The federal government has transferred Rs1.28 trillion to the provinces as their share under the 7th National Finance Commission (NFC) Award — from the divisible tax pool and as straight transfers — during the first half of the present financial year.

The amount transferred is 45.4 per cent of the total provincial share of Rs2.82tr budgeted for the entire year but 3.5pc less than received by the provinces during the same period last fiscal year, according to the federal fiscal operations summary for the first six months to December 2020 published by the finance ministry last week.

Last year, the federal government had transferred Rs1.33tr to the provinces during the same period, which is equal to 40.9pc of the total annual provincial share projection of Rs3.25tr for 2019-20. Thus, the provincial transfers are actually down by Rs46.7 billion in absolute terms this year when compared with the last fiscal year in spite of the improvement in the ratio of the amount projected for the entire year.

The provinces had actually cumulatively received more than a quarter or Rs853bn less than their projected share from the federal transfers last year, which was why the provincial fiscal balance ended up to be in a deficit of Rs81bn against Islamabad’s projections of a surplus of Rs423bn to keep down the consolidated budget deficit at the close of the year.

Provincial transfers are actually down by Rs46.7bn in absolute terms this year when compared with the last fiscal year despite improvement in the ratio of the amount projected for the entire year

The federal government has projected a provincial surplus of Rs242bn for the present year. But the slowing growth in the Federal Board of Revenue (FBR) collection means it would miss the tax target of Rs4.9tr by a good margin, resulting in lesser than the projected transfers to the provinces. With the provincial expenditure on health increasing because of the Covid-19 pandemic, they may again end up throwing up a bigger than last year deficit when the year closes on June 30.

According to the NFC Award, the provinces get 57.5pc of the federal divisible pool. The award, agreed for five years in 2010, expired in 2015. But it has been extended every year since no progress has so far been made on a new award.

The situation suits the provinces as the federal government is asking them to forego at least 7pc of the net divisible tax pool revenues for financing security of the multi-billion-dollar China Pakistan Economic Corridor (CPEC) initiative, development of the merged districts of erstwhile Federally Administered Tribal Areas (Fata) with Khyber Pakhtunkhwa, Azad Kashmir and Gilgit Baltistan, as well as sharing foreign loan repayments, subsidies and losses of state-owned enterprises (SOEs). None of the provinces is prepared to accept a reduction in the provincial share, which is constitutionally protected under the landmark 18th amendment to the Constitution.

Khyber Pakhtunkhwa has however been lobbying with the other federating units for giving up a part of their share to support the development of its merged tribal districts. The north-western province is already drawing 1pc from the net pool as compensation for the damage done to its economy by years of war on terror on top of its share under the award.

The provincial share is distributed among the federating units on the basis of multiple criteria with population having 82pc weight, poverty and backwardness 10.3pc, inverse population density or area 2.7pc and revenue collection and generation 5pc.

The critics of the 7th award, including the International Monetary Fund, have argued that the increased share of the provinces under the NFC arrangements has led the Centre to accumulate massive debt — foreign and domestic both — because it is left with little or nothing after making loan repayments and paying for the defence of the country. It says the award transferred 10pc of additional tax sources to the provinces.

But the provinces insist that their share had grown by less than 1pc of GDP after the implementation of the award, which was not enough to finance the functions devolved to them after the passage of the 18th amendment. Besides, the federating units contend, the Centre was facing financial constraints mainly because of the poor FBR performance, which was assumed by the authors of the award to raise the tax revenues to 15pc of GDP by 2014-15 from less than 9pc in 2009-10.

The reduction in the provincial share during the first half of the fiscal year means a cut in the federal transfers to all the four federating units. Punjab, for example, has received Rs621.7bn or Rs12.7bn less than last year. Likewise, Balochistan’s share is slashed by Rs15.6bn billion to Rs133.3bn, Sindh’s by Rs7.8bn to Rs319.9bn and Khyber Pakhtunkhwa’s Rs9.6bn to Rs205.1bn.

Surprisingly, however, both Khyber Pakhtunkhwa and Balochistan have stepped up their development spending in spite of reduced federal transfers. Balochistan has increased its development expenditure by almost a quarter to Rs20bn from Rs15.5bn last year. Khyber Pakhtunkhwa is reported to have ramped up its development expenditure by 37.6pc to Rs50.1bn from Rs36.4bn. Punjab and Sindh on the other hand have slowed down their development spending by around 7pc to Rs108.6bn and by almost 5pc to Rs48.9bn.

The slower spending by the provinces has helped them throw up a cash surplus of Rs255.1bn — Punjab Rs146.4bn, Sindh Rs44bn, Khyber Pakhtunkhwa Rs19.7bn and Balochistan Rs45bn — in the first six months of the year. This has helped the federal government keep down its consolidated fiscal deficit to 2.5pc and primary surplus of 0.7pc of GDP compared with 2.3pc and 0.6pc in the same period last financial year.

Published in Dawn, The Business and Finance Weekly, February 8th, 2021