Conflict surrounding provincial shares of federal funds

ByFahad Ali

Associated with maritime trade


September 8, 2022

Conflict surrounding provincial shares

Fahad Ali describes a Conflict surrounding provincial shares

The recent conflict surrounding provincial shares turmoil regarding the leaked conversation of PTI leadership regarding the convoluted stand proposed to be taken by PTI-led governments in Punjab and KP about the provincial share in the federal fund. This stance was also quite surprising in wake of the fact that the PTI consistently avoided calling meeting of Economic Coordination Committee (ECC) the apex body mandated to iron out the differences between the federation and the provincial units that keep on cropping about the monetary distribution prevailing in the country. Not calling the meeting of ECC crucially indicated that the PTI government while in power cared nothing about this issue but now it has created an issue about this matter with clear political goal in mind. Though the IMF had paid no attention to PTI’s disruptive move but it has, once again, brought to fore the cobwebs surrounding this issue requiring a thorough review of the entire process.

It has been quite obvious since many years that one of the major contentions between the federation and the provinces is regarding the distribution of financial kitty of the country. The provinces have never failed to complain about the reduced funds transferred to them by the federation according to the NFC Award. The contention is so serious that it has already delayed the finalisation and announcement of NFC Award by many years and it looks that issue may take considerably longer to settle. This issue now frequently crops up and apparently no attempt is made at seriously resolving it creating further confusion and heightened sense of bitterness.

Instead of providing the due financial emoluments to the provinces, the federation usually raised reservations about the 18th Amendment that it accuses has reduced the federal funds and this financial crunch is causing it financial hardship. This indicates that the provinces perceive that the federation may eventually attempt to roll back the 18th Amendment and many segments, particularly, aligned with the establishment, keep on raising the matter further complicating the relations between the federation and the provinces.

This time round the federal government has transferred Rs.1.5 trillion to four provinces as their share under the National Finance Commission (NFC) Award in first seven months of the current fiscal year, which is not in line with annual projections due to a steep shortfall in tax collection. The legislators advocating the case of provinces expressed concern over less spending on development by the provinces due to their commitments to the federal government to show a surplus budget to meet the International Monetary Fund (IMF) fiscal targets.

In this context it was mentioned by the federal ministry of finance that from July through January, the four provinces received Rs.1.5 trillion as their share under the NFC. The ministry did not give a comparison with the transfers made in the same period of the previous fiscal year. Instead it was mentioned that the size of the federal divisible pool was Rs.2.6 trillion in seven months, including the previous years’ arrears, and out of that Rs.1.5 trillion was transferred to the provinces.

It is also found out that in the current fiscal year, the share of provinces in the federal divisible pool is projected at Rs.3.2 trillion, subject to the collection of Rs.6.1 trillion in taxes by the Federal Board of Revenue (FBR). Collections in the first seven months were equal to 47.6% of the annual share. According to the seventh NFC Award, the provinces get 57.5% of the federal divisible pool. The award had been agreed in 2010, which expired five years ago but the president of Pakistan extends it every year since there is no new award.

The federal finance ministry mentioned that the annual federal divisible pool was projected on the basis of tax collection by the FBR. Though the FBR consistently churns out the figures about tax collection but these figures usually do not tally with the FBR as most of these figures depict glaring discrepancies promptly pointed out by the provinces. However, the finance ministry’s figures are more authentic being based on the reconciled data provided by the central bank. An example will amply demonstrate the discrepancy in tax collection as in the first seven months the FBR faced a minimum shortfall of Rs.385 billion, even after considering Rs.2.407 trillion in tax collection. This has affected the share of provinces, except for Balochistan, in the NFC Award pointing out that the recurrence of this problem ever so often. It may be clarified that Balochistan gets its share on the basis of projections as compared to the other three provinces which receive their share as per actual tax collection.

It is quite evident that out of the 57.5%, most of the resources, 82%, are distributed among the four provinces on the basis of the population under the horizontal distribution formula. The remaining 18% is distributed on the basis of poverty and backwardness (10.3%), inverse population density (2.7%) and revenue collection and generation (5%). According to this sequence, Punjab received Rs.746 billion in first seven months of the current fiscal year, which was equal to 49.6% of its total projected share of Rs.1.5 trillion. It was mentioned that the Punjab government spent Rs.770.7 billion on current expenses and Rs.125.3 billion on development in almost seven months.

Though Punjab had signed a memorandum of understanding with the federal government to show a cash surplus at the end of the year but the cash surplus target would be scaled down due to the shortfall in FBR’s tax revenues. This tendency has however been considered wrong and it is not appreciated that the provinces were not spending on development and instead saving money for the federal government, which was also adversely affecting economic growth and undermining employment creation. The provinces vehemently deny this point but even heated debates about this matter have failed to resolve the matter. Although it is often mentioned that the provinces do not run on deficit yet they are not prepared to give back the unspent money to the federation.

It was also mentioned that Sindh got Rs.354 billion in federal transfers during the Jul-Jan period, which was equal to 46.5% of its annual share of Rs.761 billion. Khyber-Pakhtunkhwa received Rs.236 billion, equal to 46.5% of its annual projected share of Rs.507.7 billion. Balochistan received Rs.164 billion in the first seven months of the current fiscal year, which was equal to 58.3% of its annual projected share of Rs.281.3 billion. Its receipts in terms of percentage were the highest among all the provinces as Balochistan got its pie on the basis of projected FBR revenues. Despite the moneys transferred to the provinces, the federation keeps on complaining about the provinces not utilising the funds appropriately.

Here the issue is raised by many financial observers that the federal authorities are bound to share the funds and they need not ask the provinces about how they were spent. Keeping in view the bitter history of federal dominance in the country, even this constitutionally resolved issue is made contentious. Now PTI using it for the sake of frustrating the federation from seeking IMF assistance is enough a cause to settle this matter for good otherwise it may be exploited by any adventurist political configuration. TW


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