Hafeez Ahmed Khan
Pakistan’s fiscal architecture has once again come under scrutiny. A recent media report has brought to the fore a view that is gaining steady traction within policymaking circles: that the NFC Award’s vertical resource-sharing formula between the Centre and the provinces has grown unsustainable and must be revised to reflect the fiscal realities confronting the federal government. Proponents of revision argue that the current arrangement leaves the Centre with insufficient resources to meet its core obligations, particularly defence expenditure and debt-servicing. The argument is not without merit. But it is also incomplete. For while the debate over vertical distribution commands attention, an arguably more damaging dimension of the NFC framework continues to escape the scrutiny it deserves.
The fiscal framework at the heart of this debate was established under the seventh NFC Award, which followed the passage of the 18th Amendment. That landmark constitutional change raised the provincial share of the divisible tax pool to 57.5 percent while reducing the federal share to 42.5 percent. Crucially, the Award also introduced a protective clause: no future NFC Award could reduce the provincial share below its existing level. Any alteration to the vertical distribution, therefore, is constitutionally contingent upon a formal amendment. This is no minor procedural hurdle. It requires political consensus of the highest order, and the provinces, understandably sensitive to any reduction in their fiscal share, have so far been unable to agree to such a change.
A workaround emerged during recent budget-making sessions. The provinces voluntarily surrendered Rs1.035 trillion to the Centre from their share of the divisible tax pool. This temporary accommodation bought breathing room but resolved nothing structurally. Influential quarters within the government and economic circles remain convinced that the underlying imbalance will eventually compel a constitutional amendment. The question is whether that conviction is based on a complete reading of the problem or only a partial one.
What is frequently overlooked in this debate is that the existing formula rested on specific assumptions at the time of its design. The expectation was that the economy would grow at a pace sufficient to expand the overall fiscal pie, generating enough revenue to satisfy both federal and provincial needs without creating a zero-sum conflict. Simultaneously, the devolution of subjects such as education and health to the provinces, as mandated by the 18th Amendment, was expected to be matched by the abolition of corresponding federal ministries. The logic was straightforward: if provinces were to bear new responsibilities, the federal government would shed the corresponding expenditure burden. Neither expectation materialised in practice.
Economic growth remained well below projections for most of the period following the Award. More critically, many of the devolved ministries continued to operate at the Centre, forcing the federal government to finance responsibilities that were constitutionally expected to have disappeared. Had these foundational assumptions held, the fiscal pressures now cited as evidence of the vertical formula’s failure might have been considerably less severe. The problem, in other words, is not solely the formula. It is also the failure to implement the broader constitutional vision that gave the formula its original logic.
Yet even granting all of this, the focus on vertical distribution misses what is arguably the more urgent structural flaw in Pakistan’s NFC framework. The horizontal formula, which governs how resources are distributed among the four provinces, deserves far greater scrutiny than it currently receives.
Under the existing horizontal arrangement, population accounts for a staggering 82 percent of the weight used to allocate resources among provinces. No other variable comes close to matching this dominance. The consequences of this design are deeply troubling. When population size is the primary determinant of resource allocation, the formula does not merely reflect demographic reality. It actively rewards rapid population growth. Provinces that expand their populations at faster rates receive larger fiscal transfers. The incentive structure embedded in this formula runs directly counter to Pakistan’s most urgent long-term interest: bringing its runaway population growth under control.
Pakistan’s population is currently expanding at an annual rate of approximately 2.55 percent. This is not a statistic to be noted in passing. It is a figure that defines the country’s trajectory. At this rate of growth, Pakistan requires GDP expansion of at least six percent every year simply to keep pace with the demands generated by a rapidly growing population. Given the country’s current productive capacity, its infrastructure constraints, its energy challenges, and the volatility of its external environment, sustaining that pace of economic growth is unlikely. The result is a widening gap between population and economic capacity, a gap that is already producing visible consequences.
Hundreds of thousands of young people enter the labour force every year. The economy lacks the structural capacity to absorb them. Unemployment remains pervasive. Social pressures continue to mount. And Pakistan is experiencing an accelerating brain drain, with many of its most talented and educated citizens choosing to build their futures in other countries rather than remain and contribute at home. This is not a crisis on the horizon. It is a crisis already unfolding.
When population remains the dominant factor not only in resource allocation through the NFC but also in federal job quotas, parliamentary seat distribution, and other critical governance structures, the incentive for effective population management inevitably weakens. Why invest seriously in family planning when a larger population translates directly into a larger fiscal transfer and a greater share of national representation?
Reforming the horizontal distribution formula deserves to be treated as a national priority, not a secondary concern. Critically, unlike changes to the federation-province resource split, revising the horizontal formula does not require a constitutional amendment. It requires consensus among the federating units through the NFC process itself. That is a political challenge, but it is a surmountable one.
Given the formidable constitutional and political obstacles involved in altering the vertical formula, building agreement around a more balanced horizontal formula may be both the more achievable reform and the more consequential one. Assigning greater weight to indicators such as development backwardness, poverty levels, revenue generation, and human development outcomes would create a more rational and forward-looking basis for resource distribution. It would align fiscal incentives with the country’s stated development objectives rather than working against them. This reform must be urgently pursued.
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