Being a federal polity, Pakistan is based on the principle of fiscal federalism. It is an arrangement in which some taxes and resources are made part of a federal divisible pool for subsequent redistribution among the federating units to ensure national cohesion through fiscal equalisation, inclusiveness and equitable resource distribution.
Fiscal decentralisation, inclusiveness and equalisation are the central tenets of federalism for which the National Finance Commission (NFC) provides the constitutionally protected institutional mechanism. Article 160 of the constitution provides for the NFC. It clearly delineates the composition of NFC and the Federal Divisible Pool (FDP) along with a timeframe for the NFC Award. The 18th Amendment has made it mandatory that the share of provinces, in each NFC award, shall not be less than its share in the previous award.
The vertical and horizontal distribution of resources from the FDP is envisioned to be determined by the NFC in accordance with both the letter and spirit of constitution. Historically, provinces have got the major share in vertical distribution. Leaving aside the Niemeyer Award of 1935 and Riesman Award of 1952, the subsequent awards have given major share to the provinces. In the 1965 award, the provinces received 65 percent of the FDP and the federal government 35 percent. In 1970, the share of the federal government was further reduced to 20 percent and that of provinces was increased to 80 percent. The military government of General Zia also did not disturb this ratio.
The NFC award of 1990 not only retained this ratio but also increased the size of the FDP by the inclusion of new taxes in it. Unfortunately, in 1996, the interim government of Malik Meraj Khalid drastically reduced the share of provinces to 37.5 percent in the fifth NFC award. This change by a non-elected government deeply damaged the cause of the federation and deprived the provinces of their due share.
The sixth NFC failed to arrive at consensus and the president issued an award through an ordinance. This award slightly increased the pool and raised the share of the provinces to 45 percent – the share was to be increased incrementally by one percent annually.
The 18th Amendment and 7th NFC award are both historic milestones that addressed the smaller provinces’ struggle for fiscal decentralisation and genuine federal dispensation. The 7th NFC award increased the share of provinces to 57.5 percent and also introduced multiple-indicator formula for horizontal resource distribution, giving 82 percent weightage to population, 10.3 percent to poverty, 5 percent to revenue generation and 2.7 percent to inverse population density.
As if the lessons learnt throughout our chequered history are not enough, some elements are trying to reverse the share of the provinces. The composition of the 10th NFC and the TORs of the commission expose this mindset. It has been struck down by courts as unconstitutional. Given the long standing grievances of the smaller provinces, a new consensus award still seems a distant dream, and yet another ordinance is looming on the horizon, likely to tamper with the vertical and horizontal resource distribution formula of the 7th NFC Award.
The 7th NFC award was issued with the optimism that the federal government would make extra efforts to create fiscal space by increasing tax-to-GDP ratio, shedding off the administrative burden of devolved departments, revitalising inefficient SOEs, managing circular debt, enhancing FDI, and bridging current account deficit mainly through increased exports. However, failure in these areas has led to yawning current account deficit, fiscal deficit and increased debt servicing. In a strange move, the federal government now wants the provinces to pay for this failure.
In a comparative study of the 6th and 7th NFC awards till 2017-18, Shakil Qadir, the additional chief secretary of Khyber Pakhtunkhwa (KP), has calculated the cumulative increase in the share of the provinces. His findings show that had there been no 7th NFC Award, the federal government would have received a paltry amount of Rs305billion. So much ado about so little!
The federal government is shying away from discharging its constitutional responsibility of issuing the NFC award after five years. Both the PML-N and PTI have deprived the provinces of the dividends of the 18th Amendment by not creating consensus on the new NFC award. Smaller provinces like KP and Balochistan are suffering for no fault of their own. KP has been the worst victim of war on terror. The 25th Amendment has merged erstwhile Fata with KP, increasing the fiscal needs of the province.
The merger and 2017 census have cumulatively increased the population of KP from 13 to 17 percent. Although under the existing horizontal distribution formula population has been given 82 percent weightage in horizontal distribution of resources, the share of KP has not been adjusted in accordance with its post-merger population. This will have consequences for the uplift of merged areas and service delivery in the rest of KP. This scenario necessitates the recalculation of KP horizontal share in the absences of a fresh NFC award. The prime minister has also pledged to the merged areas 3 percent from the share of the federal government, Punjab and KP. This promise is yet to be fulfilled.
Amid these dark clouds over the fate of federalism, fiscal decentralisation, equalisation and ultimately national integration and cohesion, Jinnah’s soul must be greatly perturbed for it was he who stood firmly and consistently for provincial autonomy and a decentralised polity against a centrist majoritarian system. How would Jinnah have felt if he were alive today to see that in Pakistan smaller provinces are still not given their due rights? Hegel said that we learn from history that we do not learn from history. But those who are tampering with the 7th NFC Award and 18th Amendment must remember that Jinnah’s dream of a genuine federation will never be complete in Pakistan if the smaller provinces are denied their constitutionally guaranteed rights.
The writer is a member of the Khyber Pakhtunkhwa Assembly.
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