The World Bank has recommended reforms in Pakistan’s NFC Award, warning that weaknesses in the federal financial system continue to affect revenue generation, fiscal discipline and public service delivery.
In its report on strengthening fiscal federalism for development, the World Bank said Pakistan should reform the NFC Award and improve coordination between the federation and provinces.
The report recommended that the federation and provinces jointly bear the financial burden of key national projects and sectors, including debt repayment, infrastructure, social protection, security and environmental protection.
Performance-based incentives proposed
The World Bank said the NFC Award and additional incentives should be linked to performance, transparency, financial discipline and better service delivery.
It added that stronger cooperation between federal and provincial governments is essential for progress in major national areas.
18th Amendment increased provincial role
According to the report, the 18th Constitutional Amendment and the NFC Award increased the responsibilities and revenue of provinces.
Provincial revenue rose from 4% to 6.5% between 2010 and 2024. However, the report noted that federal expenditure did not decline, while weaknesses in the national fiscal system remain.
The World Bank said local government expenditure has fallen to only 5%, down from 10%. It warned that challenges continue in financial discipline, revenue collection and the delivery of public services, including health and education.
Most additional funds on current expenses
According to the report, 80% of the additional funds available to provinces are spent on ongoing expenses such as salaries and pensions.
The World Bank said this limits fiscal space for development and public welfare projects.
The report emphasized effective implementation of agricultural income tax and a uniform property tax system. It said agriculture contributes more than 20% to Pakistan’s GDP, but a large part of the sector remains outside the tax net.
Pakistan’s tax-to-GDP ratio insufficient
The World Bank declared Pakistan’s tax-to-GDP ratio of 9.9% insufficient and among the lowest in the region.
The report compared Pakistan with Ethiopia at 10.2%, Indonesia at 10.3%, Egypt and Mexico at 12.6%, Vietnam at 14.3%, India at 16.8% and Turkey at 17.5%.
The World Bank also stressed the need to harmonize Pakistan’s tax system. The report specifically called for harmonization of the GST system to improve revenue collection and reduce gaps in the fiscal framework.
