The case for strengthening local governments in Pakistan cannot be overemphasised. Time and again, experts and analysts have argued that the cure for the politico-socio-economic polycrisis plaguing the country lies in strengthening local governments and encouraging effective devolution of power and finances. Without this, national policies and measures are rendered self-defeating at best and detrimental at worst. Unless power and resources are effectively devolved to the grassroots level of local administration and governance—the level closest to the masses and their lives—schools will always lack infrastructure, health centres will remain without healthcare, and communities will continue to bucket water from miles away and endure without electricity.
FAFEN and World Bank Highlight Persistent Gaps
Last year, the Free and Fair Election Network (FAFEN) suggested that Pakistan strengthen its long-neglected system of local governments, highlighting persistent gaps in the implementation of constitutional provisions related to devolution and autonomy. According to a FAFEN analysis: “The 18th Amendment devolved powers to the provinces but the same spirit has not been shown by the provinces in devolving political, administrative, and financial authority to the local governments.” They further noted: “Repeated delays in local elections have contributed to the curtailment of local mandates, weakening foundations of grassroots democracy in the country.”
A World Bank report, Strengthening Fiscal Federalism in Pakistan, released last week, bluntly reconfirmed this overlooked fact. It stated that fiscal rebalancing across the three tiers of government—federal, provincial, and the almost non-existent local—should be prioritised under the 11th National Finance Commission (NFC) Award. The report indicates that Pakistan’s federal government continues to operate in constitutionally devolved areas, while local governments lack clear and adequately resourced mandates. Their powers remain largely subject to the discretion and coordination of provincial governments, as weak institutions continue to underperform.
Fiscal Federalism and the Decline of Local Government Spending
Fiscal federalism is a framework that establishes and regulates how public money is raised, split, and spent across federal, provincial, and local governments. However, with an undermined local government (LG) system, the benefits meant to reach the people through effective fiscal federalism never do so. Consequently, the share of total government spending meant to be undertaken by local governments is usually in single-digit lows, falling from around 10% in 2005 to under 5% in 2024.
“Pakistan took a historic step in 2010 by bringing government closer to its people, the full promise of devolution has yet to be realised,” remarked the World Bank Country Director for Pakistan, Bolormaa Amgaabazar, while speaking to the media earlier. Highlighting flawed spending trends, the World Bank report adds that spending across districts in Pakistan has continued to “track historical precedent” rather than attending to high poverty levels or service delivery gaps.
Reform Options for the 11th NFC Award
The report presents a listing of reform options for the upcoming 11th NFC Award for a better division of resources between the centre and provinces, and to ensure broader measures within Pakistan’s existing constitutional framework. Empowering local governments with more fiscal transfers and improving coordination across all tiers of government is among the report’s key recommendations. Ultimately, stronger LGs and steady accountability of systems are essential if fiscal federalism is to be reformed to deliver quality public services. Devolution, it notes, has so far been patchy, with very limited impact in aligning public spending with needs. Much of this is owed to successive, self-serving governments that have repeatedly followed the same pattern of expanding administrative structures and recurrent expenditure, while ensuring that LGs remain weak financially and politically. This misgovernance and its failures should be rectified to improve the process of power and financial devolution.
Even in sectors duly devolved, there is recurrent federal overlap, marred by deficient institutional restructuring, insufficient intergovernmental coordination, and botched accountability, which gravely compromises efficiency and execution.
Provincial Reluctance and Administrative Bloat
At the provincial level, appropriate devolution has been pending forever due to rampant political pressures and challenges to authority. The priorities of provincial governments often hinge on political survival rather than public welfare or service delivery. Provincial governments are the hubs of political party strength and power plays in the country, a privilege they are not willing to risk by devolving resources to the LGs. For Pakistan’s fiscal federalism to reform, the provinces also need to expand their own tax bases, in addition to receiving fiscal transfers from Islamabad. Pakistan’s tax-to-GDP ratio consistently remains below that of its peers, while provincial own-source tax revenue hovers around just 1% of GDP.
The provinces have also devoted much of the additional incoming resources to salaries and expanding bureaucracy rather than improving public services through human resource and social development programmes. Much of the increase in provincial spending since the 7th NFC Award was absorbed by these administrative expenses rather than education or health, with more than 80% of expenditure used to meet recurrent costs. The underutilisation of agriculture income tax and property taxes also continues to mar the financial performance and revenues of the provinces.
Federal Deficits and the Way Forward
The federal government, on the other hand, runs deficits as well because fund transfers to the provinces increase under the Award without what should have naturally followed: a corresponding decrease in federal expenditure and an increase in the tax-to-GDP ratio, both being overdue measures. While provincial revenues rose from less than 4% of GDP to an average of 6.5% during the 2010–2024 period, federal expenditures did not decline accordingly.
Fiscal discipline, as also pointed out in the report, has always been missing. There is a lot of overlapping in spending, with Islamabad spending in devolved sectors, further weakening already faltering fiscal discipline. Furthermore, incentives to promote provincial revenue efforts and service delivery performance are never provided by the centre. “A better transfer system should equalise needs and capacity while strengthening fiscal incentives,” the World Bank report declares. A new NFC Award should offer a new opportunity to recalibrate incentives by rewarding provinces that strengthen their own revenue endeavours and improve service delivery, also ensuring that resources are mostly directed where needs are greatest. This is why the World Bank advises “boosting provincial revenue mobilisation, rationalising federal expenditure, reforming the NFC formula, and ensuring regular awards,” as urgent reformative steps.
Case Study: Sindh’s Missed Opportunities
Taking the example of Sindh, one can see that after an increase in its financial resources following the 7th NFC Award, the province did not make much progress towards human resource development or investment in infrastructure and public services—areas that critically needed input. Instead, Sindh decreased the share of the Annual Development Programme in its provincial budget, bringing it down to 10.8%. With local governments under the axe facing the biggest cuts, it directly led to chronic underfunding for municipal services and the maintenance of roads, parks, and civic amenities; the tell-tale signs are well visible in Karachi’s landscape. Over the past decades, growing fiscal transfers to provinces have contrasted with declining social indicators, shrinking development budgets, and weakening LGs. These are outcomes that do not fare well for grassroots democracy, which may go a long way in improving lives and livelihoods.
