Islamabad Should Cut Provinces From Tax Revenue: World Bank

The World Bank has urged Pakistan to reduce unnecessary federal spending and overhaul its fiscal resource distribution system, saying a new National Finance Commission (NFC) Award is essential to improve the country’s economic management and strengthen public finances.

World Bank Country Director for Pakistan Bolorma Amgaabazar said Pakistan’s system for distributing financial resources between the federal and provincial governments needs to be reformed.

She stressed that a new NFC Award is critical for ensuring sustainable economic growth and improving fiscal coordination across the country.

She said local governments should be given greater authority and financial resources, while the federal and provincial governments need to reach a consensus on a fair distribution of revenues. According to the World Bank, the review of fiscal arrangements between the federation and provinces has remained pending for the past 15 years.

The World Bank noted that around 3.5 million people enter Pakistan’s labor force every year, underscoring the need for stronger public finances to support economic growth and job creation. It also advised the federal government to reduce unnecessary expenditures to ease fiscal pressures.

Amgaabazar said the federal government continues to transfer a significant share of its revenues to the provinces under the NFC framework but has not reduced its own expenditures accordingly.

As a result, the federal government is facing an annual fiscal shortfall of around Rs. 2 trillion, while the country’s debt burden continues to rise.

The World Bank also recommended reducing the provincial share in the divisible tax pool to create greater fiscal space for key national priorities. It called for improvements in provincial tax collection, particularly through more effective collection of agricultural income tax and property tax.

According to the World Bank, Pakistan continues to have one of the region’s lowest tax to GDP ratios. Urban property tax collections stand at just 0.13 percent of GDP, compared with 0.3 percent to 0.6 percent in many other countries. The lender also urged provincial governments to increase spending on health and education while expressing concern over rising administrative expenditures.

The World Bank said a more efficient fiscal framework, combined with stronger revenue collection and better expenditure management, would help strengthen Pakistan’s economy and improve the delivery of public services.