Development & Policy | July 2026 | 4 min read
⚡ Quick Takeaways
- The World Bank has urged Pakistan to redesign the NFC Award around fiscal needs and revenue capacity.
- The report says population should play a smaller role in deciding provincial resource shares.
- It recommends a single nationwide GST collection system, with proceeds shared through an agreed formula.
- Provincial own-source tax revenue remains weak at around 0.7% of GDP, below its estimated potential.
- Future transfers may reward provinces for better tax collection, services, climate work and local empowerment.
The World Bank has pushed Pakistan to rethink how federal money is shared with provinces, arguing that the NFC Award should focus more on needs, tax effort and service delivery than population alone.
| 6.5% Average provincial revenue share of GDP, FY2010-24 |
0.7% Provincial own-source tax revenue of GDP |
5% Local government share of public spending in 2024 |
World Bank Wants a Needs-Based NFC Formula
The World Bank has proposed a major overhaul of Pakistan’s National Finance Commission Award, recommending that future resource sharing be linked to provincial spending needs and revenue raising capacity. The proposal appears in the lender’s report, Strengthening Fiscal Federalism in Pakistan, released this week.
At present, population remains the dominant factor in the horizontal distribution of the divisible pool among provinces. The World Bank argues that this approach does not fully reflect differences in poverty, service delivery gaps, climate exposure, geography, local government needs or a province’s ability to raise its own revenue.
The report recommends a fiscal equalization model, similar to systems used in countries such as Australia, Canada, China, Nigeria and South Africa. Under that model, transfers are designed to help poorer or weaker regions provide comparable public services, while also encouraging provinces to improve tax collection and spending discipline.
| Policy Shift: The proposal does not simply ask for less money for provinces. It asks Pakistan to link money with needs, tax effort and results. |
GST Reform and Weak Taxes Add Pressure
The World Bank also recommended reuniting Pakistan’s fragmented General Sales Tax system. It proposed a single nationwide GST collection mechanism, with revenue then distributed among provinces through an agreed formula. Such a change would require legislative amendments and political consensus among the federation and provinces.
The report says Pakistan’s current fiscal federalism framework has contributed to a structural federal budget deficit. Provincial revenues rose from less than 4% of GDP to an average of 6.5% of GDP between fiscal years 2010 and 2024, but federal expenditure did not fall in line with the transfer of responsibilities. This has kept pressure on the federal budget and public debt.
Tax collection remains another weak point. Provincial own-source tax revenue has stayed around 0.7% of GDP, compared with an estimated potential of 1.15%. The World Bank identified agricultural income tax and urban property tax as two underused sources that could help provinces finance services more responsibly.
| Reform Area | Current Problem | World Bank Proposal | Likely Impact |
| NFC Award | Population still carries heavy weight | Use needs and revenue capacity | Fairer provincial shares |
| GST System | Multiple collection systems raise costs | Single national collection route | Simpler compliance |
| Provincial Taxes | Own revenue remains low | Use property and farm income taxes better | More fiscal space |
| Local Governments | Transfers remain weak and uncertain | Predictable local funding | Better service delivery |
| Revenue Warning: Weak provincial tax effort makes provinces more dependent on federal transfers and leaves less room for better local services. |
Local Governments and BISP Also in Focus
The report also criticized overlap between federal and provincial governments in areas devolved under the 18th Constitutional Amendment. It said such overlap creates inefficiency, weakens accountability and contributes to avoidable spending. In simple terms, when two layers of government keep working in the same space, taxpayers may pay more without receiving better services.
Local governments were another major concern. The World Bank noted that local bodies remain fiscally weak despite constitutional guarantees. It called for stronger, regular and more predictable transfers to the local level so cities, towns and districts can plan basic services instead of depending on uncertain provincial releases.
On social protection, the lender recommended keeping the Benazir Income Support Programme’s national registry at the federal level, while introducing cost sharing so all provinces contribute to financing. This would preserve a national database while spreading the funding burden more fairly.
| Local Services: The report links fiscal reform with schools, clinics, city services and climate resilience, not just budget accounting. |
Performance-Based Transfers Could Reshape Incentives
The World Bank suggested that future federal transfers should reward provinces that improve tax collection, strengthen fiscal discipline, invest in education and healthcare, build climate resilience and empower local governments. Linking part of the transfer system to measurable indicators could help improve public services while preserving provincial autonomy.
The recommendation is politically sensitive because the NFC Award affects the balance of power and money between the federation and provinces. Any change would require negotiation, legal work and consensus. However, the World Bank argues that a planned new NFC Award provides a chance to correct weaknesses that have remained unresolved since the 2010 devolution reforms.
For Pakistan, the debate is not only about how money is divided. It is also about whether public funds follow actual needs, whether provinces raise more of their own revenue, and whether citizens see better schools, healthcare, local services and climate protection from the money already being spent.
Disclaimer: This article is based on publicly reported details and the World Bank’s stated reform recommendations. Final policy changes depend on federal-provincial negotiations, legislation and official approval.
