ISLAMABAD: The World Bank has recommended that Pakistan overhaul its National Finance Commission (NFC) Award by revising both the vertical and horizontal resource-sharing formula and adopting a fiscal equalisation model to distribute financial resources among provinces based on expenditure needs and revenue-generating capacity.
The recommendations were presented in the World Bank report, “Strengthening Fiscal Federalism in Pakistan,” launched on Wednesday by World Bank Lead Economist Tobias Haque and Country Director Bolormaa Amgaabazar.
What changes has the World Bank proposed for the NFC Award?
The World Bank recommended replacing the existing multi-factor NFC distribution formula with a transparent fiscal equalisation mechanism that allocates resources according to provinces’ spending needs and projected revenue capacity.
The report also suggested reducing the role of population as the primary criterion for provincial resource distribution, arguing that a needs-based allocation system would better promote fiscal equity and improve public service delivery.
According to the report, several countries—including Australia, Canada, China, Nigeria and South Africa—already employ similar fiscal equalisation models.
Why does the World Bank want reforms?
The report argues that Pakistan’s fiscal federalism framework has contributed to a structural federal fiscal deficit by increasing provincial revenues without a corresponding reduction in federal expenditure responsibilities following the 18th Constitutional Amendment.
According to the World Bank, provincial revenues increased from less than 4% of GDP before devolution to an average of 6.5% of GDP between FY2010 and FY2024, while federal expenditures remained comparatively high, contributing to persistent fiscal deficits and rising public debt.
What recommendations were made on taxation?
The World Bank identified Pakistan’s fragmented General Sales Tax (GST) system as a major obstacle to revenue mobilisation and economic efficiency.
It recommended reunifying GST collection under a centralised administrative mechanism, with revenues subsequently distributed among provinces through an agreed constitutional formula.
The report also called for stronger implementation of provincial agricultural income taxes, harmonisation of property taxation through a common valuation system and improved information sharing between federal and provincial tax authorities to reduce tax evasion.
What did the report say about provincial revenues?
The World Bank noted that provincial governments have not fully utilised their taxation powers.
It said provincial own-source revenues have remained around 0.7% of GDP despite an estimated potential of approximately 1.15%, while agricultural income tax and urban property tax continue to remain significantly under-collected.
What concerns were raised about public spending?
According to the report, increased provincial spending following devolution has largely been absorbed by recurrent administrative expenditures rather than investment in education, health and other public services.
The World Bank also observed that local governments remain fiscally weak despite constitutional recognition under Article 140A, with Provincial Finance Commission awards remaining infrequent and local bodies continuing to depend heavily on provincial governments for financial resources.
What recommendations were made for social protection?
The report recommended maintaining the national registry for the Benazir Income Support Programme (BISP) at the federal level while introducing cost-sharing arrangements with provincial governments, noting that social protection is constitutionally a provincial responsibility.
The World Bank further proposed introducing conditional fiscal transfers linked to measurable improvements in education, healthcare, revenue collection, climate resilience, disaster preparedness and local government performance.