ISLAMABAD: A new report from the World Bank underscores the need for Pakistan to enhance its fiscal federalism to maintain economic stability and improve public services. The report, titled “Strengthening Fiscal Federalism in Pakistan,” argues that refining the distribution of public resources among the federal, provincial, and local governments is crucial to meeting the demands of the country’s growing population.
According to the World Bank, the 2010 reforms, which included the 18th Constitutional Amendment and the 7th National Finance Commission (NFC) Award, were significant in devolving service delivery responsibilities to the provinces and increasing their revenues. However, the system’s structural weaknesses continue to challenge fiscal discipline, hinder revenue mobilization, and affect service quality.
The report identifies two main factors contributing to the federal fiscal deficit: increased transfers after the 7th NFC Award without corresponding federal expenditure adjustments and stagnant revenue collection. While provincial revenues increased from less than 4 percent of GDP to an average of 6.5 percent between 2010 and 2024, federal expenditures did not decrease accordingly. The division of the tax base across jurisdictions has raised compliance costs and constrained revenue, especially as agricultural income remains largely untaxed.
Bolormaa Amgaabazar, World Bank Country Director for Pakistan, noted that while the devolution of 2010 brought government closer to the people, further alignment of financing with responsibilities and tax base broadening is essential for stability and improved service delivery.
The report also highlights the limited impact devolution has had on aligning public spending with needs, as resource distribution across provinces does not incentivize revenue efforts or improve service delivery. Much of the increased provincial spending post-7th NFC Award went towards administrative costs, with recurrent expenses consuming over 80 percent of expenditure in FY23. Local government spending has dropped significantly, from 10 percent in 2005 to under 5 percent in 2024.
Tobias Haque, World Bank Lead Country Economist and report lead author, emphasized the need for recalibrating incentives through a planned new NFC Award, rewarding provinces that bolster revenue efforts and improve services, while directing resources to areas of greatest need.
The report offers various reform options, including aligning federal financing with responsibilities, strengthening domestic revenue mobilization, empowering local governments, and improving intergovernmental coordination. Ensuring reliable NFC Awards is also highlighted as a critical reform, fostering dialogue and consensus-building for lasting improvements.
The World Bank Group has been involved in Pakistan since 1950, providing over $51.2 billion in assistance. The current portfolio includes 52 operations with a total commitment of approximately $16.9 billion. The International Finance Corporation has invested around $22 billion since 1959, supporting various sectors including renewable energy, financial inclusion, and infrastructure development.