Pakistan needs to strengthen the way financial resources are shared between the federal, provincial, and local governments to maintain macroeconomic stability, improve public services, and meet the demands of its growing population, it was reported on Wednesday.
According to a new World Bank report titled Strengthening Fiscal Federalism in Pakistan released on Wednesday, says the country’s 2010 reforms, including the 18th Constitutional Amendment and the 7th National Finance Commission (NFC) Award, significantly expanded provincial powers by devolving key service delivery responsibilities and increasing provincial revenues. However, it says structural weaknesses continue to undermine fiscal discipline, limit revenue generation, and affect the quality of public services.
According to the report, Pakistan’s widening federal fiscal deficit stems largely from higher transfers to provinces under the 7th NFC Award without a corresponding reduction in federal spending, alongside stagnant revenue collection. While provincial revenues increased from less than four per cent of GDP to an average of 6.5pc between 2010 and 2024, federal expenditures did not decline proportionately.
The report also notes that the division of tax authority across five jurisdictions has increased compliance costs and constrained revenue collection, while agricultural income remains largely untaxed despite the sector contributing more than one-fifth of the country’s GDP.
“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 World Bank Country Director for Pakistan, Bolormaa Amgaabazar.
“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 added.
The report says devolution has had only a limited impact on aligning public spending with actual needs. It argues that the current formula for distributing resources among provinces neither reflects fiscal needs nor encourages provinces to improve revenue collection or service delivery.
According to the World Bank, much of the increase in provincial spending since the 7th NFC Award has gone towards administrative expenses rather than education or healthcare. More than 80pc of provincial expenditure in the 2022-23 fiscal year was spent on recurring costs, while spending across districts continued to follow historical patterns instead of being based on poverty levels or service delivery gaps.
The report also highlights a decline in the role of local governments, noting that their share of total public expenditure has fallen from around 10pc in 2005 to below five per cent in 2024.
