Pakistan’s struggle to reshape its fiscal federalism

A recent proposal by Ahsan Iqbal, Pakistan’s federal minister for planning, development and special initiatives, has exacerbated deep-seated fears in the country’s provinces of fiscal recentralisation and a further focus on Punjab – already the province that the rest of Pakistan sees as unduly favoured by federal policy. In June, Iqbal proposed revisiting the revenue-sharing formula between the centre and the provinces through changes to the National Finance Commission (NFC) award. The NFC award is a constitutional mechanism that determines how a pool of resources, created from direct and indirect taxed collected by the government, are distributed vertically between the federal government and the provinces, as well as horizontally among the provinces. While amendments to the NFC award are long overdue to keep up with the needs of the provinces, Iqbal’s proposed new formula has sparked concern. 

Iqbal claimed that the current NFC formula places an undue financial burden on the centre, limiting its ability to invest in critical infrastructure, and called for its complete overhaul. He also said that the new formula must account for water and climate vulnerabilities, and shift away from the criterion of population size – the current formula gives overwhelming weightage to population size when determining relative revenue distribution –  to instead link revenue allocations to provinces’ success in population control. Under the current formula, Punjab – which is home to more than half of Pakistan’s population – has an outsize advantage. Under the new formula, Punjab retains its advantage because it has a lower growth rate than Balochistan and Sindh. It is also the richest of the four provinces and therefore better equipped to implement population control measures.