Unfinished business

THE landmark 18th Amendment and seventh NFC Award radically reshaped Pakistan’s fiscal federalism by transferring greater powers and financial resources to the provinces so that authority would eventually flow closer to citizens through local governments.

Sixteen years later, a new World Bank report, Strengthening Fiscal Federalism in Pakistan, has concluded that while the constitutional framework remains sound, its implementation has been patchy and ineffective. The federal government continues to run deficits because transfers to the provinces increased without a corresponding reduction in federal expenditure, or increase in the tax-to-GDP ratio. Islamabad still spends in devolved sectors, creating duplication and weakening fiscal discipline.

The provinces themselves have failed to expand their own tax bases. And despite receiving larger fiscal transfers, they have devoted much of the additional resources to salaries and an expanding bureaucracy rather than meaningfully improving public services. More than four-fifths of provincial expenditure remains tied to recurrent spending, leaving limited room for development. LGs have also steadily weakened. The report notes that fiscal allocations continue to reflect historical patterns instead of current poverty levels and service delivery needs.

While these findings underline weaknesses in our fiscal architecture, they should not be taken as evidence that devolution itself has failed. The report shows that provincial governments often spend inefficiently. It does not establish that the centre would have delivered better outcomes had these functions remained centralised. The report suggests devolution remains incomplete, with federal overlap in devolved sectors, inadequate institutional restructuring, weak intergovernmental coordination and blurred accountability undermining its effectiveness.

But it gives limited attention to how provincial performance has evolved over the years. A more detailed review could have revealed whether changes in provincial leadership or policy affected service delivery. Such analysis would have strengthened its conclusions. Provincial governments have emerged as the principal centres of civilian political authority, and their incentives are often driven by political survival rather than service delivery.

They have expanded administrative structures and recurrent expenditure while keeping LGs financially and politically weak. These are failures of governance rather than of devolution. The response, therefore, should not be to dilute provincial autonomy but to complete the unfinished process of devolution.

The World Bank rightly advises boosting provincial revenue mobilisation, rationalising federal expenditure, reforming the NFC formula, ensuring regular awards, empowering LGs through predictable fiscal transfers, and improving coordination across all tiers of government. Ultimately, stronger LGs and clearer accountability are essential if fiscal federalism is to deliver better public services.

Published in Dawn, July 3rd, 2026 ...