A recent proposal by Ahsan Iqbal, Pakistan’s federal minister for planning, development and special initiatives, has exacerbated deep-seated fears in the country’s provinces of fiscal recentralisation and a further focus on Punjab – already the province that the rest of Pakistan sees as unduly favoured by federal policy. In June, Iqbal proposed revisiting the revenue-sharing formula between the centre and the provinces through changes to the National Finance Commission (NFC) award. The NFC award is a constitutional mechanism that determines how a pool of resources, created from direct and indirect taxed collected by the government, are distributed vertically between the federal government and the provinces, as well as horizontally among the provinces. While amendments to the NFC award are long overdue to keep up with the needs of the provinces, Iqbal’s proposed new formula has sparked concern.
Iqbal claimed that the current NFC formula places an undue financial burden on the centre, limiting its ability to invest in critical infrastructure, and called for its complete overhaul. He also said that the new formula must account for water and climate vulnerabilities, and shift away from the criterion of population size – the current formula gives overwhelming weightage to population size when determining relative revenue distribution – to instead link revenue allocations to provinces’ success in population control. Under the current formula, Punjab – which is home to more than half of Pakistan’s population – has an outsize advantage. Under the new formula, Punjab retains its advantage because it has a lower growth rate than Balochistan and Sindh. It is also the richest of the four provinces and therefore better equipped to implement population control measures.
Debates over NFC awards in Pakistan have often been fraught and politically charged. The National Finance Commission, comprising the federal finance minister and provincial finance ministers, must review and recommend changes to the existing award every five years with the stated aim of maintaining balanced fiscal relations. However, in the more than 50 years since the implementation of Pakistan’s current constitution, only seven awards have been announced – underscoring the difficulty of developing political consensus around them. The last award was implemented 15 years ago.
The current formula follows the seventh award, signed in 2009 and brought into effect in July 2010. This award marked a major shift from its predecessors. The sixth award, announced in 1997, allotted 62.5 percent to the centre, and the remaining 37.5 percent to the provinces. This gave the centre enormous financial power, while limiting provincial autonomy. The horizontal distribution formula, which determined the division of the 37.5-percent share among the provinces, also had problems. In 1997, the only criterion used to determine provincial share was relative population. Punjab, as the most populated province, received well over half of the portion reserved for the provinces.