The Fiscal Implications of More Provinces

August 24, 2026 (MLN): A province can be administratively justified and still be fiscally unsustainable. That distinction is largely missing from Pakistan’s debate over new provinces.

The issue is not only whether smaller administrative units can improve governance and representation, but whether the country’s revenue base, expenditure structure and fiscal system can sustainably support a larger number of provincial governments.

With the 11th National Finance Commission now reviewing Pakistan’s federal-provincial fiscal framework, this is the right time to examine the economic implications.

The Fiscal Starting Point

Pakistan’s provinces already operate within a system heavily dependent on federal transfers. During July–March FY2025-26, provincial revenue stood at Rs. 7.22 trillion, including Rs. 5.63 trillion in federal transfers, while provincial own-source revenue was Rs. 1.14 trillion.

Federal transfers therefore accounted for roughly 78% of provincial revenue during the period. (Source: Pakistan Economic Survey 2025-26, Chapter 4: Fiscal Development, Finance Division),

Provincial own revenue nevertheless increased by 28.3%, while provincial tax revenue rose by 25.8% during the same period.

The improvement is encouraging, but the relative scale remains important: provinces continue to finance most of their resources through federal transfers. (Source: Pakistan Economic Survey 2025-26, Chapter 4: Fiscal Development, Finance Division).

This is the fiscal context in which proposals for additional provinces should be examined. Creating an administrative unit does not automatically create a corresponding tax base. A sustainable province needs sufficient economic activity from which revenue can be mobilized, alongside clearly defined expenditure responsibilities.

The NFC Question

The central fiscal issue is how additional provinces would fit into Pakistan’s system of fiscal federalism.

The 11th NFC was constituted in August 2025 under Article 160 of the Constitution. Its mandate covers the distribution of federal revenues between the federation and provinces, grants, borrowing powers and other aspects of intergovernmental fiscal relations.

The Commission has also established technical groups to examine specific aspects of the fiscal framework. (Source: Ministry of Finance, Government of Pakistan — National Finance Commission)

If the number of provinces were to increase, how would the existing fiscal-sharing architecture accommodate the change?

Would the provincial pool be distributed among a larger number of units? Would the horizontal distribution formula require adjustment? Should population remain the principal criterion, or should greater weight be given to revenue effort, expenditure needs, development gaps and economic capacity?

These questions are part of the fiscal viability of any administrative restructuring and should be addressed before, rather than after, such a change.

The issue is particularly relevant because Pakistan is already reviewing the incentives within its fiscal federalism.

A 2026 PIDE study argues for a more performance-oriented NFC framework, with greater emphasis on provincial revenue effort and fiscal responsibility. (Source: Pakistan Institute of Development Economics, “A Critical Path to Fiscal Federalism: Policy Imperatives for the NFC Award Remake,” 2026)

A New Province Needs an Economic Base

Fiscal viability ultimately depends on the economic structure of a proposed province. Formal employment, industrial and services activity, property transactions, agricultural income, natural resources and exports all influence the potential for sustainable own-source revenue.

This is already a structural challenge within Pakistan’s existing provinces.

PIDE’s recent analysis finds that own-source revenue remains a relatively small component of provincial resources and argues that the next NFC should strengthen incentives for provincial revenue mobilization. (Source: Pakistan Institute of Development Economics, “A Critical Path to Fiscal Federalism: Policy Imperatives for the NFC Award Remake,” 2026)

The principle is straightforward: administrative boundaries and fiscal capacity are not the same thing.

A proposed province with a narrow formal tax base and substantial development needs could remain dependent on federal transfers for many years. Another with a broader economic base could have greater potential for fiscal self-reliance.

Every serious proposal should therefore begin with a revenue-capacity assessment, not simply a population or administrative assessment.

The Recurring Expenditure Matters More

Establishing a new province would involve transition costs, including the reorganization of departments, assets, personnel and administrative functions. The larger concern, however, is the recurring expenditure that follows.

Government departments, personnel, service-delivery institutions and administrative infrastructure create continuing obligations, including pension liabilities.

The fiscal assessment therefore needs to distinguish between one-time establishment costs and permanent recurrent expenditure.

