August 19, 2002	Monday	Jamadi-us-Saani 9, 1423

The government decision on the National Finance Commission (NFC) Award, 2002 prior to October elections for the packaged democracy seems to augur well.

The four committees constituted for general consensus on the new formula for revenue distribution among the five stakeholders — federation and the federating units of Punjab, Sindh, the NWFP and Balochistan — have done a good deal of spadework for the next four years as per requirement of the Article 160 of the 1973 Constitution, under which, the government had announced the NFC in 2001. This would replace the NFC 1997, with which most of the provincial governments are not at all satisfied. Under the NFC 1997 Award, the then caretaker government through the Presidential Order No. 1 of 1997 on Feb 12, 1997, had fixed the share between the federation and the four federating units. The federal share in net proceeds of the Divisible Pool of taxes was fixed at 62.5 per cent. The remaining 37.5 per cent went to the provinces. The share of the provinces was: Punjab 57.9 per cent, Sindh 23.28 per cent, the NWFP 13.54 per cent and Balochistan 5.3 per cent.

Balochistan case: The critical analysis of the NFC Award 97, in vague, shows that Balochistan has suffered the most by almost every award, on account of population without taking into consideration the problems of poverty and territory. The first Award was announced in 1974, which continued till 1979. From 1979 to 1990, the NFC was formed twice. But for eleven long years, there was no consensus on the distribution of resources. As such, during this period, the distribution of resources to the provinces was made on the year-to-year basis. The next Award came in 1990 effective from 1st July 91 to June 30, 1996.

Federal assistance: Prior to 1990 Award, the federal government picked up revenue deficit of Balochistan. The federal government also provided Rs2,383 million as a special grant for meeting the revenue deficit, and Rs1,056 million for the special development programme. But after it, Balochistan was deprived of a total of Rs3,444 million receipts under both these heads.

Big chunk: Taking away a big chunk of Rs3,444m from Balochistan after the NFC Award 90, the then federal government had claimed that the Balochistan government would have sufficient resources with the implementation of the Award. The federal government projection for the province turned out to be true for two years only, but during the subsequent three years and the fourth extended year 1997, the development of the province suffered heavily. There were two major factors for it: unfavourable receipts under the NFC Awards, right from 1990 to 1997, and the exclusion of development budget from the NFC scope.

First budget: Balochistan’s first budget for the FY1997-98 under the NFC Award 1997, showed substantial revenue receipts, but for only six months. After which, the revenue receipts from the Federation were reduced to only making pays and allowances to its employees. No money was left for the development work. Moreover, the revenue surplus in the first year also went into negative. The reason was that on 1st July 1997, i.e. the effective date of the NFC Award ‘97, Balochistan was having overdraft of Rs2165.951 million against the borrowing limit of Rs207 million from the State Bank of Pakistan.

The provincial government had to resort to overdrafting from the SBP. On overdrafts exceeding the ceiling, the Balochistan government had to pay a mark-up at the rate of 16 per cent. As such, during FY1996-97, it paid Rs286.9 million as the mark-up to the SBP on account of its overdraft. Such a major mark-up payment was an unnecessary drain on the poor financial resources due to two factors: delay in the transfers of funds from Islamabad to Quetta and the persisting shortfall in federal receipts.

Award projection: According to Award 1997, it was projected that Balochistan would get federal receipts to the tune of Rs16.9 billion. But during the preparation of the Federal Budget for FY1997-98, the figure of Rs16.9 billion was reduced to Rs14.8 billion. It created a shortfall of Rs2.1 billion in the beginning of the operation of the Award. So much so that by Dec ‘97, a shortfall of Rs1.3 billion had occurred to Balochistan in the federal receipts.

Debtor balance: Moreover, the debtor balance inherited by the Balochistan government on 23rd Feb 1997, was Rs2.4 billion. The NFC award came into operation on 1st July 1997. Balochistan debtor balance on that day was Rs2.1 billion, which increased to Rs2.5 billion on 31st Dec 1997. Had the federal government stuck to the NFC projections, the then Balochistan government would not have faced the debtor balance problem. Even disbursement on the basis of budgetary allocations for 1997-98 would have eased the situation to a great extent.

New methodology: During FY1998-99, the federal government adopted a new methodology for the disbursement of funds to Balochistan and to other provinces. In the past the budgetary allocations were given in 12 equal instalments. The adjustment was made in the month of May. The deficit because of any shortfall in receipts would appear only in May. The new methodology by the federal government, was to disburse the federal receipts on the basis of actual collections reported by the CBR. Such system did not only delay the transfer of money to Balochistan and other provinces but also caused serious types of shortfalls. Such shortfalls forced Balochistan and other provincial governments to exceed the overdraft limit from the SBP. As such, Balochistan and other provincial governments had to pay huge mark-up on the overdraft. This led to an escalation in the deficit of Balochistan from the beginning of the financial year till the take-over by General Pervez Musharraf on October 12, 1999.

Change: Since then, the course of Balochistan’s finances has changed for the better by Governor Amir ul Mulk Mengal. The budget 2000-2001, showed stable financial position. The province is no more constrained to borrow from the SBP on high rates with tough measures and prudent financial management, the government has been able to cross the budgeted revenue target of Rs782.221 million. Balochistan had also collected Rs974.502 million. The province crossed the target by increasing provincial receipts by 14 per cent. Balochistan, thus, qualifies for a matching grant from the federal government as enunciated in the NFC Award. The same rosy picture is likely to emerge for the Budget 2002-03.

Sustainable situation: A consensus formula is essential for sustainable situation between the federation and the federating units. So far as Balochistan is concerned, the following suggestions should be taken into consideration.

* It is proposed that in order to make the gas development surcharge (GDS) an explicit tax, the surcharge should be collected at well head. It should be levied on per unit basis. The methodology for the GDS computation should be evolved. It should be according to international accounting practices as laid down in the report of the international consultants M/s Arthur Anderson & Co. Presently, the GDS is distributed among all the provinces on production basis. It is produced by Balochistan only, which is the only potential beneficiary, because the difference between the production cost and the gas price exists in this province, only. Gas production in all other provinces is carried out at break-even points.

* Privatization policy and debt retirement should be directed toward provincial debt retirement.

* The divisible pool base should be widened. The federal share has been increased from 20 per cent to 72.5 per cent and provincial shares reduced from 80 per cent to 37.5 per cent. The divisible pool is projected to be bigger, but actually it is not so, because the provinces finally stand net losers under the existing NFC Award.

* The population ratio of 1981 census is neither authentic nor justified. Balochistan population having a verified growth rate of 7 per cent as per 1981, has increased proportionately. Even on the basis of downward adjusted growth rate of 4.5 per cent, the population comes to 6.44 per cent and not 5.3 per cent. This calculation has caused a colossal loss of Rs1.5 billion.

* Besides population, development potential, area and backwardness of Balochistan should be taken into account by new formula under the NFC Award.