July 22, 2006	Saturday	Jumadi-ul-Sani 25, 1427

KARACHI, July 21: The provinces are getting only an additional amount of around Rs31 billion under the amended resources distribution formula of the National Finance Commission (NFC) during this fiscal year but they are paying back more than Rs40 billion to the federation, as no relief has been given on debt servicing, particularly on interests that range between 12 and 18 per cent.

At the end of the day, the federation will be the net beneficiary of Rs9.5 billion, as the budget 2006-07 stipulates a flow of Rs178.2 billion from the provinces to the Centre as against Rs138 billion last year.

In its annual review of the fiscal year 2005-06 on “Growing Macro-Economic Imbalances”, the private research consultancy Social Policy and Development Centre (SPDC) points out that the provinces will pay Rs22.8 billion interests and Rs16 billion principal amounts of the loans. The provinces will finance Rs85.6 billion of the Public Sector Development Programme (PSDP) and there is a provincial surplus of Rs53.8 billion flowing back to the federal government.

Interest payments and loan amounts are physically transferred from the provinces to the Centre but provincial contribution to the PSDP and provincial surplus are added to the total resources that the provinces contribute to reducing deficit. However physical transfers on servicing interests and loans have come down from Rs61 billion in 2004 to Rs38.8 billion in 2006-07.

The SPDC also questions the government’s claim of having increased provincial share by Rs94 billion in the fiscal year 2006-07 as compared to 2005-06. It finds the claim misleading on two counts: first, it compares estimates of 2007 with budgeted figures rather than revised estimates of 2006; second, the amount going to the provinces would have increased to some extent in any case because of a growth in tax base.

“A more relevant and transparent procedure is to compare the resources allocation to the provinces under the old and new NFC awards,” the SPDC review observes and illustrates it with a comparison of stipulated distribution of resources that shows that an increase of Rs63 billion would have come in any away without any change in the formula.

The SPDC review report draws a parallel of the resources availability to the provinces under the old 1997 NFC formula and under the amended distribution arrangement enforced by President Pervez Musharraf from the current fiscal year. Under the amended formula, the provinces are getting Rs407.5 billion as against Rs376.6 billion distribution proposed under the discarded 1997 NFC formula, showing an increase of only Rs30.9 billion.

The amended revenue formula has fixed 41.50 per cent share for the provinces in the federal tax pool for 2006-07, which will go up to 42.5 per cent in 2007-08, 43.75 per cent in 2008-09, 45 per cent in 2009-10 and 46.25 per cent in 2010-11 and onwards.

A distinct change of the revenue distribution formula in the amended NFC arrangement is that one-sixth collection of sales tax has now been made a part of the divisible pool. Under the old formula, it was a grant given to the provinces to compensate for the loss on account of abolition of octroi and zila tax. Under the new arrangement, Punjab gets 50 per cent share in one-sixth of sales tax, Sindh 34.45 per cent, the NWFP 9.93 and Balochistan 5.22 per cent.

From Rs29 billion special grants and subvention, the NWFP gets the highest share of 35 per cent, Balochistan 33 per cent, Sindh 21 per cent and Punjab 11 per cent.