LAHORE: Sindh expects the ongoing negotiations between the federation and the federating units for future resource distribution under the next National Finance Commission (NFC) award to be “painstaking”, which will “take time” to conclude.

“It will take time. These are painstaking negotiations and to build consensus [these] cannot be hurried,” Asad Sayeed, Sindh’s non-statutory member on the reconstituted ninth NFC, told Dawn via an email interview. “I did say this during the first meeting [of the NFC on Feb 6] to Federal Finance Minister Asad Umar and he appeared to agree.”

Take a look: Provinces’ stance on the NFC

Mr Sayeed chose not to answer some of the questions because the negotiations have just begun and all stakeholders — the federal and provincial governments — are firming up their positions on different issues that are on the table. His replies to other questions were also quite brief.

Province more in favour of enlarging size of federal tax pie

“We expect a just award with complete consensus among all the stakeholders. That was the spirit of the seventh NFC award and we would like continuation of that spirit,” he asserted in reply to another question. However, he underscored the fact that a lot depended on how forthcoming the federal government was in forging a consensus in the spirit of cooperative federalism.

Asked if Sindh would press for changes in horizontal revenue-sharing formula for resource distribution among the provinces, he refused to reveal the province’s position “at this stage of the negotiations”.

But a Sindh government official with direct knowledge of the Murad Ali Shah government’s stance said the province was more in favour of enlarging the size of the federal tax pie rather than pressing for altering the current horizontal resource distribution arrangement for greater funds from the same smaller divisible pool.

“We realise that both the federal government and provinces are under resourced. The solution to this issue is in increasing tax collection and not in reduction in the share of any stakeholder,” an official, who spoke on the condition of anonymity because he is not authorised to make public statements on behalf of the provincial government, told Dawn by telephone.

All provinces have expressed their concerns over the federal government and its tax collection arm — the Federal Board of Revenue (FBR) — to increase the tax-to-GDP (gross domestic product) ratio since the finalisation of the last award. The seventh award that substantially increased the provincial share and changed the horizontal distribution formula to allow greater share to smaller provinces had projected the tax-to-GDP ratio to rise to 15 per cent of GDP at the expiry of its tenure in 2015 from 9.2 per cent in 2010.

Yet, according to Minister of State for Revenue Hammad Azhar, the present tax-to-GDP ratio stands at just 11.3 per cent even after nine years of finalisation of the previous award. Hence, the provinces had expressed their serious concerns over the poor performance of the FBR and demanded that they be involved in revenue generation policymaking process during the first meeting of the Commission.

Mr Sayeed said all the usual issues — divisible pool and horizontal sharing formulas — were on the table. “In addition, there are issues of straight transfers pertaining to oil and gas royalties, and excise duty as well as net hydel profits. There is also the issue of finding resources for the development of the ex-Fata [Federally Administered Tribal Areas that have now been merged with Khyber Pakhtunkhwa].”

IMF’s reservations

The International Monetary Fund (IMF) has repeatedly expressed its reservations on 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 considers the reduced federal share a major source of the federal government’s fiscal problems and called for revisiting this arrangement either through an increase in the federal share or transfer of certain responsibilities to the provincial governments. The Fund is expected to insist on this as talks between Islamabad and the lender of last resort for another bailout package advance in the next several weeks.

“We [the provinces] had in the first meeting [of the NFC] requested the finance minister to arrange a meeting of the IMF either with the NFC or with provincial governments so that we can understand their position exactly and put forth our views to them also,” Mr Sayeed said. At the same time, he cautioned: “They should also know that the Article 160(3)(a) of the Constitution prohibits reduction in the provincial share. And to change that, it requires a constitutional amendment.”

As an alternate, the federal government has since the start of the resource distribution negotiations in 2016 been demanding that the provinces should pick part of the costs of development projects in ex-Fata, Gilgit-Baltistan and AJK, as well as chip in for additional internal security expenditure on account of ongoing military operation against militant organisation in Khyber Pakhtunkhwa and elsewhere in the country.

Besides, Islamabad also wants the units to contribute to the expense on protection of the China Pakistan Economic Corridor (CPEC) route. So far the provinces have refused to oblige the federal government.

Published in Dawn, March 27th, 2019