ISLAMABAD: Pakistan must reform the way financial resources are distributed among the federal, provincial and local governments to safeguard macroeconomic stability, improve public services and meet the needs of its rapidly growing population, the World Bank said in a new report released on Tuesday.
The report, Strengthening Fiscal Federalism in Pakistan, reviews the country’s fiscal decentralisation since the landmark 2010 reforms, including the 18th Constitutional Amendment and the 7th National Finance Commission (NFC) Award. While those reforms significantly expanded provincial authority by transferring key service delivery responsibilities and increasing provincial revenues, the report says several structural weaknesses continue to hinder fiscal discipline, revenue generation and effective public service delivery.
According to the report, Pakistan’s growing federal fiscal deficit is largely the result of increased transfers to provinces under the 7th NFC Award without a corresponding reduction in federal expenditure, combined with stagnant revenue collection. Provincial revenues increased from less than four per cent of GDP before the reforms to an average of 6.5 per cent between 2010 and 2024, but federal spending failed to decline proportionately.
The World Bank also pointed to Pakistan’s fragmented tax structure, where tax authority is divided across five jurisdictions, increasing compliance costs for businesses and limiting overall revenue collection. It further highlighted that agricultural income remains largely outside the tax net despite the sector contributing more than one-fifth of the country’s gross domestic product.
“Pakistan took a historic step in 2010 by bringing government closer to its people, but the full promise of devolution has yet to be realised,” said World Bank Country Director for Pakistan Bolormaa Amgaabazar.
She stressed that aligning financing with government responsibilities, broadening the tax base and ensuring resources reach schools, healthcare facilities and local communities are essential for sustaining economic stability and improving public services.
The report argues that the existing formula for distributing financial resources among provinces neither adequately reflects fiscal needs nor provides incentives for provinces to improve revenue collection and service delivery. As a result, devolution has had only a limited impact on ensuring that public spending is directed where it is needed most.
According to the World Bank, much of the increase in provincial expenditure since the implementation of the 7th NFC Award has been absorbed by administrative costs rather than priority sectors such as education and healthcare. During the 2022-23 fiscal year, more than 80 per cent of provincial spending was allocated to recurring expenditures, while district-level funding continued to follow historical spending patterns instead of being targeted based on poverty levels or service delivery gaps.
The report also expressed concern over the declining role of local governments. Their share of total public expenditure has dropped from around 10 per cent in 2005 to below five per cent in 2024, reducing their ability to address local development needs effectively.
World Bank Lead Country Economist Tobias Haque said the planned new NFC Award presents a critical opportunity to modernise Pakistan’s fiscal framework.
“The structure of fiscal federalism shapes whether children attend functioning schools and whether health facilities are stocked with medicines,” Haque said.
He added that a revised NFC Award should reward provinces that strengthen their own revenue generation and improve public services while allocating greater resources to areas with the highest development needs.
Rather than recommending a single approach, the report outlines several reform options that can be implemented within Pakistan’s existing constitutional framework. These include better aligning federal financing with expenditure responsibilities, strengthening domestic revenue mobilisation, ensuring predictable financial support for local governments and improving coordination among all tiers of government.
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