InternationalVolume 14 Issue # 17

Talks for new NFC Awards

Eventually after the delay of several years, talks on the next National Financial Commission (NFC) Awards started between the federal and provincial governments. Keeping in view huge economical and particularly fiscal challenges to both federal government and provinces, finalization of the new NFC would be an uphill task.

 

Nevertheless, the beginning of the process of talks is indeed a very welcome development and its credit must be given to the Pakistan Tehreek-e-Insaf (PTI) government at the Centre to have started the process. The previous Pakistan Muslim League-Nawaz (PML-N) government failed to even initiate the process of talks on the NFC, fearing it would be extremely difficult to evolve a consensus among the federal government and the provinces on the division of financial resources of the country.

 

The PML-N government, during its five year tenure (2013-18), did not start the process of giving a new financial award, let alone finalizing it due to two main reasons. The PML-N had got almost its entire mandate from the largest province, the Punjab, and as the party also had its government in the province apart from the Centre, it feared that in case it would demand increase in the share of the federation and curtailing funds for the provinces, it would be politically damaging for it. It must be mentioned that in the last NFC (7th), finalized during the rule of the Pakistan People’s Party in 2010, the share of the provinces had substantially been increased while that of the federal government slashed significantly. It was under the 7th NFC that for the first time in the history of Pakistan, the share of the provinces was increased in comparison to the federal government.

 

Insofar as the new NFC is concerned, there are a number of issues which are quite acrimonious and would be very difficult to resolve. A reversion in the vertical distribution of financial resources between the federation and the provinces is almost out of the question and there are some constitutional guarantees in this regard. However, the horizontal distribution of financial resources among the provinces is quite on the cards. However, the two bigger provinces, the Punjab and Sindh, seem not to be in favour of changes in the horizontal distribution of resources whereas the relatively smaller Khyber Pakhtunkhwa (KP) and Balochistan provinces are intent upon changing the horizontal distribution of financial resources. This particular stance of different provinces emerged in the wake of the last national census, under which the population of KP and Balochistan provinces has increased while that of the Punjab has decreased but that of Sindh remained almost unchanged. KP and Balochistan also got some additional financial resources in the 7th NFC due to their relative backwardness and in case of Balochistan, due to its largest area among provinces. As the lion’s share of distribution of financial resources of the country has been on the basis of the population, KP and Balochistan expect an increased share in the national financial pie. Although Sindh and the Punjab would try to preserve the status quo on the horizontal distribution of provinces, yet the other two federation units would like to change it to their advantage.

In the recent talks on the new NFC, on its part Sindh has proposed that instead of decreasing the financial share of any federating unit the solution was to increase the tax net. Indeed, this is a very sagacious advise because any federating unit, will not only object to decrease in its share, even justified, but also feel deprived. However, the solution of increasing the tax collection is not all that easy to achieve. Here, it is important to note that since the finalization of the last award, whether it is the federal government or all provinces, they have had serious reservations about the Federal Board of Revenue (FBR)’s failure to increase the tax-to-GDP ratio. The 7th award had projected the tax-to-GDP ratio to rise to 15 per cent of the GDP at the expiry of its tenure in 2015, from 9.2 per cent in 2010. At the moment, according to Minister of State for Revenue Hammad Azhar, the existing tax-to-GDP ratio stands at just 11.3 per cent. This poor performance of the FBR has compelled the provinces to demand that they be made part of the revenue generation policymaking process during the first meeting of the new NFC. It is a solid and rational demand as only an inclusive and participatory mechanism from all federating units could result in improvement in tax collection.

Another very important issue regarding the finalization of the new NFC is the role and demands of the International Monetary Fund (IMF) about the distribution of financial resources within the federation. The IMF, with which the PTI government has been negotiating a bailout loan arrangement of around $12 billion, has on several occasions expressed its reservations about the present vertical resource distribution arrangement that allocates 57.5 per cent of the net divisible tax pool to the provinces and the remaining 42.5 per cent to the federal government. The IMF is of the view that the reduced federal share under the 7th NFC has been a major source of the federal government’s fiscal problems. Therefore, the IMF has been recommending revisiting the NFC distribution formula, either by increasing the federal share or transfer of certain responsibilities to the provincial governments. Unless there is a consensus among the Centre and provinces in this regard, contracting a bailout package from the IMF for the federal government would be very difficult. There is also a political aspect of the whole situation. Sindh which is ruled by the opposition PPP,would try its utmost that the federal government is not able to get a loan from the IMF so that it could have the much-needed monetary space. Given the involvement of the PPP’s central leadership in large-scale financial corruption and money-laundering due to which it is under the radar of the National Accountability Bureau, it would try to create problems for the PTI’s federal government.

What problems the government may face, it is duty-bound to constitute a new NFC and it has become quite necessary, given the negative forces to formulate a new NFC at the earliest.

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