The World Bank has issued a new report on strengthening fiscal federalism in Pakistan, recommending a review of the National Finance Commission (NFC) agreement between the federation and the provinces.
The report says that not only does the NFC agreement between the federation and the provinces need to be reviewed, but the current mechanism for distributing resources among the provinces should also be reviewed.
According to the World Bank report, revenue distribution under NFC should be based on performance, so that the province that performs better in the sectors of public services, health and education should be provided with more resources.
The World Bank said that after the seventh NFC award, the share of the federation in revenue decreased, but its expenditure could not be reduced in the same proportion.
The report further states that after the 7th NFC Award and the 18th Constitutional Amendment, several ministries were transferred to the provinces, but their replacements remained in the federation, due to which the federal fiscal deficit continued to increase.
According to the World Bank, provincial governments failed to effectively transfer the benefits of the 7th NFC Award and the 18th Amendment to the people, while after receiving more resources through NFC, the provinces increased their expenditures.
The World Bank pointed out that provincial governments are spending more on administrative matters than on public services. According to the report, about 80 percent of provincial revenues are being spent on administrative expenses, while only one percent of resources are being allocated for the environment sector.
In addition, a large part of provincial expenditures are being spent on current and administrative expenses, while important sectors such as environment, public services, education and health are being neglected.
The report states that revenues have been affected due to the lack of effective taxation on agricultural income. Provincial revenues in 2009 were equal to 0.3 percent of the economy, which increased to 0.7 percent in 2026, however, despite the increase in provincial revenues, federal spending could not be reduced adequately.
The World Bank has recommended that better and fair distribution of resources between the federation, provinces and local government institutions is indispensable.
The report said that the 18th Constitutional Amendment and the 7th NFC Award were important reforms in Pakistan, however, the main reason for the federal fiscal deficit is high fiscal transfers and weak tax collections.
According to the report, the share of local governments in total government expenditure has decreased from 10 percent to less than 5 percent, therefore, there is a need to empower local governments, provide them with stable fiscal transfers and ensure better fiscal coordination between the federation and provinces.
The World Bank recommended that funds in the new NFC Award be allocated on the basis of fair distribution of resources and better performance.