The World Bank has called for a fundamental overhaul of Pakistan’s National Finance Commission Award, urging the country to abandon its heavy reliance on population as the main criterion for sharing federal resources among provinces.
In a new report titled Strengthening Fiscal Federalism in Pakistan, released on Wednesday, the global lender argued that the existing resource distribution system has failed to reduce regional disparities and has contributed to long-standing fiscal imbalances at the federal level.
The World Bank recommended replacing the current formula with a fiscal equalization model that allocates funds based on provincial spending needs and their capacity to generate revenue. Such systems are already in place in countries including Australia, Canada, China, Nigeria, and South Africa, where transfers are designed to promote equity rather than reward population size alone.
According to the report, Pakistan’s present framework has played a role in deepening the federal budget deficit. While provincial revenues increased significantly between fiscal years 2010 and 2024, federal expenditures did not fall in proportion. This mismatch has added pressure on the federal government and accelerated the growth of public debt.
The report also raised concerns about Pakistan’s fragmented general sales tax system, recommending a single nationwide GST collection mechanism. Under this proposal, tax would be collected centrally and distributed among provinces using an agreed formula. The World Bank cautioned that such a reform would require legislative changes and strong political consensus.
Weak provincial tax collection was another key issue highlighted in the report. Provincial own-source revenue has remained around 0.7 percent of GDP, well below its estimated potential.
The World Bank identified agricultural income tax and urban property tax as major but underutilized sources of revenue that could help provinces reduce dependence on federal transfers.
On social protection, the lender advised maintaining the national registry of the Benazir Income Support Programme at the federal level, while introducing a cost-sharing mechanism that requires provinces to contribute to its financing. This approach, the report said, would strengthen ownership and improve long-term sustainability.
The report also criticized the continued overlap between federal and provincial governments in sectors devolved under the 18th Constitutional Amendment. It said this duplication weakens accountability, inflates spending, and undermines the spirit of devolution. Local governments, despite constitutional guarantees, were described as fiscally weak and overly dependent on unpredictable transfers.
To improve governance and service delivery, the World Bank proposed linking a portion of federal transfers to measurable performance indicators. Provinces could be rewarded for improving tax collection, maintaining fiscal discipline, investing in education and healthcare, strengthening climate resilience, and empowering local governments.
The report concluded that without meaningful reform of the NFC Award and broader fiscal federalism framework, Pakistan risks continued budgetary stress, inefficient public spending, and widening regional inequalities.
