Provincial Finance Commission: Options for Fiscal Transfers (Public SECTOR AND FISCAL REFORMS‪)‬

The Provincial Finance Commissions were constituted in all four provinces of Pakistan in 2001. The Commissions were asked to formulate a formula for the distribution of resources among the districts in their respective province to ensure smooth functioning of the local governments and to minimise the poverty and income inequalities among the districts. This paper analyse to what extent the existing development transfers are based on the existing level of deprivation in the districts by looking at the Rank Correlation between them. This paper also runs different simulations to suggest different options for the provincial governments to improve the distribution formulas. The Provincial Finance Commissions were constituted in all four provinces of Pakistan in 2001. The Commissions were asked to formulate a formula for the distribution of resources among the districts in their respective province. The formula includes both transfers- the development transfer and current transfers. The purposes of the current transfers are to ensure the maintainability of existing services at the districts level and of the development grants to minimise the intra-district poverty and inter-districts income differential. In this paper we compute the Rank Correlation between the existing development grants transfer index and the deprivation index. This will help the policy-makers understood whether the transfers are fiscal need based or not? That is to highlight to what extent the existing development transfers are based on the existing level of deprivation in the districts. If not, then what can be done to make the transfers pro-poor. To assist the policy maker in this regards this study carried out a simulation when 50 percent transfers are based on population and 50 percent on deprivation. This simulation will provide sufficient range in which the policy maker can exercise their discretion to minimise poverty and at the same time provide resources to maintain existing infrastructure. The distribution of funds among the districts which is based only on expenditure needs of the districts cannot help address poverty issue. The provinces therefore, have to use different indicators in the formula of PFC Award to achieve both objectives.