The Government of Pakistan has officially scheduled the much-anticipated meeting of the 11th National Finance Commission (NFC) on Friday, August 29, in Islamabad. The session, which will be chaired by Federal Finance Minister Muhammad Aurangzeb, is expected to play a crucial role in reshaping the country’s fiscal federalism framework and revisiting the formula that determines the distribution of national financial resources between the federation and the provinces.
The announcement comes at a time when economic pressures, debt repayments, and demands from provinces are growing louder. In particular, the government of Khyber Pakhtunkhwa (KP) has raised strong concerns over the existing formula, calling for a reduction in the population-based share and the inclusion of new indicators such as plantation, prosperity, and climate change resilience in the resource distribution mechanism.
Background of the National Finance Commission (NFC) Awards
The NFC Award is a constitutional mechanism under Article 160 of the 1973 Constitution of Pakistan. It mandates the formation of a commission every five years to decide the formula for the distribution of divisible pool resources between the federal government and provinces.
- So far, 10 NFCs have been formed, but only 4 commissions have produced awards that were implemented.
- The most notable was the 7th NFC Award of 2009, announced during the tenure of former President Asif Ali Zardari, which significantly increased the provincial share to 57.5% of divisible pool resources.
- However, the increased allocation to provinces left the federal government struggling to meet debt repayment, defense, and social sector spending, particularly in light of Pakistan’s growing fiscal deficits.
Now, with President Zardari having constituted the 11th NFC Commission, expectations are high that reforms will be undertaken to address new economic realities.
Agenda of the August 29 NFC Meeting
According to sources in the Ministry of Finance, the upcoming meeting will focus on the following key areas:
- Debt and Interest Payments:
- The federal government plans to brief provinces on the enormous interest payments on foreign and domestic debt, which consume the bulk of federal revenues.
- Anti-Terrorism Expenditures:
- A detailed discussion will be held on resources spent on counter-terrorism operations, particularly relevant to provinces like KP, which have borne the brunt of militancy.
- Defense and Security Costs:
- The defense budget, historically consuming a large share of federal expenditure, will also be presented to the provinces to justify the center’s share.
- Social Sector Spending (BISP):
- Expenditure on the Benazir Income Support Programme (BISP) will be discussed, as the federal government aims to continue supporting vulnerable populations across all provinces.
The Ministry of Finance has emphasized that provincial consensus is critical for ensuring that the new award is both fair and sustainable.
Khyber Pakhtunkhwa’s Position: Reducing Population Share
At the heart of the upcoming discussions is Khyber Pakhtunkhwa’s demand to reform the population-based criterion for resource distribution.
Current Formula:
- 82% of divisible pool resources are allocated based on population.
- Only 10.6% is distributed based on backwardness.
KP’s Argument:
KP’s Finance Minister Muzammil Aslam has strongly criticized this formula, arguing that it is heavily skewed towards Punjab, which holds the largest population share. According to him:
- The 82% population weight marginalizes provinces like KP and Balochistan, which face unique challenges such as terrorism, militancy, natural disasters, and climate change vulnerabilities.
- He proposed that plantation, environmental sustainability, prosperity, and backwardness should be given more weight in the formula.
“The current NFC award does not reflect the ground realities. It is unjust that provinces which sacrificed the most in the fight against terrorism and climate challenges are deprived of their rightful resources,” said Aslam while addressing a recent seminar.
Federal Minister Ahsan Iqbal’s Suggestion
Supporting KP’s concerns, Federal Minister for Planning, Development, and Reforms Ahsan Iqbal has also suggested a reduction of the population share from 82% to 60%.
He stressed that the revised formula should:
- Allocate resources on the basis of plantation drives and environmental conservation.
- Recognize the impact of climate change, especially on provinces like Sindh and KP, which face recurring floods, droughts, and deforestation.
- Encourage provinces to adopt sustainability-driven policies.
Challenges Faced by the Federal Government
While the provinces are demanding a greater share, the federal government’s fiscal space is shrinking.
- Debt Burden:
- Pakistan is currently paying a record amount in interest payments. Nearly 50% of federal revenues go toward servicing debt, leaving little for development.
- Defense Spending:
- Rising regional tensions, especially with India and Afghanistan, have led to increased defense allocations.
- Limited Revenue Generation:
- The tax-to-GDP ratio remains below 10%, one of the lowest in the region, putting immense pressure on federal finances.
As a result, once the federal government transfers its 57.5% share to provinces, it is left with insufficient resources to meet core responsibilities.
Grievances of Khyber Pakhtunkhwa and Other Smaller Provinces
Muzammil Aslam has also pointed out specific grievances against the federal government’s handling of provincial projects:
- Left Bank Canal Funds:
- The federal government had promised funds for the Left Bank Canal Project but failed to deliver.
- NHA Bias:
- The National Highway Authority (NHA) is accused of completing major projects in Punjab and Sindh, while ignoring KP and Balochistan.
- Underdevelopment:
- KP argues that despite its sacrifices in the war on terror, it continues to face underfunding and neglect compared to Punjab.
Call for Investment in Water Infrastructure
The former President of the Federation of Chambers of Commerce and Industry, Mian Anjum Nisar, has also weighed in on the NFC debate. He emphasized the urgent need to:
- Build large dams to store water for agriculture and energy generation.
- Allocate NFC resources for new water reservoirs to reduce reliance on imports and secure food security.
- Recognize water as a provincial subject while ensuring coordinated efforts to avoid inter-provincial disputes.
Broader Implications of NFC Award Reforms
The outcome of the 11th NFC Award will have far-reaching consequences:
- For the Provinces: It will determine their ability to fund health, education, agriculture, and infrastructure projects.
- For the Federation: It will decide whether the federal government can sustain debt repayments, defense needs, and social safety nets.
- For Pakistan’s Unity: An equitable award is essential to address grievances of smaller provinces and ensure national cohesion.
Conclusion
The August 29 NFC meeting is shaping up to be a critical moment for Pakistan’s fiscal federalism. With Khyber Pakhtunkhwa pushing for a reduction in the population share and greater emphasis on environmental sustainability, prosperity, and backwardness, the stage is set for intense debates.
While the federal government struggles with debt and defense pressures, provinces like KP and Balochistan continue to demand a fairer deal. Balancing these competing priorities will be a test of political will and cooperative federalism.
If consensus is achieved, the 11th NFC Award could pave the way for a new era of equitable resource distribution in Pakistan. However, if divisions persist, the tensions between the federal center and provinces may deepen, threatening both economic stability and national unity.
