• Blames Centre for incomplete devolution, high fiscal deficits
• Calls for resource sharing based on fiscal needs, revenue effort and service delivery
• Says fresh NFC Award offers chance to recalibrate incentives
ISLAMABAD: Blaming chiefly the federation for failing to fully implement devolution and contain fiscal deficits, the World Bank on Wednesday urged Pakistan to undertake a serious review of the needs and potential of federal, provincial and local government systems, assigning greater weight to fiscal need indicators, incentivising revenue effort and linking share of resources to service delivery performance at all tiers.
In its new report, ‘Strengthening Fiscal Federalism in Pakistan’, the World Bank said fiscal rebalancing across the three tiers of government — federal, provincial and local — should preferably be undertaken as part of the 11th National Finance Commission Award discussions currently in process.
The report called for moving sustainably away from discretionary grants and a regressive distribution formula based on population, geography and other factors.
“A better transfer system should equalise needs and capacity while strengthening fiscal incentives,” it said.
The report identified two main factors behind the widening of the federal fiscal deficit: an increase in transfers following the 7th NFC Award that was not matched by adjustment in federal expenditures and stagnant revenue collection.
It said provincial revenues rose from less than 4pc of GDP to an average of 6.5pc during 2010-2024, yet federal expenditures did not decline accordingly.
“Federal expenditure increased from an average of 11.2pc during FY09 to 13pc of GDP during FY24,” the report said.
It said the division of the tax base across five jurisdictions — the Centre and four provinces — had raised compliance costs and constrained revenue. It called for ending federal spending overlaps with provincial mandates and then assessing remaining gaps against federal revenue potential.
The report noted that fiscal federalism institutions had not been able to safeguard system performance. It said the formal architecture was strong on paper, but implementation had lagged.
“Institutions intended to coordinate the federation have not been convened or empowered to manage fiscal federalism risks,” it said.
It added that a successor to the 7th NFC Award had been delayed for more than a decade and a half, while the Council of Common Interests had met irregularly despite the constitutional requirement of quarterly meetings.
The report also pointed to weak monitoring, saying no mechanism was in place to consistently track functional assignments, transfers, service delivery or fiscal outcomes.
“Institutional renewal is not a procedural issue: regular coordination can lower the political stakes of each negotiation and enable incremental experimentation,” it said.
In one of the options based on experience in other countries, the World Bank suggested considering function-specific deductions from the divisible pool for debt servicing, national infrastructure, social protection, security, environmental programmes and coordination. However, it advised against provincialising the Benazir Income Support Programme (BISP) at this stage to ensure the success of the national data registry and coordination.
According to the World Bank’s assessment, financing devolution did not follow function devolution, contributing to a structural increase in the federal fiscal deficit as the Centre continued spending on devolved ministries.
“Loss in federal revenues was roughly equivalent to the increase in federal primary deficits after devolution”, or 1.6pc of GDP, the report observed.
It noted that federal activity continued in devolved areas, local government powers remained largely subject to provincial discretion and coordination institutions underperformed.
As a consequence, the federal government still operates in constitutionally devolved areas, while local governments lack clear and adequately resourced mandates.
“Federal spending in devolved areas blurs accountability and creates overlaps. Local governments are recognised constitutionally but lack clear and adequately resourced functional mandates. Shared functions require stronger coordination when spillovers, scale or equity concerns are material,” the report said.
At the same time, agricultural income remained largely untaxed despite the sector accounting for more than 20pc of the economy.
“Pakistan took a historic step in 2010 by bringing government closer to its people, but the full promise of devolution has yet to be realised,” said Bolormaa Amgaabazar, World Bank Country Director for Pakistan.
“Aligning financing with responsibilities, broadening the tax base, and ensuring that resources reach schools, clinics, and local communities are essential to sustaining stability and delivering better services to Pakistan’s growing population,” she said.
Ms Amgaabazar said the biggest disappointment was population growth. “Something needs to be done,” she said, adding that while fiscal reforms had taken place, the majority of the population was not seeing the benefits of devolution.
The report also noted that devolution had so far had limited impact in aligning public spending with needs.
It said the formula for distributing resources across provinces did not provide allocations in line with fiscal needs or create strong incentives for provincial revenue effort and service delivery performance.
Much of the increase in provincial spending since the 7th NFC Award was absorbed by administrative expenses rather than education or health, with more than 80pc of expenditure in FY23 used to meet recurrent costs.
“Spending across districts has continued to track historical precedent rather than poverty levels or service delivery gaps,” it added.
The share of total government spending undertaken by local governments has meanwhile fallen from around 10pc in 2005 to under 5pc in 2024.
“The structure of fiscal federalism shapes whether children attend functioning schools and whether health facilities are stocked with medicines,” said Tobias Haque, World Bank Lead Country Economist and lead author of the report.
“A planned new NFC Award offers an important opportunity to recalibrate incentives — rewarding provinces that strengthen their own revenue effort and improve service delivery, while directing more resources to where needs are greatest,” he said.
The report presented a menu of reform options through a new NFC Award and broader measures within Pakistan’s existing constitutional framework.
These include aligning federal financing with responsibilities, strengthening domestic revenue mobilisation, empowering local governments with more predictable transfers and improving coordination across different levels of government. It said Pakistan’s tax-to-GDP ratio remained below peers, while provincial own-source tax revenue hovered around just 1pc of GDP. The underutilisation of agriculture income tax and property taxes continued to hold back the revenue performance of provinces, it added.
Published in Dawn, July 2nd, 2026