Federalism and the NFC

There were apprehensions voiced earlier that the 18th Amendment could be rolled back. However, so far the PTI government has stated that there is no rollback in the offing and the 9th National Finance Commission (NFC) has been reconstituted. Earlier, the IMF had also raised concerns regarding the distribution of resources, so it has been suggested to involve provinces in the government’s discussions with the IMF.

Eminent historian Ayesha Jalal has pointed out the competing compulsions in Pakistan to be a federation on the one hand and to have a unitary sort of state, on the other.

Lessons from Jalal’s earlier work (1995) are that there is a dialectic relationship between “state construction and political processes” as well as between “centralism and regionalism.” There is also the need to distinguish between a “formal” and “substantive” democracy. In order to alleviate the grievance of regions and social groups, the balance of power between the centre and regions needs to change. We review some literature (Waseem 2010, SPDC 2018, Adeney 2012, CCE 2013) in this article.

Pakistan has gradually moved towards federalism, particularly under the rule of civilian governments. However, it is also seen by some as a way to dilute the authority of the state. The 18th Amendment is considered a milestone in the progress towards fiscal federalism that devolved both power and financial resources to the provinces more than ever before.

In the 7th NFC Award, changes were made both to the vertical (between the centre and provinces) and horizontal (intra-provincial) distribution of resources through consensus. It introduced a multiple criteria for the horizontal intra-provincial transfers from the divisible pool by taking into account population (82 percent), backwardness (10.30 percent), resource generation (5 percent), and inverse population density (2.7 percent). Before the 7th NFC Award, population used to be the single criteria.

As the result of the 7th NFC Award, the share of provinces in the divisible pool increased from 47 percent to 56 percent for 2010-11 and to 57.5 percent in the subsequent years. The centre and Punjab saw a decrease in their shares and other provinces, particularly Khyber Pakhtunkhwa and Balochistan, gained.

Not only that, the 18th Amendment did away with the concurrent legislative list and transferred the subjects in the concurrent list wholly to the provinces. It also granted joint control over mineral resources such as oil and gas and territorial waters to the centre and the provinces. It also made it possible for provinces to receive GST on services. The 18th Amendment overall made nearly 100 changes in the constitution in a most substantive revision.

The amendment restored parliamentary sovereignty with the repeal of Article 58 (2) (B); expanded the writ of the Political Parties Act to Fata; made the Council of Common Interests (CCI) a stronger body; restricted the scope of running the government through presidential ordinances; provided for the appointment of the chief election commissioner on the basis of mutual agreement; renamed NWFP as Khyber Pakhtunkhwa, made consultation possible in the case of hydro-power projects, stipulated that the share of provinces in the subsequent NFC awards not be less than the previous award, amongst other steps. It is significant since provinces rely on intergovernmental transfers to meet more than 80 percent of their expenditure.

However, the 18th Amendment has been criticised by pro-federalism forces and others. The former wanted it to institute even more gains for federalism such as a federal constitutional court, independent accountability commission instead of NAB, and local government as third tier of the government. Pro-federalism proponents also criticised it for not empowering the Senate fully, not federalising the National Economic Council (NEC) and not doing away with Article 62 of the constitution.

Yet, there are others who questioned the 18th Amendment in another way. Pasha et al (2010) raised issues such the ability of the federal government to be able to check the growth in its expenditure given the prevalent rigidities, and the nature of financial discipline that the provinces would be able to exercise. Ishrat Hussain writing in the press in 2012 talked about the federal government facing problems financing its expenditure given the overall decline in the revenues.

However, the social sector expenditure despite its provincial variations increased from 1.9 percent of GDP in 2000-01 to 3.5 percent of GDP in 2016-17, largely due to an increase in provincial resources as a result of the 18th Amendment. Public spending on health, education and water supply and sanitation increased. This increased social sector expenditure did not necessarily lead to better social sector outcomes, according to an SPDC report. However, we have to be mindful that this increase in expenditure would also be offset by an increase in population.

One of the challenges has been that the federal government’s revenues actually declined in the post 7th NFC Award, rather than increasing. Similarly, the federal government’s expenditure did not decline. Kaiser Bengali, as per reports, has held the centre itself responsible for this fiscal imbalance and not the provinces. There is rejection of the proposed demand of 7 percent upfront cut in the new upcoming NFC award.

In terms of recommendation, it has been suggested to continue with the unconditional transfers to the provinces as they have a positive impact on social-sector development. Similarly, the multiple criteria for intra-provincial distribution should also continue. Integration of gender-sensitive criteria for horizontal distribution would also lead to better gender outcomes. A matching grant as an incentive to increase self-financing by the provinces will be helpful. Planning post 18th Amendment should be federalised rather than centralised. Similarly, there is a recommendation to establish a constitutional court at the federal level to protect the constitution.

The new NFC award committee should keep this history and recommendations in mind while coming up with the new award.

The writer is an Islamabad-based social scientist.