July 2, Pakistan – In a report entitled “Strengthening Fiscal Federalism in Pakistan,” the World Bank emphasized the importance of revising the nation’s approach to allocating resources between national, regional, and municipal authorities.
It cautioned that enhanced financial cooperation was crucial for maintaining economic stability, enhancing the quality of public services, and efficiently addressing the needs of an expanding population.
The document stated that the significant 2010 changes, including the 18th Constitutional Amendment and the 7th National Finance Commission (NFC) Award, represented an important advancement by transferring essential service provision duties to provincial authorities and greatly boosting their income.
Nevertheless, it pointed out that ongoing structural vulnerabilities still posed difficulties for financial responsibility, hindered the collection of revenues, and impacted the standard of services provided to the public.
The study highlighted two primary reasons for the growing federal budget shortfall: higher payments after the 7th NFC Award, with no matching changes in federal spending, along with flat income generation.
Although provincial income increased from under 4 percent of GDP to an average of 6.5 percent between 2010 and 2024, federal spending did not decrease proportionally.
It further highlighted that distributing the taxable base among five regions has led to higher compliance expenses and limited revenue expansion, even though agricultural earnings remain mostly exempt from taxation despite accounting for more than 20 percent of GDP.
"In 2010, Pakistan made a significant move toward making the government more accessible to its citizens, although the complete potential of decentralization remains unfulfilled," stated Bolormaa Amgaabazar, the World Bank’s Country Director for Pakistan, during the release of the report.
"Matching financial support with obligations, expanding the tax system, and making sure funds arrive at schools, health centers, and local neighborhoods are crucial for maintaining stability and providing improved services to Pakistan's increasing population," she further stated.
The study also noted that decentralization has achieved only modest effectiveness in matching government expenditure with real requirements.
It highlighted that the method of allocating resources across provinces fails to properly account for financial requirements or encourage more robust provincial income generation and enhanced service provision.
Many of the additional funds spent at the provincial level following the 7th NFC Award have gone towards administrative costs instead of key areas like education and healthcare, with over 80% of funding in FY2023 directed toward regular expenses.
According to the report, spending within different areas remained consistent with past trends rather than being influenced by factors such as poverty rates or deficiencies in services provided.
At the same time, the portion of overall governmental expenditure managed by municipal authorities has dropped from approximately 10 percent in 2005 to under 5 percent in 2024.
"The framework of fiscal federalism determines whether children go to well-operating schools and whether healthcare centers have adequate medicine supplies," stated Tobias Haque, World Bank Lead Country Economist and principal author of the report.
"A newly proposed NFC Award presents a significant chance to adjust incentives—recognizing provinces that enhance their revenue generation and boost service quality, while channeling greater support to areas with the highest requirements," he further noted.
Instead of recommending one specific approach for reforms, the report outlined various policy choices that could be carried out via a new NFC Award and under Pakistan's current constitutional system.
This encompasses enhanced synchronization between federal funding and duties, increased internal revenue generation, more consistent allocations to regional authorities, and heightened collaboration across various levels of governance.
It further highlighted that guaranteeing prompt and consistent NFC Awards would represent significant change, since steady updates would lower the pressure during discussions and allow room for ongoing conversation and agreement essential for lasting financial security.
