President Asif Ali Zardari on Friday constituted the 11th National Finance Commission to finalise a new resource distribution award, paving the way for a fresh showdown as the Centre seeks to win back lost fiscal space while the provinces prepare to hold their ground.
In pursuance of Clause (1) of Article 160 of the Constitution, the president of Pakistan is pleased to constitute the 11th National Finance Commission (NFC) with immediate effect, according to a notification issued by the Ministry of Finance on Friday.
The five-year life of the 10th Commission ended last month, which held a few meetings but lost steam after the provinces did not find an incentive to negotiate due to chances of losing fiscal space to the Centre.
Under the 7th NFC award of 2010, the provincial share increased by 10% to 57.5% of the total federal divisible pool without giving them additional responsibilities. This contributed to a massive increase in the public debt due to the unsustainable budget deficit that the federal government has been running since 2010. Successive central governments also unduly retained some of the expenditures to achieve their political objectives in the provinces.
Minister for Finance Senator Muhammad Aurangzeb will be the chairman of the nine-member commission. The four provincial finance ministers will be the permanent members, while every province has a right to nominate one technical member.
Nasir Mahmood Khosa, former secretary and former executive director World Bank, would represent Punjab. Sindh has retained Dr Asad Sayeed while Dr Musharraf Rasool Cyan will again represent Khyber-Pakhtunkhwa. Balochistan has brought in Farman Ullah as its technical member.
In a joint working paper written by Sajid Amin and Vaqar Ahmad, the authors had argued that "the future NFC awards include a gradual shift from a needs-based distribution of resources to an efficiency-seeking sharing of resources".
They suggested cutting the population's weightage down by at least 10% in the next two NFC awards; slash its share by another 15% in the subsequent two awards to ultimately reduce its weightage to 50% from 82%.
The federal government is already working on some of these lines. Planning Minister Ahsan Iqbal has already proposed to freeze the population at 241.5 million for the purpose of the distribution of resources.
According to an internal meeting held this week in the Finance Ministry, one of the initial options that the federal government is considering is that at least 10 to 15% of the provincial shares in the federal taxes should be linked with improvements in the education, health, population management and climate indicators. The government also wants to incentivize provinces for tax efforts by linking the resources with tax efforts, said the sources.
The Ministry of Finance is also preparing a paper to showcase how the federal government's finances would look like in terms of public debt and budget deficits after five years. The theme of the paper will be that the existing 57.5% of the divisible pool that the provinces get has to be reduced and cuts are to be placed on the expenditures that are the responsibility of the provinces but are incurred by the Centre due to its own compulsions.
According to the terms of reference of the 11th Commission, the NFC will make recommendations to the President for the distribution between the Federation and the Provinces of the net proceeds of the taxes mentioned in clause (3) of Article 160 of the Constitution.
The new commission will also make recommendations about the grants-in-aid by the federal government to the provincial governments. The commission will look into borrowing powers being exercised by the federal government and the provincial governments.
It will also discuss and decide issues relating to sharing of financial expense incurred or to be incurred by the federation in respect of subjects and matters falling within the domain of the provinces and issues relating to sharing of financial expense incurred or to be incurred by the federation or the provinces or both in respect of trans-provincial matters.
This is the major issue as the Centre is incurring expenses that are not trans-provincial in nature and putting undue burden on the federal exchequer. The federal government is funding roads in Punjab, Sindh and Balochistan, which should have been financed by the respective provincial governments.
The new commission will also discuss issues relating to financial expenses for national projects to be shared by the federation and the provinces; and any other matter relating to finance referred to the Commission by the President.
The federal government may ask the provinces to set aside a portion of the divisible pool for building large dams. Dams are now a matter of national security and the provinces should contribute to it.
Under the 7th NFC award, Khyber-Pakhtunkhwa gets 1% of the divisible pool for mitigating the impact of war on terror.
The federal government is also considering demanding explicit allocations for Islamabad Capital Territory, Gilgit-Baltistan, and Azad Jammu & Kashmir, which are the responsibilities of the Centre.
Another significant consideration by the Center is that the transfers to the provinces should also be linked with onward allocations for the local governments, the sources added.
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