What is National Finance Commission?
Learn about the National Finance Commission, its role in economic distribution, and its impact on federal and provincial financial relations.
2024-05-20
Introduction
The National Finance Commission (NFC) is a pivotal institution in Pakistan's financial landscape, responsible for the equitable distribution of financial resources between the federal government and the provinces. Established under Article 160 of the Constitution of Pakistan, the NFC aims to address fiscal imbalances and ensure that all provinces receive a fair share of national revenues.
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Historical Background
The concept of the NFC dates back to the early years of Pakistan's independence. The first NFC was constituted in 1951, following the model of the Raisman Award from the colonial era. Over the decades, the NFC has evolved, with several awards being announced to refine the distribution formula and address the changing economic and demographic realities of the country.
Structure and Composition
The NFC is constituted by the President of Pakistan every five years. It includes the Federal Finance Minister, the Finance Ministers of the four provinces, and other appointed members. The composition ensures representation from both federal and provincial levels, facilitating a balanced approach to resource distribution.
Functions and Responsibilities
The primary function of the NFC is to recommend the distribution of the net proceeds of certain taxes between the federation and the provinces. This includes taxes on income, sales, and exports, among others. The NFC also advises on grants-in-aid to the provinces and the exercise of borrowing powers by both federal and provincial governments.
Key Responsibilities:
Vertical Distribution: Allocation of resources between the federal government and the provinces.
Horizontal Distribution: Allocation of resources among the provinces based on criteria such as population, poverty, revenue generation, and inverse population density.
Key Awards and Their Impact
Since its inception, the NFC has announced several awards, each with significant implications for federal-provincial financial relations. The 7th NFC Award, announced in 2009, was particularly notable for increasing the provincial share of the divisible pool to 57.5% and introducing new criteria for horizontal distribution, such as poverty and revenue generation.
Notable Awards:
7th NFC Award (2009): Increased provincial share and introduced multiple indicators for distribution.
10th NFC Award (2020): Focused on addressing the financial needs of special areas and reducing losses of state-owned enterprises.
Challenges and Criticisms
Despite its crucial role, the NFC has faced several challenges. Political disagreements often delay the announcement of new awards, and there are criticisms regarding the adequacy and fairness of the distribution criteria. Smaller provinces have historically felt disadvantaged, leading to calls for more inclusive and transparent processes.
Common Criticisms:
Delays in Award Announcements: Political disputes can hinder timely decisions.
Distribution Criteria: Some provinces argue that the criteria do not adequately reflect their financial needs and contributions.
Conclusion
The National Finance Commission plays a vital role in ensuring fiscal equity in Pakistan. While it has made significant strides in addressing financial imbalances, ongoing challenges highlight the need for continuous improvement and cooperation among all stakeholders. Understanding the NFC's functions and impact is crucial for appreciating its role in Pakistan's economic governance.
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