The President constituted the 11th National Finance Commission recently to announce a new award for the sharing of the federal tax revenues between the federal and the provincial governments.
This is an appropriate time to make an assessment of the economic developments in each province after 2009-10, when the 7th NFC Award was announced. This award was initially valid for five years. However, it has continued in the absence of a consensus on a new award in the 8th, 9th and 10th NFCs.
One of the fundamental requirements for assessing the income gap and distance among the provinces is the presence of an annual Gross Regional Product (GRP) series of each province by sector and sub-sectors.
However, despite the pressing need for this data base to facilitate provincial planning the Pakistan Bureau of Statistics, along with the Provincial Bureaus, has not yet produced the time series of the GRP of each Province. Such a series has been produced for each State of India over the last many years.
The absence of an official series of the GRP by sector of each province in Pakistan has made it difficult to determine the economic consequences of NFC Awards. Given the fiscal equalization in the horizontal sharing formula, the fundamental question is whether there has been a process of reduction in the extent of inequality among the provinces in per capita incomes. Other key measures are the extent of own-fiscal effort by each provincial government, level of development spending to promote growth and so on, which have to be related to the size of the regional economies.
Fortunately, there have been attempts by economists to make estimates of the GRP of each province and to quantify the growth rates. The first such attempt was by Dr. Kaiser Bengali, at the Applied Economics Research Centre of the University of Karachi. His Ph.D. thesis was on the estimation of the time series of the GRP for each Province. The methodology used has been applied by other economists to up-date the series.
The objective of this article is to present estimates by the author of this article of the GRP of each Province up to 2024-25, on the basis of access to a large number of statistical publications and extrapolations thereof. The publications include the findings of various Censuses and annual surveys by the Pakistan Bureau of Statistics and the provincial bureaus. Further, a large number of specialized publications by individual ministries and agencies have also been accessed.
The end result is the time series from 2009-10 onwards of the GRP of each province at constant prices of 2015-16, in line with the GDP estimates. Estimates have also been made of the GRP of each province at current prices for recent years to enable comparison of fiscal effort and expenditure levels and patterns.
The first outcome is the identification of sub-sectors of comparative advantage of each province. These are sub-sectors where a particular province has a larger share in the national value-added than its overall share in the GDP of the country. This provides very useful insights into the likely growth performance of a particular province as to whether it has a comparative advantage in relatively fast- or slow-growing sub-sectors.
The list below presents a comparative advantage in sub-sectors of each province, excluding very small sub-sectors with share in the GDP of 2 percent or less.
Punjab has a comparative advantage in 7 sub-sectors including major crops, livestock, large-scale manufacturing and others as shown in the list below. Sindh has a comparative advantage also in seven sub-sectors, Khyber-Pakhtunkhwa in six sub-sectors and Balochistan in five sub-sectors. This identification is very useful as each province should focus its development strategy on sub-sectors in which it has a comparative advantage.
The relatively fast-growing sub-sectors since 1999-2000 have been livestock, large-scale manufacturing, construction, wholesale and retail trade, transport, community services and private services. The list of slow-growing sub-sectors includes major crops, minor crops, mining and quarrying, electricity and gas and public administration. As highlighted earlier, this list does not include the very small sub-sectors, with share in GDP of 2 percent or less.
The above analysis has led to the quantification of the economic structure, in terms of sectoral shares, of each provincial economy. This is given in Table 1 below for 2015-16, the base year of the national income accounts of Pakistan.
The Table 1 clearly shows the relatively high shares of agriculture in Punjab and Balochistan. Industry is playing a bigger role in Sindh, while Khyber-Pakhtunkhwa and Punjab have a somewhat a larger role of the services.
Based on the sub-sectoral shares within each province and their evolution of the years, we are finally in a position to derive the growth rates of the economy of each province in different periods in Table 2.
The growth rates presented in Table 2 highlight the variation since 2009-10, the base year of the 7th NFC Award, to 2024-25.
The province which has shown a higher growth rate is Khyber-Pakhtunkhwa of 4 percent over the last fifteen years. It has had a comparative advantage in relatively fast-growing sectors like livestock, transport, etc. It has also received over 27 percent of the national home remittances, which have fueled the domestic economy. Balochistan has lagged behind with a significantly lower GRP growth rate of 2 percent. There has been a big decline in the mining sector, which is a key sector in the economy of the province.
Derivation of the Gini-coefficient, the measure of inequality, among the per capita GRP of the provinces, reveals that there has been some reduction in inequality. The equalization dimension of horizontal share in federal tax transfers has contributed to a relatively strong performance by the economy of the smaller and more under-developed province of Khyber-Pakhtunkhwa. The province was given a per capita transfer almost 16 percent above the average national per capita transfer.
However, the other smaller and under-developed province of Balochistan has fallen behind with a low GRP growth rate, especially from 2015-16 to 2024-25, despite getting a per capita transfer of 78 percent above the national average.
Therefore, one the key finding of the research on the provincial economies is that the 7th NFC Award has contributed to a reduction in income inequalities among the provinces. The two smaller and less developed provinces of Khyber-Pakhtunkhwa and Balochistan have had contrasting trends.
The former province has shown relative buoyancy while the latter province has fallen further behind. The 11th NFC will need to continue focusing strongly on the process of equalization among the provinces.
Copyright Business Recorder, 2025
The writer is Professor Emeritus at BNU and former Federal Minister