The National Finance Commission (NFC) Award is the backbone of Pakistan’s fiscal federalism and a constitutional mechanism designed to ensure equitable distribution of financial resources between the federation and the provinces. Under Article 160 of the Constitution, the NFC Award determines how revenues from the federal divisible pool are shared vertically between the center and the provinces, and horizontally among the provinces themselves. In a country marked by regional disparities, uneven development, and structural fiscal weaknesses, the NFC Award plays a decisive role in shaping economic stability, political cohesion, and service delivery outcomes.

At the time of independence, Pakistan inherited a highly centralized fiscal system in which the federal government retained most revenue-raising powers while provinces remained fiscally dependent. Early NFC Awards relied almost entirely on population as the sole criterion for revenue distribution. While simple, this approach failed to account for variations in poverty levels, development gaps, service delivery costs, and geographic challenges. Smaller and less-developed provinces, particularly Balochistan and Khyber Pakhtunkhwa, consistently argued that population-based transfers entrenched inequities rather than correcting them.

A major shift occurred with the announcement of the 7th NFC Award in 2010, implemented alongside the 18th Constitutional Amendment. Under this award, the provincial share in the divisible pool increased from 46.25 percent to 57.5 percent, leaving the federal government with 42.5 percent. For the first time, a multi-criteria formula was adopted for horizontal distribution: population received a weight of 82 percent, poverty and backwardness 10.3 percent, revenue effort 5 percent, and inverse population density 2.7 percent. This reform was widely regarded as a step toward fiscal equity and strengthened provincial autonomy.

As a result, provinces today receive the majority share of national tax revenues. In FY2025–26, NFC transfers to provinces are estimated at approximately Rs8.2 trillion, with Punjab receiving around Rs4.07 trillion, Sindh Rs2.04 trillion, Khyber Pakhtunkhwa Rs1.34 trillion, and Balochistan about Rs743 billion. These transfers constitute over half of the total revenues collected by the Federal Board of Revenue, underscoring the centrality of the NFC framework in Pakistan’s public finance system.

Despite its progressive intent, the post-7th NFC arrangement has exposed serious structural challenges. Vertically, the federal government faces growing fiscal stress and mounting liabilities. While its share of revenues has declined, its expenditure responsibilities remain extensive, including debt servicing, defense, internal security, pensions, subsidies, and major infrastructure projects. Debt servicing alone consumes more than half of federal revenues, constraining development spending and forcing repeated borrowing, which exacerbates fiscal imbalances. With Pakistan’s tax-to-GDP ratio stagnating around 9–10 percent—among the lowest in comparable economies—the federal government’s fiscal space is alarmingly limited.

At the provincial level, increased transfers have not been matched by commensurate improvements in revenue mobilization or expenditure efficiency. Provinces possess constitutional authority over key tax bases such as agriculture income tax, property tax, and services, yet own-source revenues remain modest. Heavy reliance on NFC transfers has, in some cases, weakened incentives for tax reform, fiscal discipline, and prudent financial management. Administrative capacity varies across provinces, meaning not all are equally able to use funds effectively, leading to inefficiencies and uneven development outcomes.

Another critical concern is the prolonged delay in announcing a new NFC Award. Constitutionally, the NFC is required to be reconstituted every five years, yet Pakistan continues to operate under the 7th NFC Award more than fifteen years after its introduction. This delay has prevented the incorporation of updated population data, evolving poverty profiles, climate vulnerability, urbanization pressures, and the fiscal implications of newly merged districts. The absence of timely revision has reduced the relevance and credibility of the NFC framework in addressing contemporary challenges.

Intergovernmental trust deficits further complicate the process. Smaller provinces, especially Balochistan and Khyber Pakhtunkhwa, fear that any revision may dilute their shares, while the federal government seeks relief from mounting fiscal pressures. These provinces face structurally higher costs of governance due to sparse populations, difficult terrain, security challenges, weak infrastructure, and limited economic bases. A purely population-driven or revenue-effort-based approach risks deepening historical inequities rather than correcting them. Any revised NFC formula must therefore retain and strengthen compensatory indicators such as poverty and backwardness, inverse population density, and cost of service delivery. Special-purpose transfers and guaranteed minimum shares should be institutionalized to protect smaller provinces from fiscal shocks or arbitrary reductions. Addressing these concerns transparently is essential not only for fiscal fairness but also for national cohesion and political stability.

Moreover, a strong and enforceable NFC Award not only ensures fair fiscal distribution but also strengthens the federation. When provinces receive resources in a timely and transparent manner, it builds trust between the center and the provinces, reinforces federal stability, and enables effective implementation of national development projects. A robust NFC mechanism is a key instrument for balancing center–province relations, reducing political tensions, and promoting national unity.

Looking forward, meaningful reform of the NFC framework is unavoidable. A new NFC Award must be constituted without further delay, grounded in transparent data and inclusive dialogue. While population will remain an important indicator, greater weight should be accorded to poverty levels, human development outcomes, revenue effort, climate exposure, and cost of service delivery. Such a balanced formula would promote equity while encouraging provinces to improve governance and fiscal performance.

Equally important is renewed focus on domestic revenue mobilization. Provinces must demonstrate seriousness in taxing underutilized sectors, particularly agriculture, real estate, and high-income services, while the federal government should support harmonization of tax systems, data sharing, and capacity building. Improved expenditure efficiency, strengthened public financial management, and outcome-based budgeting are essential to ensure that increased transfers translate into tangible improvements in education, health, and social protection.

Ultimately, the NFC Award must evolve from being a contested revenue-sharing arrangement into a framework that promotes national cohesion, fiscal responsibility, federation strength, and sustainable development. A transparent, enforceable, and strong NFC system can reduce center–province tensions, improve macroeconomic management, and restore investor confidence. Without reform, continued delays and ad-hoc adjustments risk deepening mistrust, weakening service delivery, and perpetuating regional inequalities. Pakistan’s economic challenges—including debt sustainability, climate shocks, urban pressures, and human capital deficits—cannot be addressed by either the federation or provinces alone. They require a cooperative fiscal compact grounded in mutual accountability, data-driven decision-making, and shared ownership of reforms. A reformed NFC Award, aligned with contemporary economic realities and the legitimate concerns of smaller provinces, can serve as a powerful instrument for inclusive growth, stronger governance, a more resilient federation, and sustainable national development.

Dr Alamdar Hussain Malik
Advisor Veterinary Sciences
University of Veterinary and Animal Sciences, Swat
Former Financial Adviser Finance Division
Government of Pakistan