ISLAMABAD: Pakistan must improve the allocation of financial resources among federal, provincial, and local governments to preserve macroeconomic stability, enhance public service quality, and address the needs of its expanding population, a new World Bank report states.
The report, titled Strengthening Fiscal Federalism in Pakistan, highlights that reforms introduced in 2010, including the 18th Constitutional Amendment and the 7th National Finance Commission (NFC) Award, significantly increased provincial authority by devolving key service responsibilities and boosting provincial revenues. Nevertheless, ongoing structural weaknesses continue to undermine fiscal discipline, restrict revenue generation, and negatively impact the quality of public services.
It points out that Pakistan’s growing federal fiscal deficit largely results from increased transfers to provinces under the 7th NFC Award without a corresponding reduction in federal expenditures, coupled with stagnant revenue collection. Provincial revenues rose from under four percent of GDP to an average of 6.5 percent between 2010 and 2024, yet federal spending did not decrease proportionately.
Moreover, the report notes that tax authority divided across five jurisdictions has raised compliance costs and hindered revenue collection. Agricultural income remains mostly untaxed despite the sector contributing over one-fifth of Pakistan’s GDP.
In a significant development, the World Bank Country Director for Pakistan, Bolormaa Amgaabazar, emphasized that while the 2010 reforms brought government closer to the people, the full benefits of devolution have not yet been realized. She stressed the need to align financing with responsibilities, broaden the tax base, and ensure resources effectively reach schools, clinics, and communities to maintain stability and improve services.
The report further reveals that devolution has had limited success in matching public spending with actual needs. The current resource distribution formula among provinces neither reflects fiscal requirements accurately nor incentivizes provinces to enhance revenue collection or service delivery.
It also highlights that much of the rise in provincial spending since the 7th NFC Award has been directed toward administrative costs rather than critical sectors like education or healthcare. In the 2022-23 fiscal year, over 80 percent of provincial expenditures were recurring expenses, while district-level spending continued to follow historical patterns rather than being based on poverty or service delivery gaps.
Meanwhile, the role of local governments has diminished, with their share of total public expenditure dropping from about 10 percent in 2005 to below five percent in 2024.
World Bank Lead Country Economist Tobias Haque pointed out that the upcoming NFC Award offers a vital opportunity to reform the fiscal system. He underscored that fiscal federalism’s structure affects whether children attend functioning schools and whether health facilities are adequately stocked.
He added that the new NFC Award could recalibrate incentives by rewarding provinces that improve revenue efforts and service delivery, while directing more resources to areas with the greatest needs.
Rather than proposing a single fix, the report outlines multiple reform options within Pakistan’s existing constitutional framework. These include better aligning federal funding with responsibilities, enhancing domestic revenue mobilization, providing more predictable funding for local governments, and strengthening coordination among government tiers.
Notably, the World Bank emphasized the importance of holding regular National Finance Commission Award negotiations. Predictable revisions would ease pressures during each negotiation cycle and help build consensus for sustainable long-term reforms.
