ISLAMABAD: The World Bank has urged Pakistan to undertake comprehensive reforms of the National Finance Commission (NFC) Award, warning that the country’s existing fiscal federalism framework has created a persistent structural imbalance in public finances and weakened fiscal sustainability.
In its report, “Strengthening Fiscal Federalism in Pakistan,” released during a media briefing on Wednesday, the World Bank said that although the 18th Constitutional Amendment and the 7th NFC Award represented a historic step toward decentralisation by transferring major service delivery responsibilities to the provinces, the accompanying financing and institutional arrangements have not evolved sufficiently to support the new governance structure.
The report noted that these structural weaknesses continue to undermine fiscal discipline, limit revenue mobilisation, and affect the quality of public services delivered to citizens. It recommended aligning expenditure responsibilities more closely with revenue generation, improving provincial tax collection, and strengthening the role of local governments to create a more balanced and sustainable fiscal system.
The World Bank acknowledged that the reverse grants proposed in the federal budget for fiscal year 2026-27 could partially reduce the existing vertical fiscal imbalance between the federation and the provinces. However, it stressed that broader institutional reforms would still be necessary to place Pakistan’s fiscal federalism framework on a sound and sustainable footing.
According to the report, the federal budget includes projected reverse grants of more than Rs546 billion from Punjab and Rs260 billion from Sindh. No such contributions, however, were reflected in the budget documents of Khyber Pakhtunkhwa and Balochistan.
Responding to a question during the media briefing, a World Bank official said that no reverse grant allocations had been identified in the budget documents of the two provinces. The federal government has estimated total grants and receipts from the provinces under Article 164 of the Constitution at Rs1.035 trillion for fiscal year 2026-27.
The World Bank maintained that without comprehensive reforms to Pakistan’s fiscal federalism framework, temporary fiscal measures alone would be insufficient to resolve the country’s long-standing structural imbalances or strengthen the efficiency and accountability of public finances.
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