Pakistan Institute of Development Economics



Financial Implications of the 7th NFC Award and the Impact on Social Services

The financial status of provincial governments in Pakistan hinges largely on federal transfers to the provinces constituted through National Finance Commission (NFC) Awards. These awards design the formula of distribution of resources between federal and provincial governments, and among the provinces for five years. Historically, federal and all provincial governments have tried their level best to get a higher share of the revenues in order to stabilise their own financial status. As a result, there are very few examples of consensus based conclusive awards in the past. These consensus based awards have had different gainers. For instance, in the NFC Award 1991, provincial governments were the main beneficiaries as they received substantially higher shares of buoyant taxes such as sales and income taxes. In contrast, the largest beneficiary of the NFC Award 1997 was the federal government as it allocated higher shares of all taxes to itself in order to stabilise its financial status. Given the sensitivity attached to NFC awards, where an increase or decrease in the share of any tier of the government affects the share of other tiers with the same magnitude in the opposite direction, it seems very difficult to develop a consensus among federal and provincial governments. As a result, since the separation of East Pakistan, there have been only three conclusive NFC Awards (1974, 1991, 1997) and one presidential distribution order (2006) prior to the 7th NFC Award.

Muhammad Sabir