ISLAMABAD: With the National Finance Commission (NFC) set to meet today (Thursday), Minister for Planning Ahsan Iqbal has proposed a revision in both vertical and horizontal distribution of resource formula among the Centre and provinces.
A working paper titled “Revisiting the NFC Award” has been shared by the Ministry of Planning with Prime Minister Shehbaz Sharif, proposing two scenarios for vertical distribution of resources among the Centre and provinces.
Under scenario one, upfront deductions for national priorities have been proposed as before distribution, 2.5% of the divisible pool is allocated for critical matters (such as the war on terror, water security, Civil Armed Forces (CAF) and grants to AJK & GB are also allocated from the divisible pool before distribution.
The remaining pool is then shared with the existing proportion of 57.5 percent and 42.5 percent between the provinces and the federal government respectively. From FY2027 onward, this mechanism would slightly ease the federal fiscal space.
Under Scenario II, the expenditures for BISP and HEC are charged upfront from the divisible pool. The remaining revenues are then distributed as 57.5 percent to the provinces and 42.5 percent to the federal government. By FY2030, the federal resources are about 11-12 percent higher than under the baseline.
It is imperative to rationalise the vertical distribution of resources under the NFC framework. A recalibrated formula, one that recognizes constitutional provinces alongside AJK, GB, ICT, and NMDs, will create a more balanced, equitable, and sustainable fiscal arrangement, strengthen federal capacity to meet national obligations and support the long-term stability of Pakistan’s fiscal federalism.
Overall, higher expenditures relative to revenues resulted in a persistently higher federal fiscal deficit, which remained within the range of 5 to 8.4 per cent for over a decade. This is not merely cyclical but structural, which fuels debt accumulation and undermines fiscal sustainability. This, in turn, has significantly increased the debt servicing cost, which is consuming a significant portion of federal revenues and squeezing the government’s fiscal space for priority areas, thus leading to repeated and often severe adjustments to bridge the revenue-expenditure gap.
For horizontal distribution within the provinces, the working paper states that population dominates with an 82 percent weight, while poverty, revenue generation and inverse population density carry only marginal significance. This report has proposed three alternative options to move away from this population-heavy approach.
In Option 1, the weight for population is reduced to 78 percent, with modest increases for other factors such as inverse population density, fertility and forest cover.
In Option 2, the distribution becomes more balanced, as population weight falls to 68 percent, while reasonable weights are assigned to revenue generation (10 percent), inverse fertility rate (2 percent) and forest cover (2 percent).
In Option 3, the distribution would even alter, as population weight falls to 60 percent, while high weights are assigned to revenue generation (20 percent), inverse fertility rate (5 percent), and forest cover (5 percent). This transition to a further broader approach reflects the intent to recognize fiscal effort, social outcomes and ecological contributions alongside population. In all three scenarios, the share of Punjab reduced from existing 51.74 percent to 47.26 percent under scenario 1, 44.73 percent under scenario-2 and 41.89 percent in third scenario under the federal divisible pool.
The share of Sindh remained at 25.55 percent under the existing NFC and would be standing at 25.05 percent in scenario-1, 25.55 percent in scenario-2 and 25.09 percent in scenario-3.
The share of KP stood at 14.62 percent under the existing NFC and under scenario-1, it will remain at 17.12 percent, 16.95 percent under scenario-2 and 15.67 percent under scenario-3.
Balochistan’s share in existing NFC stood at 9.09 percent and it would be standing at 9.75 percent under scenario 1, 11.5 percent under scenario-2 and 12.02 percent under scenario-3.
The share of ICT will be standing at 0.83 percent under scenario-1, 1.26 percent under scenario-2 and 5.33 percent under scenario-3.
It states that the current NFC arrangement, while historic in expanding provincial fiscal space and strengthening autonomy, has created structural imbalances which threaten the sustainability of Pakistan’s fiscal federalism.
Despite receiving 57.5 percent of divisible pool transfers, provincial revenues remain stagnant at around 1 percent of GDP, with weak performance in services taxation, agriculture income tax, and property taxation.
