Revisiting NFC Award: beating about the same bush

With the reported advice of IMF to revisit the NFC (National Finance Commission) Award, certain quarters inclined towards centralisation have kick-started a new debate by trying to find faults in the award, considering it to be responsible for the deplorable fiscal situation in the country. Is that really so?

The fact remains that the Constitution of the Islamic Republic of Pakistan had been drafted and promulgated with consensus, carrying the collective wisdom of chosen representatives, and had long ago settled the administrative, legislative and financial authority of the Federation and federating units.

Most importantly, fiscal federalism has set arrangements for the collection and distribution of revenues accruing from different sources, including natural resources. However, through an organised campaign, attempts are being made to build public opinion against the NFC, trying to develop an impression as if NFC and the 18^th Amendment are the causes of all Ills of the economy. Such attempts may upset the equilibrium, with snowball effects, and disastrous consequences.

The same elements are trying to make us believe that NFC Awards were the outcome of the 18^th Amendment. But history of the awards is a testament to the fact that Article 160 of the Constitution of Pakistan regarding National Finance Commission was already there in the original Constitution of 1973. Date wise awards were: NFC, 1974 (1^st award); NFC, 1979 (2^nd NFC) 11^th Feb, 1979 (Remained Inconclusive): NFC, 1985 (3^rd NFC) (Remained Inconclusive); NFC, 1990 (4^th NFC) 23^rd July, 1990 1^st July, 1991; NFC, 1995 (5^th NFC) 23^rd July, 1995 Reconstituted on 10^th Dec, 1996 1^st July, 1997. The 6^th NFC was constituted on 22^nd July 2000, re-constituted on 13^th November 2003 by the President of Pakistan which could not reach a consensus decision and thus the matter was referred to the President of Pakistan for exercising his powers under Article 160 (6) of the Constitution. The President passed an order called “Distribution of Revenues and Grants-in-Aid (Amendment) Order, 2006”, President Order No.1 of 2006. The Award Issued under Article 160 (6) as Presidential Order No. 1 of 2006 revised vertical and horizontal distribution of divisible pool.

The historic 7^th NFC Award was announced on 18^th March 2010 resolving the longstanding issue of distribution of resources between the Federation and Provinces of Pakistan. In this Award, the share of provinces in vertical distribution was increased from 49% to 56% during 2010-11 and 57.5% during the remaining years of the Award. The traditional population based criteria for horizontal distribution of resources amongst the provinces has been changed to Multiple-Criteria Formula. According to this criterion, 82% distribution was made on population, 10.3% on poverty and backwardness, 5% on revenue collection/generation, and 2.7% on inverse population density.

Under the same Award, the Federal Government cut down its collection charges from 5% to 1%, which largely benefited the provinces. Realising the role of Khyber-Pakhtunkhwa in the war on terror, 1% of the net divisible pool was assigned to the province of Khyber-Pakhtunkhwa. Under the new formula, Punjab gets 51.74% from the divisible pool, Sindh 24.55%, Khyber-Pakhtunkhwa 14.62% and Balochistan 9.09%, a significant rise of 10%. In the new Award, Punjab has given up 1.27%, Sindh 0.39% and Khyber-Pakhtunkhwa 0.26%, while Balochistan has gained.

Acclaimed as a significant achievement for fiscal federalism in the country, the NFC Award depicts political consensus regarding the need to transfer resource control to the provinces. Moreover, outstanding issues, such as the arrears owed to Khyber-Pakhtunkhwa on net hydel profits and to Balochistan on gas development surcharge (GDS) by the Centre, have also been agreed upon.

One thing is clear from the aforementioned discussion, that the 7^th NFC award was signed on 30^th December, before the promulgation of the 18^th Amendment. However, the 18^th Amendment under Article 160 of the Constitution obligates that future NFC agreements cannot reduce the provinces’ share beyond that enumerated in the 7^th NFC Award, to prevent potential derailment of fiscal federalism in the future.

Here again, the question crops up: if the NFC Awards based on the aforementioned consensus formula had been working well till 2010 and even onwards, then why not now? Is there something essentially wrong with the Award? The fact remains that fault is not in the scheme of the Constitution but in those who have been holding the reigns of the country and have brought the country to such a pass.

The grim fact is that we have been breeding on aid-based economy and economic growth has not been in the real sense of the term. Why has the GDP growth rate remained at zero, which according to the World Bank the GDP may grow at 1.8% in the current fiscal year ending in June 2024? The major reasons are the scarce foreign reserves, muted economic activity, high cost of federal state-owned enterprises, poor governance failing to generate more revenue (tax collection) and bringing new incomes to tax nets, and above all, an elitist captured economy. Glued to centralism, the federal government is reluctant to shed the burden of departments to the provinces and is adamant that it would continue with the Benazir Income Support Programme, basically the job of the provinces. The major reason is dismal growth and failure to reduce poverty, as a result of which 40% now live below the poverty line.

It is high time that we realised that most of human development activities such as education, health, sports and recreation, social welfare, housing, water and sanitation and even economic development are being undertaken by the provinces, which is not possible without proper fiscal space. Therefore, instead of beating about the same bush to revisit the NFC Award, it is better to focus on improving the economy.

Published in The Express Tribune, April 17^th, 2024.

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