The World Bank has recommended that Pakistan revise the National Finance Commission (NFC) Award formula to improve fiscal federalism, strengthen revenue collection and ensure a more equitable distribution of resources among the provinces.
The recommendations were presented in the World Bank’s report, Strengthening Fiscal Federalism in Pakistan, launched by lead economist Tobias Haque and Country Director Bolormaa Amgaabazar in Islamabad.
The report proposes revising both the vertical and horizontal resource-sharing formulas and adopting a fiscal equalisation model that allocates funds based on provinces’ expenditure needs and revenue-generating capacity rather than population alone. It also recommends assigning greater weight to poverty, backwardness and inverse population density in resource distribution.
The World Bank identified the fragmented General Sales Tax (GST) system on goods and services as a major challenge and suggested creating a unified tax collection mechanism, with revenues later distributed among provinces under an agreed formula. The proposal would require legislative and constitutional changes.
The report also recommends that provinces share the cost of the Benazir Income Support Programme, arguing that while the national registry should remain under the federal government, social protection is primarily a provincial responsibility.
According to the report, Pakistan’s fiscal federalism framework has contributed to a structural federal fiscal deficit by reducing federal revenues without a corresponding reduction in expenditure responsibilities. It also notes that provincial tax collection remains below its potential, particularly in agricultural income and property taxation.
The World Bank further called for clearer expenditure responsibilities between federal, provincial and local governments, improved incentives for provincial revenue collection, and conditional transfers linked to measurable performance in sectors such as education, health and climate resilience.
Officials said the report offers policy options based on international experience and aims to support reforms that improve public service delivery, strengthen fiscal sustainability and enhance economic governance across Pakistan.