Is the NFC Award sustainable?
How should revenues be distributed between the Federation and the Provinces? Consideration number 1: We need a financially functional federal system. Consideration number 2: We need a resource distribution formula that is fair, equitable and, most importantly, sustainable. Consideration number 3: The resource distribution mechanism must be dynamic. Consideration number 4: The resource distribution procedure must be flexible.
Under Article 160 of the Constitution, “Within six months of the commencing day and thereafter at intervals not exceeding five years, the President shall constitute a National Finance Commission consisting of the Minister of Finance of the Federal Government, the Ministers of Finance of the Provincial Governments, and such other persons as may be appointed by the President after consultation with Governors of the Provinces.”
The National Finance Commission Awards have a rather checkered history. In 1974, the 1st NFC Award under Zulfikar Ali Bhutto was conclusive. In 1979, the 2nd and the 3rd NFC Awards under Zia-ul-Haq remained inconclusive. In 1991, the 4th NFC Award under Nawaz Sharif was conclusive. In 1995, the 5th NFC Award remained inconclusive. In 2002, the 6th NFC Award under Pervez Musharraf was inconclusive.
On 18 March 2010, the 7th NFC Award-under Yousaf Raza Gillani-was announced under which “the share of Provinces in vertical distribution has been 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 criteria 82% distribution was made on population, 10.3% on poverty and backwardness, 5% revenue collection/generation, and 2.7% on inverse population density (IPD).” Punjab’s percentage of share on the basis of the 7th NFC Award is 51.74%, Sindh 24.55%, Khyber Pakhtunkhwa 14.62% and Baluchistan 9.09%.
The 8th NFC Award under Nawaz Sharif also remained inconclusive. The 9th National Finance Commision also failed to conclude. The maiden meeting of the 10th National Finance Commision is scheduled to take place in February.
Is the NFC Award sustainable? Budget 2021-22 estimates ‘FBR Collection’ of Rs5.8 trillion of which Rs3.3 trillion is to be paid out to the provinces under the NFC Award. The Federation is thus left with Rs2.5 trillion. Budget 2021-22 expects ‘Non-Tax Revenue’ of Rs2 trillion leaving the Federation with a total of Rs4.5 trillion.
Of the Rs4.5 trillion left with the Federation, the Federation has to pay Rs3 trillion in ‘debt servicing’ and Rs1.4 trillion for ‘defense’. After ‘debt servicing’ and ‘defense’ the Federation is left with next-to-nothing. The Federation must therefore borrow to cover the Public Sector Development Program (PSDP) Rs900 billion; borrow to cover Pensions of Rs480 billion; borrow to cover Running of the Civil Government of Rs479 billion; borrow to cover Subsidies of Rs682 billion and borrow even more to cover Grants of Rs1.2 trillion.
To be certain, the Rs3 trillion in ‘debt service payments’ are made on debt taken by the State of Pakistan, not just Islamabad. Yes, the Rs1.4 trillion for ‘defense’ is to defend the State of Pakistan, not just Islamabad. Then there’s the multi-billion dollar Covid-19 vaccine procurement and other unforeseen natural calamities like floods, locust attack and earthquakes.
Clearly, the resource distribution formula under the 7th NFC Award is neither fair nor sustainable. The 18th Amendment made the Award rather inflexible-and that has resulted in a financially non-functional federal system. The need of the hour is to revisit the entire resource distribution mechanism, including the formula. To be sure, the Provinces currently have no incentive to revisit. The need of the hour is to incentivize the Provinces to assist the Federation in revenue generation rather than just laying back and collecting trillions under the NFC Award.
A revisit is a must. A consensus-based revisit will be ideal-but a revisit for a sustainable NFC Award is the only way out of this financial quagmire.