KP government says its share is expected to increase from 6% to nearly 20% after merger with tribal districts
ISLAMABAD:
As the first meeting of the National Finance Commission is set to highlight the performance of the provinces, Khyber-Pakhtunkhwa in particular, Planning Minister Ahsan Iqbal has proposed several options to redistribute resources that would benefit the Center and smaller federal units.
Although more weight is given to variables that strengthen the fiscal position of smaller provinces, the share of KP would increase by 1% to 3% in the range of 15.7% to 17.1%, details of the proposals submitted to Prime Minister Shehbaz Sharif show.
The KP government says its share is expected to increase from 6% to nearly 20% after the merger of erstwhile tribal districts.
Under these options, the federal government would first reduce the undistributed divisible pool from 4.7% to 6% due to various expenses, then distribute the remaining 57.5% of taxes among the provinces.
To increase the flow of resources to smaller provinces, the minister proposed reducing the population share from 82% to 60% and increasing the revenue collection share to 20% to force them to generate their own resources.
The federal government has convened the first meeting of the NFC today (Thursday), which will be chaired by Finance Minister Muhammad Aurangzeb. This meeting will pave the way for the development of a new formula for the distribution of fiscal resources between the Center and the federated units.
But the spotlight will be on Khyber Pakhtunkhwa Chief Minister Sohail Afridi, who is also the provincial finance minister. The federal government wants to hold the KP government accountable for its failure to use budgetary resources effectively.
In addition to its 14.62% share in the NFC, the KP government also receives 1% of the divisible pool as compensation for losses due to the war on terror. According to some estimates, the total additional resources transferred to the province amounted to Rs700 billion since 2010.
However, despite this additional support, promised improvements in public safety, law enforcement and post-conflict recovery remain largely unrealized, according to federal officials. There have been calls for a full public audit to show precisely how these funds were used, with the provincial government saying it has not been adequately compensated for the price it pays as a frontline state.
According to federal authorities, the KP government also benefited from direct transfers, oil and gas royalties, waterworks profit allocations and rehabilitation allocations from merged areas.
Low contribution from the provinces
Federal government sources said that during substantive discussions, provinces showed some willingness to share federal spending, but were not prepared to face a direct impact on their share of revenue.
“While the NFC award envisaged a shared responsibility for revenue generation, provincial revenues have also not increased in line with the NFC award objectives,” according to the Ministry of Planning report.
There is a massive and guaranteed influx of financial resources from the federal fund to provincial governments, but the latter have made little effort to mobilize their own revenues.
Provincial tax and non-tax revenues in terms of the size of the economy remained at only 1.1%, which is negligible compared to their potential. This has created a culture of dependency, making provincial finances vulnerable to shocks to federal revenues and highlighting the need to modernize their tax generation mechanism.
Federal scholarship
In this context, the Ministry of Planning has proposed changes in the vertical distribution of resources between the Center and the provinces and the horizontal distribution between the four provinces.
Under the first vertical option, the Ministry of Planning proposed that the federal government deduct in advance 4.7% of the undistributed reserve for the war on terrorism, water security, expenses related to the civil armed forces and shares of special zones and federal territory.
He proposed the second vertical option of deducting in advance 6% of the expenditure of the Benazir Income Support Program and the Higher Education Commission, according to the proposals submitted to the Prime Minister.
If the federal government retains 4.7% of the undistributed reserve, this would slightly ease federal fiscal space. However, in the case of a 6% deduction, federal resources will be 12% higher by 2030 than in the 7th NFC Prize reference scenario.
Sharing between provinces
Under the current NFC price, population dominates with a weight of 82%, but poverty, income generation and inverse population density are only of marginal importance. The Planning Ministry has proposed major changes in the formula, which would reduce Punjab’s share by around 10% and Sindh’s share as well, a reduction of half a percentage.
However, KP’s share would increase to between 1% and 2.6% and that of Balochistan could reach 3%. The Islamabad Capital Territory could get up to 5% share for the first time.
Under the first option, the population weight can be reduced to 78% with modest increases for other factors such as inverse population density, fertility and forest cover. In the second option, the distribution becomes more balanced, since the weight of the population falls to 68%, while 10% is attributed to income generation, 2% to the reverse fertility rate and 2% to forest cover.
According to the third option, the distribution would even be modified, since the weight of the population would fall to 60%, while 20% would be attributed to income generation, 5% to the reverse fertility rate and 5% to forest cover. This transition to a broader approach reflects the intention to recognize fiscal effort, social outcomes and ecological contributions alongside the population.
The Planning Ministry said a strategic recalibration of the NFC price was a political necessity rather than a choice. It adds that defense, debt servicing, grants and strategic national investments, such as water security, energy transition and climate resilience, are intrinsic responsibilities of the federal government, which require sustained and predictable fiscal capacity at the central level.
The ministry also proposed that the federation retains the capacity to respond to large-scale national shocks, whether natural disasters, global commodity cycles or external security challenges.
Without adequate fiscal space, the state’s capacity to preserve stability and unity is threatened, with consequences that equally affect all federated units, the text adds.
