Fiscal implications

The 18th Amendment and 7th NFC Award have fundamentally restructured how Pakistan is to be governed


constitution is a living document and can be amended by parliament to make it responsive to the changing needs of the citizens. Seen this way, all the 25 amendments made to the constitution of Pakistan so far should be defended or criticised on the sole criterion of whether these were inserted in the constitution as a response to any civic needs. Consider the latest amendment — the one that merged the Federally Administered Tribal Areas (FATA) with the province of Khyber Pakhtunkhwa. It certainly has been enacted to fulfil a longstanding demand by many political parties, activists and the residents of FATA who saw the administrative and legal system of those areas as being incompatible with democratic fundamental rights guaranteed by the constitution.

In Pakistan’s historical context, however, some constitutional amendments have been more pertinent to civic life than others. For instance, the Eighth (1985), the Seventeenth (2004) and the Eighteenth (2010) Amendments have had more far reaching impacts on the state and the society than any other over the last four decades. The former two changed a parliamentary system into a semi-presidential one. The last one not only ensured the return of a parliamentary system, it also gave more autonomy to the provinces and declared any attempt to subvert, abrogate or suspend the constitution as an act of high treason.

Enactment of 7th National Finance Commission (NFC) Award in April 2010 was another important political development preceding the passage of the 18th Amendment. It ensured a fiscal decentralisation that was necessary to implement the administrative and legislative autonomy provided by the Eighteenth Amendment. Provincial share in the divisible pool of federal revenues was raised to 56 percent in the first year after the implementation of the NFC award — and then to 57.5 percent in subsequent years. Poverty or backwardness, revenue collection or revenue generation and inverse population density were all considered for the first time as criteria for distributing financial resources among the provinces. Earlier, population was the only criterion for such distribution. Consequently, Punjab and Sindh accepted a reduction in their shares — to 51.74 percent and 24.5 percent respectively — while the shares of Khyber Pakhtunkhwa and Balochistan increased to 14.62 percent and 9.09 respectively.

Both the 18th Amendment and the 7th NFC Award, thus, fundamentally restructured how Pakistan is governed — a change that has also generated a deep divide between the proponents of a strong Centre and those of a genuinely devolved federal system. This divide has widened over the last ten years and has been especially intense over the fiscal implications of the 18th Amendment. The critics of the amendment contend that it is having a negative effect on the fiscal stability of Pakistan.

The divide between proponents of a strong Centre and those of the federal system has widened during the last ten years, especially when it comes to fiscal implications of the 18th Amendment.

Below is a brief description of its major fiscal implications.

Firstly, the provinces have been authorised to generate additional revenue through sales tax on services, capital gains tax on properties and income tax on agriculture (which, indeed, has their mandate since 2001).

Secondly, the provinces were assured through the insertion of Clause 3(A) in Article 160 of the constitution that their share in any future NFC Award shall not be less than the share given to them in the previous Award.

Thirdly, they were given an enhanced say, through the Council of Common Interest (CCI), in formulating and regulating policies related to major ports, water reservoirs, electricity, public debt, national census, industries and production among many other similarly common subjects. The council was to have a permanent secretariat and was supposed to meet at least once after 90 days to build consensus on all divisive issues — including a lockdown over Covid-19.

Lastly, the provinces were given greater access to domestic and/or foreign borrowing.

In an ideal situation, these provisions would have helped the provinces develop large, progressive and buoyant tax bases to be able to take care of their added administrative responsibilities under the amendment. They were also supposed to have distributed financial resources among their districts through provincial finance commissions — and under the same criteria that is being used by the National Finance Commission. In the same vein, the federal and provincial governments would have jointly worked to expand the tax base and increase the tax to GDP ratio.

In order to ensure that the federal government could live within its reduced financial resources under the revised NFC formula, it was supposed to have only less than a dozen ministries and divisions.

We, however, are not living in an ideal world. Provincial revenue authorities set up in Punjab and Sindh did make an impressive start but could not sustain their performance. In the words of the State Bank of Pakistan — as stated in its Annual Report for 2018-19 — the lack of institutional capacity among provinces has given “rise to lower revenue collection, less tax-to-GDP ratio and poor fiscal consolidation efforts”. The provinces are also not willing to share their revenues with districts. At the level of the central government, too, the number of federal departments has not gone down as it should have. Instead, federal expenses have increased. The Federal Board of Revenue (FBR) could also neither expand the tax base nor increase the tax to GDP ratio.

Resultantly, the federal government is barely left with funds to pay for its two non-discretionary expenses — debt servicing and defence. Rest, it had to borrow to finance even its administrative and development expenditures. In the current fiscal year, it does not have sufficient funds to service its debt — for which it will have to borrow even more. The provinces, especially Sindh, are simultaneously complaining that they are not receiving their due share from the federal divisible pool.

All these monetary and fiscal issues aside, the federal and provincial governments have failed to utilise the CCI and other such forums for inter-provincial coordination. As is obvious from the different approaches being taken in different parts of the country over a lockdown to avoid the spread of coronavirus, these institutional arrangements have been rendered irrelevant in clear violation of Article 154 of the constitution which states: “The Council shall formulate and regulate policies in relation to matters in part II of the Federal Legislative List and shall exercise supervision and control over related institutions.”

This is not to say that the current governments in the Centre as well as in the provinces are exclusively to be blamed for this state of affairs. If one looks back at the three democratically elected dispensations over the last ten years, one can say that both the provincial and the federal parts of them implemented the provisions of the 18th Amendment only selectively — solely on the convenient basis of what suited their political and partisan interests. This explains why expert opinion for or against the amendment remains deeply divided.

This division, however, should not be used as an excuse by the federal authorities to roll back the 18th Amendment unilaterally. Without first letting the full benefits of a fiscal and administrative devolution reach the provincial and district levels and then conducting an evidence-based assessment of service delivery before and after the 18th Amendment, no conclusion should be reached about its future. Such a step will only create further divisions and conflicts in the federation — particularly if it is taken without a thorough understanding of the actors and factors involved. 

The writer heads Sustainable Development Policy Institute. He tweets at @abidsuleri

Fiscal implications