The national issues cropping up owing to the deadlock in the National Finance Commission (NFC) are prompting the federation to have a fresh look at its devolution policies.

It includes a shift from an exclusive focus on the vertical distribution of resources between the centre and the provinces to issues in horizontal sharing of NFC divisible pool among the provinces.

Since the expiry of the five-year 7th award in 2015, the centre did not allow the NFC discourse to go beyond vertical resource distribution. That proved to be futile. Federal Minister for Planning and Development Ahsan Iqbal says the existing NFC award is “regressive as it provides 80 per cent weight to population and actually incentivises population growth.”

The NFC focus on population — the predominant criteria for resource distribution — has also frustrated its original objective of removing fiscal imbalances among the federating units, according to an independent study. It notes that federal resources continue to flow disproportionately to the provinces with large populations. The Indian Finance Commission has reduced the population distribution weightage to 25pc.

Federal resources continue to flow disproportionately to the provinces with large populations

To fight crises, the World Bank is seeking capital to scale up lending on various counts, and it would very much like to explore further the potential of sub-national lending, says an official of the international lender. US Treasury Secretary Janet Yellen advised the World Bank in April to step up lending to sub-sovereign entities such as cities and regional authorities.

Earlier, the Planning Commission had submitted a summary to the Cabinet suggesting that provincial projects related to subjects devolved to the sub-federations should be excluded (barring exceptional cases) from Federal Public Sector Development Programme FY24. The resources thus saved will be diverted to finance strategic federal projects suffering from delays and cost overruns for want of funds.

The 7th award marked a fundamental shift to make resource distribution more equitable and progressive, says a study conducted in 2019 titled “NFC Award: Devising Formula for Horizontal Distribution.” The study, authored jointly by fiscal experts Sajid Amin Javed and Vaqar Ahmed, acknowledges that the award was need-based, but it failed to capture the full sense of equity.

It was the first time that the resource distribution under the 7th NFC award was based not on population alone but on multiple factors with the following weights: population 82pc, poverty and backwardness 10.30pc, resource generation and collection 5pc and inverse population density 2.7pc.

The share of Punjab on a population basis in the NFC Divisible Pool was reduced from 53.20pc to 51.74pc, that of Sindh from 24.96pc to 24.55pc and in the case of Khyber Pakhtunkhwa’s from 14.78pcto 14.64pc. The share of Balochistan with inverse population rate was increased from 7.05pc to 9.09pc.

The future awards are expected to build on the multiple criteria initiated in the 7th award to help bring backward regions at par with the developed areas.

The provincial governments complain that various constitutional provisions relating to fiscal and administrative devolution have not been fully implemented.

KP caretaker Chief Minister Azam Khan says the issue of the share of Fata districts merged with KP in the next NFC award, as well as other dues, were brought to the attention of Prime Minister Shahbaz Sharif recently. He hoped that the matter would be resolved in the near future.

The 18th Amendment created participatory federalism, but such organisations as the National Finance Commission and Council of Common Interests remain largely inoperative.

It is not clear whether the remarks of Mr Ahsan Iqbal would lead to a long-delayed meeting of the National Finance Commission any time soon with the government preoccupied with budget-making for the next fiscal year.

There are also problems at the provincial level which need to be tackled by a fresh NFC accord. The provincial revenues are not increasing as stipulated because incomes from agriculture and property are lightly taxed for want of really effective efficiency criteria in the NFC. The increasing provincial non-development expenditures are also questioned.

Fiscal experts suggest that the weightage in distribution criteria for tax collection should be much higher than 5pc and must be gradually increased to encourage the provinces to generate more revenues.

They feel that the federal government needs to highlight that NFC is a tool to create economic efficiency and seed development priorities across the country. It is pointed out that the Indian Finance Commission has adopted multi-based criteria with five broad categories: need, equity, efficiency, financial disability and non-plan resource expenditure.

Since the sales tax on services (STS) was devolved in 2010 to the province, the revenue collection by Punjab and Sindh has increased many times compared to the meagre amount raised earlier by the Federal Board of Revenue. Critics, however, say that it is still much below the STS’s revenue potential. While the collection of sales tax on goods falls in the constitutional jurisdiction of the province, it is still retained by the federation.

Published in Dawn, The Business and Finance Weekly, May 29th, 2023