World Bank Urges Pakistan to Rewrite NFC Award Formula

The World Bank has proposed a major overhaul of Pakistan’s National Finance Commission (NFC) Award, recommending that the country replace the current resource distribution formula with one based on provinces’ spending needs and revenue raising capacity instead of population.

The recommendation was presented in the World Bank’s report, Strengthening Fiscal Federalism in Pakistan, released on Wednesday. The report argues that Pakistan should adopt a fiscal equalization model to distribute federal resources more efficiently and reduce regional disparities.

One of the report’s key recommendations is to reduce the role of population in determining provincial shares under the NFC Award. Instead, the World Bank proposes allocating resources based on provinces’ expenditure requirements and their ability to generate revenue, a model already used in countries such as Australia, Canada, China, Nigeria, and South Africa.

The World Bank also recommended reuniting the fragmented General Sales Tax (GST) system by introducing a single nationwide collection mechanism. Under the proposal, GST would be collected centrally and then distributed among the provinces through an agreed formula. The report notes that implementing such a system would require legislative changes.

The report said Pakistan’s current fiscal federalism framework has contributed to a structural federal budget deficit. While provincial revenues increased from less than 4 percent of GDP to an average of 6.5 percent of GDP between fiscal years 2010 and 2024, federal expenditures did not decline accordingly, increasing pressure on the federal budget and contributing to rising public debt.

The World Bank also highlighted Pakistan’s weak tax collection, noting that provincial own source tax revenue has remained around 0.7 percent of GDP, well below its estimated potential of 1.15 percent. It identified agricultural income tax and urban property tax as two of the country’s most underutilized revenue sources.

On social protection, the lender recommended retaining the Benazir Income Support Programme’s national registry at the federal level while introducing a cost sharing mechanism under which all provinces contribute to its financing.

The report also criticized the continued overlap between federal and provincial governments in areas devolved under the 18th Constitutional Amendment, saying it creates inefficiencies, weakens accountability, and contributes to unnecessary spending. It further noted that local governments remain fiscally weak despite constitutional guarantees and called for stronger and more predictable financial transfers to the local level.

The World Bank suggested that future federal transfers should also reward provinces for improving tax collection, strengthening fiscal discipline, investing in education and healthcare, enhancing climate resilience, and empowering local governments. It said linking part of the transfers to measurable performance indicators could improve public service delivery while preserving provincial autonomy.