A fresh award by the 11th National Finance Commission (NFC) on the vertical and horizontal distribution of tax revenues under its divisible pool would require an enlightened approach to reconcile divergent views and enable the smooth functioning of the federation and provinces.

To make equitable and rapid social, economic and political progress, the country cannot afford to remain stuck with the 7th NFC award as it has for the past 15 years.

The current transformational era requires all stakeholders to seek cooperation and not indulge in conflict or confrontation in order to tackle lingering problems and unforeseen formidable domestic and external shocks and challenges.

While retaining their independence, it is imperative for all political parties, groups and individuals to pursue a policy of cooperation on the basis of give and take for achieving a consensus on a fresh award. But pragmatism must work within the four walls of principles enshrined in the Constitution and for strengthening fiscal federalism. And all three tiers of governments must be accountable to each other to ensure the effective implementation of the new award.

As the government prepares to discuss the new divisible pool, provinces hope to challenge previous metrics to receive fair shares

Here, one may recall a statement by Balochistan Chief Minister Mir Sarfraz Bugti that a joint stand will be taken through consultations with all parliamentary parties and also those parties not represented in the parliament to defend the rights of the people of the province.

Speaking at a pre-NFC meeting recently, Mr Bugti said the suggestions of economic and financial experts, and experts from other fields, would be sought so that the interests of the people of the province could be comprehensively defended at the NFC meeting. On August 26, he also decided to set up the Bank of Balochistan, which is seen as a step towards self-reliance and fulfilling the long-time demand of the local business community and the citizens.

However, fears are haunting analysts that negotiations on the new NFC Terms of Reference would be far from smooth, which, a Dawn editorial says, signals Islamabad’s intent to reclaim the fiscal space ceded to the provinces under the 7th NFC Award. To quote media reports, among other stipulations, the Centre is proposing a cut in the provinces’ share from the divisible pool by at least 10 per cent, seeking allocations for Islamabad Capital Territory, Gilgit-Baltistan and Azad Jammu and Kashmir that fall within its purview.

Currently the provinces’ share in the NFC divisible pool stands at 59pc, but the federation collects petroleum levy (about Rs1.5 trillion) and has secured about Rs1.5tr cash balances from the provinces effectively, which analysts say has reversed the financial balance in its favour. Khyber Pakhtunkhwa (KP) argues that one of the reasons for low income and high budget deficits was that the Federal Board of Revenue (FBR) failed to increase its tax-to-GDP ratio to 15pc by 2015 (currently at around 10.2pc).

The solution to the centre’s financial woes does not lie in reclaiming a greater share of resources but in raising the tax-to-GDP ratio to increase the size of the pie and halting wasteful expenditure

Similarly, the provinces have failed to deliver the 7th NFC Award target to increase their revenue by 0.5pc of GDP every year.

“The discussions for a new award should not end in a showdown between the centre and the provinces,” say analysts at Dawn, adding, “It should be used as an opportunity to find a solution to Pakistan’s myriad economic and fiscal challenges.”

The solution to the centre’s financial woes does not lie in reclaiming a greater share of resources but in raising the tax-to-GDP ratio to increase the size of the pie and halting wasteful expenditure. That said, the provinces also need to transfer fiscal resources to the local government and increase their tax revenues.

Under Balochistan’s phased five-year plan, jointly financed by the International Fund for Agricultural Development and the provincial government, 40 union councils in Gwadar and Lasbela have finalised development plans involving the local community, government departments and private sector partners. The plan outline aims to address local development priorities by mobilising community resources and strengthening self-reliance.

On the other hand, KP finance mini­ster Muzammil Aslam says his government would demand changes in the formula of the horizontal resource distribution within the federating units during the upcoming NFC deliberations. Mr Aslam explained that 82pc of the resource distribution among the provinces was based on the population criterion and 10.6pc on the basis of backwardness, but the KP government would now stipulate reduction in population, prosperity, and forestation as criteria for the distribution of resources. The federal minister of planning has already proposed to freeze the population at 241.5m for the purpose of the distribution of resources. Reduction in the population’s share is also under consideration.

One of the initial options that the financing ministry is considering is that at least 10–15pc of the provincial shares in the federal taxes should be linked with improvements in the education, health, population management and climate indicators. The government also wants to further incentivise provinces by linking the resources with tax efforts.

Mr Aslam argues, “The imbalance in the development approach has aggravated the situation in the smaller provinces,” while the planning minister has talked about financial constraints, as the development budgets of Sindh and Punjab exceeded that of the centre.

Published in Dawn, The Business and Finance Weekly, September 1st, 2025