Distribution of financial resources in a federal state or a state with a federal structure is never without troubles. In Western states, centuries ago, elaborate and sustainable mechanisms were developed to distribute financial resources between the central government and federating units.
However, in Pakistan, distribution of financial resources vertically between the central government and provinces has always been a massive problem. This fundamentally has been due to the highly centralised state structure of Pakistan.
In the 1973 Constitution of Pakistan, a provision was included known as the National Finance Commission (NFC) to distribute financial resources or the Federal Divisible Pool (FDP) both vertically between the federal government and federating units as well as horizontally among the provinces.
But no fixed criteria was set for the distribution of financial resources and the federal and provincial governments are required to use the constitutional forum of the Council of Common Interests (CCI) to agree upon the distribution of these resources.
The NFC Award is thus an instrumental mechanism to determine the vertical distribution of financial resources between the federal government and provinces, in addition to horizontal distribution of the finances among the federating units.
The 18th Constitutional Amendment (2010) and the seventh NFC Award agreed upon in the same year enabled provinces, including Khyber-Pakhtunkhwa (K-P), to have somewhat more fiscal space.
The main reason was that under the 18th Amendment the Concurrent Legislative List of the original constitution was abolished and the subjects/departments maintained in the list were devolved to the provinces as provided in the 1973 constitution. However, the seventh NFC distribution was not at all based on justice.
Under the 18th Amendment, the increase of provincial share of financial resources to 57.5 percent through the seventh NFC was a salubrious development.
Given the number and strength of subjects/departments devolved to the provinces through the amendment, the provincial share in the divisible pool of resources should have been much higher. At least 75 percent of the financial share should have been given to the provinces and with the federal government retaining the rest of the part.
Historically, K-P and Balochistan have been far lesser developed provinces as compared to Punjab and Sindh. So they should have been given the lion’s share of the financial resources but there are multiple logical reasons behind this unequal allotment.
Firstly, neither province has been the main focus of central government developmental policies or initiatives due to which there has been a widespread sense of deprivation with strong separatist movements emerging among the residents of these provinces. In order to overcome this sense of deprivation in K-P and Balochistan, a far bigger share of the NFC must have been earmarked for them.
This is in the larger national interest of Pakistan. With such a sense of deprivation and centrifugal tendencies prevailing in two of the four provinces of the federation, a strong and viable state cannot be formed. In other words, overcoming the prevailing sense of deprivation among a large part of a country’s population is critically necessary for the process of state formation and nation-building.
Secondly, due to large-scale underdevelopment of K-P and Balochistan the overall development of Pakistan has been seriously affected. One key reason has been that due to underdevelopment of these provinces, in particular K-P having the highest density per square kilometre among all provinces, apart from prevalence of large-scale unemployment and poverty, a large number of people have been constantly migrating to other provinces in search of employment and higher standard of living. This process has been scaling back the development of even the relatively developed provinces which, in this case, have been Punjab, Sindh and Balochistan.
For instance, around four to seven million Pakhtuns, mostly from K-P and some from Upper Balochistan, live in Karachi. Consequently, Karachi has the largest Pakhtun population instead of Peshawar. Due to migration of a large number of young people – particularly educated ones – to other provinces, the chances of economic development have received a serious blow. Against this backdrop, giving a larger share to K-P in the NFC Award has become critical.
Realising the role of K-P in the war on terror, one percent of the net divisible pool was assigned to this province. Under the new formula, Punjab would get 51.74 percent from the divisible pool, Sindh 24.55 percent, K-P 16.42 percent and Balochistan 9.09 percent In the new award, Punjab gave up 1.27 percent, Sindh 0.39 percent and K-P 26 percent, while Balochistan had gained.
The FATA merger
The seventh NFC Award was finalised in 2010 when the erstwhile Federally Administered Tribal Areas (Fata) had not been merged into K-P province. The merger took place in May 2018. This increased not only the area of the province but also its population. According to the 2017 national census, the total population of FATA was 4,993,044 or nearly five million.
Unfortunately, the change in area and population of K-P was not accompanied by an increase in the share of the province in the NFC award. This is totally unconstitutional and, according to the criteria of the distribution of the national financial resources among provinces, population is the main – rather the biggest criterion – catering for 82 percent of the award.
It is the official stance of the K-P government that after the merger of FATA with the province, the latter is entitled to a 19.6 percent share in the NFC award based only on its existing population. However, the province since 2018 has been receiving only 16.42 percent.
When FATA was being merged with K-P, the federal government of the Pakistan Muslim League-Nawaz (PML-N) had pledged to provide three percent additional share of the NFC. However, the federal government had made just a request to provincial governments of Punjab, Sindh and Balochistan to cut their own existing share of the NFC in order to provide the additional three percent to K-P. Nevertheless, all provinces raised serious objections to curtailing their own share.
After almost six years of the merger, it appears that the federal government of the PML-N in 2018 promised the additional three percent to K-P just to keep the then provincial government of the Pakistan Tehreek-e-Insaf (PTI) satisfied.
The PML-N government did not have any plan or means to provide the additional share of the NFC to K-P. The incoming federal government of PTI could only ask the other three provinces to provide the additional percentage of funds to K-P but due to their reluctance it could not give any relief to its own party government in the province.
Nevertheless, the PTI federal government should have constituted a new NFC and taken into consideration the case of K-P’s additional share of NFC resources as it had a sweeping majority in the National Assembly from the province and had a very strong government in K-P also.
However, due to non-finalising the new NFC share for K-P has not been increased so far. The previous government of PML-N-PPP-BAP-MQM and Jamiat-e-Ulema-e-Islam (JUI-F) of Prime Minister Shahbaz Sharif (April 2022-November 2023) and the incumbent government of the same parties and prime minister minus the JUI-F (Feb 2024) must be criticised for failure to take up the case of K-P for increased share in the NFC.
