Impact of Intergovernmental Fiscal Transfer on Inter-Provincial Fiscal Disparity in Pakistan

Abstract

The purpose of this research is to evaluate the disparity in the intergovernmental fiscal transfers to the sub-national governments, in the last four NFC awards specifically in the 7thNFC award in Pakistan. This study measures the disparity by employing two different approaches. Firstly coefficient of variation (C.V) approach i.e. variation in the regional own-source revenues to the variation in the total resource of regional government after inclusion of federal transfer and the own-source revenue, secondly, In addition, to estimate the impact of intergovernmental transfers on the fiscal disparity among the sub-national government this study uses panel data technique i.e. least square dummy variable (LSDV). The Results of fiscal disparity reflect that in Pakistan the disparity in combined regional own source revenue increases from 0.52 to 0.83 points during the last four NFC awards. However, at the sub-national level, the values of disparity remain constant at 0.16 in Sindh province which reflects fiscal efforts for the collection of own-source revenues among provinces. In contrast to this, the disparity increases in KPK, and its value reaches 0.240 in the existing award. The results of the empirical analysis also reveal that when the intergovernmental transfer increases by 1 percent the disparity ratio increases by 1.19percent. While the expenditure of the government increases the disparity at the sub-national level as the positive sign of the model reflects. Based on the findings this study suggests that Pakistan still needs to devise a revenue-sharing formula that encourages the efforts of optimal resource generation from the regional governments.