2 The record of the PPP-led Federal Government since 008
2.2 The seventh National Finance Commission award
As we have seen, the 18th Amendment of April 2010 strengthened the legislative and administrative powers of the provinces: Punjab, Sindh, Balochistan and Khyber-Pakhtunkhwa. In doing so, it complemented the changes to the financial settlement between the centre and the provinces set out in the December 2009 seventh National Finance Commission award.
Negotiations between the centre and the provinces over previous awards had often been extremely difficult and produced unsatisfactory outcomes. The seventh National Finance Commission award was intended to be a fresh start after 15 years of deadlock on the issue.85
80 “Punjab, Karachi and decentralisation”, The News, 9 August 2011; “PPP striving to get 21st Amendment through next NA session”, Right Vision News, 4 October 2012
81 “Democracy Monitor”, Quarterly Update (May-August 2012), Pakistan Institute of Legislative Development and Transparency (PILDAT)
82 “SC dismisses government appeal against holding of LB polls”, 1 December 2012
83 “Punjab, Karachi and decentralisation”, The News, 9 August 2011
84 “Rabbani sees plot to roll back devolution process”, Right Vision News, 29 July 2012; “Provinces lament non-transfer of assets”, Right Vision News, 10 October 2012
85 This is the seventh award since provision for such awards was incorporated into the Constitution in 1973. Bew awards are supposed to be made every five years. The sixth was awarded in 2006, but did not address many issues that had been on the agenda since its 1996 predecessor.
Nowhere was this a higher priority than with regard to Balochistan, where nationalist sentiment – often accompanied over the decades since the creation of Pakistan by rumbling rebellion – has been fuelled by a host of grievances about unfair treatment. Thinly populated Balochistan is the poorest province in Pakistan despite being rich in natural resources, including gas.86
Whereas previous awards had been based solely on the size of the population of each province – a criterion which favoured Punjab, by far the most populous province – the seventh award brought into play a range of other criteria: low population density, poverty, role in revenue generation/collection and role in combating terrorism.
Through the award, the centre increased the percentage of resources available to the provinces by 10 percentage points from 47.5% to 57.5%. Below is a table setting out what the award meant for each of the four provinces in terms of their share of what is known as
“the divisible pool” of revenues.
Province
% Share in Divisible
Pool under 7th NFC % Reduction in share Additional budget %
Punjab 51.74 1.27 48
Sindh 24.55 0.39 61
KPK 14.62 0.26 79
Balochistan 9.09 (+ 1.82%) 175
* The provincial share of the divisible pool would increase from 47.5% to 56% in the first year of the NFC Award and 57.5% in the remaining years of the award.
Percentage Share of 7th NFC Awards in the Divisible Pool and Percentage Reduction or Increase of Share and Additional Budget*
Source: U. Mustafa, “Fiscal federalism in Pakistan: The seventh National Finance Commission award and its implications”, Pakistan Institute of Development Economics, Working Paper No. 73, 2011, p7
As the table demonstrates, while all of the provinces experienced a significant increase in the size of their budgets, by far the biggest beneficiary of the new arrangements was Balochistan.
The award contained a host of other measures designed to strengthen the fiscal position of the provinces, including arrangements to repay large historic arrears owed by the centre to the provinces and a reduction in the centre’s charge to the provinces for the cost of revenue collection. The provinces also got the power to raise domestic or foreign loans, with the approval of the National Economic Council.
The award, which came into force in financial year 2010/11 and which is supposed to apply for five years to 2014/15, represents a move towards deeper fiscal federalism in Pakistan.87 It
86 For further background, see: “In brief: Baluchistan – Pakistan’s forgotten conflict”, House of Commons Library Standard Note SN06106, 1 November 2011
87 During the Musharraf era, the centre had seemed more interested in promoting decentralization down to local government, partially by-passing provincial governments. By contrast, the PPP-led Government has placed the provinces at the centre of its agenda.
calls on both the centre and the provincial governments to increase their revenues so as to achieve a 15% tax to GDP ratio.88
But the majority of provincial revenues still come from the centre. It is also worth noting that, while the overall division of resources between the centre and provinces was improved under the seventh award, it is still a far-cry from the division which prevailed under the first three awards, in 1974, 1979 and 1990, when – reflecting the way in which this issue had contributed ultimately to the traumatic secession of Bangladesh (formerly known as East Bengal or East Pakistan) – the centre was awarded 20% and the provinces 80%.89 Whether such a distribution could ever really be sustainable within a federal framework is another matter. Indeed, with the centre currently wrestling with a chronic fiscal deficit, some have argued that even the comparatively modest split agreed under the seventh award is over-ambitious. Others assert that the federal deficit has been caused much more by other factors, including excessive defence spending.90
Nonetheless, many have hailed the seventh award as a major step towards a more stable and equitable relationship between the centre and the provinces.91 It certainly reflects a much greater willingness than in the past on the part of the most powerful province, Punjab, to be flexible. But there continue to be arguments between the provinces over the implementation of the seventh award. For example, Punjab, Khyber-Pakhtunkhwa and Balochistan have complained that Sindh is receiving more than its fair share of General Sales Tax on goods that are coming in through its ports.92
The eighth National Finance Commission, which was constituted in July 2010, will have a no less delicate path to tread than its predecessor. The fact that the 18th Amendment prohibits a reduction in the share of provinces below that set out in the previous award should provide some reassurance to the provinces as negotiations proceed. The provincial government in Balochistan has wasted little time in arguing that it will need a further boost to its revenues under the next award.93
Pakistan saw street protests about the state of the economy during 2012, symbolised by unprecedented mid-summer power cuts that affected both businesses and ordinary citizens.94 The new government will inherit a debilitating fiscal crisis at the federal level (several provincial governments – for example, Sindh – are also in a parlous state). Defence spending and interest payments on existing debts alone make up about 65% of state spending. Unless the next civilian government is prepared to confront the military on defence spending, which it may be hesitant to do, there is a risk that the improved settlement between the centre and the provinces in the 2010 Seventh National Finance Commission Award could unravel in the years ahead.
Finally, it should be noted that each province has also agreed its own Provincial Financial Commission award based on the seventh award. There is significant variation between
88 N. Iqbal and S. Nawaz, “Fiscal decentralization and macroeconomic stability: Theory and evidence from Pakistan”, Pakistan Institute of Development Economics, December 2010
89 U. Mustafa, “Fiscal federalism in Pakistan: The seventh National Finance Commission award and its implications”, Pakistan Institute of Development Economics, Working Paper No. 73, 2011, p9
90 “Assessing the National Finance Commission award – Bilquis”, Changing up Pakistan blog, 18 May 2010;
“Was the seventh NFC award a disaster?”, Express Tribune, 5 April 2012
91 “Assessing the National Finance Commission award – Bilquis”, Changing up Pakistan blog, 18 May 2010;
“Was the seventh NFC award a disaster?”, Express Tribune, 5 April 2012
92 “Sales tax, FED issues remain unresolved”, Dawn, 21 May 2012
93 “What Balochistan gets under NFC not sufficient, says official”, Right Vision News, 12 August 2012
94 “Thousands of power cut rioters storm politician’s house”, Guardian, 20 June 2012
provinces in the weightings given to each of the factors described above in deciding how available resources are to be distributed.95
2.3 Other developments in relations between the centre and the rest of Pakistan