Asif Ali Zardari as President signed two documents much appreciated at the time that have become the subject matter of intense politicking in recent months notably the seventh National Finance Commission (NFC) award and the eighteenth constitutional amendment.
A consensus between the federal and provincial governments (including Punjab led by the PML-N at the time) on the seventh NFC award was reached by end-2009, was signed by the then President Zardari on 16 March 2010 and became effective 1 July 2010. The Nawaz Sharif-led opposition party's support was also critical for the passage of the 18th Constitutional Amendment from parliament on 8 April 2010, after almost a year of intense negotiations, and was signed by President Asif Ali Zardari on 19 April 2010. The timing of the two documents indicates a quid pro quo between the two major political parties at the time - the Pakistan People's Party and the PML-N. What precisely was the quid pro quo can be better answered after reviewing the components of the two documents.
The then Finance Minister Shaukat Tarin and all provincial chief ministers hailed the NFC award as breaking a 19-year deadlock between the provinces and the federation. A far-reaching and undeniably positive feature of the 7th NFC award was for Punjab, with Chief Minister Shahbaz Sharif at the helm, to agree to a formula with multiple indicators instead of population alone, a long-standing demand of the smaller provinces: population 82 percent, poverty/backwardness 10.3 percent, revenue collection/generation 5 percent and inverse population density 2.70 percent. This effectively implied Punjab's share declined from 53.2 percent of the divisible pool taxes to 51.74 percent, while the share of the three remaining provinces rose - Sindh's share rose from 24.96 percent to 25.21 percent, Khyber Pakhtunkhwa's (KPK's) to 16.24 from 14.78 percent and Balochistan's share from 6.8 percent to 9.09 percent.
What has been a source of concern to the centre is the percentage increase in the share of provinces in the divisible pool taxes - from 46.5 percent to 57.5 percent from 2011-12 onwards with a commensurate decline in the centre's share - from 53.5 percent to 42.5 percent. As the seventh NFC award was agreed, provinces sought a guarantee from the centre that their combined share in the divisible pool would not be rolled back in times to come which necessitated the insertion of Article 160 (3A) in the eighteenth amendment which stipulates that "the share of provinces in each award of NFC shall not be less than the share given to the provinces in the previous award." And therein lies the crux of the problem: the centre is unable to fund its expenses from the remaining resources available under the divisible pool. This increase in the provincial share was necessitated as the eighteenth amendment did away with the concurrent list transferring several subjects to provinces.
Take last fiscal year (2018-19) as an example. The revised estimates for the year showed FBR tax collections of 4.150 trillion rupees with the provincial share at 2.37 trillion rupees and the federal share as low as 1.78 trillion rupees. This amount could not fund the combined allocation (revised estimates) on defence 1.13 trillion rupees and debt servicing 1.98 trillion rupees with a combined allocation of 3.28 trillion rupees. The federal government revenue from other taxes (including petroleum levy, gas infrastructure development cess and natural gas development surcharge) was 243.8 billion rupees last year and 637.7 billion rupees from non-tax revenue (revised estimates) giving a combined total of 881.5 billion rupees. Thus the federal government's combined total tax and non-tax revenue (revised estimates) for last year was 2.66 trillion rupees giving a shortfall of 0.62 billion rupees with respect to meeting just the two largest budgetary items.
However if the centre's share was 53.5 percent of the divisible pool taxes as in the pre-18th Amendment period, its share last year would have been 2.2 trillion rupees, still not sufficient to meet the combined allocation on defense and debt servicing. If one adds other taxes and non tax revenue the total would still be lower than the combined allocation for defense and debt servicing though of course the shortfall would lower which in turn implies that a constitutional amendment would not obviate the need to reduce expenditure and raise revenue. And this is precisely what donors maintain, including development finance institutions (DFIs).
Unfortunately, however, donors fail to take account of the fact that threats on our eastern and western borders make any reduction in defence allocation unlikely and that subsequent to each programme loan (budget support) Pakistan's reliance on debt has increased. The International Monetary Fund's (IMF's) 39-month Extended Fund Facility (EFF) commencing July 2019 envisages over 38 billion dollars external assistance during the programme period. Prior to Covid-19 Pakistan's debt in 2020 as per the IMF was projected at 85 percent while post Covisd19 it is projected at 90 percent. Disturbingly, the debt's sustainability as per the IMF document titled Request for purchase of Rapid Financing Instrument (RFI) staff report is premised on: (i) agreed rollover of maturing obligations by key bilateral creditors (China, Saudi Arabia, and the UAE); (ii) the government has extended the maturity structure; and (iii) Pakistan's exposure to capital markets is relatively limited minimizing the risks associated with portfolio outflows. But did not note that last year hot money was attracted into the country's short term government securities due to the flawed policy of setting a prohibitively high discount rate at 13.25 percent when globally interest rates were close to zero. The State Bank of Pakistan has post-Covid-19 reduced the rate to 9 percent though economists maintain that it needs to be further reduced. Thus debt sustainability does not entail a reduction in total debt only an extension in the debt's maturity and roll over of foreign debt.
So what was the quid pro quo that compelled Nawaz Sharif to agree to multiple criteria in the NFC award at Punjab's cost? A constitutional amendment allowing a third term as prime minister in the 8th Amendment, specific to Nawaz Sharif and in return NWFP was renamed Khyber Pakhtunkhwa and a consensus on multiple NFC award criteria.
The incumbent government wants to amend Article 160 (3A) to enable it to reduce the provincial share from the federal divisible pool and raise its own share, however, it needs two-third majority to change the constitution which it does not have. The PPP leadership has publicly opposed any constitutional amendment while the current president of PML-N Shahbaz Sharif has so far not commented on this matter. Two factors need to be highlighted in this context. First, Shahbaz Sharif was the chief minister Punjab at the time of the seventh NFC award and the man who negotiated on his behalf was Ishaq Dar who, once he became the country's finance minister in June 2013, used delaying tactics to ensure that the eighth NFC award due in 2015 was never negotiated (with Sindh and KPK ironically led by PTI threatening Supreme Court intervention in the matter). Privately Dar complained of insufficient federal funds to meet the centre's expenditure needs. So what are the chances of success in amending Article 160 (3A)? The civilian and military leadership are reportedly on the same page in this matter today which is fuelling speculation that the PML-N in general and the Sharif family in particular maybe considering yet another quid pro quo given their legal difficulties. And perhaps these synonymous views on the matter provided the comfort level to the IMF as well as the Pakistani economic team leaders - Sheikh and Baqir - to state in the staff report on Pakistan's request for EFF (stalled due to Covid19): "the provinces will aim to increase collection of property and sales taxes, and to assume more spending responsibility...stronger institutional arrangements will be required to ensure the sustainability of the envisaged fiscal consolidation. To this end, and in the context of ongoing NFC Award, the federal and provincial governments will seek to make progress on measures aimed at better rebalancing inter-governmental relationships."
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