Money for the provinces

Both vertical and horizontal distributions will see tremendous battles

AT PENPOINT

The National Finance Commission is not meeting because of the US-Israeli attack on Iran. There is a certain bureaucratic logic to this, because the war, by closing the Strait of Hormuz, or at least rendering it a war zone, has made any prediction about the price of oil impossible, and it is not clear what sort of revenue projections can be made. And without those projections, it becomes impossible for the NFC to carry on.

However, as this Award comes after a 16-year gap rather than the constitutionally prescribed five years, it is probably too important to be abandoned. Since the time of the last Award, there have been a number of developments which need to be addressed. The option applied for the last decade, would be for the Award to receive a one-year extension. However, it would mean another year of ducking urgent issues, and of sharing out money according to an Award made on assumptions that have grown increasingly out of sync with reality.

One of the issues that has been sharply brought into focus has been the question of the areas where the federal government also provides funding. The question is reflected by the change of the status of the Federally Administered Tribal Areas into KP districts. That implies that the federal share be reduced and that of KP be enhanced. That has been one of the sticking points for the whole NFC. It constituted a committee to study the issue and make recommendations, but it has not done so thus far, so the Commission cannot move forward.

But apart from the ex-FATA districts, the issue of Gilgit-Baltistan and Azad Jammu and Kashmir have come up, which receive money from the federal government, and which have no share in the NFC. AJK is Free State, pending a final determination of its status by a UN-administered plebiscite, but receives subventions towards its budget from the federal government. Though the President of AJK is elected, and not selected by the federal government like a provincial governor, it is very much like a province. Gilgit Baltistan has been called a province, but even though it has the structure of one, it is a federally administered Northern Area, and the local council has been empowered as a provincial government. It too has no guaranteed share in the NFC Award, except what it is given by the federal government from its share. After all, its provincial status is granted by an act of Parliament in exercise of its provincial powers, not as for the other provinces, which have been created by the Constitution.

Azad Kashmir and Gilgit-Baltistan may become a province after the plebiscite, but the Federal Capital of Islamabad, located in the Federal Capital Territory, will always be dependent on the federal government for provincial functions. The Islamabad Metropolitan Corporation may be at some stage empowered to become a quasi-provincial government like that of Gilgit-Baltistan, but that too will only be because Parliament will so vote. The FCT has no provincial government, and Parliament is empowered to act as its provincial assembly.

The federal government would like all of these obligations quantified, and reserved separately. In an extension of that approach, it wants the provinces to contribute to two other items which absorb most of its revenue, debt servicing and defence. The mechanism which the federal government favours is to make the provinces contribute to these two items. The mechanism to defeat the Eighteenth Amendment, which specified that provincial share of the Federal Divisible Pool would not be reduced, and could only presumably be enhanced, would be to have the provinces allocate a proportion out of their share for these two heads.

It is a matter of who blinks first. Even a flawed Award will be better than the present one. However, since the Award is achieved by consensus, an Award can still be stymied by any one province. It has happened before, but this time, the stakes are higher.

A recent conference on governance in Islamabad, the Pakistan Governance Forum 2026, seemed to have the federal and provincial governments lay out their respective positions, and it was only Punjab which seemed to support this idea. It should be noted that the debt servicing is incurred partly from development loans which the provinces spend. They do obtain these as loans, and they do pay debt servicing on these loans, but the cost of programme loans, like IMF loans or other budget support loans, are borne solely by the federal government. Other debt servicing is incurred to maintain government credit, and thus provides an indirect benefit, in that Punjab’s money remains good, and the banking system remains functional. Defence expenditure provides provinces a similar benefit, for their activities would not be possible without security from foreign invasion.

Apart from Punjab, other provinces did not seem concerned. At this conference, which assumed greater importance because of the NFC not meeting, the provinces criticized the federal government’s handling of finances, both on spending and revenue raising. There was a suggestion that the provinces get a role in collection, particularly since the provinces had done better in increasing taxes. Sindh and KP also complained about the federal failure to collect as much as projected by the existing Award. This is one more indication that a new Award is essential. Projections of revenue collection will be more accurate than the ones presently obtaining.  One unwelcome reminder for the federal government was its commitment when the Award was made to raise the tax-to-GDP ratio to 15 percent by the end of the Award period, as it has hovered between 8.5% and 11.4%, being 10.4 percent in 2024-2025, at the end of year 14 of the Award period.

There is also a dispute on horizontal distribution, that of the provincial share, among the provinces. The federal government does not want poverty or population to be the main criteria, saying that the Award incentivizes them. That means switching to, or at least increasing the weight of, criteria which are more desirable, particularly outcomes in education and health.

There is also politics involved. The PTI rules in KP, the PPP in Sindh, the PML(N) in Punjab and the Centre.

Punjab is lining up with the federal government. The PTI is objecting to any semblance of the federal government spending on provincial subjects, like the Rs 38 million on this year’s Ramazan Package. Sindh has voiced its intention of protecting the provincial share, which implies that it will object to any mechanism to defeat the 18th amendment protection of the provincial share in the Award.

It is a matter of who blinks first. Even a flawed Award will be better than the present one. However, since the Award is achieved by consensus, an Award can still be stymied by any one province. It has happened before, but this time, the stakes are higher.