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10th NFC Award: Federal govt plans 15pc deduction in provincial share from FDP

By Mehtab Haider
May 15, 2020

ISLAMABAD: Without changing vertical distribution ratio among the federal government and provinces, the Centre plans deduction of up to 15 percent from the provinces’ shares into the Federal Divisible Pool (FDP) in the name of four major expenditure heads.

It will result into distribution of resources among Centre and the provinces in a massive way. The existing share of provinces 42.5 percent and Centre's share of 57.5 percent will be changed massively. Now the share of Centre will go up to 60 percent while the provinces' share will shrink to 40 percent, a calculation done by renowned economist Dr Kaiser Bengali and shared with The News disclosed on Thursday.

Post 18th Amendment, this is the first time the government plans to share cost with the provinces on four major expenditure heads, including debt servicing, defence/security, losses incurring to state-owned enterprises (SOEs) and development of AJK/GB into terms of reference (ToRs) of the newly-constituted the NFC Award.

The vertical distribution among the Centre and the provinces stood at 42.5 percent and 57.5 percent respectively under the existing operational 7th NFC Award. Under the 18th Amendment, the share of provinces cannot be reduced, so it will remain intact. However, the federal government desires that the share of provinces should be deducted from the existing 99 percent out of 57.5 percent to around 85 percent. There is 1 percent additional share already given to KP on account of the war of terror losses from the FDP in accordance with the 7th NFC Award, so the provinces get their remaining share out of total 99 percent of 57.5 percent of FDP.

Earlier, during the second meeting of 9th NFC held under the chairmanship of former finance minister Ishaq Dar, the Centre had proposed to the provinces for deduction of 7 percent from their share, out of their 57.5 percent share. That would have included 3 percent on account of security and 4 percent for development of AJK/GB and FATA areas. Under that formula, the share of the provinces was proposed to be deducted by 7 percent from 99 percent to 92 percent out of the total share of 57.5 percent.

This time around, the Centre wants to slash the share of provinces by up to 15 percent as currently 99 percent of total share of 57.5 percent among the provinces, would come down to 84 percent.

Former non-official member of NFC and renowned economist Dr Kaiser Bengali has estimated the losses in the share of provinces and shared with The News by stating that the share of provinces might come down from 57.5 percent to 39.6 percent of total 99 percent with deduction in share up to 15 percent.

So Punjab’s share would reduce to 29.43 percent of 57.5 percent to 24.99 percent, Sindh’s share would decrease from 13.98 percent to 11.86 percent, KP’s share would come down from 8.32 percent to 7.06 percent and Balochistan’s share from 5.17 percent to 4.39 percent.

Similarly, some major changes have been made in part of ToRs of the 10th NFC as customs duty is proposed to be excluded from the Federal Divisible Pool (FDP), resulting into shrinking the size of the resource envelop.

Dr Abdul Hafeez Shaikh in his capacity as the Adviser to Prime Minister on Finance and Revenues is to chair the meetings of NFC in the absence of Federal Minister for Finance. The portfolio of finance minister currently lies with Prime Minister Imran Khan.

Actually, after giving subvention and other resources, over 60 percent out of FDP goes to the provinces, so the Centre is left with meager resource envelop. But the question arises why the Center failed to increase tax to GDP ratio by 1 percent jacking it up from 10 percent to 15 percent envisaged at the time of finalizing the 7th NFC Award. After 10 years, the tax to GDP ratio remains almost stagnant, rather it might further decline and fall below 10 percent of GDP by end of the ongoing fiscal year 2019-20 in the post COVID-19 scenario.