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February 18, 2019

A post-merger NFC


February 18, 2019

An important issue before the now functional 9th NFC is to accommodate the financial requirements of what after the merger of ex-Fata is an enlarged Khyber Pakhtunkhwa (KP).

The report of the Committee on FATA Reforms 2016 had recommended, and the then federal government committed, to allocate three percent of the divisible pool of taxes in the NFC award. The PTI government is, so far, keeping that up. This is a commitment given to a region that was kept historically backward and exploited with impunity. As we know to our cost, any serious deviation from what is committed to such regions may have consequences well beyond our imagination and control. Not committing the promised resources will just add to the disaffection in the region.

In the inaugural meeting of the 9th NFC, a working group to determine the fiscal share of ex-Fata was set up. It will appropriately be headed by the Khyber Pakhtunkhwa government. The group has to find a way to manage the three percent promise. The challenge is to work out a formula that would be acceptable to the federal as well as provincial governments. This they have to do at a time when the federal government is in an extremely precarious fiscal situation. There is talk about increasing rather than decreasing the federal share to meet defence and debt servicing requirements. Donors, particularly the IMF in the ongoing dialogue, are also terming the 7th NFC rather generous to the inexperienced provinces.

The Fata Reform Committee’s exact recommendation bears repeating here: “The NFC should make allocation of 3 percent of the available resources in the federal divisible pool (Rs90 billion) on annual basis for the implementation of the 10-year Development Plan. This will be in addition to the existing annual PSDP allocation of Rs21 billion.” The amount of Rs90 billion suggests that the committee was referring to the net divisible pool of federal taxes that stood at Rs3010.978 billion in 2015-16. The netting is done after deducting one percent collection charges and another one percent for KP in relation to the war on terror.

Today the recommendation is unlikely to have smooth sailing. The divisible pool of resources under the existing NFC award is apportioned between the federal government and the provinces in the ratio of 42.5: 57.5 – the so-called vertical distribution. A straight deduction of three percent will affect all levels of government, but the burden on the provinces will be relatively great due to their larger share.

Each NFC process in the past started with demands for increasing the share of the provinces. It is for the first time that the federal government is strategising to increase its own share. However, the 18th Constitutional Amendment stands in its way. According to this amendment, the share of the provinces cannot be less than the determination in the previous NFC. There is no constitutional bar on reducing the federal share. To achieve the objective of increasing its share, the federal government needs a constitutional amendment. Mustering necessary support in parliament for this amendment is almost impossible. As there is already agreement on using the results of the population census of 2017, there is no real basis to make any other change in the multiple criteria of resource distribution among the provinces – the so-called horizontal distribution.

Punjab’s share in the population has reduced. This means automatic reduction in its share in the horizontal distribution. It will resist any other reduction. Sindh has proposed a reduction in the federal share to the extent of its spending on the erstwhile Fata and, presumably, earmark it for the enlarged KP for the duration of the NFC.

In the original budget for 2018-19, the current and development allocation for Fata totalled Rs53.7 billion, far less than the three percent commitment of the committee. At any rate, the committee expected the federal government to continue development funding, which in the original 2018-19 budget was Rs28.25 billion, in addition to the three percent of the divisible pool. The total amount in 2015-16 was Rs111 billion annually. In terms of the original 2018-19 budget, the corresponding amount will be around Rs159 billion.

With political polarisation reinforcing the rigidity of respective positions, how to fulfil a commitment from which there is no backing off? There is a solution embedded in the existing NFC that would make former Fata better off and no claimant to divisible pool too worse off.

First, the 9th NFC has to adhere to the results of the new population census. The population of Fata is 2.4 percent of the population of Pakistan. Proportionately, it will be entitled to its share in the provincial share of the divisible pool. Secondly, it will receive its share according to the criteria of poverty and backwardness from the provincial share in the divisible pool. Third, the low population density will secure a share according to the inverse population density criteria.

In addition, the population share of KP has increased from 13.4 to 14.7 percent, with its own revenue implications. Finally, one percent of the divisible pool has been earmarked for KP to share the extra burden imposed by the war on terror during the period of the 7th NFC award. This may be continued in the 9th NFC award for the development of ex-Fata, as the region suffered the most at the hands of terrorists and the displacement resulting from the military operations.

For its part, the federal government should provide an annual development grant of around Rs30 billion, as per recommendation of the committee. All told, the resource envelop for ex-Fata is likely to be close to the commitment of three percent of the divisible pool. The resulting fiscal burden will be shared by the federal and provincial governments. This is as it should be, in recognition of the sacrifices made by the tribal people.

The recent return of peace in the former Fata region has not been accompanied by a well-resourced plan for education and development. An agreement in the 9th NFC is a necessary first step to fill the gap. This will also fulfil the promise made by Imran Khan in his speech at the Fata Convention in Peshawar on April 11, 2018.

The writer is a senior economist.

Email: [email protected]

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