The World Bank has proposed a major overhaul of Pakistan’s National Finance Commission Award, urging the government to replace the population-based resource distribution formula with one focused on provincial spending needs and revenue capacity. The recommendation appeared in the World Bank report titled Strengthening Fiscal Federalism in Pakistan, released on Wednesday.
The report called for adopting a fiscal equalization model to improve efficiency and reduce regional disparities. It advised reducing the weight of population in the NFC formula and allocating funds based on expenditure requirements and revenue generation ability. The World Bank noted that countries such as Australia, Canada, China, Nigeria, and South Africa already use similar models.
The lender also recommended unifying the fragmented General Sales Tax system through a single nationwide collection mechanism, with revenues distributed among provinces under an agreed formula. It said this change would require legislative action.
The report linked Pakistan’s fiscal structure to a persistent federal budget deficit. It highlighted that while provincial revenues rose to an average of 6.5 percent of GDP between FY2010 and FY2024, federal spending continued to increase. The World Bank flagged weak provincial tax collection and identified agricultural income tax and urban property tax as underutilised sources.
On social protection, it advised retaining the Benazir Income Support Programme registry at the federal level with provincial cost sharing. The report also criticised overlaps under the 18th Constitutional Amendment and called for stronger local government financing.
