National Finance Commission Award (NFC) is Pakistan’s constitutional mechanism for dividing money between the federal government and the four provinces.
Under Article 160 of the 1973 Constitution, the President must constitute an NFC Award every 5 years.
The job of NFC is to decide:
How will the “Divisible Pool” of taxes must be split between Federal Govt and Provinces?
The “Divisible Pool” mainly include: Income tax, Sales tax, Federal excise duty, and Customs duty.
After the 18th Amendment 2010 and 7th NFC Award 2010, provinces also got more powers plus more money to handle those powers. The 7th NFC Award 2010 the important one.
This is the award that’s still in place and is most referenced with World Bank reports.
Key features of it include: Vertical Distribution inficste Federal Provinces changed from 56:44 to 42:58. Provinces now get 58% of divisible pool.
Horizontal Distribution indicate how that 58% is divided among provinces.
Initially it was only on “population”. 7th NFC added 4 more factors:
1. Population: 82% weight
2. Poverty/Backwardness: 10.3%
3. Revenue Collection/Generation: 5%
4. Inverse Population Density: 2.7%
Results indicate smaller provinces like Balochistan and KP got more share, in order to address grievances.
The World Bank regularly mention the NFC Award feature in its Pakistan reports like Pakistan Development Update, Public Expenditure Report and Fiscal Decentralization report. Here’s what they have to say: The World Bank called the 7th NFC Award a “historic step” because:
1. It gave provinces more fiscal autonomy to spend on health, education, social protection after 18th Amendment.
2. It used multiple criteria instead of just population, which helped reduce regional disparities.
“Vertical Imbalance” remain the World Bank’s main concern since 2010:
Provinces got 58% of money, but Federal Govt still has most of the big expenses such as, Debt servicing, defense, pensions, federal development. This leaves the federal govt with very little “fiscal space”.
Provinces don’t collect enough taxes on their own. They rely 90% on federal transfers. World Bank calls this “dependency” and demand that provinces should mobilize more provincial taxes like agriculture tax, property tax, sales tax on services.
In multiple reports the World Bank has suggested:
The 8th, 9th and 10th NFCs have been delayed. This creates uncertainity. It’s better to hold NFC Award regularly on perticular time.
Provinces must increase their Own-Source Revenue. Provinces need to tax agriculture and real estate as per rules.
Some percent of NFC money, a substantial amount should 7be linked to education and health for improvement in these two neglected sectors. For better results must work hard. It also added: As population number changes, the weights may need to be revised.
Question is why it matters in the year 2026?
As Pakistan deals with IMF programs and debt, the NFC formula is under debate again.
Federal Govt view is 42% is too little for them to run the country. While Provinces argue they need 58% to run schools and hospitals after 18th Amendment.
World Bank mentioned that the system needs to be more “efficient and equitable”. Need more provincial revenue and better intelligent spending.
The World Bank sees the NFC Award as necessary tool for fairness between provinces. It also warns that Pakistan needs to fix the imbalance where provinces have more money but the center has more bills, and where provinces fail to raise enough revenue of their own.
On 3rd July, read a news item of World Bank, published in, “Gulf News”, urging Pakistan to revamp NFC Award formula.
On July 2, 2026, the World Bank released a report called, “Strengthening Fiscal Federalism in Pakistan” and urged Pakistan to overhaul the National Finance Commission (NFC) Award.
Why the World Bank stresses the need to revamp NFC Award formula?
As per the World Bank’s report the current fiscal setup led to 3 major problems: 1. Structural federal fiscal deficit. After the 7th NFC Award and18th Amendment, the federal government’s share of revenues fell, but its spending didn’t drop. Federal ministries still exist in parallel to provincial ones, resulting in widening the deficit.
2. Weak revenue mobilisation. Provinces are heavily reliant on federal transfers. In FY 2024-25 Punjab generated only 16.8% of its resources from its own revenue. Provincial tax revenues are just 0.7-0.8% of GDP.
3. Poor public service. Despite devolution, service delivery hasn’t improved. Around 80% of provincial revenues go to administrative costs, with only 1% to environmental protection.
The World Bank also urged provinces to improve agricultural income tax collection and harmonise property related taxes through a common valuation system.
