The recommendations have been presented in the World Bank's report, "Strengthening Fiscal Federalism in Pakistan," launched in Islamabad by World Bank Country Director Bolormaa Amgaabazar and Lead Economist Tobias Haque
ISLAMABAD: (UrduPoint/Pakistan Point News-July 2nd, 2026) The World Bank has recommended a comprehensive overhaul of Pakistan's fiscal federalism framework, urging the government to revise the National Finance Commission (NFC) Award formula and adopt a fiscal equalisation model to ensure a fairer distribution of financial resources among the provinces.
The recommendations were presented in the World Bank's report, "Strengthening Fiscal Federalism in Pakistan," launched in Islamabad by World Bank Country Director Bolormaa Amgaabazar and Lead Economist Tobias Haque.
The report recommends revising both the vertical distribution of resources between the federation and provinces and the horizontal allocation among provinces. It suggests replacing the existing multi-factor NFC formula with a transparent fiscal equalisation model based on provincial expenditure needs and revenue-raising capacity rather than relying primarily on population.
According to the World Bank, the current fiscal arrangements have contributed to a structural fiscal imbalance by increasing provincial revenues without a corresponding reduction in Federal expenditure responsibilities. Provincial revenues, including federal transfers, increased from less than four percent of GDP to an average of 6.5 percent between FY2010 and FY2024, while the federal government's financial obligations remained largely unchanged, adding pressure to the national budget and public debt.
The report also identified Pakistan's fragmented General Sales Tax (GST) system as a major weakness. It recommended creating a unified GST collection mechanism under a single administration, with revenues subsequently distributed among the provinces through an agreed formula. The World Bank noted that implementing such a system would require legislative and constitutional changes.
The report further observed that several provinces had reduced or withdrawn financial grants pledged to the federal government under Article 164 of the Constitution in their 2026-27 budgets. It noted that Punjab reversed grants amounting to Rs546 billion, while Sindh withdrew Rs260 billion. Khyber Pakhtunkhwa and Balochistan did not allocate any such grants.
Regarding social protection, the World Bank recommended that the Benazir Income Support Programme (BISP) continue to maintain its national beneficiary registry at the federal level while encouraging provinces to share the programme's financial burden, given that social protection is largely a provincial responsibility after the 18th Constitutional Amendment.
The report also highlighted weaknesses in Pakistan's tax system, stating that despite the devolution of taxation powers, provincial own-source revenues remain significantly below their potential. It pointed to agricultural income tax and urban property tax as largely underutilised revenue sources, despite agriculture accounting for more than one-fifth of the country's GDP.
The World Bank further noted that the federal government continues to operate in sectors constitutionally devolved to provinces, creating duplication of functions and weakening accountability. At the same time, local governments remain financially dependent on provincial administrations, with limited revenue-generating authority and irregular transfers under Provincial Finance Commission awards.
The report said public spending has not sufficiently improved service delivery in key sectors such as education and health. Instead, much of the increase in provincial expenditure since the 18th Amendment has been absorbed by administrative and recurrent costs, while district-level allocations continue to be driven by historical patterns rather than poverty levels or development needs.
To improve fiscal governance, the World Bank recommended introducing conditional grants linked to measurable outcomes in education, healthcare, local governance, revenue mobilisation, climate resilience and disaster preparedness. It also called for greater incentives for provinces to improve tax collection and fiscal discipline while strengthening the role of local governments.
The report concluded that reforming Pakistan's fiscal federalism framework would help improve resource distribution, strengthen public service delivery, enhance revenue generation and place public finances on a more sustainable footing.
