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Mon. May 27, 2024
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The Dilemma of Fiscal Federalism in Pakistan
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The redistribution of a country's economic resources is one of the three primary pillars that underpin the fiscal federalism. One of the essential components of the federalism is the transfer of resources to both the central government and the local governments. In contrast to any other developed country, fiscal federalism has remained a mystery throughout Pakistan's political and economic history. This stands in stark contrast to the situation in any other developed nation and is one of the key reasons why the economy of the country has always been subject to vicissitudes.

It is generally agreed that the constitution of the Raisman Award, which took place in 1951, marks the commencement of fiscal federalism in Pakistan's historical record. The award was decided upon without considering the constitutional arrangements. On the other hand, it was anticipated that this award would distribute the divisible pool of resources into 50:50, with one half going to the central government and the other half to the local governments. In addition, the National Financial Commission (NFC) award was presented for the first time in 1961-1962; this was exactly ten years after the Raisman Award was first instituted under General Ayyub's administration. It was a daring move, and it was also a step to decide the jurisdictions of tax collection between the federal government and the provincial governments. The National Financial Commission (NFC) award was first presented in 1961 in compliance with the clause (1) of article 160 of the Constitution of Pakistan. Since that time, a total of the ten National Financial Commission (NFC) awards have been constituted. On the other hand, the method for calculating the distribution of total dividable has evolved throughout the course of history in response to the evolving political and economic factors.

The examination of fiscal and political federalism may not be thorough, but it examines most of the significant elements, rising dynamics, crucial challenges, and reform agenda pertaining to federalism. Undoubtedly, the improvement is discernible, although mostly on paper, and demonstrates that there is still a long way to go. In Pakistan, the issue with the fiscal federalism is not a lack of investment in the public sectors; rather, the problem is that resources are being distributed in an inefficient manner. In addition, there is a slip between cup and lip as we shift from theory to practice. Because politicians have the power in the decision-making process, and the technocrats are not included in most of the decisions that are made.

The historical analysis of legislative and functional allocations at different levels of government indicates that the central government has always controlled the two subnational levels. The issues designated to the federal government have a national scope, and the costs and benefits may be handled more efficiently by the federation. However, this does not imply that the federation will interfere with provincial functional allocations. Since provincial governments were not granted the authority to create this competence, they have not had the chance or ability to do so.

Prominent economists agree that the 7th NFC Award, which was constituted after the devolution, has exacerbated the country's financial troubles. It fostered financial irresponsibility and significantly contributed to macroeconomic instability. In a federal state such as Pakistan, fiscal decentralization is necessary for enhancing the quality of services supplied to the population. If fiscal decentralization is mismanaged, the provinces and the federation may face significant challenges. The Award was completed in a rush, no thorough research was conducted, therefore lacked a solid economic base, and the income forecasts for the duration of the award were highly unrealistic.

The Award's scope was too vast. Therefore, the pace of implementation made it impossible to administer fiscal decentralization in an orderly manner. Insufficient attention was given to the provinces' capability, financial discipline, and ability to use these funds wisely when massive amounts of resources were handed to them in too short a time frame. In addition, the timing of the Award was improper. Pakistan already faced formidable obstacles. The security situation deteriorated, necessitating more expenditure. Interest payments increased at an exorbitant pace, almost doubling in three years. Subsidies for the power industry were increasing at a faster rate, and Public Sector Enterprises, PSEs, were losing ground. No consideration was given to these expanding financial demands of the federal government when establishing the federal government's lack of interest in implementing serious tax reform. Nonetheless, Provinces lacked motivation to increase their own income- further reducing their fiscal effort. Since most resources are being transferred to the provinces, fiscal deficit management is now the provinces' duty. The federal government alone cannot preserve budgetary discipline. The macroeconomic management of Pakistan confronts significant problems in the future Award, and it must not weaken the federal government’s ability to reduce fiscal deficit and public debt.

In the end, provinces will have to improve their own revenue collection and curtail unnecessary expenditure. However, there is no reason that the federal government still finance provincial governments’ development projects. Albeit some binding constraints must be put in place so that provincial governments provide fiscal surpluses. We need provincial Fiscal Responsibility and Debt Limitation Laws, and a high powered permanent national finance commission may be established, consisting of known fiscal economists and retired finance or revenue division secretaries. Moreover, a performance–based revenue transfer mechanism needs to be developed. The 75 per cent of the divisible pool can be released to the provinces without linking it to the performance of the provinces in service delivery, with the High-Power Commission monitoring performance. In the case of federal projects executed in the provinces and any debt so acquired, the respective provinces should share debt servicing costs with the federal government.

Abdul Basit Mahbbob is a final year student of Economics at National Defense Univerity, Pakistan.

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