The federal government has notified eight committees under the National Finance Commission (NFC) to deliberate on key fiscal and constitutional issues ahead of the 11th NFC Award, a move that has revived debate over provincial resource sharing, debt utilisation and the role of the Centre in devolved subjects.
The notification follows legal backing from the attorney general, who supported the federal government’s position against objections raised by Sindh regarding the inclusion of expenditure-sharing matters within the NFC’s mandate. The decision comes as economists and provincial representatives continue to question the gap between constitutionally guaranteed transfers and actual fiscal outcomes.
Speaking at a seminar on the NFC organised by the Social Policy and Development Centre (SPDC), veteran economist Dr Hafiz Pasha highlighted that although the Constitution mandates that 57.5 percent of the divisible pool be allocated to provinces, they effectively received only 45.8 percent in the last fiscal year. He explained that the shortfall resulted from the imposition of petroleum levies, which fall outside the divisible pool, and the return of transferred funds in the form of provincial cash surpluses.
The seminar was marked by the absence of Finance Minister Muhammad Aurangzeb, who had earlier confirmed his participation. SPDC Managing Director Asif Iqbal said the finance minister expressed regret late the previous night and instead met SPDC representatives at his office.
According to official sources, the finance ministry has constituted committees on eight critical issues that will shape deliberations for the next NFC Award. The last consensus-based NFC Award, the seventh, was agreed upon 15 years ago for a five-year period, after which extensions have continued in the absence of a new agreement.
One of the key working groups, headed by the Punjab finance minister, has been tasked with making recommendations on sharing financial expenditures incurred by the federation in areas that constitutionally fall under provincial jurisdiction. The group was formed after the attorney general opined that such expenditure-sharing could be discussed within the NFC framework, a position strongly contested by Sindh. Sources indicated that Sindh may seek its own legal opinion on the matter.
Dr Asad Sayeed, Sindh’s technical member on the NFC, said the federal government continues to retain ministries linked to devolved subjects and spent Rs328 billion on them, as highlighted in a 2023 World Bank report. He argued that such spending undermines the spirit of devolution.
Khyber-Pakhtunkhwa Finance Advisor Muzammil Aslam criticised federal policies, particularly in the energy sector, saying mismanagement has resulted in over Rs5 trillion in circular debt in power and gas and more than Rs5.1 trillion in payments to Chinese power plants.
Another working group, headed by Finance Minister Muhammad Aurangzeb, will review the composition of divisible pool taxes, including proposals to include or exclude certain taxes. Sources said the federal government is considering excluding customs duties from the divisible pool shared among the federation and provinces.
A separate committee will examine vertical transfers, determining the percentage of resources shared between the Centre and provinces. While provinces are constitutionally entitled to 57.5 percent, experts argue the effective share has eroded. Dr Hafiz Pasha noted that the federal government collected over Rs1.2 trillion in petroleum levies last year, while provinces parked Rs921 billion as cash surpluses to meet IMF programme conditions.
A working group led by the Balochistan finance minister will review the horizontal distribution of resources among provinces. Currently, over 82 percent of resources are allocated based on population. Dr Asad Sayeed recalled that disputes over population-based distribution had historical roots, while Muzammil Aslam argued for reducing population-based incentives and increasing reliance on revenue generation and other indicators.
Other committees include one on improving the overall tax-to-GDP ratio, chaired by Khyber-Pakhtunkhwa’s finance minister, amid concerns that FBR’s tax-to-GDP ratio remains around 10.3 percent, with provinces contributing just 0.8 percent. Another group, chaired by the Sindh finance minister, will review straight transfers to provinces, while a committee led by K-P’s finance minister will examine the NFC implications of the merger of erstwhile FATA.
The final working group will focus on national debt composition and its utilisation, under the leadership of the Balochistan finance minister. Together, these committees are expected to play a central role in shaping fiscal federalism debates as Pakistan moves toward negotiations on the long-delayed 11th NFC Award.
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