Poverty and backwardness
Relative to the two more mainstream and developed provinces of Punjab and Sindh, K-P is far poorer and backward in all respects whether infrastructure, or social indicators like literacy ratio, health or education. In this situation, inflation has the biggest impact on K-P in terms of increasing the poverty ratio as well as discouraging businesses.
According to Pakistan’s first-ever official report on multidimensional poverty, released in 2016, the Fata had the highest poverty rate, where three out of every four persons (73.7%) were poor in 2016. In other words, out of the approximately five million people, 3.5 million inhabitants of the merged tribal districts were poor in 2016. This means that such a large number of poor have been added to the population of K-P with the government having no means to support them.
Against this backdrop in the seventh NFC Award, the criterion of backwardness along with poverty has been given 10.30 weightage. Backwardness itself is not a condition, rather it is the result of certain other factors. Some of these important factors include bad law and order and physical security. Backwardness mainly means economic backwardness and in K-P backwardness has been directly related to non-availability of business opportunities. This has mainly been due to the worsening law and order situation because of unprecedented terrorism going on in the province since 2005.
Grant in lieu of war on terror
Noticeably, in the seventh NFC award, K-P was given a 1.80 percent grant to fight the war on terror. This grant of 1.80 percent part of the NFC was peanuts because K-P has been fighting not only for itself but serving as the frontline in Pakistan's war on terror. The province has been affected due to terrorism as a direct consequence of Pakistan's overall security policy and particularly within its context Afghan policy.
According to well-known economist Dr Hafiz Pasha, Pakistan's economy by 2018 had sustained a monumental loss of $252 billion after becoming part of the US-led war against terrorism. This massive amount was calculated by Dr Pasha in his book Growth and Inequality –Agenda for Reforms. Noticeably, the cost was double the amount that the Ministry of Finance had earlier published in the Economic Survey of Pakistan. The $252 billion loss is equal to 93 percent of the total size of the country's economy at the time.
By 2024 the economic losses due to the war against terrorism have increased significantly. Nearly 80 per cent of the brunt of terrorism and counterterrorism operations has been borne or faced by K-P. Therefore, much if not most of the negative economic fallout of terrorism and counterterrorism has been inflicted on K-P. Consequently, K-P economic losses could not be less than half of the total cost of Pakistan, which according to different estimates is at least $200 billion.
According to reputed economist Professor Sajjad Ahmed Jan, working at University of Peshawar, “The economic loss of K-P is not less than 100 billion dollars. Against this backdrop giving just 1.82 percent is totally unjustified. K-P should be given 25 percent additional weightage in the distribution of financial resources as the province has been fighting the country’s war on terror.”
The US authorities stated that it provided Pakistan a huge amount of $33 billion after 2001 when Islamabad became an official partner of the Washington-led Global War on Terror. Most of these funds Pakistan received in the form of the Coalition Support Fund (CSF). Pakistan disputes the US claim and only acknowledges receiving $28 billion from Washington. Whatever the exact amount, both are huge sums of money but unfortunately K-P has not been provided even a significant share from the aid received from the US. This left the province extensively backward whereas terrorism prevented the local economy from utilising its resources.
Thus denial of justified share in the foreign aid which Pakistan received particularly from the US in the context of its partnership in the GWoT on the one hand and terrorists making the K-P the theatre of their destructive activities on the other hand pushed the province in such a vortex and morass from which it could not come out. Only billions of dollars, at least 90 to 100 billion, could meaningfully lay the foundation of a modern flourishing economy in K-P and rehabilitate millions of affected residents as well as reconstruct the devastated infrastructure.
The refugee crisis
Pakistan has one of the largest refugee and illegal alien nationals population and more than 90 percent of this population comprises residents of Afghanistan. More significantly, 80 percent of these Afghans have been living for the last 40 years in K-P. The total number of registered or documented Afghans in Pakistan, according to UNHCR, is 2.18 million. Pakistani authorities’ estimates also show the presence of 1.7 million undocumented, unregistered or simply illegal Afghans in Pakistan.
However, both the UNHCR figures regarding documented Afghans in Pakistan and Pakistani authorities statistics about illegal Afghans appear to be inexact keeping in view the hitherto porous nature of their 2,640 kilometres-long international border. Moreover, there is also a big difference in UNHCR and Pakistan data about the total number of Afghans in Pakistan.
The UNHCR data suggest around 3.7 million Afghans living in Pakistan while Pakistani authorities say there are more than 4.4 million Afghans in Pakistan. Most registered and undocumented Afghans are living in the least economically developed provinces of Pakistan while Afghan nationals (legal or illegal) have a huge stake in K-P. The presence of a huge Afghan refugee population is an additional burden on K-P's financial, infrastructural, land and water resources. In this context the present multiple indicator criteria for distribution of the Federal Divisible Pool (FDP) without taking the Afghan refugee population as a factor is unrealistic and unjustified.
Unless the foundation of a modern vibrant economy is not laid in K-P particularly in the Merged Tribal Districts, the very factors of terrorism cannot be successfully addressed and the region cannot be mainstreamed.
Consequently, the country cannot be quarantined from the negative fallout of the prevailing situation there. So in the larger national interest of Pakistan there is a need to increase the share of the K-P in the NFC by jacking up the weightage of criteria of ‘grant in war against terrorism.’ Here it is also recommended that the foreign aid received in lieu of the country’s efforts against terrorism may be made part of the NFC as a special head and the nearly the entire funds allocated to K-P.
Dr Raza Khan is honorary Senior Research Fellow at Development Insights Lab, University of Peshawar, and can be reached at razakhan80@hotmail.com
All facts and information are the sole responsibility of the author