The World Bank has released a comprehensive new report examining Pakistan's fiscal federalism framework, warning that structural weaknesses in revenue sharing and expenditure management continue to constrain the country's development potential. The report, titled "Strengthening Fiscal Federalism in Pakistan," was published on July 1, 2026.
The report notes that the landmark 2010 reforms, including the 18th Constitutional Amendment and the 7th National Finance Commission (NFC) Award, significantly devolved service delivery responsibilities to Pakistan's provinces and boosted their revenue capacity. Provincial revenues rose from less than 4 percent of GDP to an average of 6.5 percent over the 2010-2024 period.
However, the report identifies two main factors behind the widening federal fiscal deficit: increased transfers following the 7th NFC Award that were not matched by adjustments in federal expenditures, alongside stagnant overall revenue collection. Meanwhile, agricultural income remains largely untaxed despite the sector accounting for more than 20 percent of Pakistan's GDP.
The division of the tax base across five jurisdictions has raised compliance costs and constrained revenue, according to the report. Furthermore, much of the increase in provincial spending since the 7th NFC Award was absorbed by administrative expenses rather than education or health, with more than 80 percent of expenditure in fiscal year 2023 used to meet recurrent costs.
A particularly striking finding is that spending across districts has continued to track historical precedent rather than poverty levels or service delivery gaps. The share of total government spending undertaken by local governments has fallen from around 10 percent in 2005 to under 5 percent in 2024, reversing the decentralization goals of the constitutional reforms.
"The structure of fiscal federalism shapes whether children attend functioning schools and whether health facilities are stocked with medicines," said Tobias Haque, World Bank Lead Country Economist and lead author of the report. He noted that a planned new NFC Award offers an important opportunity to recalibrate incentives — rewarding provinces that strengthen their own revenue effort and improve service delivery, while directing more resources to where needs are greatest.
The report presents a menu of reform options that could be pursued through a new NFC Award and broader measures within Pakistan's existing constitutional framework. These include aligning federal financing with responsibilities, strengthening domestic revenue mobilization, empowering local governments with more predictable transfers, and improving coordination across different levels of government.
Pakistan has been a member of the World Bank since 1950, with the institution providing over $51.2 billion in assistance to date. The current portfolio comprises 52 operations with a total commitment of approximately $16.9 billion. The International Finance Corporation (IFC), the World Bank's private sector arm, has invested and mobilized approximately $22 billion in Pakistan since 1959, with a current commitment standing at $1.6 billion across 56 projects.
Sources: worldbank.org
