The federal government of Pakistan has postponed the 11th meeting of the National Finance Commission (NFC) that was scheduled for Friday. The decision came after the Sindh government requested a delay due to the devastating floods that have wreaked havoc across the country. Additionally, the technical member representing Balochistan also expressed his inability to attend, prompting the Ministry of Finance to officially issue a notification of postponement.
This postponement reflects not only the immediate impact of natural disasters but also the longstanding financial challenges that the NFC seeks to address, particularly regarding revenue-sharing between the federation and the provinces.
Background: What is the National Finance Commission (NFC)?
The NFC is a constitutional body responsible for the distribution of financial resources between Pakistan’s federal government and its provinces. It plays a crucial role in ensuring fiscal balance by determining the share of revenues collected by the federal government that should be transferred to provincial governments.
- The NFC comprises nine members:
- The Federal Finance Minister (who chairs the commission).
- Four provincial finance ministers.
- Four technical members, one from each province, usually economic experts.
The NFC is mandated to meet every five years under the Constitution to review and adjust the formula for resource distribution. Its awards significantly affect the economic autonomy of provinces and the financial strength of the federation.
Reasons for the Postponement
The postponement of the 11th NFC meeting was attributed to two main reasons:
- Sindh’s Request Due to Floods – The province of Sindh, which has been one of the hardest hit by the recent floods, requested that the meeting be rescheduled so the provincial government could focus on relief and rehabilitation efforts. The catastrophic flooding has displaced millions, destroyed infrastructure, and left authorities struggling to manage humanitarian needs.
- Balochistan’s Member Unavailable – The technical member from Balochistan, Farmanullah, cited other professional commitments and was unable to attend. This absence, combined with Sindh’s request, meant that the NFC Secretariat could not secure full representation.
According to officials, eight out of nine members expressed their inability to attend, making it impractical to proceed.
Current Representation in the NFC
Each province is represented in the NFC by its Finance Minister and a technical member. The current lineup includes:
- Punjab: Represented by Nasir Mehmood Khosa (technical member).
- Sindh: Represented by Asad Saeed (technical member).
- Khyber Pakhtunkhwa (KP): Represented by Dr. Musharraf Rasool Sayan.
- Balochistan: Represented by Farmanullah, though unavailable for the latest meeting.
The Federal Finance Minister, Muhammad Aurangzeb, serves as chairperson of the commission.
Key Agenda of the Postponed NFC Meeting
The President of Pakistan had convened the NFC meeting primarily to deliberate on the revenue-sharing formula between the federation and provinces.
Under the 7th NFC Award (2010), the share of provinces in the divisible pool of federal revenues was increased by 10 percent, rising to 57.5 percent. However, this increase was not accompanied by any additional fiscal responsibilities for provinces.
Consequences of the 7th NFC Award:
- Rising Federal Debt: The federation retained only 42.5% of revenues, which has strained its ability to meet debt obligations and defense expenditures.
- Budget Deficit: Successive governments have faced growing fiscal deficits, largely because they avoided reducing expenditures due to political pressures.
- Weak Revenue Collection: The Federal Board of Revenue (FBR) has consistently failed to achieve a tax-to-GDP ratio of 15%, a target set as far back as 2015.
The FBR’s Performance and IMF Targets
The performance of Pakistan’s Federal Board of Revenue (FBR) has been a central issue in NFC discussions.
- The FBR failed to meet the International Monetary Fund (IMF) target of achieving a 10.6% tax-to-GDP ratio.
- Pakistan continues to rely heavily on indirect taxation, which disproportionately affects lower-income groups.
- The inability to expand the tax base has left the federal government dependent on borrowing and foreign aid.
This weak revenue performance has made it difficult for the federal government to argue for a reduction in provincial shares, as international institutions like the IMF and World Bank expect the federation to enhance its domestic resource mobilization rather than seek additional fiscal space from provinces.
The World Bank and IMF’s Economic Outlook for Pakistan
The Federal Ministry of Finance had also sought guidance from the World Bank on macroeconomic projections for the next five years. According to recent reports:
- The IMF has declared Pakistan’s economy to be stable until 2030, provided reforms continue.
- The Planning Commission has projected an economic growth rate of 6 percent in the coming years.
- Under the Udan Pakistan Program, the government expects:
- A 16 percent increase in revenue (as a share of GDP).
- Expenditures limited to 18.8 percent of GDP.
- A reduction of the fiscal deficit to 2.8 percent of GDP.
These projections suggest a relatively positive outlook, though experts caution that political instability, natural disasters, and weak governance could undermine these targets.
Why the Federation Wants a Larger Share
The federal government has argued that the current NFC formula is unsustainable for the center, which has to bear:
- Debt servicing obligations.
- Defense expenditures, which remain significant due to regional security concerns.
- Federal Public Sector Development Program (PSDP) funding for infrastructure projects.
- Social protection schemes, especially amid economic crises.
Proponents of revisiting the NFC award argue that unless the provinces share more fiscal responsibilities, the federation will remain under severe financial strain.
Provinces’ Counterargument
The provinces, however, maintain that:
- They require substantial funds for education, healthcare, agriculture, and infrastructure.
- The 18th Amendment to the Constitution has already devolved several responsibilities to provinces, making them more financially dependent on NFC allocations.
- Cutting their share could exacerbate inequality and slow down development at the provincial level, especially in smaller provinces like Balochistan and Khyber Pakhtunkhwa.
Impact of Floods on Economic Policy
The timing of the NFC meeting was particularly challenging due to the severe flooding across Pakistan. Sindh, in particular, has faced unprecedented devastation:
- Millions displaced, with thousands living in makeshift camps.
- Agricultural losses amounting to billions of rupees, threatening food security.
- Infrastructure, including roads and schools, severely damaged.
In this context, Sindh requested a postponement to allow the province to prioritize flood relief and rehabilitation efforts rather than fiscal negotiations.
The Way Forward
While the meeting has been postponed, several issues remain on the table:
- Review of NFC Formula – Whether the current 57.5% provincial share is sustainable.
- Revenue Mobilization – Strategies for the FBR to expand the tax base and achieve a higher tax-to-GDP ratio.
- Debt Management – Addressing the federal government’s growing reliance on domestic and external borrowing.
- Economic Reforms – Implementation of structural reforms under IMF and World Bank guidance.
- Flood Recovery Plans – Integration of disaster management funding into fiscal policy discussions.
Conclusion
The postponement of the 11th NFC meeting underscores the complex intersection of natural disasters and economic challenges facing Pakistan. While floods have forced the delay, the underlying issues—fiscal imbalance, weak revenue collection, and center-province tensions—remain pressing.
With the federal government under pressure from debt obligations and international lenders, and provinces struggling to meet their development needs, the upcoming NFC discussions will be critical for Pakistan’s economic stability.
The road ahead requires cooperation between the federation and provinces, meaningful tax reforms, and a balance between development spending and fiscal discipline. Unless addressed comprehensively, Pakistan risks remaining trapped in a cycle of budget deficits, debt dependence, and provincial dissatisfaction.
