National Finance Commission: Centre reconvenes top finance body

President makes appointments to NFC; centre gears to revise resource distribution formula.

Shahbaz Rana August 19, 2011

ISLAMABAD: President Asif Ali Zardari on Thursday made his appointments to the National Finance Commission, as the federal government gears to lobby for a new resource distribution formula between the centre and provinces, barely a year after the implementation of the seventh NFC award.

Non-statutory members of the commission, according to the constitution, are appointed by the president on the recommendation of provincial governors. Other members of the commission include the federal finance minister as its chairperson and provincial finance ministers as statutory members.

Balochistan is the only province that has opted to nominate a new member, Sheikh Jaffar Khan Mandokhail, in place of Dr Gulfraz who was part of the negotiations for the 7th NFC Award.

The other three provinces have retained their members from the previous round of negotiations – Abdul Ghafoor Mirza for Punjab, Kaiser Bengali for Sindh and Senator Haji Mohammad Adeel for Khyber-Pakhtunkhwa.

Reduced fiscal space

The federal government, however, feels that its fiscal space has drastically reduced after the transfer of 10% additional resources to the provinces.

Under the 7th NFC Award, the provinces’ share from the federal divisible pool was increased from 47% to 56% for the first year of the implementation, and 57.5% for the remaining four years.

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Though the Pakistan Peoples Party-led government takes political credit of signing the award after a gap of 14 years, its finance managers complain that a large part of the national burden is borne by the federal government.

The existing fiscal arrangement has turned into a structural problem, finance ministry officials say.

With limited resources and increasing responsibilities, the federal government cannot restrict budget deficit below 6% of the total size of the economy, they add.

The federal government has estimated a 4% deficit for the current fiscal year, but finance managers privately say it is bound to slip to 6% of the GDP.

Crocodile tears

Architects of the 7th award, however, believe the problem is not with the award but in the federal government’s inability to generate additional resources.

Gulfraz, a former non-statutory member from Balochistan, said the 7th award’s projections were made on the assumption that the federal government would increase tax-to-GDP ratio by one percentage point every year – a cumulative five percentage point increase during the implementation period.

Instead of increasing to 10% from the current 9% as projected, the tax-to-GDP ratio dipped to 8.5% by the end of the last fiscal year.

The federal government wants to punish the provinces for its inability to increase federal income, Gulfraz said.

Share protected

The lobbying may be of little practical significance, however, because for this award period and the following years, the provinces’ share in the federal resources is protected through 18th amendment.

(Read: Devolution may be good but a lot of loose ends need to be tied up)

According to Article 160(3) of the constitution, the provinces’ shares in subsequent awards cannot be less than the share from previous award.

Any change to that would require a two-thirds majority in the parliament, highly improbably given the current political scenario.

Finance Ministry officials, however, say that in order to find a solution to the fiscal problem, the federal government could transfer more responsibilities to the provinces, for instance, devolution of power distribution companies that are causing billions of rupees worth of losses to the national exchequer.

Published in The Express Tribune, August 19th, 2011.


Punch Clock | 10 years ago | Reply

Comment on increasing resource rationalizing the expenditures seems extremely unrealistic and may only hold true in theory. The term political economy might ring some bells.

It seems highly unlikely that provinces will let go off their increased shares, especially after the 18th amendment, because of the election economics coming into play.

Meekal Ahmed | 10 years ago | Reply

To me, the issue is simple. Both the federal government AND the provinces need to raise resources. This is the crux of the issue. There should have been a medium-term path of fiscal consolidation that would be binding on ALL parties.

The provinces need to pare back their wasteful spending plans and be more realistic in what they can achieve given their administrative and technical absorptive capacity. If they did only this, budget deficts would be reduced and some provinces may even move into a surplus. This would reduce aggregate demand pressures and inflation and constrain the rise in debt levels.

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