THE World Bank (WB) has asked Pakistan to revise the National Finance Commission (NFC) Award formula — both vertically and horizontally — and adopt fiscal ‘equalization’ for resource distribution among the provinces based on spending needs and projected revenue capacity. The Washington-based lender released a comprehensive report on the implementation of the seventh NFC Award and found the federal government at fault for spending in areas that, under the constitution, were not its responsibility and caused fiscal stress. It also wrote that the provincial governments, too, did not spend wisely and major spending was incurred on creating more government jobs, increasing salaries and pensions after 2010.
The conclusions drawn in the report strengthen the viewpoint that the provinces should contribute their share in fulfilling financial needs of seven public goods services to lessen financial stress on the federation. According to the Bank, the function-specific deductions from the divisible pool could share the burden of continued federal expenditure on national public goods such as national transport infrastructure, certain security expenditures, debt servicing, social protection, environmental programmes, strategic interprovincial water infrastructure and national policy coordination. It was in line with this thinking that the provinces were asked to contribute to national security expenditure and Punjab and Sindh did oblige by committing Rs. 546 billion and Rs. 260 billion respectively but Khyber-Pakhtunkhwa, (which receives additional share from the NFC on account of counter-terrorism) and Balochistan did not allocate any amount in their new budgets for the purpose. Similarly, the provinces, especially Sindh, were not cooperating in saving the tax-payers’ money that is currently lavishly being spent on the Benazir Income Support Programmes (BISP) despite the fact it has failed to improve the lot of the poor in any manner. The World Bank too has favoured continuation of the programme on the plea of social protection but wanted cost-sharing from all provinces, as social protection falls under the domain of federating units. It has rightly pointed out that the 18th Constitutional Amendment devolved responsibility for social services and economic functions to provinces.
However, the federal government continues to operate in constitutionally devolved areas, causing waste and blurring accountability, while local governments lack clearly defined or adequately resourced functional mandates. This aspect can be addressed by listening seriously to PPP leader Bilawal Bhutto Zardari, who has long been demanding that the ministries, departments and functions assigned to provinces under the amendment should be effectively devolved to the provinces to save federal resources. Debt-serving is also assuming alarming proportions as this consumed about sixty percent of revenue collections for the year 2025-26, leaving too little for development and other expenditures. As most of the debt is spent on projects in provinces, it is but logical that the federating units should bear the burden on this account. Same is the case with infrastructure projects in transport and water sectors as respective provinces stand to gain in terms of utilization, economic benefits and royalty. True, the NFC-based transfer system provides predictability and protects provincial revenue shares. However, financing has not followed function. The current framework reduced federal resources without a commensurate adjustment in expenditure responsibilities, driving a structural federal fiscal deficit. The horizontal distribution formula also does not achieve genuine fiscal equalization and provides no meaningful incentives for provincial revenue effort or service delivery performance. Another issue rightly highlighted by the World Bank report is inability or unwillingness of the provinces to devolve properly the resources to the local governments. Administrative expenditure of the provinces is also increasing whereas the focus should have been on social services like health and education, areas from where the provinces, especially Punjab, are backtracking.
