The World Bank’s latest unusually blunt report, “Strengthening fiscal federalism in Pakistan”, has been met in some quarters with a degree of angst, seen as ‘dressing down’ a sovereign country. The protestations are, however, uncalled for. Pakistan has been at the receiving end of such ‘advice’ from a number of international institutions and ‘friendly’ countries for some time now. After all, the hands that feed us all the time have some ‘right’ to execute a ‘slap on the wrist’ once in a while.
There are, however, serious matters at stake. The said report, of course, gets an A+ for technical standard, but suffers from political naivete.
The subjects of constitutional amendment as well as fiscal distribution were intertwined and entirely political. The primary agenda before both was the decades old lopsided inter-provincial balance of political and resource control mechanisms that demanded correction. And that is what the 18th Amendment and the 7th National Finance Commission Award (NFC) attempted to do. The finesse that the report addresses was not even on the agenda.
Accordingly, cognizant of the structural distortions in resource distribution, there was an implicit understanding among the NFC members that the first round would be devoted to overcoming the sense of ‘unfairness’ and move the ‘who gets what’ issues out of the way. The members were not unaware of the associated issues flagged by the report, but were prepared to pend them for the following awards.
Its report gets an A+ for technical standards, but suffers from political naivete
Unfortunately, the following award has been pended for the past decade and a half. This delay can be attributed entirely to the federal government’s intrusion, demanding a greater share of the divisible pool than that assigned under the 7th NFC Award. Resultantly, the fiscal distribution debate has been pushed back to the ‘who gets what’ stage.
Some misconceptions need to be dispelled. The report complains that choice of criteria and the weights assigned were arbitrarily determined and ‘reflected a negotiated outcome rather than application of a clear legal or technical framework’. That the accord was a negotiated outcome is correct and was consciously so. However, it was not devoid of technical framework. Both the choice of criteria and the weights assigned were outcomes of intensely debated technical and political rationale.
The report rightly states — and reflects the first such admission by the World Bank — that the emergence of a structural federal fiscal deficit is a result of the failure of federal expenditures failing to adjust commensurately. It further elaborates that the ‘expenditure assignments remain incompletely implemented ’, and that ‘the federal government continues to operate in constitutionally devolved areas. This is the position many of us have held for the last decade and a half, holding the federal government itself responsible for its fiscal crisis.
The report comes down heavily on provincial performance, including with respect to own-source revenue generation. The record, however, shows provinces performing significantly better than the Federal Board of Revenue (FBR).
The elaborate narrative regarding ‘function not following financing’, ‘weak local governments’, ‘financing of public services’, and the state of social development amounts to firing blank shots
The collection of the general sales tax (GST) services was devolved from the FBR to the provinces in 2010. Sindh began to collect the tax in FY12, Punjab in FY13, Khyber-Pakhtunkhwa in FY14 and Balochistan in FY15. The combined annual average compound growth rate of collections of the four provinces over the four-year period, 2011-15, was 42.5 per cent.
Granted that the provinces were starting from a low base (for which FBR was responsible), growth in provincially collected GST services over FY16 to FY25 was 17pc, compared to 11pc growth in GST goods collected by FBR in both periods.
The report proclaims that ‘federal-provincial transfer arrangements… do not achieve important policy objectives.’ It may be likely that the arrangements do not meet policy objectives as the World Bank sees it, but it certainly met the then national policy objectives.
The constitutionally defined terms of reference of the NFC are to arrive at a formula to distribute tax revenues included in the divisible pool, vertically between the centre and the provinces and horizontally between the provinces. No more, no less. As such, the elaborate narrative regarding ‘function not following financing’, ‘weak local governments’, ‘financing of public services’, and the state of social development amounts to firing blank shots.
Nevertheless, the concerns shown by the report are eminently valid and social development remains the responsibility of provincial governments, irrespective of whether the NFC requires so or not. The current NFC formula also merits improvement. And subject to the removal of the federal sword hanging over the provinces, NFC can and should be geared to achieving socioeconomic and human development goals.
One reform could be to split the divisible pool into direct (net of withholding taxes) and indirect tax components. And the vertical distribution ratio between the centre and provinces can be 80:20 for the former and 20:80 for the latter. A greater share of direct taxes for the centre can likely incentivise greater direct tax collection efforts, thereby contributing to a more progressive tax regime.
The writer is an economist who was a member of the 7th NFC and a former advisor for planning and development to the Sindh chief minister
Published in Dawn, The Business and Finance Weekly, July 6th, 2026