The recommendations were un-veiled on 2nd July 2026, in, The World Bank’s report
“Strengthening Fiscal Federalism in Pakistan, launched by Lead Economist Tobias Haque and Country Director Bolormma Amgaabazar in Islamabad.
“The structure of fiscal federalism shapes whether children attend functioning schools and whether health facilities are stocked with medicines”.
This quote is related straight to the real-world. It’s not just about budget numbers. It’s about services people need every day.
Haqu is linking, macro fiscal design, to micro service delivery reaching to a common man.
Fiscal federalism mean who collects money, who spends it, and by what rules.
In Pakistan, after the 18th Amendment, 7th NFC Award 2010, Provinces got 57.5% of the divisible pool for most social sector functions: education, health, social protection, but improvement not seen.
Federal govt kept debt servicing, defence, and pensions but still runs parallel programs.
So if the formula is imperfect, provinces either don’t have enough money, or have no incentive to spend it well. That directly hits schools and hospitals most.
The problem today faced is of Underfunded provinces, 80% of provincial spending goes to salaries/admin. Little left for medicine, textbooks, schools maintenance. They conclude there is
No revenue incentive. Punjab only generates 16.8% of its own resources. Other provinces even less. So they wait for federal transfers.
Population-based formula: 82% weight on population rewards bigger provinces, not better-performing ones. Poor districts, low density areas, climate-vulnerable regions get left behind. Unpredictable awards: NFC Awards are delayed. The eleventh NFC has been delayed by almost six months now. That makes planning for teachers, doctors, and drug supplies near to impossible.
The obvious result seen in the form of, Ghost schools, clinics without doctor’s out-of-stock medicines, and low human development despite devolution.
The World Bank’s proposal tries to fix this
A better structure could be:
1. Need-based and performance-based formula. More money to provinces with high poverty, low revenue capacity, but also to those improving literacy, health outcomes, tax collection. Good progress Award.
Schools get teachers, clinics get drugs. (Read medicines)
2. Align responsibilities with funds:
Stop federal-provincial duplication. If provinces own health and education, federal should fund national priorities like debt and infrastructure.
3. Provinces can hire staff, procure medicine, plan school years instead of multiple episodes of ad-hoc budgeting.
4. Challenges to face still are:
Political reality it is. Population weight protects smaller provinces. If try to change it will face resistance. Punjab argues it needs protection too.
Capacity gap also an important factor. Giving provinces more money is not a solution, better services is. Governance, corruption, and local govt capacity also matter a lot in this regard. The Bank itself calls for empowering local governments. The Federal government says after NFC transfers it has almost nothing left for its own duties, so it borrows. Just shifting more to provinces could worsen federal debt.
Bottom line evaluation is: Haque’s statement is accurate and powerful.
In Pakistan’s context, fiscal federalism is the delivery mechanism for basic rights. The current formula was good for political stability in 2010, but it’s now creating perverse incentives, reward size, not need or performance. That’s why schools lack teachers and clinics run out of even paracetamol.
The World Bank isn’t saying “cut provincial share”. It’s saying “change the way of sharing”, to needs, performance, and revenue effort. Hence, money actually reaches a classroom or a hospital bed.
It reframes NFC from a political bargaining tool to a development tool. The structural change is the call of the day.
Beside above, key recommendations from the World Bank also include: The report suggests revising both vertical and horizontal revenue-sharing: It says Change the formula criteria. Move away from population as the dominant factor. Right now population gets 82% weight. Adopt a fiscal equalisation model based on provinces, spending needs and revenue capacity.
Add performance-based distribution: provinces that do better in public service delivery, healthcare, education, poverty reduction, and tax collection should get a larger share.
One expert proposal mentioned: 60% population (based on 1998 census), 15% poverty & backwardness, 5% inverse population density, 15% Provincial Performance Index, 5% climate/sustainability. Align federal financing with constitutional responsibilities.
Reduce overlapping federal expenditures and consider function-specific deductions from the divisible pool for debt servicing, infrastructure, Broaden the tax base and improve domestic revenue mobilisation. Empower local governments with more predictable transfers. It is a must now. Hold regular and timely NFC Awards to make fiscal arrangements predictable. The most important is to create a permanent NFC Secretariat for data-driven research instead of ad-hoc commissions. The upcoming NFC Award is seen as an opportunity to “redesign incentives by rewarding provinces that improve revenue collection and service delivery while directing more resources to areas with greatest needs”.
