The 9th NFC is scheduled to have its first meeting on the 6th of February. The previous 7th NFC Award was signed and then promulgated on by the President of Pakistan in 2010. As per the provisions of Article 160 of the Constitution the Award was to be valid for five years from 2010-11 to 2014-15. However, in the absence of consensus on the part of the 8th NFC, the 7th NFC Award has continued to be operative up to the current financial year, 2018-19. In effect, the de facto tenure has already been of nine years. Clearly, the 9th NFC is to complete the task that fully reflects the changed nature of inter-governmental fiscal relations in the country and the relative economic position of the four Provinces in a new Award.
The deliberations of the 9th NFC will take place in a somewhat tense environment. The Federal Government has voiced the inadequacy of Federal Net Revenue Receipts following the transfer to the Provinces as per the 7th NFC Award. The expenditure obligations of debt servicing and defense services apparently leave inadequate resources to meet other expenditure obligations on civil administration, pensions, grants, subsidies, development expenditure, etc.
However, Article 160 of the Constitution clearly indicates that there is a floor to the combined Provincial share from the divisible pool as follows:
'The share of the Provinces in each Award of National Finance Commission shall not be less than the share given to the Provinces in the previous Award'.
Therefore, unless an attempt is made to shrink the size of the Divisible Pool by agreement on prior claims to Federal revenues, the minimum guaranteed share of the Provinces from the divisible pool is of 57.5 percent. Of course, the terms of reference of the 9th NFC include a proposal for first meeting the requirements of the AJK, Gilgit-Baltistan, FATA, Natural Disasters and Terrorism, etc. However, the probability of this being accepted by the Provincial representatives in the 9th NFC is low. Given the apparently fiscally constrained circumstances the probability also of the Provincial share being enhanced beyond 57.5 percent is also very low.
The search for the consensus will, therefore, devolve largely on the horizontal sharing formula among the four Provinces. The 7th NFC had set the historic precedent on multiple criteria being used on determination of individual Provincial shares. Four criteria were agreed on including population, poverty/backwardness, inverse population density and revenue collection/generation. The respective weights were 82.0 percent, 10.3 percent, 2.7 percent and 5.0 percent. In earlier Awards, the sole criterion had been the population.
There are likely to have been significant changes in individual Provinces in the magnitudes in each criterion after the gap of nine years. Application of the horizontal criteria for sharing in the 7th NFC Award had led to the following Provincial shares: Punjab, 51.74 percent; Sindh, 24.55 percent; Khyber-Pakhtunkhwa (then NWFP), 14.62 percent and Balochistan, 9.09 percent. The only Province which had received a lower share than its population share was Punjab.
Sindh received a bigger share than its population share in the revenue collection/generation criterion. Balochistan was given the benefit of lower population density while both Balochistan and Khyber-Pakhtunkhwa received a higher share due to higher poverty and backwardness. Consensus was achieved because of the gesture on the part of the largest Province, Punjab, to accept larger shares of the three smaller Provinces in relation to their population and reduction in its own share in relation to its population. This was facilitated by an overall increase of the Provinces' share to 56 percent in the first year and to 57.5 percent in the fifth year. The share earlier was 46.25 percent.
The fundamental question is what will be the Provincial shares now if the same four criteria are used for horizontal sharing and the respective weights remain unchanged? The answer to this question is given below. Presumably, the NFC Secretariat in the Federal Ministry of Finance has already completed this exercise.
There are two clearly identifiable developments which will affect the shares. First, the results of the Population Census of 2017 have become available and they indicate significant changes in population shares of the four Provinces. Second, FATA has been merged into Khyber-Pakhtunkhwa and this will increase the population share of the Province.
The revised population shares are as follows: Punjab, 53.46 percent; Sindh, 23.28 percent; Khyber-Pakhtunkhwa, 17.26 percent and Balochistan, 6.00 percent. Two Provinces, namely, Punjab and Sindh, see a decline in their population shares of 3.90 and 0.43 percentage points respectively in relation to magnitudes used in the 7th NFC Award. Punjab's share has fallen substantially because the population growth rate in the Province was the lowest at 2.1 percent as compared to 2.4 percent for the country as a whole. The increases in population shares of Khyber-Pakhtunkhwa and Balochistan are 3.44 and 0.89 percentage points respectively. Khyber-Pakhtunkhwa has a big increase in its population share because of relatively fast population growth and the merger of FATA's population into the Provincial total.
The next criterion with the second highest weight is poverty/backwardness. There is a good source of data on poverty in Pakistan. This is the report on Multidimensional Poverty in Pakistan prepared by the UNDP and the Oxford Poverty and Human Development Initiative. Latest estimates of poverty incidence as percentage of the population are given at the Provincial and district level for 2014-15. These are 31.4 percent in Punjab; 43.1 percent in Sindh; 52.6 percent in Khyber-Pakhtunkhwa (including FATA) and 71.2 percent in Balochistan. Based on the 7th NFC methodology the resulting share in the poverty/backwardness criterion are as follows: Punjab, 15.84 percent; Sindh, 21.73 percent; Khyber-Pakhtunkhwa, 26.53 percent and Balochistan, 35.90 percent.
Data on the criterion of Revenue Collection/Generation has been obtained from the FBR yearbook for 2015-16. Inverse population density is derived on the basis of population of 2017 from the Population Census.
The resulting overall shares are given below in the table.
OVERALL PROVINCIAL SHARES (%)
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Province Share in 7th Share (%)
NFC Award Now Change
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Punjab 51.74 47.24 -4.50
Sindh 24.55 24.72 0.17
Khyber-
Pakhtunkhwa 14.62 17.23 2.61
Balochistan 9.09 10.81 1.72
Total
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Therefore, if the 7th NFC horizontal sharing formula is used again by the 9th NFC then there will be significant changes in the Provincial shares. Punjab's share falls once again by 4.50 percentage points, due primarily to the lower population growth. The shares of the other Provinces all increase. The increases are 0.17 percentage points for Sindh; 2.61 percentage points for Khyber-Pakhtunkhwa and 1.72 percentage points for Balochistan. The increase in the shares of the two smaller and relatively backward Provinces will promote the process of fiscal equalization.
Will Punjab accept the big reduction of 4.50 percentage points in its share? Last time, in the 7th NFC, the loss was reduced by a rise in the vertical share from the divisible pool of the four Provinces combined. As highlighted earlier, this is very unlikely in the 9th NFC Award. The only option may be to revert back to a higher weight to the population criterion.
Overall, we can look forward to protracted and intense discussions in the 9th NFC. Hopefully, a consensus will be reached in the interest of strengthening the Federation. After all, we must appreciate and achieve 'Unity in Diversity'.
(The writer is Professor Emeritus at BNU and former Federal Minister)
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