Breaking the NFC deadlock

Updated 13 Aug 2018


THE PML-N government could not break the enduring deadlock at the National Finance Commission (NFC) to finalise the 9th NFC award during the party’s five-year tenure.

Will the incoming PTI government succeed where its predecessor failed? For the next five-year tenure of the new award, the NFC will have to include issues such as the new population census, the merger of Fata with Khyber Pakhtunkhwa, and possibly the creation of a South Punjab province — which is on the PTI’s 100-day agenda.

Meanwhile, the voices for fiscal re-centralisation to remove a “vertical fiscal imbalance” are growing louder. In recent public debate, issues in horizontal distribution of resources that have cropped up and may not be prudent to ignore are: undue weightage given to population, and an absence of impetus for boosting the provinces’ own tax collection and generation.

The PTI has yet to make up its mind on how to go about tackling divergent views. In an interview on July 30 with Business Recorder, Mr Asad Umar, tipped as the next finance minister, said the NFC award is “long overdue”. He however, added: “at this stage, it is too early to provide specifics”.

Voices for fiscal re-centralisation to remove a “vertical fiscal imbalance” are growing louder with views that population should cease to be a consideration in resource distribution

Three days later, addressing a workshop on ‘Sustainable Development Goals—Baseline on Target Setting’ Finance Minister Dr Shamshad Akhtar stressed that the finalisation of the NFC award was “crucial” for the next financial year to promote social development; align federal and provincial budgets; take onboard provincial and local governments to pursue SDG goals; and play an effective role in policy implementation.

Under constitutional mandate, the current resource distribution arrangement, based on expenditures and needs of the stakeholders, has to be revised every five years. After Fata’s merger with Khyber Pakhtunkhwa, the province, with increased population and much larger territory, will qualify for a bigger share in the Divisible Pool.

The changes in the horizontal distribution criteria may be easier than the vertical distribution of resources. To amend the NFC formula for sharing of resources between the federation and all the provinces combined, a two-third majority is required in the parliament which the PTI will not command. A change of heart in major opposition parties, which managed the 18th Amendment, is unlikely to occur.

The PTI Chairman Imran Khan has set his sight on reforming the Federal Board of Revenue and incentivising the informal sector to pay taxes and raise tax revenue with a mind-boggling target of Rs8 trillion.

A peep in party’s posture in the NFC proceedings would show that resource-poor KP government was comfortable with horizontal distribution of resources under the 7th NFC award as the province shared the revenues raised by Sindh and Punjab. On the other hand, the KP government’s representatives in the NFC had sought to increase the share of the provinces from 57.5 per cent to 75pc; something beyond the realm of possibility.

The PTI provincial government had reservations about transferring collection of sales tax on goods to the federating units as provided under the 1973 Constitution (and proposed by Sindh), fearing that the province’s share in the divisible pool would be reduced.

On the political level in the two smaller provinces, there are views that population should cease to be a consideration in resource distribution; as suggested by Senator Usman Khan Kakar from Balochistan and Senator Shibli Faraz from KP in a meeting of Senate Standing Committee on Planning and Development held in May. They said that the NFC Award should be based on only poverty/ backwardness and social and economic development of the federating units.

The multiple indicators and their respective weights in the 7th NFC award are as follows: population 82pc, poverty/backwardness 10.3pc, revenue collection/generation 5pc, and inverse population ratio 2.7pc.

On the technical level too, views differ sharply. In an article published in this newspaper on July 9, titled ‘Federation’s fiscal dismemberment’, political economist Mohammad Zubair Khan was highly critical of the 7th NFC award. He argued that the progress in improving basic social service delivery — one of the key economic justifications for fiscal decentralisation — has been mixed.

The International Monetary Fund holds similar views. The Fund says the 7th NFC award has created “a vertical fiscal imbalance” but sees no easy solutions. It has advised Pakistan to create a contingency fund to be financed jointly by the federal government and the provinces.

However, there is also a view that federal spending can be significantly cut by administrative reforms. The number of federal ministries can be reduced from 27 to 18 and divisions from 35 to 23 through mergers, creation of new entities and transfer to the provinces as provided by the 18th Amendment.

Some even see room for reducing spending on national security. And the two bigger provinces are convinced that more revenues can be generated by transfer of collection of sub-national taxes to the federating units, still retained by the federation.

The issues involved in hammering out the new NFC award are complex, diverse and difficult to resolve. All stakeholders have to demonstrate flexibility and mutual accommodation for arriving at a decision to strengthen fiscal federalism and not weaken it.

Published in Dawn, The Business and Finance Weekly, August 13th, 2018