For nearly two decades, debate over Pakistan’s National Finance Commission (NFC) Award has been framed as a contest between the federation and the provinces.
Every fiscal crisis revives calls to revisit the resource-sharing formula, while any reform proposal is portrayed as an attack on the 18th Amendment. The latest World Bank assessment urges policymakers to move beyond this binary. It does not question provincial autonomy but asks whether Pakistan’s model of fiscal federalism remains sustainable amid persistent deficits, mounting debt, climate risks, rising security costs and slowing growth.
Pakistan has entered another fiscal year under an IMF programme with public debt exceeding Rs76 trillion, while almost half of federal revenues go towards debt servicing. Despite growing revenues, fiscal space remains constrained after NFC transfers, debt repayments, defence spending, pensions and subsidies. The report highlights a long-neglected reality: Pakistan’s fiscal architecture no longer aligns with the expenditure responsibilities of either the federation or the provinces.
The immediate controversy arose because only Punjab and Sindh allocated reverse grants amounting to approximately Rs806 billion, while the federal government had projected Rs1.035 trillion in provincial contributions to finance national security, strategic infrastructure, major dams and future fuel price stabilisation. Khyber Pakhtunkhwa and Balochistan did not provide budgetary allocations for these grants, leaving a financing gap of nearly Rs229 billion. Although this shortfall may appear manageable in accounting terms, it reveals a deeper institutional weakness. Pakistan increasingly relies on political negotiations rather than predictable fiscal mechanisms to finance national public goods that benefit all federating units.
This episode exposes an uncomfortable reality. The federation remains responsible for defence, external debt, macroeconomic stability, strategic infrastructure, climate resilience and international commitments, yet the Seventh NFC Award significantly reduced its fiscal capacity without proportionately reducing its expenditure obligations. As a result, Islamabad has increasingly borrowed to finance constitutionally mandated spending. The World Bank identifies this as a classic case of vertical fiscal imbalance. Unlike federations such as Australia, Canada, Germany and India, Pakistan has not agreed on a new NFC Award since 2010 despite the Constitution requiring one every five years.
The report is equally critical of the provinces. Since the 18th Amendment, they have enjoyed unprecedented fiscal autonomy, but much of the additional funding has gone towards recurrent expenditure rather than productive investment. Provincial salaries rose by about 250 per cent and pension spending by 330 per cent between FY2009 and FY2023, with expanding bureaucracies absorbing a disproportionate share of new resources.
This pattern explains why Pakistan continues to rank poorly on nearly every major human development indicator despite increased fiscal decentralisation. According to the UN Human Development Index 2025, Pakistan remains among the lower-ranked countries globally. Learning poverty remains alarmingly high, maternal mortality continues to challenge public health systems, and nearly 40 per cent of children under five suffer from stunting, according to recent national surveys. Provincial autonomy was expected to improve service delivery by bringing decision-making closer to citizens. Instead, fiscal decentralisation often expanded government payrolls more rapidly than improvements in education, healthcare, water supply, sanitation or local governance.
Equally concerning is the federal government’s failure to fully implement constitutional devolution. The World Bank notes that federal expenditure rose from approximately 11.2 per cent of GDP during FY2002-09 to nearly 13 per cent of GDP during FY2010-24, despite the devolution of numerous responsibilities following the 18th Amendment. Even more striking is the finding that federal employment in non-devolved sectors increased by approximately 85 per cent, representing an additional 191,000 employees since 2009.
This institutional overlap creates duplication, administrative inefficiency and blurred accountability. Citizens often struggle to identify which level of government is responsible for failures in education, healthcare, policing, disaster response or municipal services. Every tier blames another while public service delivery continues to deteriorate.
The political implications of reopening the NFC debate are substantial. Provincial governments, particularly smaller provinces, have historically viewed any discussion of revising the NFC formula as an attempt to weaken provincial autonomy. Consequently, even technically sound proposals often become politically toxic before meaningful debate begins.
This is precisely why policymakers must separate constitutional principles from fiscal mechanics. Revisiting expenditure assignments or financing arrangements does not necessarily require a reversal of devolution. Rather, it requires recognising that national public goods such as defence, macroeconomic stabilisation, climate adaptation, strategic infrastructure, debt servicing and national disaster management benefit every province regardless of where they are financed.
The economic consequences of maintaining the current arrangement could become increasingly severe over the coming years. Pakistan’s economy continues to grow modestly, with projections of around 4.0 per cent, while population growth remains close to 2.0 per cent annually. Tax-to-GDP remains below 11 per cent, among the lowest in comparable emerging economies. Federal borrowing requirements therefore remain persistently high. Without structural reforms, rising debt servicing costs will continue to crowd out productive public investment in infrastructure, innovation, digital transformation, climate resilience, and industrial competitiveness.
Pakistan’s climate vulnerability also introduces entirely new fiscal pressures. Following the devastating 2022 floods, the country continues to require billions of dollars in climate adaptation, flood protection, water management and resilient infrastructure investments. These are inherently national challenges that transcend provincial boundaries. Financing such projects through annual political bargaining between the federation and provinces is neither predictable nor sustainable.
Similarly, evolving regional security dynamics continue to impose substantial fiscal demands. Counterterrorism operations, border management, cybersecurity, refugee management, maritime security and critical infrastructure protection increasingly require nationally coordinated financing. Expecting ad-hoc reverse grants to finance these responsibilities creates uncertainty precisely when strategic planning demands long-term fiscal stability.
Socially, continued fiscal inefficiency has direct consequences for citizens. Every rupee absorbed by overlapping bureaucracies or excessive administrative expenditure is a rupee unavailable for classrooms, hospitals, clean drinking water, digital connectivity, agricultural productivity or employment generation.
The best way forward lies not in reopening divisive constitutional battles but in pursuing evidence-based institutional reform through political consensus. Pakistan should convene the constitutionally mandated NFC Commission without further delay. Sixteen years without a new award has effectively frozen a fiscal arrangement that no longer reflects present economic realities.
Policymakers should undertake an independent expenditure review across both federal and provincial governments to eliminate duplication, redefine responsibilities and clarify accountability. Every ministry, department and agency should justify its constitutional relevance before receiving continued budgetary allocations.
National public goods should receive dedicated financing through transparent, formula-based deductions agreed upon by all provinces rather than relying on negotiated reverse grants each fiscal year. Defence, strategic water infrastructure, national transport corridors, disaster resilience, environmental protection, macroeconomic stabilisation and debt servicing should be financed through predictable constitutional mechanisms.
Provincial governments must significantly strengthen their own-source revenue mobilisation. Property taxation, urban service charges, mining royalties and municipal revenues remain severely underutilised. Genuine fiscal autonomy requires greater revenue responsibility alongside expenditure authority.
Fiscal transparency must become the cornerstone of federalism. Citizens deserve clear information about which level of government collects taxes, how resources are distributed, who is responsible for delivering specific services, and how performance is measured. Transparency strengthens accountability far more effectively than constitutional disputes.
For Pakistan, the choice is not between federal authority and provincial autonomy but between preserving an increasingly dysfunctional status quo or modernising fiscal institutions to reflect today’s economic realities. The World Bank has offered a diagnosis, but the responsibility for reform ultimately rests with Pakistan’s political leadership.
If the NFC debate remains trapped in partisan narratives, the country risks deeper fiscal fragmentation, slower economic recovery and declining public service delivery. If approached with constitutional maturity, evidence-based policymaking and political consensus, however, this moment could become the foundation for a stronger, more resilient and more cooperative federation.
The writer is a trade facilitation expert, working with the federal government of Pakistan.
