The federal government has indicated its inability to increase the provincial share of the divisible pool beyond 60 percent. The reason for this is patently evident: the country's macroeconomic indicators continue to be under considerable stress attributed to the failure of the government to convince the Friends of Democratic Pakistan to release the 5.2 billion dollars pledged in April this year in Tokyo.
Higher oil prices in the international market and declining exports due to the ongoing global recession have severely impacted on the country's foreign exchange reserves. While the government may cite the preponderance of external factors in the failure of assistance pledges to be translated into disbursements and in declining foreign exchange reserves yet it can not lay the blame for continued poor tax collections on any external factor other than what it envisaged in its own finance bill 2009/10 as well as poor performance of the Federal Board of Revenue. Repeated exhortations by economists, both within and outside the country, to raise the tax to GDP ratio, and ensure that exemptions are done away with, inclusive of exempting rich landlords from income tax, have fallen on deaf ears of yet another Pakistani government.
At the same time efforts to improve governance by ending nepotism resulting in inefficiency and corruption are acknowledged to present a continuing challenge to this government. Thus the prescription can be indigenous to our economy; however, with the government continuing to place a heavy reliance on foreign medicine it has narrowed its own options.
It has been reported that the federal government offered three options to the provinces: take 50, 55 or 60 percent of the divisible pool. Such an option appears rather foolish at first glance as each province is bound to support the maximum possible ie 60 percent. However as details of the three presentations made by the federal government are not available each percentage increase in the allocation to the divisible pool may reflect increasing financial obligations of the provincial governments.
Be that as it may it is pertinent to note the reservations expressed by Sindh which are, in all probability, a reflection of the views of the other three provinces. Sindh argued that the discord between the provinces is not with respect to vertical resource distribution (or how much the federal government would inject into the divisible pool) but with respect to horizontal resource distribution (or what criteria would determine distribution between provinces). It may be recalled that the existing criterion for distribution, based on population alone, has been consistently opposed by the three smaller provinces who have urged a multiple criteria inclusive of (i) level of under development, (ii) linking it to how much tax revenue is collected in each province and (iii) the cost of the war on terror. Reports indicated that in a meeting on the NFC award held a couple of months ago the Punjab government, the major beneficiary of the single criterion, had agreed to the adoption of multiple criteria. In this context it is disheartening to note that the recent NFC award meeting focused on vertical instead of horizontal distribution and the major irritant, the formula for sharing between provinces that is perhaps a major cause of inter-provincial disharmony is yet to be resolved.