Pakistan must drastically reform how it distributes public resources across its federal, provincial, and local governments. Consequently, failing to act will threaten macroeconomic stability and cripple essential services for a rapidly growing population. A newly released World Bank report, Strengthening Fiscal Federalism in Pakistan, outlines this stark reality.
The report acknowledges that the landmark 2010 reforms, the 18th Constitutional Amendment and the 7th National Finance Commission (NFC) Award, successfully devolved major service responsibilities to the provinces. Furthermore, these reforms significantly boosted provincial revenues.
However, deep structural weaknesses remain. These flaws continue to destroy fiscal discipline, severely limit revenue generation, and degrade the quality of services that reach citizens.
The Root of the Federal Deficit
The World Bank identifies two primary factors driving the widening federal fiscal deficit. First, the federal government increased financial transfers to the provinces following the 7th NFC Award but failed to cut its own expenditures to match. Second, national revenue collection remains dangerously stagnant.
Provincial revenues increased from under 4% of GDP to an average of 6.5% between 2010 and 2024. Despite this provincial surge, federal spending did not decline commensurably.
Additionally, Pakistan fractures its tax base across five different jurisdictions. This division skyrockets compliance costs and artificially limits revenue. Meanwhile, the agricultural sector accounts for more than 20% of the national GDP. Yet, this massive sector remains largely untaxed.
Bolormaa Amgaabazar, World Bank Country Director for Pakistan, highlighted this disconnect. She stated:
Pakistan took a historic step in 2010 by bringing government closer to its people, but the full promise of devolution has yet to be realized.
Aligning financing with responsibilities, broadening the tax base, and ensuring that resources reach schools, clinics, and local communities are essential to sustaining stability and delivering better services to Pakistan’s growing population.
Administrative Bloat Over Basic Needs
The report exposes a severe failure in service delivery. Devolution has not aligned public spending with the actual needs of the people. Currently, the resource distribution formula ignores actual fiscal needs. It also fails to reward provinces for improving tax collection or service delivery performance.
Instead of funding schools or clinics, administrative bloat swallowed the surge in provincial funding. In FY23, recurrent costs consumed more than 80% of provincial expenditures. Furthermore, district-level spending relies on historical precedent rather than targeting poverty levels or service gaps.
Consequently, the local tier of government has been starved of critical funds. The share of total government spending managed by local governments collapsed from around 10% in 2005 to under 5% in 2024. World Bank Lead Country Economist and lead author of the report, Tobias Haque, explained:
The structure of fiscal federalism shapes whether children attend functioning schools and whether health facilities are stocked with medicines.
A planned new NFC Award offers an important opportunity to recalibrate incentives – rewarding provinces that strengthen their own revenue effort and improve service delivery, while directing more resources to where needs are greatest.
World Bank Provides A Clear Path to Reform
The World Bank provides a specific menu of reform options. Policymakers can pursue these through a new NFC Award and within Pakistan’s existing constitutional framework.
- Align Financing: The federal government must match its financing strictly with devolved responsibilities.
- Boost Revenue: The state must strengthen domestic revenue mobilization by fixing the fragmented tax system.
- Empower Local Governments: Authorities must provide predictable financial transfers directly to local governments.
- Improve Coordination: Different tiers of government must drastically improve their administrative coordination.
Finally, the report stresses that ensuring reliable, regular NFC Awards is a major reform in itself. Predictable revisions lower the high stakes of single negotiations. Ultimately, this regularity creates the necessary space for dialogue and the consensus-building required for lasting economic stability.