During July–March FY2025-26, provincial current expenditure was Rs. 4.47 trillion, compared with Rs. 1.61 trillion in development expenditure. (Source: Pakistan Economic Survey 2025-26, Chapter 4: Fiscal Development, Finance Division). 

These figures do not establish what a new province would cost; that would depend on how functions, employees, assets and institutions were redistributed. They do, however, demonstrate why recurring expenditure must be central to any fiscal assessment.

A Fiscal Viability Test

 As an economic analyst, I would suggest to the government and policymakers that no proposal for a new province should proceed without a transparent Provincial Fiscal Impact Statement.

The assessment should cover the proposed province’s own-source revenue potential, expected NFC transfers, recurrent expenditure, pension and other long-term liabilities, and development requirements. It should be prepared over 10- and 20-year horizons, with separate estimates for transition and recurring costs.

Three scenarios should be tested: a base case based on reasonable economic assumptions; a stress case reflecting weaker revenue growth and higher expenditure pressures; and a growth case incorporating stronger investment, formalization and revenue mobilization.

The assessment should also examine the effect on the wider federation. A proposed province cannot be evaluated in isolation when a significant share of its resources would come from the national divisible pool.

Fiscal Devolution Should Carry Fiscal Responsibility

Greater fiscal devolution should also be accompanied by greater fiscal responsibility.

If a new province receives substantial federal transfers, it should have clearly defined revenue responsibilities and measurable targets for improving own-source revenue. Its borrowing capacity, expenditure responsibilities and fiscal reporting requirements should be established from the outset.

The government should therefore consider linking any future provincial restructuring with a Fiscal Responsibility Framework covering revenue mobilization, expenditure controls, borrowing limits and transparent fiscal reporting.

More Provinces or Stronger Local Governments?

If the objective is to bring decision-making and public services closer to citizens, creating another full provincial administration is not necessarily the only option. Stronger fiscal decentralization to local governments could achieve some of the same objectives without creating an additional layer of provincial institutions.

PIDE’s 2026 research on fiscal devolution argues that Pakistan’s decentralization remains incomplete and calls for stronger and more predictable financial arrangements for local governments. (Source: Pakistan Institute of Development Economics, “Beyond the NFC Award: Pakistan’s Unfinished Devolution to Local Governments,” 2026)

The relevant economic question is therefore not simply whether Pakistan should have more provinces. It is which level of government can deliver better public services, stronger accountability and greater economic value from each rupee of public resources.

A Decision That Should Be Based on Numbers

The debate over new provinces does not need to be settled politically before it can be examined economically. What is needed is a transparent framework that allows policymakers to compare the fiscal consequences of alternative administrative structures.

The 11th NFC provides a timely institutional opportunity. Alongside its broader review of fiscal federalism, the government should require a Fiscal Viability Assessment for any serious proposal to create an additional province.

It should establish the proposed unit’s revenue capacity, expenditure obligations, expected federal transfers, long-term liabilities, development requirements and impact on the wider NFC framework.

The purpose would not be to support or oppose additional provinces. It would be to ensure that administrative reorganization is accompanied by fiscal planning and fiscal responsibility.

A province may be administratively desirable and still be fiscally weak. Conversely, a smaller province may prove economically viable if it has a sufficiently broad revenue base, appropriate expenditure responsibilities and the capacity to improve service delivery. The difference cannot be established through political arguments alone. It has to be demonstrated through numbers.

Pakistan may eventually redraw its provincial map. Before it does, policymakers should understand the fiscal map that would accompany it.

The question is not simply how many provinces Pakistan can create. It is how many fiscally sustainable provincial governments its economy can support.

 About Author:

The writer, Shahid Anwar, is an Economic Analyst and former Secretary General of the Federation of Pakistan Chambers of Commerce and Industry (FPCCI).

He also served as Senior Director Research at the Institute of Cost and Management Accountants of Pakistan (ICMAP), with 36 years of experience in business, trade and economic affairs. He provides advisory support on trade, investment and business partnerships.

Disclaimer:

The above analysis/article is for informational and educational purposes only.

Copyright Mettis Link News