Pakistan fiscal federalism has made “meaningful” progress since 2010, but major weaknesses remain in how money, taxation powers and responsibilities are divided between the federation, provinces and local governments, according to a new World Bank report.
The report, titled Strengthening Fiscal Federalism in Pakistan, says the country’s post-18th Amendment framework has improved provincial autonomy and made federal-provincial transfers more predictable. However, it also warns that Pakistan’s current fiscal structure still departs from international good practice in several important areas.
The World Bank identified four broad weaknesses: unclear expenditure responsibilities, fragmented taxation, shortcomings in the National Finance Commission framework and weak local government financing. Together, these issues have contributed to fiscal pressure at the federal level, underused provincial tax bases and limited improvement in service delivery.
Pakistan Fiscal Federalism Still Faces Structural Gaps
Pakistan’s fiscal federalism changed significantly after the 18th Constitutional Amendment, which devolved several functions to provinces and expanded their role in public service delivery. The 7th NFC Award also increased the provincial share in federal divisible pool revenues.
The World Bank said these changes gave provinces more predictable resources, but the assignment of functions remains incomplete. The federal government continues to operate in some constitutionally devolved areas, creating overlaps, waste and blurred accountability.
This is one of the central problems in Pakistan’s fiscal structure. If the federal government keeps spending on areas assigned to provinces while also transferring a large share of revenues to them, Islamabad’s fiscal space becomes squeezed. According to the report, the current framework reduced federal resources without a matching adjustment in expenditure responsibilities, helping drive a structural federal fiscal deficit.
The report noted that provincial revenues, including federal transfers, rose from less than 4 percent of GDP to an average of 6.5 percent over FY10 to FY24. However, federal expenditures did not fall proportionately. The estimated loss in federal revenues from transfers, at 1.9 percent of GDP, was roughly equivalent to the increase in federal primary deficits after devolution, at 1.7 percent of GDP.
NFC Award Has Not Delivered Full Equalisation
The World Bank also raised concerns over the NFC Award, Pakistan’s main mechanism for sharing federal revenues with provinces. While the NFC has protected provincial revenue shares and improved predictability, the report said it has not fully achieved fiscal equalisation or linked money to outcomes.
The existing formula does not create meaningful incentives for provinces to increase their own revenue collection or improve service delivery. It may also reduce incentives for federal revenue effort because a large share of collected revenue is automatically transferred to provinces.
The World Bank suggested that Pakistan could consider a transparent fiscal gap approach, under which transfers would be based on assessed expenditure needs and each province’s own revenue capacity. Such a system could help poorer or less developed regions receive support while still encouraging provinces to collect taxes efficiently.
The report also suggested that conditional transfers could be linked to measurable outcomes in devolved sectors such as education, health, climate adaptation, disaster preparedness and local government reform.
Tax Fragmentation Remains a Major Problem
The World Bank Pakistan report placed particular emphasis on tax fragmentation after the 18th Amendment. Provinces gained greater authority over the General Sales Tax on services, while the federal government retained GST on goods. This split created multiple tax jurisdictions with different definitions, rates, filing systems, withholding rules and refund mechanisms.
According to the report, this fragmentation raises compliance costs, discourages inter-provincial trade and creates opportunities for avoidance. It also weakens overall revenue performance at a time when Pakistan needs more domestic revenue to reduce fiscal pressure and fund public services.
The World Bank recommended GST harmonisation as a first priority. This could include common definitions, shared place-of-supply rules, a unified digital filing and payment system, and better data sharing between tax authorities. The report also said Pakistan could consider reunifying the GST base under centralised administration, with revenues distributed through an agreed formula.
Agricultural Income and Property Taxes Underused
The report also highlighted Pakistan’s weak use of major provincial tax bases. Agricultural income tax remains largely uncollected, even though agriculture accounts for more than 20 percent of GDP. Urban immovable property tax generates only 0.13 percent of GDP, far below comparator country norms of 0.3 to 0.6 percent.
These weaknesses matter because provinces now carry major spending responsibilities, especially in education, health, local services and development. If provinces rely mainly on federal transfers rather than building their own revenue base, accountability between taxpayers and provincial governments remains weak.
The World Bank recommended stronger implementation of provincial agricultural income tax regimes and a more coherent system for property taxation. It also suggested harmonising immovable property-related levies, including taxes, duties, fees and charges, through a common valuation framework.
Local Government Pakistan Remains Weak
A major theme of the report is that devolution has not meaningfully extended below the provincial tier. Article 140A of the Constitution requires provinces to establish local government systems and devolve political, administrative and financial responsibility to elected local representatives. In practice, the World Bank said local governments remain fiscally dependent, institutionally unstable and subordinate to provincial discretion.
Provincial Finance Commission awards are infrequent and non-binding, transfers are often ad hoc and local own-source revenue remains minimal. The report noted that local government’s share of total government spending fell from 10 percent in 2005 to 4.7 percent in 2024.
This weakens service delivery because many basic public services are local in nature. Municipal services, sanitation, local roads, water systems, waste management and neighbourhood-level planning depend on empowered local institutions. Without stable financing and clear responsibilities, service gaps persist even when provinces receive larger fiscal transfers.
Spending Has Not Fully Shifted Toward Services
The World Bank said fiscal federalism has had limited success in aligning spending with service delivery needs. Provinces have increased spending on basic services since the 18th Amendment, but the largest single increase has been in administrative expenses.
About 80 percent of total provincial expenditure goes to recurrent costs. The report said much of the incremental spending has been absorbed by general public services and administrative costs rather than education or health. It also warned that district allocations often follow historical patterns rather than poverty levels or service delivery gaps.
This means that more money has not automatically produced better outcomes. For devolution to work, transfers need to be accompanied by clearer responsibilities, performance tracking, transparent district allocations and stronger local delivery systems.
Reform Priorities Identified by the World Bank
The World Bank recommended several reforms to strengthen Pakistan fiscal federalism. These include reducing federal spending overlaps in devolved areas, reviewing whether vertical revenue sharing remains aligned with expenditure responsibilities and improving the NFC formula to better reflect need, revenue capacity and performance.
The report also called for GST harmonisation, stronger provincial tax mobilisation, better property valuation systems and clearer arrangements for sharing the fiscal burden of social protection.
On local government, it recommended objective and regularly updated Provincial Finance Commission systems, clearer expenditure assignments, stronger municipal revenue powers and meaningful participation of local representatives in fiscal decisions.
The report also urged Pakistan to revive fiscal federalism institutions. It noted that the Council of Common Interests has historically underperformed and that a successor NFC Award has been delayed for more than a decade and a half. Regular NFC revisions, it said, would lower the political stakes of each negotiation and create space for dialogue and experimentation.
Why the Report Matters
The findings come at a time when Pakistan is under pressure to strengthen public finances, raise domestic revenue and improve service delivery. The World Bank has also supported Pakistan’s broader fiscal reform agenda through financing aimed at improving revenue mobilisation, spending quality and data-driven service delivery.
The report does not argue against devolution. Rather, it says Pakistan’s fiscal federalism remains unfinished. Provinces have received greater resources and authority, but the supporting framework for taxation, accountability, local government and service delivery has not fully caught up.
The central message is that Pakistan does not simply need more revenue. It needs a clearer and more accountable system for deciding who raises money, who spends it and who is responsible when public services fail.
If implemented carefully, the recommended reforms could make Pakistan’s federal structure more balanced, improve provincial responsibility and strengthen local service delivery. Without them, the country risks continuing with a system in which resources move downward, responsibilities remain blurred and citizens see too little improvement in everyday public services.
Published in SouthAsianDesk, July 2, 2026
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