Summary The World Bank has released a new report on strengthening fiscal federalism in Pakistan, recommending a comprehensive review of the NFC Award
ISLAMABAD (Dunya News) - The World Bank has urged Pakistan to introduce key reforms to the National Finance Commission (NFC) Award and strengthen coordination between the federal and provincial governments to enhance public service delivery and support long-term economic growth.
The World Bank has released a new report on strengthening fiscal federalism in Pakistan, recommending a comprehensive review of the NFC Award governing the distribution of financial resources between the federal government and the provinces.
According to the report, the formula used to allocate NFC resources among the provinces should also be reconsidered, with greater emphasis placed on performance-based revenue distribution. The World Bank suggested that provinces demonstrating stronger performance in public service delivery, healthcare and education should receive a larger share of federal transfers.
The report noted that while the federal government's share of revenues declined after the implementation of the Seventh NFC Award, its expenditure levels did not decrease accordingly. It added that although several ministries were devolved to the provinces under the Seventh NFC Award and the 18th Constitutional Amendment, parallel federal ministries continued to exist, contributing to a widening fiscal deficit.
The World Bank observed that provincial governments increased their spending after receiving larger transfers through the NFC Award, but much of the additional expenditure was directed towards administrative costs rather than public services. It estimated that around 80 percent of provincial revenues are spent on administrative expenses, while only about one percent is allocated to environmental protection.
The report stressed the need for a more balanced distribution of resources among the federal, provincial and local governments. It described the 18th Constitutional Amendment and the Seventh NFC Award as significant reforms but said persistent federal fiscal deficits are largely driven by high revenue transfers to provinces and weak tax collection.
It further highlighted that the absence of effective taxation on agricultural income has adversely affected revenue generation. Provincial revenues have increased from 0.3 percent of GDP in 2009 to 0.7 percent in 2026, but corresponding reductions in federal expenditure have not materialised. The report also pointed out that a substantial share of provincial spending continues to be absorbed by administrative and recurring expenses.
The World Bank expressed concern that spending on environmental protection, public services, education and healthcare remains insufficient. It also noted that the share of local governments in total public expenditure has fallen from less than 10 percent to below 5 percent.
The report recommended that the next NFC Award should ensure a fairer distribution of resources based on provincial performance. It also called for stronger financial transfers to local governments, greater empowerment of municipal institutions and improved fiscal coordination between the federal and provincial governments.
