World Bank urges fiscal reforms in Pakistan

July 01, 2026 (MLN): Pakistan needs to overhaul its fiscal federalism framework by improving coordination between the federal, provincial and local governments to safeguard macroeconomic stability, strengthen public service delivery and meet the needs of its expanding population, according to the World Bank's latest report, Strengthening Fiscal Federalism in Pakistan.

The report noted that the 18th Constitutional Amendment and the 7th National Finance Commission (NFC) Award, introduced in 2010, significantly reshaped Pakistan's fiscal landscape by transferring major service delivery responsibilities to provinces and increasing their share of financial resources, according to APP.

Despite these reforms, the World Bank said persistent structural shortcomings continue to undermine fiscal discipline, weaken revenue generation and limit improvements in essential public services.

According to the report, the federal fiscal deficit has widened largely because transfers to provinces increased under the 7th NFC Award without a corresponding reduction in federal expenditures, while overall revenue collection has remained stagnant.

Provincial revenues increased from below 4% of GDP before the reforms to an average of 6.5% of GDP during 2010-2024. However, federal spending did not adjust in line with the new fiscal arrangement, adding pressure to public finances.

The report also highlighted weaknesses in Pakistan's tax structure, noting that tax administration is fragmented across five jurisdictions, raising compliance costs and constraining revenue growth. It further pointed out that agricultural income, despite accounting for more than one-fifth of the country's GDP, remains largely outside the tax net.

Launching the report, World Bank Country Director for Pakistan Bolormaa Amgaabazar said Pakistan's devolution reforms represented a historic milestone but had yet to fully achieve their intended objectives.

She stressed that aligning financial resources with government responsibilities, expanding the tax base and ensuring greater funding reaches schools, healthcare facilities and local communities would be critical for improving service delivery and maintaining long-term economic stability.

The report further observed that public spending has not been adequately aligned with development needs, as the existing resource distribution formula among provinces neither sufficiently reflects fiscal requirements nor encourages stronger provincial revenue collection and better service delivery.

It noted that much of the additional provincial spending since the implementation of the 7th NFC Award has been absorbed by administrative and recurrent expenditures instead of priority sectors such as education and health. In FY2023, more than 80% of provincial spending was allocated to recurring expenses.

In addition, spending patterns across districts continue to be driven largely by historical allocations rather than indicators such as poverty levels or service delivery gaps, while the share of total public expenditure managed by local governments has declined from around 10% in 2005 to below 5% in 2024.

World Bank Lead Country Economist and the report's lead author, Tobias Haque, said the design of Pakistan's fiscal federalism directly affects the quality of education, healthcare and other essential public services available to citizens.

He said the upcoming NFC Award presents an opportunity to redesign incentives by rewarding provinces that enhance revenue collection and improve public service outcomes, while directing greater financial resources toward areas with the greatest development needs.

Rather than recommending a single course of action, the report outlined several policy options that could be implemented within Pakistan's existing constitutional framework through a new NFC Award.

These include better alignment of federal expenditures with devolved responsibilities, stronger domestic revenue mobilisation, more predictable fiscal transfers to local governments and enhanced coordination across all tiers of government.

The World Bank also underscored the importance of holding NFC Awards on a regular and timely basis, saying predictable revisions would ease negotiations, strengthen policy coordination and support long-term fiscal sustainability.

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