ISLAMABAD: Pakistan will continue its talks with provinces regarding a constitutional revenue-sharing arrangement, though it will be utilizing provincial funds to meet its national defense and strategic requirements over the next three years, officials said on Monday.
The National Finance Commission (NFC) Award determines how tax revenues collected by the federal government are distributed among Pakistan’s four provinces. The arrangement has long been a sensitive political issue, particularly in smaller provinces that have sought a greater share of national resources.
Pakistan’s government has been in talks with the provinces over their shares in the NFC award as it seeks to maintain fiscal discipline under a $7 billion International Monetary Fund (IMF) program while balancing development needs and rising security costs in the country.
A day after Pakistan unveiled this month a $67.49 billion federal budget and increased defense spending by around 18 percent to $10.8 billion for the next fiscal year, Finance Minister Muhammad Aurangzeb announced Islamabad will tap a portion of provincial funds to help meet its defense requirements.
“The government is planning to use this arrangement for three years for defense purposes, but this will not impact National Finance Commission (NFC) award discussions between the federation and the provinces,” State Minister for Finance Bilal Azhar Kiani told Arab News on Monday.
“This is a separate arrangement.”
There has been a growing debate in Pakistan over the distribution of revenue under the NFC award framework. While the award is constitutionally required to be presented every five years, the most recent agreed-upon award was signed on December 30, 2009 and officially took effect on July 1, 2010.
Federal officials argue that while provinces receive the bulk of divisible tax revenues, Islamabad remains responsible for major national obligations, including debt servicing, defense spending, and foreign affairs. They say that after transferring funds to the provinces, the federation is often left with limited fiscal space to meet these commitments, prompting calls for a review of the current revenue-sharing arrangement.
The strategy to leverage provincial resources was first made public by Aurangzeb at a post-budget presser on Saturday, during which he explained the mechanics of a massive Rs1,035 billion ($3.7 billion) grant provided by the provinces to the center.
The government’s new fiscal plan came amid a rapidly evolving regional threat environment. Islamabad has for months been engaged in border skirmishes with Afghanistan over a rise in militancy in Pakistan’s western regions, while tensions remain high with New Delhi following an intense, four-day India-Pakistan military conflict in May last year.
According to official budget documents, the transfer was executed under Article 164 of the Constitution, which allows provinces to provide discretionary financial grants.
Elaborating on the move, Aurangzeb told Arab News on Monday that the capital injection was vital for the federation to address pressing, immediate liabilities that exceeded its available resources.
“This arrangement is for one year which will be extended for another two years with consultation,” the finance minister said, adding that the framework would remain flexible.
Asked if the over Rs1 trillion provincial contribution would be restricted entirely to military spending, the finance minister said: “It will be used for defense and other strategic purposes,” Aurangzeb said.
