Since 1974 population has been the sole criterion of the distribution of the Divisible Pool revenues in Pakistan. It has been used as a proxy for the re-distributional needs of the provinces and is considered reflective of spatial variations in the level of development in the country. It has, however, been seen that reliance on just one proxy (population) is very simplistic.

Even though Punjab has the highest population share, it is not the most underdeveloped and the needy province viewed in a number of ways. Also, the existing formula makes the practice of revenue-sharing inconsistent with the basic economic principles of the design of the intergovernmental transfers and the international practice. On top of this, the sole reliance on population to distribute the federal revenues, which constitute the lifeline of the provinces, creates an incentive for an environment which entirely negates the major national objective of reducing the population growth in the country.

To gain higher revenue share, it is in the interest of the provinces to encourage population growth and migration into its boundaries. It has always jeopardised the carrying out of a population census and the gap of over 18 years in carrying out census after 1981 is a testimony to this argument. It is, therefore, important that the criteria for distribution of revenues across the provinces be refined and is brought more in line with basic economic principles and international practice so that it can more successfully achieve the underlying objectives of revenue sharing in Pakistan.

The 1996 NFC Award: A major change in strategy in the 1996 NFC Award was adopted by creating a National Resource Picture with the aim of projecting tax and non-tax revenues of the federal and provincial governments combined, and adding on to these funds that become available through borrowings to finance the targeted national budget deficit by protecting priority expenditures of the federal (defence, debt-servicing, social sector and development expenditures) and provincial governments. Besides, the above change the Divisible Pool expanded to cover all taxes (except surcharges on oil), and the federal provincial revenue shares, respectively have changed from 20:80 per cent in earlier awards to 62.5:37.5 per cent in the current award.

The Award proved to be extra unfair for Sindh as none of the demands of the GoS were accepted for given consideration. More than anything, Sindh suffered immensely due to selection of an unfairly low benchmark figure for its current expenditure. Prior to the NFC meetings, the federal government had asked all the provinces to undertake an economy cut in the interest of the national economy. Sindh at that time conducted an internal economy measures amounting to Rs5 billion. This amount was used arbitrarily as an economy cut for the NFC Award for computing the expenditure requirements. This was done despite repeated protests of the government of Sindh, where it was clarified that it was an internal measure at expenditure rationalization and should not be used for future expenditure and resource requirements.

On the contrary, the benchmark figures of the budgetary current expenditures for Punjab was taken as Rs75.5 billions, following an adjustment of Rs1.5 billion economy cut from its budgeted current expenditure figure of Rs77 billion. The government of Sindh’s protests were vindicated as the actual expenditure incurred for 1996-97 came to be Rs39 billion, Rs3 billion more than the expenditure benchmark taken in the base year.

Had the benchmark figure for Sindh been computed on the basis of actual expenditure of Rs39 billion Sindh would have been eligible for a subvention on the same basis as extended to the NWFP and Balochistan. A full calculation on the actual figures has been done on the formula used for computing subvention for the NWFP and Balochistan and in accordance with it an amount of Rs3.4 billion is due to Sindh (Annex-A)

Sindh’s contribution: The situation becomes grim in the background of the fact that Sindh makes proportionately highest contribution in the national growth; and its contribution in national revenues is the highest no matter how it is calculated. Conversely, it receives proportionately the least from the Federal Divisible Pool. For all practical purposes the province is able to meet some of its essential functional responsibilities due to the incomes received in lieu of its natural resources of oil and gas. Exclusive of the revenue transfers received on account of natural resources Sindh’s existing share under the Divisible Pool cannot even meet the government’s wage bill.

Out of the Sindh contribution of Rs189 billion in the Federal Divisible Pool it only received Rs30 billion (16 per cent) in return in the year 1999-2000. This indicates a substantial resource transfer of Rs159 billions to other provinces or the federation. For every rupee of tax paid by the people of Sindh they get back only 16 paisas in the form of expenditure on services, and the remainder 84 paisas, is transferred to other provinces or to the federation.

Conversely Punjab contributed Rs78 billion to the Divisible Pool and received Rs70 billion (in FY1999-00) indicating a return transfer equivalent to almost 90 per cent of its collection.

In the case of Balochistan and the NWFP the share reverted back to the provinces accounted for 82 per cent of their collection in the Divisible Pool taxes.

As such, there is a sizeable transfer of resources under the existing revenue sharing formula from the province of Sindh to the other three provinces of Pakistan and all other provinces are being effectively subsidized at the expense of Sindh.

Sindh’s poverty:There is another striking feature which has been consistently ignored by the Federation and that is in contrast to the province’s richness is the poverty situation which has assumed critical proportions due to the continued economic stagnation coupled with fiscal constraints of the provincial government and its inability to extend requisite level of social and infrastructure services to the population. According to a host of independent studies the extent and intensity of poverty in Sindh is one of the highest in the province, especially if the data of urban and rural poverty is segregated rural Sindh comes out to be as poor as Balochistan, if not more.

General perception: All the above factors coupled with the dissatisfaction with the entire mechanism of revenue distribution involving: * vertical sharing formula and fiscal centralization, * status-quo in horizontal revenue distribution, * massive deviation from the projected revenues during the current NFC and * selection of a wrong expenditure benchmark, are seen to be unfavourable to Sindh. All these factors put together had almost a crippling effect on Sindh as it led to increase in debt burden, especially in the overdraft liability of the State Bank of Pakistan which skyrocketed to over Rs10 billion, a drastic decline in the non-salary expenditures, especially the social sectors as these constitute the bulk of provincial expenditures, maintenance of infrastructure and a very undesirable reduction in development which reduced from being 25 per cent of the provincial expenditure in 1990 to less than 5 per cent in FY 2000.

These issues have been sounded at various forums including the NFC Monitoring Committee’s meetings (held only once or twice) however, these did not lead to any redressal of Sindh’s issues. An overriding perception of the system being Sindh unfriendly has recently echoed in the provincial assembly and almost 20 resolutions have been passed on the subject in a single day. The provincial government would be unable to face the public pressure unless the federal government resolves the issue in an equitable manner.

(The writer is Adviser to Sindh’s Chief Minister for Finance and Cooperation)