The World Bank has urged Pakistan to revisit its existing framework of fiscal federalism, arguing that the current arrangement has become a major source of the country’s persistent fiscal challenges.
In its latest report, Strengthening Fiscal Federalism in Pakistan, the World Bank stated that fiscal rebalancing across the three tiers of government—federal, provincial, and local—should ideally be undertaken as part of the deliberations on the 11th National Finance Commission (NFC) Award, which are currently underway. The report places considerable responsibility on the federal government for failing to fully implement the devolution agenda while simultaneously allowing fiscal deficits to widen. It recommends a comprehensive review of the roles, responsibilities, needs, and revenue potential of the federal, provincial, and local governments. The World Bank further advocates assigning greater weight to fiscal need indicators, incentivizing revenue generation, and linking the distribution of public resources to measurable service delivery performance across all levels of government.
The report is particularly significant because it challenges the existing fiscal arrangement under which relatively passive and underperforming tiers of government, as well as some provinces and districts, continue to receive substantial financial resources regardless of their administrative efficiency or service delivery outcomes. In this context, the recommendation to connect resource allocation with performance appears both timely and logical. The real challenge, however, lies in designing an objective and transparent mechanism for assessing performance. While such an evaluation is technically feasible, implementing it in Pakistan’s deeply polarized political environment would be an extremely difficult task.
The World Bank has also advised Pakistan to gradually move away from discretionary grants and the existing resource distribution formula, which relies heavily on population, geography, and other traditional indicators. There is considerable merit in the argument that the current formula, particularly its overwhelming emphasis on population, has become increasingly regressive rather than progressive. Although population should remain one of the criteria, making it the dominant factor may inadvertently discourage provinces from adopting effective population control policies. In a country where rapid population growth continues to place enormous pressure on economic resources, infrastructure, and public services, a more balanced formula incorporating performance and development indicators deserves serious consideration.
The report identifies the expansion of provincial transfers following the 7th NFC Award, without a corresponding reduction in federal expenditures or significant improvements in revenue collection, as one of the principal reasons behind the widening federal fiscal deficit. According to the World Bank, provincial revenues increased from less than 4 percent of GDP to an average of 6.5 percent during 2010–2024, yet federal expenditures failed to decline accordingly. This represents a realistic and evidence-based assessment of Pakistan’s fiscal architecture.
It is important to recall that the 7th National Finance Commission (NFC) Award, signed in December 2009 and implemented on July 1, 2010, represented a landmark development in Pakistan’s fiscal history. It increased the provinces’ share in the federal divisible pool from 46.5 percent to 56 percent during its first year and to 57.5 percent in subsequent years. It also introduced a multiple-criteria formula for revenue distribution that remains in force today, although population continues to carry the greatest weight within that formula.
The 7th NFC Award was implemented shortly after the passage of the historic 18th Constitutional Amendment. The amendment fundamentally transformed Pakistan’s federal structure by devolving extensive administrative, legislative, and financial powers from the federal government to the provinces. It abolished the Concurrent Legislative List, transferring full legislative and administrative authority over sectors such as education, health, labour, and local government to the provinces. It also granted the provinces greater authority over their financial resources, including the power to levy sales tax on services, while constitutionally safeguarding their share under future NFC Awards.
Consequently, both the 18th Constitutional Amendment and the 7th NFC Award have increasingly become central to discussions surrounding Pakistan’s fiscal challenges. Although the World Bank has not recommended reversing or repealing the 18th Amendment, it has clearly argued that the next NFC Award should rely more heavily on performance-based criteria instead of the current distribution mechanism, which it considers insufficiently responsive to governance outcomes.
It is worth noting that the 18th Constitutional Amendment was passed in April 2010 with near-unanimous support from all major political parties. It was widely welcomed by Pakistan’s ethno-linguistic groups and is regarded as one of the most significant constitutional achievements in the country’s history. Much of the political credit for securing consensus on the amendment is attributed to the then President and current Pakistan People’s Party (PPP) Co-Chairman, Asif Ali Zardari.
Despite its historic importance, the amendment has also exposed several structural weaknesses. While it transferred sweeping powers to the provinces, it failed to establish effective constitutional safeguards to ensure that those powers would, in turn, be devolved to local governments, including districts and union councils. Although the Supreme Court has repeatedly emphasized the constitutional necessity of holding regular local government elections, the transfer of administrative and financial authority to local bodies continues to depend largely on the discretion of provincial governments.
As a result, local government institutions in many parts of Pakistan either remain absent or operate without meaningful authority and financial autonomy. This undermines the delivery of essential public services and weakens grassroots governance. Since local governments are constitutionally recognized institutions, their ineffective functioning prevents citizens from participating directly in decision-making and reduces the efficiency of public administration.
Moreover, local governments have traditionally served as nurseries of democratic leadership by cultivating future political representatives and strengthening democratic culture at the grassroots level. Without empowered local bodies, democratic institutions struggle to mature, and governance becomes increasingly centralized. Pakistan’s recurring governance crises can, to a significant extent, be attributed to the prolonged absence or weakness of effective local government structures across the provinces. Consequently, even routine municipal services are often managed by provincial ministers or departments that were never designed to perform such functions. The inevitable outcome has been administrative inefficiency, duplication of responsibilities, financial strain, and governance chaos.
The essence of the 18th Constitutional Amendment was to devolve political authority, financial resources, and administrative powers from the federation to the provinces. However, the true spirit of devolution cannot be realized unless those powers are further transferred to the grassroots level, where citizens interact directly with the state and where decisions regarding local development and public services have the greatest impact.
There is little doubt that the 18th Constitutional Amendment represented a historic milestone in strengthening Pakistan’s federal system by granting provinces the constitutional authority and financial autonomy they had long demanded. While many ethno-linguistic groups regard the amendment as their greatest constitutional achievement, its broader significance lies in reinforcing the unity of the Pakistani federation itself. Historically, grievances over political, constitutional, economic, and cultural rights have repeatedly fueled tensions between the federation and the provinces. These unresolved issues contributed to the secession of East Pakistan under the leadership of Bangladesh’s founder, Sheikh Mujibur Rahman, while similar concerns continue to influence separatist sentiments in Balochistan.
The amendment therefore addressed many longstanding constitutional grievances. Nevertheless, constitutional reform alone cannot guarantee effective governance if implementation remains incomplete. The real shortcomings may lie not in the 18th Amendment itself but in Pakistan’s broader parliamentary and governance framework, which introduced far-reaching reforms without adequately preparing the institutional mechanisms required for their effective implementation. The resulting administrative weaknesses have become increasingly evident through the declining performance of numerous state institutions, a concern frequently highlighted by the Supreme Court during hearings involving public bodies.
Pakistan’s fiscal and governance challenges, therefore, require more than constitutional debate. They demand meaningful institutional reforms, stronger fiscal discipline, greater accountability at every tier of government, and above all, the genuine empowerment of local governments. Only through a balanced and performance-oriented system of fiscal federalism can the country ensure efficient public service delivery, sustainable financial management, and stronger democratic governance.