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February 11, 2019

NFC negotiations


February 11, 2019

When the question of the reconstitution of the National Finance Commission (NFC) award comes up, the disagreements between the centre and the provinces have a way of dominating the agenda. The NFC award is one of the most crucial mechanisms designed to ensure the health of Pakistan’s federation. The 18th constitutional amendment became a way of reinforcing the importance of the NFC award by promising that the share of the provinces from the national kitty could only increase in relation to the federation. Moreover, questions have remained over the mechanism through which the provincial pool is divided between the four provinces. From the newly-started round of negotiations for the 9th NFC award it seems that the federal government would like additional responsibilities for the collection of revenue. This was one of the controversial issues that were up for debate in the first meeting of the NFC award last week. Two major decisions taken in the meeting were to distribute resources based on the 2017 population census and involve provinces in the dialogue with the IMF on a possible bailout. The decision to move to the 2017 census is a logical one – as long as population is not the only mechanism to decide the distribution of resources.

The last NFC award failed on the issues of improving taxation and maintaining fiscal discipline. It will be important to see these issues rectified. The dispute between the provinces and the federal government on tax collection is not an easy one to resolve. Provincial tax administrations remain ill-equipped to collect additional taxes, while the FBR seems reluctant to let responsibilities go. Provinces are within their right to question the performance of the FBR with respect to tax collection at a time when poverty alleviation and equitable social development remain major concerns, with all governments feeling the squeeze of additional fiscal pressure. As per reports, six committees have been formed to address these disputes.

The major question is: whether there will be a new resource redistribution formula in this round – and who will be left unhappy with the new mechanism of distribution? The trick in the negotiations is for all parties to feel like they are better off than they were before. This is why one of the key issues that has been identified is additional resource mobilisation, but this is easier written on paper than actually done in practical terms. Improved data sharing on water and oil and gas production will also be a crucial issue to resolve. NFC award negotiations are always tricky. As it stands, the federal government looks less likely to compromise in front of provincial demands than it was when the 7th NFC award was announced. This will make for difficult negotiations moving forward.

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