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Changes in the NFC award

New award applicable from next financial year will be finalised in the next few months.


Sep 24 - 30, 2001

The Finance Minister, Shaukat Aziz, who presided over the meeting of the 8th National Finance Commission in Islamabad on September 9, 2001, has assured the nation that thorny issues will be resolved and the new award applicable from next financial year will be finalised in the next few months with concensus of all the federation units. It would need some drastic changes in the present award in force since fiscal year 1996-97 both in shares of federal government and the Provinces in the divisible pool, distribution of province wise share besides enhancing the size of the divisible pool.

The 8th National Finance Commission was constituted by the then Chief Executive Gen. Pervez Musharraf in Dec. last on the recommendation of Inter Provincial Coordination Committee 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 governments, 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.

Distribution of resources has always been a matter of contention between various provinces of Pakistan. Given the paucity of funds and the urge of different regions to develop at a fast rate, it is not surprising. Since the inception of the country, Heads of State have been constituting commissions/committees under the statutory provisions and announcing National Finance Commission (NFC) awards which determine the share of each province in the divisible pool of resources. The 1973 constitution makes it mandatory for the President to constitute NFC under Article 160. At present, distribution is governed by the seventh 1996-97 award which is to expire by the close of the current fiscal year. The eighth commission was announced in August last year, its composition was completed by December, 2000 and its work is now in progress.

The task of the Commission, however, it exceptionally tough. Over the decades, views of provinces have hardened to an extent that it is extremely difficult to reach a consensus. Smaller provinces are particularly vexed. Seen closely, some of their grievances appear to be genuine. The real representatives of provinces have largely been ignored in deciding the distribution of resources. For instance, the seventh award was announced without the consent of elected assemblies or a representative government and the eighth one is also going to meet with a similar fate due to suspension of assemblies and removal of elected government. Right from the first budget of 1948-49, financial powers of the provinces to levy taxes or receive taxes on the basis of collection were gradually curtailed by the Federal government. Before partition of the country, provinces were competent to levy and retain sales tax. In the 1948-49 budget, sales tax was taken over by the centre but the provinces were allocated 50 per cent of the proceeds on collection basis. However, even this entitlement was withdrawn subsequently.

The most contentious issue is the criteria to apportion the amount in the divisible pool. According to the present formula, population is the sole determining factor of distribution of resources between different provinces. This could have been acceptable if the capacity to generate resources was in line with the level of population and poverty level was almost the same in every province. Unfortunately, such a situation is not obtaining in the country. For instance, Punjab, on an average, has been contributing about 22.9 per cent to the national exchequer but receiving more than 58 per cent of the resources. For Sindh, the position is quite the reverse. It has been contributing about 68 per cent but receiving only 23 per cent. Although, most of the revenue generating capacity in Sindh is due to the existence of sea port in Karachi and location of head offices of financial institutions, yet a large divergence between contribution and distribution is a cause of heart-burning. The argument of Balochistan also cannot be easily overlooked. In a Federation development should be fairly balanced and the poverty level evenly spread otherwise the accusations of a step-motherly treatment cannot be avoided.

It seems that the present NFC is aware of the issues and proceeding on the right track. After the Commission's meeting on 9th September, the Finance Minister indicated that the members were basically addressing three issues. Firstly, which of the taxes should be included in the divisible pool. Secondly, the share-ratio of 62.5 and 37.5 between the Federation and provinces was being looked into, and lastly, a new formula had to be evolved which, besides population, would take into consideration such factors as poverty, the need of resources for development and other points. He added that the Federation and provinces had agreed to a framework and the final outcome would be to the satisfaction of all provinces. Next meeting of the Commission is likely to be held in Sindh in November.

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 finalizing 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 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 are 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 are 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.

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.