In an unexpected and a largely uncelebrated move, finance minister Asad Umar has already invited provinces to re-nominate the non-statutory members of the National Finance Commission (NFC). That the initiative comes at a time when Q-block is supposedly busy with much more pressing concerns such how to deal with the external account situation, Asad’s invitation toward the formation of the NFC is a much-welcomed move.
However, all may not be hunky dory. Insiders say the PTI may fall prey to the thinking that the centre must deduct 7 percent prior to the divisibility of the divisible pool for its spending on security and federal territories. If that is indeed true then, there may be no NFC at all in the ensuing five years, because the provinces are very clear that the expenditure items in question lies squarely in the federal domain. The constitution and the 7th NFC Award have the implicit assumption that Pakistan will get to 20 percent tax to GDP ratio; the 7th NFC had also agreed to raise tax to GDP to 15 percent by the end of five year award period and 1 percent increase from that point onward. But neither the centre nor the provinces made significant efforts to that affect. The centre needs to realise that at 10-12 percent the centre will always have impossible trade-offs, between development and the need to spend on security and debt. Until Islamabad fixes its fiscal house in order, and increases the size of its pie, the NFC deadlock will likely stay.
Secondly, according to some media sources, the PTI may also be considering either to increase the number of indicators used for horizontal distribution among provinces or to increase the weights of other indicators at the expense of the indictor of population. Without increasing the size of the pie – the total size of divisible pool – these efforts will be futile. This is because, according to calculations shared by certain NFC stakeholders, reducing the weight of population lower than 78 percent will mean that even Sindh will be worse off and will need to be compensated by the centre, as was Punjab at the time of 7th NFC. And that’s a difficult proposition.
On that note, the seriousness of the ruling party about reform in general and NFC in particular will be exhibited by whether or not it does something to set up an independent NFC secretariat or at least strengthen the existing one housed in the Q-block.
The idea behind having an NFC Award every five years is that you should periodically look at the system of sharing revenue and spending repositions. But unfortunately, that hasn’t been the case in Pakistan. The NFC in India, as in the case in Pakistan, is a political decision which is arrived at by a compromise between the union and state governments. But they do not take decisions on political grounds alone; there is a huge amount of work research work with the best brains involved for the purpose.
There has been nothing like that in Pakistan. Unless Pakistan has a strong research backing the NFC, she will have a political decision with little economic analysis except for self-serving analysis. In Pakistan, only the politicians decide with limited information, if any. It’s not a transparent system at all; there is little analysis; options or alternatives; or a discussion on operational and institutional constraints. All of these things are part of the Indian award.
One option could be to set up a strong NFC secretariat under the CCI or the Ministry of Inter Provincial Coordination, and give it the mandate for empirical research. The PTI should kickstart the process of revenue of tax and expenditure assignments under the CCI and review the whole picture because solving this problem is the key to solving the macro picture. And best if it does that in the first year because in the later years they will be in the election mode.
In many countries with enviable intergovernmental forums, chalking out revenues isn’t their only mandate. NFC’s mandate in Pakistan is limited, because you can’t just chalk the revenues without taking into account the expenditure side of the equation. Doing so leads to risks of having unfunded mandate. Hence the need to rethink the constitutional arrangements; it can’t be done overnight but at least debate and discussions must start at the earliest.
On that account it must be recalled that according to Pakistan’s constitution provinces have the first right of usage of natural resource, but Islamabad sets the prices. Can pricing be divorced from usage? This is a very important but much neglected question. The question of pricing deals with exactly the same issues as the tax. What the tax does is that it introduces a price range. When you have administered pricing, it is exactly the same as tax; the analytics for public sector pricing and tax reform are exactly the same; both look at the effect on producers, consumers, environment, and so forth. Therefore, public sector pricing ought to be coordinated with the national revenue and expenditure assessment agenda.
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