World Bank Report Exposes Long-Standing NFC Vacancy
Article 160 of the Constitution mandates that the President constitute a National Finance Commission (NFC) at intervals not exceeding five years to recommend how federal funds are shared. The World Bank's new report, "Strengthening Fiscal Federalism in Pakistan," launched in Islamabad earlier this month, proposes revising the NFC formula both vertically and horizontally. It suggests moving away from a distribution where population carries 82 percent weight towards fiscal equalization based on expenditure needs and revenue capacity, reunifying the fragmented sales tax, and tying part of future transfers to measurable service delivery. However, the most uncomfortable aspect is not the recommendations but the fact that the ground it walks on has stood unattended for nearly two decades.
Reaction to the Report: Jurisdictional Concerns
The reaction has been swift and jurisdictional, with critics arguing that a lender has no business drafting the internal settlement of a sovereign federation. This objection deserves respect, as the underlying fear has already materialized. In September 2024, the federal government and all four provinces signed a National Fiscal Pact to satisfy a structural benchmark under the IMF programme. Spending responsibilities were rebalanced, provincial surpluses pledged, and agricultural income tax laws rewritten to match federal rates on a timetable set out in programme documents rather than in any constitutional forum. This was a federal-provincial fiscal architecture negotiated to a creditor's calendar.
Why the Vacancy Persists
The honest question is how this became possible. The answer is vacancy. The Commission required every five years has produced only one award this century. The seventh award, in effect since 2010, survives only because no successor has ever been agreed upon. Three successive commissions expired without producing an award. The eleventh commission, constituted last August, first met only in December, and by early this year six of its eight working groups had never convened. Institutions that decline to exercise their jurisdiction should not be astonished when others let themselves in. The Bank's report did not displace a functioning constitutional process; it moved into an empty room.
Federal and Provincial Failures
The vacancy endures because the stalemate suits both tiers of government. The Centre never adjusted to devolution. According to the report, federal expenditure averaged 13 percent of GDP in the fifteen years after the award against 11.2 percent in the years before it, even as ministries held on to subjects no longer theirs to run. The revenue surrendered in transfers, about 1.9 percent of GDP, corresponds closely to the rise in the federal primary deficit since devolution. This is the record of a state that gave away income without giving up functions, then borrowed to cover the difference. Interest now takes the first charge on federal resources: in this year's budget, debt servicing alone is more than two-thirds of net federal revenue after provincial transfers. Development spending has become the adjustment variable rather than the national priority.
Provincial Revenue Collection Lags
The provinces have matched this failure with their own. Guaranteed 57.5 percent of the divisible pool, the provinces raise barely 0.7 percent of GDP from their own sources against an assessed potential of 1.15 percent. Urban property tax yields 0.13 percent of GDP, a fraction of what comparable economies collect. Agriculture, more than a fifth of the economy, is still barely taxed in practice even after the new provincial statutes. The problem has shifted from setting the rate to enforcement mechanisms. Beneath them, local governments have seen their share of public spending fall from roughly ten percent in 2005 to under five percent today, indicating that the devolution of 2010 stopped at the gates of provincial capitals.
Opportunity or Threat?
A strong federation can selectively adopt proposals. Pakistan should choose overdue reforms such as incentives for provinces to boost revenue collection, regular and enforceable Provincial Finance Commission awards, and unified property tax valuation. However, changes to the horizontal NFC formula must remain a political decision, as the population's role in the formula is deeply contested. Removing it based on outside advice would risk political stability. Similarly, reuniting the sales tax system challenges the Eighteenth Amendment and is a matter for national and provincial legislators, not lenders.
None of this requires a protest note. It requires an award. The eleventh Commission already exists with members appointed and terms of reference issued. What it lacks is a published timetable and the visible intention to conclude before the next budget. A finished award, the first in sixteen years, would answer the World Bank more completely than any rebuke because the federation's most intimate settlement is going to be drafted somewhere. The only open question is whether it is written in the Commission's minutes or in the annexes of our creditors.
