World Bank urges Pakistan to revamp NFC Award formula

ISLAMABAD: The World Bank (WB) has urged Pakistan to overhaul the National Finance Commission (NFC) Award by revising both the vertical and horizontal revenue-sharing formula and adopting a fiscal equalisation model based on provinces’ spending needs and revenue capacity.

According to The News, the recommendations were unveiled on Wednesday in the World Bank’s report, Strengthening Fiscal Federalism in Pakistan, launched by Lead Economist Tobias Haque alongside Country Director Bolormaa Amgaabazar in Islamabad.

The World Bank said the current fiscal arrangements had contributed to a structural federal fiscal deficit, weakened revenue mobilisation and failed to improve public service delivery despite the devolution introduced under the 18th Constitutional Amendment.

The report also recommended replacing population as the dominant criterion for resource distribution with a fiscal equalisation model based on provinces’ spending needs and revenue capacity.

Revamp NFC Award: Replace the current formula with a fiscal equalisation model based on spending needs and revenue capacity. Reduce the emphasis on population in sharing federal revenues.

Unify GST collection: Bring GST on goods and services under a single collection mechanism. Share revenues among provinces through an agreed formula.

Boost provincial tax collection: Improve agricultural income tax collection. Harmonise property taxes using a common valuation system.

Fix federal-provincial finances: Align federal spending responsibilities with available revenues. Address the structural fiscal deficit created after devolution.

Reform transfers: Reward provinces that improve tax collection and service delivery. Increase weight for poverty, backwardness and low population density in resource distribution.

Strengthen local governments: Hold Provincial Finance Commission awards regularly. Give local governments greater financial autonomy and stable funding.

Share BISP costs: Keep the national beneficiary registry with the Centre. Require provinces to share the cost of the programme.

Link funding to performance: Tie part of federal transfers to outcomes in education, health, governance, climate resilience and disaster preparedness.

The report identified Pakistan’s fragmented General Sales Tax (GST) regime as a major weakness, saying the split collection system for goods and services across multiple jurisdictions has increased compliance costs, discouraged inter-provincial trade and weakened revenue performance.

The World Bank proposed reunifying GST collection under a centralised administration, with revenues distributed among provinces through an agreed formula — a move that would require legislative changes.

It also urged provinces to improve agricultural income tax collection and harmonise property-related taxes through a common valuation system.

According to the report, provincial own-source tax revenues have remained at around 0.7 per cent of GDP, despite an estimated potential of 1.15 per cent. Agricultural income tax remains largely uncollected, while urban property tax generates only 0.13 per cent of GDP, well below international norms.

The World Bank said devolution under the 18th Amendment remains incomplete, with the federal government continuing to operate in constitutionally devolved sectors, leading to duplication and blurred accountability.

It said local governments remain financially weak despite constitutional protection under Article 140A, with Provincial Finance Commission awards remaining irregular and local bodies heavily dependent on provincial governments.

The report recommended retaining the Benazir Income Support Programme’s national beneficiary registry at the federal level while introducing provincial cost-sharing.

It also noted that of the Rs1.035 trillion in grants committed by provinces to the Centre under Article 164, Punjab later reversed Rs546 billion and Sindh Rs260 billion, while Khyber Pakhtunkhwa and Balochistan made no allocations in their 2026-27 budgets.

The report said fiscal devolution has delivered only limited improvements in public service delivery. Although provincial spending has increased since the 18th Amendment, nearly 80 per cent continues to go towards recurrent expenditure, with much of the increase absorbed by administration rather than education or healthcare.

It also found that district-level allocations remain driven largely by historical patterns instead of poverty levels or service delivery needs.

World Bank Country Director Bolormaa Amgaabazar said fiscal federalism had not delivered the expected benefits at the grassroots level, adding that the report offers policymakers reform options drawn from international experience.

The report recommended linking part of federal transfers to measurable improvements in education, healthcare, governance, climate resilience, disaster preparedness and local government performance.