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Drastic changes in the NFC Award

In the past Sindh and Balochistan have been agitating over the inequitable distribution of shares of provinces in divisible taxes

Jan 15 - 21, 2001

Some drastic changes are likely to be made in the new award of the National Finance Commission, which is meeting some time this month to consider almost unanimous demand from the provinces to enhance their share in the divisible pool.

On the recommendation of Inter Provincial Coordination Committee (IPCC) the Chief Executive Gen. Pervez Musharraf last month announced reconstitution of National Finance Commission to review the 1996 award two years ahead of schedule.

Earlier a high level meeting of Inter-provincial Coordination Committee (IPCC) called by the Interior Minister and attended by Provincial government, federal & Provincial Ministers and senior officials had recommended to the government to review the NFC Award over which the small provinces have been agitating for long. The Chief Executive has already hinted at removing provincial disharmony through equitable distribution of federal and provincial resources. In the past Sindh and Balochistan have been agitating over the inequitable distribution of shares of provinces in divisible taxes.

Financial problems

The meeting was told that the provincial government could not complete the ongoing development projects because of financial restraints due to abolishment of the octroi system and amendments in the taxation procedure. All the provinces submitted their recommendations in seeking fresh allocation of financial resources under the NFC award. Finance Minister Shaukat Aziz assured the federating units that serious consideration would be given to the recommendations. If the recommendations found justified, measures will be taken to provide additional allocation in the next federal budget, Shaukat added.

In a meeting called by Gen. (Rtd) Tanveer Naqvi, chairman National Reconstruction Bureau to discuss fiscal decentralisation of financial resources and power between the provincial and district government, a formula was proposed in the meeting that for the Provincial Financial Award there should be four bases for transfer of funds from provinces to local government i.e. population, needs of districts, backwardness and share of each district in taxes. The provinces demanded that the NFC award should also be finalised by transfer of funds from centre to the provinces on these four bases rather than the population alone.

The federal government has received nominations from all the four provinces to constitute the new National Finance Commission (NFC) Award and convene its first meeting this month. Official sources said that the government was now "scrutinizing" the names suggested by the provinces for the new NFC award. Most of the names, they said, were acceptable to the Centre and the purpose of the exercise was to constitute the new NFC Award urgently with a view to mitigating the grievances of the provinces against the present resource distribution formula.

"The new distribution formula will be worked out in such a manner that it satisfies everyone, specially the smaller provinces," said an official of the Ministry of Finance. He said that preparations for constituting and finalising the NFC Award had been started on the instructions of Chief Executive Gen Pervez Musharraf to mitigate the feelings of the provinces over the issue.

The government is said to have been advised by some planners to allocate 50 per cent resources for Centre and 50 per cent for the provinces against the prevailing formula of 62.5 per cent for Centre and 37.5 for provinces under the 1996 NFC Award to remove inter-provincial disharmony.

The sources said a number of officials of the Finance Ministry had apparently agreed with the present authorities that the divisible pool should offer additional funds to the provinces in the new NFC Award. However, they did not make any firm commitment about resource availability to address one of the concerns of the Chief Executive, the removal of inter-provincial disharmony.

Some economists and experts in the Planning Commission and the Finance Ministry were of the opinion that the federation would be strengthened if the Centre and the provinces share the divisible pool on a fifty-fifty basis. Those who were resisting the 50:50 formula in the Ministry of Finance maintained that it was pretty difficult to spare additional funds due to huge amount of debt servicing, defence expenditures as well as the failure of the CBR to generate adequate revenues over the years. Like previous political governments, the present government, sources said, too looked helpless to work out an equitable distribution formula due to existing financial constraints.

Chief Executive Gen Pervez Musharraf had reportedly asked the authorities concerned to make available some additional funds to remove the grievances of the provinces by evolving better resource distribution formula.

However, he was told that under the present circumstances there was hardly any fiscal space available to oblige the provinces with more resources except that the government could perhaps ensure some justice by cutting Punjab's share due to reduction in its population and offer the same to Sindh whose population has increased over the years compared to other provinces.

Sources said any better funding plan for the provinces under the new NFC Award would simply base on the government's efforts to have additional revenues and exports which at present did not look promising. The World Bank believed that Pakistan was facing serious balance of payment crisis and that the government should overcome its serious debt burden problem on priority. The government has been advised by the World Bank to consider increasing revenues and exports to work out any equitable distribution formula under the new NFC Award.