Islamabad – As Pakistan prepares for fresh negotiations on the new National Finance Commission (NFC) Award, the federal government has initiated formal internal deliberations to finalize its position. According to reliable sources, several proposals are under consideration that could significantly reshape the fiscal relationship between the center and the provinces.
Among the most prominent ideas being debated is the possibility of making a portion of the provinces’ share conditional on performance in social, environmental, and fiscal sectors. The government is also weighing proposals to allocate resources for large dam construction, higher education, and development in federally administered regions, including Gilgit-Baltistan, Azad Kashmir, and the federal territories.
Background: Understanding the NFC Award
The NFC Award is a constitutional mechanism established under Article 160 of the Pakistani Constitution. It determines how revenues collected by the federal government are distributed between the center and the provinces. The award is usually renegotiated every five years, though in practice, political challenges often delay the process.
The most recent and transformative arrangement was the 7th NFC Award in 2010, which significantly increased the provinces’ share of the divisible pool of taxes from 47.5% to 57.5%. This was widely hailed at the time as a step toward provincial autonomy. However, over the years, the federal government has expressed concerns that the center has been left with insufficient resources to cover its own constitutional responsibilities, particularly in areas such as defense, debt servicing, and federal development projects.
Federal Government’s Concerns
According to sources in the Ministry of Finance, the government believes that the existing fiscal arrangement is unsustainable. The country faces persistent budget deficits, mounting debt burdens, and declining fiscal space at the federal level. Officials argue that the center continues to shoulder responsibilities—such as debt repayment, national security, and federally funded social programs—that technically should fall within provincial jurisdictions.
The Ministry of Finance is currently drafting a comprehensive paper to present these challenges in detail. This paper will highlight:
- The impact of the current 57.5% provincial share on federal fiscal health.
- Projections of budget deficits and debt levels over the next five years.
- The mismatch between expenditure responsibilities and available federal resources.
- The need to reallocate responsibilities such as the Benazir Income Support Programme (BISP) to the provinces, since social welfare falls under their constitutional domain.
Proposals Under Discussion
During a recent meeting of key federal ministers from the law, planning, finance, and economic affairs portfolios, multiple options were debated. Some of the leading proposals include:
1. Linking 10–15% of Provincial Shares to Social and Environmental Performance
One proposal suggests that 10–15% of the provincial allocation be made conditional upon measurable improvements in sectors such as:
- Education (literacy rates, school enrollment, quality of teaching)
- Healthcare (hospital facilities, maternal and child health indicators)
- Population management (family planning and demographic stabilization)
- Environmental protection (pollution control, water conservation, reforestation efforts)
This idea reflects the federal government’s view that financial incentives are necessary to push provinces toward improving governance in critical areas.
2. Linking Resource Distribution with Tax Collection Efforts
Another major proposal involves tying resource transfers to the tax collection performance of provinces. Currently, Pakistan suffers from a chronically low tax-to-GDP ratio, and provincial governments have been slow to broaden their tax bases, particularly in areas such as agriculture and property. By linking shares to collection performance, the center hopes to encourage provinces to play a greater role in mobilizing domestic revenues.
3. Allocations for Large Dams and Higher Education
One minister suggested earmarking a portion of the divisible pool for large-scale dam construction and higher education, both considered matters of national security and long-term survival. Given Pakistan’s looming water scarcity crisis and energy shortages, dams are viewed as strategic investments. Similarly, strengthening higher education is seen as a way to enhance competitiveness in the global knowledge economy.
4. Support for Federally Administered Areas
Currently, Khyber Pakhtunkhwa receives 1% of the divisible pool as compensation for its sacrifices in the war on terror. The federal government now wants additional allocations for Gilgit-Baltistan, Azad Kashmir, and Islamabad Capital Territory, which remain outside the provincial framework but are the center’s financial responsibility.
5. Linking Provincial Shares to Local Government Transfers
Another option being explored is to require provinces to transfer resources to local governments as a condition for receiving their full share. This proposal is rooted in the constitutional principle of devolution, which mandates that provinces empower district and municipal authorities to improve grassroots governance.
6. Revising the Population-Based Formula
At present, 82% of NFC transfers are based on population size, with Punjab benefiting the most. The federal government may propose reducing this percentage, which Punjab would likely accept, provided it is compensated through alternative criteria such as tax effort, backwardness, or geographic needs.
Provincial Responses and Likely Reactions
During preliminary discussions, Sindh reportedly raised objections to the Planning Minister’s proposals. Sindh has traditionally been a strong advocate for provincial fiscal autonomy and is expected to resist any attempt to reduce its share. Similar resistance is anticipated from Punjab if any proposals appear to disproportionately impact its allocations.
Experts note that the politics of the NFC Award are deeply complex. Any change to the formula requires consensus among all provinces and the federal government. This makes negotiations challenging, as each province prioritizes its own fiscal needs.
The Case of the 7th NFC Award
The 7th NFC Award of 2010 marked a turning point in Pakistan’s fiscal federalism. For the first time, multiple indicators beyond population—such as poverty, revenue collection, and inverse population density—were included in the distribution formula. While it boosted provincial finances, it also significantly constrained federal fiscal space.
Since then, the federal government has repeatedly argued that the award tilted the balance too far in favor of the provinces, leaving the center unable to meet its rising obligations, especially in the wake of security challenges, debt repayments, and social protection programs.
Delays in NFC Negotiations
Despite the urgency, no formal notification for the new NFC meeting has been issued, even though months have passed since discussions were expected to begin. Sources suggest that the government is still trying to finalize a coherent negotiating stance before engaging with provinces.
When contacted, the spokesperson of the Ministry of Finance declined to comment, reflecting the sensitivity of the ongoing deliberations.
What’s at Stake for Pakistan’s Economy
The outcome of the new NFC negotiations will have far-reaching consequences for Pakistan’s economic stability, governance model, and provincial relations. Key stakes include:
- Federal fiscal sustainability in the face of rising debt.
- Provincial autonomy and their capacity to deliver social services.
- National cohesion, given that fiscal disputes have historically fueled political tensions.
- Development priorities, especially in infrastructure, water security, and education.
Economists warn that without a carefully balanced arrangement, Pakistan risks further deepening its fiscal crisis, weakening both the center and the provinces.
Conclusion
The federal government’s internal deliberations ahead of the NFC Award negotiations mark the beginning of what promises to be a heated and consequential debate. Proposals such as linking provincial shares to social sector performance, tax collection efforts, dam construction, and allocations for federal territories highlight the center’s determination to reclaim fiscal space.
However, with provinces like Sindh and Punjab already signaling objections, building consensus will be a formidable challenge. As Pakistan grapples with debt pressures, budget deficits, and developmental needs, the new NFC Award will shape the country’s economic trajectory for years to come.
For now, the federal government continues to prepare its case, with another round of ministerial meetings scheduled before formal talks with the provinces begin. Whether compromise can be reached remains to be seen, but the stakes for Pakistan’s federal system and fiscal stability could not be higher.
