A Step Towards Fiscal Federalism

by | Aug 12, 2010 | Federalism Project Posts | 0 comments

The Historic National Finance Commission Award 2009; a step towards fiscal Federalism

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President Pakistan Asif Ali Zardari is signing the 7th National Finance Commission Award, along with Prime Minister, Provincial Governors and Chief Ministers

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Gawadar, Balochistan: National Finance Commission Award ceremony, Prime Minister Yousuf Raza Gilani, Provincial Chief Ministers and the then Federal Finance Minister Mr. Shoukat Tareen

The 7th National Finance Commission award has been appreciated by all sections of society at national and international level. It has been considered as a victory of democracy and provincial partners. Political experts have acknowledged the efforts of Federal Government to bring all units at a consensus after a long time period.  Economists have considered it a foundation for “Fiscal Federalism” in Pakistan. 

Overall, the 7th NFC award is historic because it has eliminated a deadlock of approximately 13 years in discussion to bring out positive and solid change within federal and provincial revenue distribution. Credit goes to the federal and provincial governments who played a pivotal role to create an environment of trust and showed accommodative flexibility. This is a rare example of mutual understanding and adjustment of all units of a state. Federal government sacrificed a major chunk of its resources in favour of provinces and evolved new criteria for resource distribution. The selection of Gawadar for the initial signing of the NFC Award was symbolic to show solidarity with the Baloch people who suffered a lot during last dictatorial regime.

The resource distribution has been contentious in Pakistan between the federal government and the provinces. For the first time in the history of Pakistan, federal government has moved away from the unsatisfactory single criteria of population for the division of resources among the provinces, to a multi-criteria award that includes poverty/backwardness, revenue collection and generation and inverse population density.   This time the center and the provinces have shown a fair apportioning while addressing Balochistan has been guaranteed a minimum award and Khyber Pakhtunkhwa, carrying extraordinary burden of war on terror.

NFC award has introduced a significant new dimension for resource distribution to the satisfaction of all units of a federation.  Under the 7th NFC, stakeholders have agreed to increase the share of provinces in the divisible poll to 56% in the first year of NFC and to 57.5 percent in the remaining years of the award from the current level of 47.5%. Stakeholders have also agreed to reduce collection charges to just 1% from the existing level of 5% which will increase the actual transfers to the provinces from the divisible pool. It is indeed the first NFC award with a new national spirit to accommodate the demands of smaller units of federation.

The seventh NFC award will provide fair and large share of resources to the provinces and experts term NFC a great leap forward to fiscal autonomy of provinces. However, it is now obligation of provinces to use these resources with financial discipline to improve the lives of their people.

Revenue Sharing Formula for 7th NFC 2009

Indicators weight Punjab Sindh Khyber-Pakhtunkhwa Balochistan
Population share (SBP estimates) 82.0 57.36 23.71 13.82 5.11
Poverty/ backwardness 10.3 23.16 23.41 27.82 25.61
Revenue generation/ collection 5.0 44.0 50.0 5.0 1.0
Inverse population density (SBP estimates) 2.7 4.34 7.21 6.54 81.92
Total share 100 51.74 24.55 14.62 9.09

Province wise distribution of population and inverse population density is estimated on the base of data obtained Pakistan statistical Year Book 2008 published by Federal Bureau of Statistics, Islamabad

Highlights of the 7th NFC Award:

  • Federal and Provincial Governments developed a consensus.
  • The new award would come into effect from fiscal year 2010-2011.
  • Population to be given 82% weightage, poverty 10.3% , revenue collection 5%(2.5% revenue generation , 2.5% revenue collection), and area 2.7%
  • The provincial share of the divisible pool would increase from the present 47.5% to 56% in the first year of NFC and 57.5% in the remaining years of the award.
  • As for inter-provincial sharing of the divisible pool, it would be made on the basis of multiple criteria formula and their respective weight as agreed upon are population, poverty/backwardness, revenue (generation/collection), and poverty. Consequently, under the new formula Punjab would get 51.74% from the divisible pool, Sindh 24.55%, Khyber Pakhtunkhwa 14.62% and Balochistan 9.09%.
  • Punjab would give up 1.27%, Sindh 0.39% and Khyber Pakhtunkhwa 0.26% while Balochistan has gained.
  • In monetary terms the award translates into Rs. 471 billion for Punjab, Rs. 223 billion for Sindh, Rs. 133 billion for Khyber Pakhtunkhwa and Rs.83 billion for Balochistan. These are the projections for FY 2010-2011 and based on 56% share.
  • For the remaining years of the new award based on provincial share of 57.5%, Punjab would receive Rs. 938 billion, Sindh Rs.445 billion, Khyber Pakhtunkhwa Rs. 265 billion and Balochistan Rs.165 billion. At present Punjab is receiving 419 billion, Sindh 197 billion, Khyber Pakhtunkhwa Rs. 118 billion and Balochistan Rs. 53 billion.
  • Sindh would receive an additional transfer of Rs. 6 billion from the Federal Government which is equivalent to 0.66% of the provincial pool. The Commission also decided to devolve sales tax on the services to the provincial level.
  • The federal and Provincial Governments pledged commitment to bear all expenditures incurred by Khyber Pakhtunkhwa Government on the war on terror.
  • Thus, as a gesture of support by all provinces and the Federation 1% of the total divisible pool has been earmarked for Khyber Pakhtunkhwa as an additional resource for war on terror during the award period. This would be equivalent to 1.83% of the provincial pool.

National Finance Commission is constituted under Article 160(1) of the 1973 constitution and proposed to be held at the intervals of five years. Its members are Federal Finance Minister (Chairman), Provincial Finance Ministers and other concerning experts which the President may appoint after consultation with provincial Governors [Constitution of Pakistan (1973)]. With the adoption of 18th amendment according to the article 160(3-A) the share of the provinces in each award of NFC shall not be less than the share given to the provinces in previous award.