Intergovernmental Transfers: An Evaluation of Mechanism and Design of Transfers in Pakistan

The 7th National Finance Commission (NFC) Award has seemingly put an end to the deadlock over revenue distribution among the constituents of the federation in Pakistan. This paper argues that though the 7th NFC Award’s use of multiple indicator criteria for the distribution of resources is a step forward in the right direction, the distribution design still falls short on various counts. For example, the weight of 82 percent for the population share is on the higher side whereas the demographic structure of the population, an important indicator of the expenditure needs, does not figure up in the distribution design. Also, the basis of weights assigned to the four elements of the revenue distribution criteria is unknown and no rigorous exercise seems to have been undertaken to determine these weights. Similarly, matching grants, which are a key element of the distribution design elsewhere, are altogether absent in Pakistan. Furthermore, provinces still rely on large transfers from the centre which undermines the incentives of the provinces to generate their own revenues. The paper emphasises that there is a need to rethink the mechanisms for resource sharing as well as the institutional structure of the NFC itself.