National Finance Commission

Interest Growth Inflation Jobless Current Exchange Rate Rate Rate Rate Account Rate Pakistan 12.50% 2.00% 8.87% 5.20% -4145 83.4762 Country

National Finance Commission (NFC): Background and History of NFC: In 1971, Pakistan was cut into two by our enemies with the indirect support of our fellow Pakistani’s and hence we lost East Pakistan to Bangladesh. There are many reasons that can be attributed to the 1971 incident but one of the major one is the “Distribution of Resources” among the provinces i.e East Pakistan and West Pakistan. Since East Pakistan was responsible for majority of our output, it was its right to get the major portion of it as well, however, it was not allowed to take when it actually owned and most of it was used in West Pakistan. This infuriated the Bangladeshi people and contributed towards their final revolt against the Government owned by West Pakistan. It is worth mentioning here for the ready reference of our readers that Bangladesh i.e East Pakistan before 1971, was more populous then West Pakistan but it was still discriminated by the East Pakistan i.e current day Pakistan. At that time, the distribution of resources based on population was never raised by anyone since it would have resulted in greater share of West Pakistan from the Federal Divisible Pool or in Federal Budget for East and West Pakistan. Below is the table showing the distribution of resources in East and West Pakistan from 1947 till 1971 as taken from Spending on Spending on Amount spent West East Pakistan on East as Year Pakistan (in (in crore percentage of crore Rupees) Rupees) West 1950– 1,129 524 46.4 55 1955– 1,655 524 31.7 60 1960– 3,355 1,404 41.8 65 1965– 5,195 2,141 41.2 70 Total 11,334 4,593 40.5

Source: Reports of the Advisory Panels for the Fourth Five Year Plan 1970-75, Vol. I, published by the planning commission of Pakistan (Quick reference: crore = 107, or 10 million)

Not only this, the education system of Bangladesh was left to face the same discrimination. The details of discrimination in the field of Education is documented by Muhammad Niaz Asadullah in his research paper at Oxford University titled “Educational Disparity in East and West Pakistan-1947-1971-Was East Pakistan Discriminated Against?”. According to the abstract of the research paper: This paper documents the regional divide in educational facilities between East Pakistan (now Bangladesh) and West Pakistan between 1947 and 1971. During this period, the total number of primary schools in East Pakistan declined, leading to overcrowding of existing schools and classrooms. On the other hand, despite being endowed with fewer schools, West Pakistan surpassed East Pakistan in the total number of primary schools, and in teacher–student ratios. This evident educational disparity, we argue, cannot be attributed to regional differences in school age population, school types, the quality and unit cost of schooling. Rather, this problem is examined in terms of the hypothesis of ‘discrimination’ as an alternate explanation. The paper further states the following: However, after a quarter-century of union with West Pakistan, the Eastern part of Pakistan broke away in 1971 following a year long civil war. Economic maltreatment of East Bengal, it is argued, was one of the factors that led to the disintegration of Pakistan in 1971 leading to the creation of Bangladesh (Auspitz et al., 1971; Islam, 1972; Rao, 1972; Laporte, 1975; Bhatia, 1979). Discriminatory allocation of government budgets across provinces arguably led to big disparities in the development of infrastructure facilities which, in turn, resulted in marked disparities in economic welfare. Now after the disintegration of Pakistan into Bangladesh and Pakistan in 1971, people in the center learned their lesson to a certain extent and hence to stop it from happening again, a National Finance Commission or NFC as it is commonly called was constituted. The National Finance Commission was given the sole objective of resource redistribution. According to Pakistan Institute of Development Economics (PIDE) Pakistan has a federal structure. It collects resources through fiscal instruments and shares with its federating units according to a formula. Major resources (almost 94%) are collected through various means by the Federal Government. The basis for resource distribution is population, location of natural resources, under development and revenue generation. National Finance Commission (NFC) was first constituted in 1974. It is

not a permanent body and doesn’t have a permanent representation. NFC award is for five years duration. NFC being the premier resource re-distribution body has evolved on the core principles of fiscal decentralization, development etc but certain emerging issues which have potentially impacted the over all objective of economic development should also be considered. There are severe economic consequences of environmental degradation. Conservative estimates revealed that the annual cost of environmental degradation is approximately 6 percent of GDP. The environmental losses required a pragmatic approach to embark upon the challenges. This is where Environmental Fiscal Reforms (EFR) can play an important role while deciding the NFC award. With the wake of devolution, where the main principle was delegation and empowerment of lower tiers of governments, significant responsibilities have been transferred but with least options to generate adequate own resources. The lower tiers of government who are the helm of affairs find it difficult to bring about a consensus among themselves for a reasonable formula of resource sharing thus delaying the award from due dates. Provinces should be given adequate representation in the Fiscal and Monetary Board to handle the development and sustainability issues adequately. The centralized revenue generation and subsequent transfer may create frictions of losses as well as be suboptimal. Mechanics of National Finance Commission Award in Pakistan: The purpose of NFC award is the re-distribution of resources among the provinces. According to PIDE Working Paper 2007:33, National Finance Commission (NFC) has undergone many changes and has dynamically grown to its present shape. NFC is established by law for the smooth and judicious re-distribution of resources collected by centre according to the need and goals for development of federation and federating units. NFC is constituted under Article 160(1) of the 1973 constitution (Annex I) and proposed to be held at the intervals of five years. Its members are Federal Finance Minister (Chairman), Provincial Finance Ministers and other concerning experts which the President may appoint after consultation with provincial Governors [Constitution of Pakistan (1973)]. The main charter of NFC is to recommend on the following [Pakistan (2006b)]: (1) The distribution of specified taxes, duties between federation and provinces. (2) The disbursement of grants to provincial governments. (3) The borrowing powers exercised by federal and provincial

