Centre Forms Eight NFC Committees Amid Rising Provincial Tensions

Introduction

The federal government of Pakistan has formed eight key committees under the National Finance Commission (NFC) to prepare the framework for the 11th NFC Award, a move that has triggered serious concerns and objections from provinces, especially Sindh and Khyber-Pakhtunkhwa (K-P).

This development comes at a time when provincial governments claim they are receiving far less than their constitutionally guaranteed share from the divisible pool, despite the 7th NFC Award clearly fixing provincial allocation at 57.5%.

The formation of these committees follows legal backing from the Attorney General of Pakistan, who supported the federal government’s stance on expenditure sharing, even though provinces argue this falls outside the NFC’s constitutional mandate.

This article explains the background of the NFC, details of the eight newly formed committees, provincial objections, fiscal realities, and how these decisions may shape Pakistan’s federal structure, IMF programme commitments, and centre-province relations.

What Is the National Finance Commission (NFC)?

The National Finance Commission (NFC) is a constitutional body under Article 160 of the Constitution of Pakistan. Its primary purpose is to decide how financial resources collected by the federal government are distributed between:

• The federal government
• The four provinces
• Merged districts (former FATA)

The NFC Award determines:

• The size of the divisible pool
• Vertical distribution (Centre vs provinces)
• Horizontal distribution (among provinces)

The last consensus-based NFC Award (7th NFC) was announced in 2010, and although it was meant for five years, it is still being followed due to political disagreements.

Background: Why NFC Is Controversial Again

Despite constitutional guarantees, provinces argue that actual transfers are far below promised levels.

Key Claim by Dr Hafiz Pasha

At an NFC seminar organised by the Social Policy and Development Centre (SPDC), renowned economist Dr Hafiz Pasha revealed:

• Provinces were supposed to receive 57.5%
• They actually received only 45.8%
• Nearly 12% was withheld through:
  • Petroleum levy (not part of divisible pool)
  • Cash surpluses forced under IMF conditions

This gap has intensified provincial distrust toward the Centre.

Formation of Eight NFC Committees: What Changed?

The Finance Ministry, led by Finance Minister Muhammad Aurangzeb, has notified eight working groups to address critical fiscal and structural issues before finalising the 11th NFC Award.

These committees will significantly influence:

• Resource distribution
• Provincial autonomy
• Federal fiscal control
• IMF-driven reforms

Committee 1: Divisible Pool Composition (Customs Duties Issue)

Key Proposal

The federal government is considering excluding customs duties from the divisible pool.

Why It Matters

Customs duties are a major revenue source. Removing them would:

• Reduce the size of the divisible pool
• Lower provincial transfers
• Strengthen federal fiscal control

This proposal has alarmed provinces, especially Sindh and K-P.

Committee 2: Vertical Distribution (Centre vs Provinces)

Currently:

• 57.5% → Provinces
• 42.5% → Centre

The new working group will revisit this ratio, raising fears that:

• Provincial share may be reduced
• Federal government may justify changes due to debt and IMF obligations

Committee 3: Horizontal Distribution Among Provinces

Current Formula

• 82% weight to population
• Remaining weight to poverty, revenue generation, inverse population density

Provincial Concerns

• K-P and Balochistan argue population-heavy Punjab benefits most
• Calls to reduce population weight and increase:
  • Revenue effort
  • Area
  • Backwardness indicators

Committee 4: Expenditure Sharing on Devolved Subjects

This committee was formed after:

• Sindh objected to federal spending on devolved subjects
• Attorney General supported the Centre

Key Issue

Sindh argues:

• NFC only deals with revenue distribution
• Expenditure sharing is outside NFC’s mandate

Financial Impact

According to a World Bank 2023 report, the Centre spent:

• Rs328 billion on ministries related to devolved subjects

Sindh may now seek its own legal opinion.

Committee 5: Tax-to-GDP Ratio Improvement

Pakistan’s Tax Crisis

• FBR tax-to-GDP ratio: 10.3%
• Provincial tax contribution: 0.8% of GDP
• IMF target: much higher

The committee, chaired by K-P’s finance minister, aims to:

• Broaden tax base
• Improve compliance
• Reduce reliance on indirect taxes

FBR Performance Concerns

• FBR may miss first half-year target by Rs560 billion
• Raises pressure on provinces to generate more revenue

Committee 6: Straight Transfers to Provinces

Straight transfers include:

• Natural gas royalties
• Hydel profits
• Oil and gas development surcharge

Sindh will chair this committee, reflecting its long-standing demands for:

• Fair gas royalty payments
• Timely transfers
• Transparent calculations

Committee 7: NFC Share for Merged Districts (Former FATA)

After the merger of FATA with K-P, new realities emerged:

• Population increased by over 5 million
• Area expanded by one-third
• Resources did not increase proportionately

K-P demands:

• Over 4% additional NFC share
• Dedicated funding for development and security

Committee 8: National Debt Composition and Utilisation

Headed by Balochistan’s finance minister, this committee will examine:

• How national debt is used
• Whether provinces are indirectly burdened
• Transparency in borrowing decisions

Provincial Criticism

K-P’s Muzammil Aslam criticised:

• Energy mismanagement
• Rs5 trillion circular debt
• Rs5.1 trillion payments to Chinese power plants

IMF Programme and Provincial Cash Surpluses

To meet IMF conditions:

• Provinces saved Rs921 billion as cash surplus
• Federal government collected Rs1.2 trillion in petroleum levy

These measures:

• Reduced actual provincial spending power
• Increased centre-province friction
• Questioned the spirit of fiscal federalism

Historical Perspective: Lessons from East Pakistan

Dr Asad Sayeed warned that:

• Resource denial and revenue centralisation in the 1960s
• Played a role in East Pakistan’s separation

He stressed:

• Population-based distribution must be handled carefully
• Provinces must feel economically respected

Why the 11th NFC Award Is So Critical

The upcoming NFC Award will:

• Shape Pakistan’s fiscal future
• Determine provincial autonomy
• Impact development spending
• Influence IMF negotiations
• Affect political stability

Without consensus, Pakistan risks:

• Continued NFC deadlock
• Weak federation
• Growing provincial resentment

Conclusion

The formation of eight NFC committees shows that the federal government is finally moving toward addressing long-pending fiscal issues. However, provincial tensions, legal disputes, IMF pressures, and trust deficits threaten the process.

If customs duties are excluded, population weight remains unchanged, and provinces continue receiving less than their constitutional share, the NFC may become another source of conflict rather than cooperation.

A transparent, fair, and consensus-based NFC Award is essential to strengthen Pakistan’s federal system, ensure equitable development, and restore trust between the Centre and provinces.

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