current NFC award faced a major challenge in the absence of a formal notification of results of the National Population Census 2017, owing to concerns expressed by various stakeholders, particularly about Karachi. The Constitution promises that provincial shares in each NFC award could not be reduced. According to the government, there is no mechanism to decide how the NFC funds were spent and the money was seen to have been previously used to pay provincial salaries and for personal use, such as purchasing cars. Besides the NFC award, the federal government also has to spend its funds to tackle natural disasters, pandemics, like COVID-19, and development packages. As a result, the Centre is not left with much money and forced to take loans to run its affairs.

It is a fact that the provincial governments have not used national funds fairly. However, any attempt to hold them accountable for it will create an impression that the government wants to target the Sindh government. It will also reinforce the opposition’s propaganda that the PTI government wants to repeal the 18th Amendment and NFC award. On the other hand, all provinces have failed to hold local elections, which can ensure fair distribution of funds at the grassroots level. A controversy about the population of Karachi is also a major hindrance to the implementation of the NFC award. The government should reform the tax system, slash its expenditure and improve coordination with the provinces to generate more revenue to run the affairs of the country efficiently.