The World Bank has recommended sweeping reforms to Pakistan’s National Finance Commission (NFC) Award, proposing that federal resources be distributed based on provinces’ spending needs and revenue-generating capacity rather than primarily on population.
The recommendations are outlined in the World Bank’s latest report, “Strengthening Fiscal Federalism in Pakistan,” released on Wednesday. The report advocates adopting a fiscal equalization model to improve the allocation of federal funds, reduce regional disparities, and strengthen public finances.
A key proposal is to reduce the weight of population in the NFC formula and instead allocate resources according to each province’s expenditure requirements and fiscal capacity. The World Bank noted that similar models are successfully implemented in countries including Australia, Canada, China, Nigeria, and South Africa.
The report also called for the reunification of Pakistan’s fragmented General Sales Tax (GST) system through a single nationwide collection mechanism. Under the proposed framework, GST would be collected centrally and redistributed among the provinces according to an agreed formula. The lender noted that implementing such a system would require amendments to existing laws.
According to the report, Pakistan’s current fiscal federalism framework has contributed to a persistent structural deficit at the federal level. While provincial revenues increased from less than 4 percent of GDP to an average of 6.5 percent of GDP between FY2010 and FY2024, corresponding reductions in federal expenditures did not occur, increasing pressure on the federal budget and public debt.
The World Bank also highlighted Pakistan’s weak provincial tax collection, noting that provinces generate only around 0.7 percent of GDP through their own taxes, compared with an estimated potential of 1.15 percent of GDP. It identified agricultural income tax and urban property tax as two of the country’s most underutilized revenue sources.
On social protection, the report recommended retaining the Benazir Income Support Programme (BISP) national registry under the federal government while introducing a cost-sharing mechanism requiring all provinces to contribute financially to the programme.
The report further criticized the continued overlap between federal and provincial governments in sectors devolved under the 18th Constitutional Amendment, arguing that duplication of responsibilities creates inefficiencies, weakens accountability, and increases public spending. It also pointed to the weak fiscal position of local governments despite constitutional protections, calling for more predictable and sustainable financial transfers to local administrations.
Additionally, the World Bank proposed linking a portion of future federal transfers to measurable performance indicators. Provinces demonstrating improvements in tax collection, fiscal discipline, education, healthcare, climate resilience, and local government empowerment could receive greater allocations, encouraging better governance while preserving provincial autonomy.
