WB proposes unified collection mechanism, with collected amount then distributed among provinces
ISLAMABAD
The World Bank (WB) has asked Pakistan to revise the National Finance Commission (NFC) Award formula, both vertically and horizontally, and adopt fiscal ‘equalisation’ for resource distribution among the provinces based on spending needs and projected revenue capacity.
The WB also supported excluding population from the main criteria for resource distribution and suggested fiscal equalisation as the way forward.
This was mentioned by World Bank lead economist and report author Tobias Haque while launching the report titled “Strengthening Fiscal Federalism in Pakistan,” alongside Country Director Bolormaa Amgaabazar at the WB’s office on Wednesday.
The bank highlighted the fragmented General Sales Tax (GST) on goods and services as a major challenge and proposed a unified collection mechanism, with the collected amount then distributed among provinces — though this would require legislative changes.
The WB also noted that out of Rs1,035 billion in grants committed by provinces for the Centre under Article 164, Punjab reversed grants of Rs546 billion and Sindh Rs260 billion. The PTI-led KP and Balochistan governments did not commit any amount for the Centre in their provincial budgets for 2026-27.
On the Benazir Income Support Programme (BISP), the WB asked for the continuation of national registry at the federal level but with cost-sharing from all provinces, as social protection falls under the domain of federating units.
The reprot stated, “Fiscal federalism arrangements have led to the emergence of a structural federal fiscal deficit.
Provincial revenues, including federal transfers, rose from less than 4% of GDP to an average of 6.5% over FY10 to FY24, but federal expenditures did not adjust commensurately. The loss in federal revenues from transfers (1.9% of GDP) was roughly equivalent to the increase in federal primary deficits post-devolution (1.7% of GDP).”
In the context of weak overall revenue and macroeconomic performance, the misalignment between federal financing and functional needs has been a material contributor to Pakistan’s fiscal deficit and to the accumulation of public debt.”
The WB’s country director said it was somewhat disappointing that fiscal federalism had not delivered benefits to people at the grassroot level. She noted that the report provides a set of options for policymakers, drawing on the experience of other developing and developed economies.
On the question of the Centre’s failure to raise the tax-to-GDP ratio from 10% to 15%, the WB’s lead economist replied that while the Centre lagged on this front, the provinces also failed to increase their contribution beyond 0.7% of GDP annually, against a potential of 1.15%.
The WB report states that expenditure assignments remain incompletely implemented and inadequately defined in some areas. The 18th Constitutional Amendment devolved responsibility for social services and economic functions to provinces.
However, the federal government continues to operate in constitutionally devolved areas, causing waste and blurring accountability, while local governments lack clearly defined or adequately resourced functional mandates. Second, the 18th Amendment led to fragmentation of the tax system.
While it strengthened provincial tax authority, particularly over GST on services, it also split the tax base between five competing jurisdictions. The resulting complexity imposes high compliance costs, discourages interprovincial trade and has constrained aggregate revenue performance. Large potential tax bases — particularly agricultural income and property — remain significantly underutilised.
Third, the current federal-provincial transfer arrangements — including both the vertical share and horizontal allocation formula — do not achieve important policy objectives.
The NFC-based transfer system provides predictability and protects provincial revenue shares. However, financing has not followed function. The current framework reduced federal resources without a commensurate adjustment in expenditure responsibilities, driving a structural federal fiscal deficit.
The horizontal distribution formula also does not achieve genuine fiscal equalisation and provides no meaningful incentives for provincial revenue effort or service delivery performance. Current arrangements arguably also deter federal revenue effort, with a large share of revenues automatically transferred to provinces.
Finally, despite constitutional recognition under Article 140A, local governments remain fiscally dependent, institutionally unstable and effectively subordinate to provincial discretion. Provincial Finance Commission (PFC) awards are infrequent and non-binding, transfers are ad hoc, and own-source revenue is minimal. The devolution envisaged in 2010 has not extended meaningfully below the provincial tier.
In the context of weak overall revenue and macroeconomic performance, the misalignment between federal financing and functional needs has been a material contributor to Pakistan’s fiscal deficit and debt accumulation. Second, fiscal federalism arrangements have contributed to continued weak revenue performance. Fragmentation of the tax base across five jurisdictions has misaligned incentives, raised compliance costs and created opportunities for avoidance.