governments. (4) Any other financial matter referred to commission. As per law NFC is intended to have an amicable mechanism for resource sharing formula between the federation and provinces and amongst the provinces. On ground it faced difficulties from time to time which barred its development. There are only three awards (recommendations) as such, in the last 34 years by National Finance Commission. The most recent NFC award is of year 2006 which was announced by the President, after a deadlock between provinces and federal government on conforming to one distribution formula. During the delay period interim NFC award were used in order to make transfers. Since 1960’s, Punjab is getting around 60%, Sindh is getting around 24%, NWFP is getting around 12% while Baluchistan is getting around 4% from the Federal Divisible pool. Beside this, there is also another mechanism termed Straight Transfer. The details are as following according to the same research paper: The other important development in this award was the increase in the straight transfers of royalties on Gas and Crude Oil, excise duty on Gas and Gas Development Surcharge. In addition, the NWFP Government is also receiving net hydel profit from WAPDA at a capped level of Rs 6 billion annually . There is substantial annual increase in these amounts over time . It is important to indicate that Sindh is the highest receiver of the amount through straight transfers. It is a matter of grave concern as to why the share of NWFP from the Hydel power has been capped at Rs. 6 billion when in reality the cost of electricity has gone very high. Why NWFP is still paid the same capped amount? Anyways, i will keep raising questions and will leave the possible answer to our readers discretion. Looking at the historic NFC award, one do start wondering as to why Population has only been kept as the criteria for distribution of NFC award when we all know that demographic changes takes place according to the economic situation. We all know how people from around the globe started moving towards Middle East and Malaysia when it was economically developed. Not only this, Population migration took place in China from less developed Western China towards more Developed Eastern China. Therefore, the distribution of population can never ever be the sole criteria of distribution of resources from the central pool. However, in Pakistan, no government was able to change it. That brings us towards the controversies facing the NFC Award. Controversial NFC Award: As said above, the basis for distribution of resources among various provinces of Pakistan has always been a boon of contention. As already explained, it also became one major

reason for the separation of Bangladesh and even today it is one major reason of friction among different provinces of Pakistan. According to the concluding remarks in a Research Paper by Pakistan Institute of Development Economics titled “National Finance Commission Awards - A historical Perspective”: There is a need for inclusion of other factors like infrastructure, poverty, backwardness, revenue generation, environment, etc. to be taken into account for justifiable of resource distribution. Even if we look at our neighbouring country India, various criteria are used for resource distribution from central to provincial governments. So, in order to achieve equity, such policies should be devised which take different aspects of development into its account while distributing the resources. The issue of resource distribution among federal and provincial governments never proved to be simple and is a much complex issue. But when we go through the history of NFC, it becomes obvious that the problem of resource distribution is never taken seriously. It further adds: Population had remained the sole criteria for resource distribution the whole time, which is not the best practice around the world. Throughout the period, smaller provinces have asked for adoption of a judicious formula with the inclusion of factors such as revenue generation, poverty, backwardness, area etc. in the revenue distribution criterion but nothing concrete have taken place. Where as in the Provincial Finance Commissions (PFC) there are other criteria as well. The Ministry of InterProvincial Coordination on 3rd March, 2007 has also suggested for the inclusion of two additional factors (backwardness and poverty) as revenue sharing elements while announcing NFC award. The federal government has been overstretching itself by accepting the matters which are purely provincial in nature like roads, rural development, gender issues and so on, for that they keep resources with them as well. So there is a need to empower the provincial governments by clearly defining the roles of each tier of the government and giving the required resources (both human and financial) to them for their planning and development autonomy. This would encourage the provinces to contribute towards the development of the country by streamlining their capabilities by having a better voice and accountability. Although, federally constituted, but with its ad hoc nature, NFC has failed to provide ideal resource distribution criteria. There are no penalties, as such and certain provinces have benefited by having no consensus for redistribution. Furthermore, the parameter choice is very narrow and suboptimal, especially the population. This is based on census, which is

carried out after every 10 years and has issues such as demographic dividend, migration, etc. in recent years. Therefore, international experiences must be incorporated in the resource distribution formula. While announcing NFC award the government should give proper importance to following factors which are exercised in the rest of the world. The factors that can be incorporated are: (1) Backwardness and development gap. (2) Inverse income distribution (rural urban income disparity). (3) Natural resource endowment. (4) Revenue generation/revenue collection. (5) Population density. (6) Poverty. (7) Area. (8) Non-formula transfers. (9) Environmental consideration. There should be a permanent body of NFC, with professionals of the subject as consultants to regularly monitor and evaluate the equitable utilization of the award. Visits should be made to different areas and stakeholder consultation should be made to have a real look at the situation prevailing there so that the resource allocation can be made more appropriate. Like PFC it should have a dynamic interface with other stakeholders in improving the flow of funds. The federal assignments should be gradually reduced, both from the financing side as well as the service delivery side. Finally, the key to successful public service delivery is adequacy, sufficiency, transparent and regular flow of funds to the stake holders in doing the business of government. In light of the above conclusions, i can no more agree with it. Anyways, its upto our readers to decide if they agree with the facts or just go with the status quo and see another Bangladesh in the making? Looking forward to your comments and feedback. The purpose of all this exercise is to bring justice in the distribution of resources so that we have a more prosperous Pakistan rather then any one province.