Does the NFC know it’s 2025?

The Pakistan of 2025 is not the Pakistan of 2009. In the years since the 7th National Finance Commission (NFC) Award was signed in 2009, the country has lived through five general elections, two censuses, repeated economic downturns, a close brush with default, a successful defence against external aggression, three super floods and a cascade of climate-driven shocks that have fundamentally altered the development landscape.

Yet fiscal federalism remains frozen in time. The vertical and horizontal distribution of resources is still governed by assumptions made more than a decade ago, under a formula that should, in principle, have been revisited at least three times since.

Article 160 of the constitution mandates a fresh award every five years, based on consensus between the federal and provincial governments. Successive governments have delayed this obligation by citing difficult political conditions. The result is a fiscal compact that no longer reflects current challenges and does not distribute responsibilities fairly across the federation.

Regular NFC meetings matter for more than arithmetic. They help clarify who is responsible for what, how resources should be shared and how provinces can be encouraged to deliver results. Other federations recognise this. South Africa and Nigeria routinely adjust their formulas to account for governance and service delivery indicators. India’s Finance Commission has issued five awards since 2009, each reflecting shifts in population, development priorities and tax performance. Pakistan, by contrast, remains tied to a formula in which 82 per cent of the horizontal distribution depends on population, a design that deters both innovation and responsibility.

The 7th NFC was historic in its time. It increased the provincial share of the divisible pool from 47.5 per cent to 57.5 per cent and introduced non-population indicators, such as poverty, inverse population density (a proxy for the cost of delivery) and revenue collection. Yet population continues to dominate the formula. This perpetuates historical inequities and creates incentives in which provinces gain more from having larger populations than from improving governance and service delivery.

This dynamic plays out in daily life. When a district hospital lacks doctors because provincial budgets are stretched thin, or when a school struggles with overcrowded classrooms, these are symptoms of a system that prioritises headcount over outcomes. A formula that links funding to population rather than performance encourages political claims rather than service improvements.

It is no surprise that census exercises have become politically charged. A system that links population size directly to resource entitlements is bound to be contested. Provinces with high fertility burdens have little incentive to improve their fiscal capacity or invest in human development when their primary reward is tied to headcount rather than results.

Peer countries have moved away from such simplistic proxies. India’s 15th Finance Commission reduced the population weight to 15 per cent and increased the emphasis on income distance and tax effort. Nigeria, despite its own federal strains, allocates only about 30 per cent of its pool on the basis of population. South Africa has adopted performance indicators that capture fiscal effort, governance quality and developmental need.

Pakistan’s next NFC will need to emulate this evolution. Population can remain a component, but it cannot dominate. Revenue effort, climate performance and multi-dimensional poverty should sit at the centre of the formula.

At the heart of the problem lies a credibility gap. Fiscal federalism in Pakistan has lost credibility not because there is too little money, but because there is too little accountability. Provinces demand larger shares of federal transfers while neglecting their own tax bases. The federal government retains devolved ministries it should have wound up. Both tiers weaken local governments and keep cities financially dependent and politically constrained.

The numbers tell their own story. Service sectors under provincial jurisdiction have expanded rapidly, yet provincial taxation of services remains below one per cent of GDP. Agricultural income, another provincial subject, contributes a negligible share to tax collection despite the sector’s large footprint. Property taxation is mired in weak assessments and poor enforcement. When a shopkeeper in Lahore or Karachi pays a token property tax while expecting better policing, cleaner streets and reliable drainage, the imbalance becomes clear.

Meanwhile, the federal government, despite relinquishing the largest share of the divisible pool, continues to finance major national programmes in health, education and infrastructure. Devolved ministries have been reconstituted under new names, duplicating provincial functions and blurring the constitutional division of labour. Debt servicing now consumes roughly half the federal budget. Development spending is the item that shrinks when revenues or external inflows fall short.

This produces a familiar fiscal paradox. Every tier claims to be short of money. Few are willing to expand their tax bases, relinquish overlapping functions or accept conditions linked to performance. If the next NFC is to be more than an accounting exercise, it must confront this gap directly. Provinces need to commit to measurable increases in their own-source revenues. The federation needs to limit itself to its constitutional mandates. Transfers should reflect need and performance, not political convenience. A durable fiscal compact must rest on shared responsibility rather than selective entitlement.

Urban Pakistan illustrates the cost of the current arrangement. Cities are engines of growth, hubs of employment and the front line of climate vulnerability – yet they remain fiscally starved. The consequences are visible: overflowing drains after a monsoon burst, inconsistent water supply, stalled buses on incomplete transport routes and weak municipal capacity during heatwaves or floods. These are the predictable results of a system that deprives cities of authority and funding.

This weakness traces back to a broken promise made alongside the 7th NFC. When Octroi and Zila Tax were abolished, the federal government pledged to pass one-sixth of General Sales Tax directly to local governments. That promise was never honoured. Provinces absorbed the replacement share into their own budgets. Provincial Finance Commissions, meant to distribute resources to districts and municipal bodies, were convened irregularly or stopped functioning entirely.

The consequences have been severe. In Sindh, the share of provincial revenue going to local governments has fallen sharply since 2010. Punjab and Khyber Pakhtunkhwa show similar declines. Only KP has issued Provincial Finance Commission awards with some regularity. Without predictable funding or clear mandates, local bodies, whether elected or run by administrators, struggle to perform basic functions.

No future NFC award can claim legitimacy if it ignores this structural exclusion of cities. One option is to restore the one-sixth GST share and channel it directly to empowered local governments. Another is to make provincial access to a portion of NFC transfers conditional on functional PFCs (if not functional, elected local governments) and regular awards. Without fiscal and administrative devolution to cities, democratic claims and development promises will continue to ring hollow.

The above is easier said than done. However, we have successfully rolled out complex reforms in the past. The 7th NFC emerged from a rare moment of political consensus. The 18th Amendment devolved wide-ranging powers to the provinces. The recent constitutional amendments show that where there is a will, there is a way.

The federal government should begin by tabling a performance-linked NFC proposal that is transparent and subject to public debate. Provincial governments should recognise that larger shares of resources entail obligations to taxpayers, to service delivery and to local governments. The Council of Common Interests should be made functional and ensure that NFC and PFC processes are treated as constitutional requirements rather than optional undertakings.

One hopes the next NFC will reflect the realities of 2025, not the politics of 2009. It should not only divide fiscal shares but also rebuild a fiscal republic in which every tier of government contributes to a state that is more inclusive, more responsive and more accountable.

The writer heads SDPI, chairs the board of the National Disaster Risk Management Fund, and serves on the ADBI’s Advisory Board. He posts on LinkedIn @Abidsuleri