Centre plans to trim provinces’ NFC share

ISLAMABAD:

The federal government has formally begun internal consultations to finalise its stance ahead of negotiations on the new National Finance Commission (NFC) award, with options under consideration to link more than one-tenth of provincial shares to their performance in social and environmental sectors.

According to official sources, the Centre is also weighing proposals to earmark a portion of the federal divisible pool for large dam projects, as well as to make explicit allocations for Islamabad Capital Territory and other special areas.

A meeting of the government’s core ministerial team was held this week in Q Block — the seat of the Finance Ministry. The gathering was attended by ministers for law, planning, finance, economic affairs in addition to the key bureaucratic aids of the prime minister.

In light of the discussions, it has been decided that the federal government would make a case for getting back a share of what had been given to the provinces 16 years ago, either through scaling back expenditures or taking a pie from revenues, said the sources.

The Ministry of Finance is preparing a paper to showcase how the federal government’s finances would look like in terms of public debt and budget deficits after five years. The theme of the paper will be that the existing 57.5% of the divisible pool that the provinces get has to be reduced and cuts are to be placed on the expenditures that are the responsibility of the provinces but are incurred by the Centre due to its own compulsions.

In a prelude to the NFC negotiations, Planning Minister Ahsan Iqbal had written to the prime minister last month, urging him to immediately begin discussions to save the federation from acute fiscal stress.

The Center gets only 42.5% share and is also responsible for expenditure on Azad Jammu & Kashmir, Gilgit-Baltistan and the ICT from the divisible pool to ensure full participation in national development for their citizens.

Due to limited fiscal space and higher spending on debt servicing, the federal government is not left with enough fiscal space for development expenditure. The minister said that the Public Sector Development Programme (PSDP) has shrunk alarmingly — from 2.6% of GDP in 2018 to just 0.8% in 2025.

The finance ministry informed the federal ministers this week that Sindh has raised objections to the proposals made by the planning minister to reverse the NFC and similar objections are also expected from Punjab, said the sources.

They said that during these kick-off meetings it has been discussed to link the transfer of the resources to the provinces with improvement in the social and environment indicators.

One of the initial options is that at least 10 to 15% of the provincial shares in the federal taxes should be linked with improvements in the education, health, population management and climate indicators. The government also wants to incentivise provinces for tax efforts by linking the resources with tax efforts, said the sources.

One of the ministries has also proposed that a portion of the divisible pool should be set aside before making transfers for the purpose of building mega dams and funding higher education. They said that dams are now a matter of national security and the provinces should contribute to it. Under the 7th NFC award, Khyber Pakhtunkhwa gets 1% of the divisible pool for mitigating the impact of war on terror.

The federal government is also considering demanding explicit allocations for Islamabad Capital Territory, Gilgit-Baltistan, and Azad Jammu & Kashmir, which are the responsibilities of the Centre.

Another significant consideration by the Center is that the transfers to the provinces should also be linked with onward allocations for the local governments, the sources added.

The federal government believes that there is inequity in the distribution of the resources between the Centre and the provinces and among the provinces. However, it has not yet notified the new National Finance Commission, after the last one lapsed a month ago.

The spokesman of the Ministry of Finance Qumar Abbasi did not comment for this article.

The sources said that in the light of discussions held this week among the federal ministers, another meeting would take place at the start of the next week for firming up the Centre’s position before a formal meeting of the NFC is convened.

The Constitution has mandated that the NFC has to be reconstituted every five years to ensure fair and updated distribution of resources between the federation and provinces. The Constitution also binds that the provincial shares cannot be reduced below 57.5% of the divisible pool, which the government now wants to navigate by shrinking the size of the divisible pool.

One of the major proposals of the federal government will be to transfer the Benazir Income Support Programme to the provinces. For this fiscal year, Rs722 billion have been allocated for the BISP, which under the constitution is the provincial subject.

The federal government may also propose to reduce the weight of the population in the money distribution formula from 82% to any ratio, which is acceptable to big provinces, mainly Punjab.

Ahsan Iqbal wrote last month to Prime Minister Shehbaz Sharif that review of the 15-year-old award was a must that has outlived its five-year constitutional life and required a revision to ease “acute stress” on the federal government. The president of Pakistan is extending the award every year due to a disagreement between the provinces and the Center over the new formula.

The 82% of the NFC is distributed on the basis of the population among the provinces, which is an incentive against controlling the population and exaggerating the number too. Pakistan’s annual population growth rate is 2.6%, which is near the annual economic growth rate and is highly unsustainable. The current horizontal distribution is heavily weighted (82%) towards population.

The minister has also proposed including environmental resilience as a new criterion by adding indicators such as forest cover, climate adaptation investments, and reforestation efforts. The recent floods in Khyber-Pakhtunkhwa are also because of the fast shrinking of forestry area, according to the climate experts.