Rethinking the NFC Award — debt and defence

There is no shortage of voices calling for new provinces. Others demand a wholesale rewriting of the resource-sharing formula. But is there a simpler, more pragmatic path forward?

Instead of dismantling the current framework of the 7th NFC Award, could we preserve it while introducing a more equitable arrangement — one where provinces also share in the burden of national debt servicing and defence expenditures?

The 7th NFC Award, enacted in 2010, boosted the provincial share of the divisible pool from 47.5% to 57.5%.

Its horizontal formula — 82% based on population, 10.3% on poverty and backwardness, 5% on revenue generation, and 2.7% on inverse population density — has, over time, driven the federal government into a colossal accumulated deficit of Rs44 trillion (from 2010 till 2024).

If left unchecked, this shortfall is projected to surge towards Rs200 trillion by 2035.

Red alert: The federal deficit trajectory is not merely troubling — it is unsustainable. Here's why the NFC Award is absolutely unsustainable: 

The federal budget for 2025–26 projects FBR tax revenues of Rs14 trillion and non-tax revenues of Rs5 trillion — bringing total federal revenues to Rs19 trillion.

From this amount, Rs8 trillion must be transferred to the provinces under the NFC Award, while Rs8.2 trillion is allocated to interest payments alone. After accounting for grants and subsidies, the federal government is effectively left with nothing.

Yet, from this depleted fiscal space, the federal government is still obligated to borrow funds for Defence Affairs (Rs2.5 trillion), Pensions (Rs1 trillion), Development Expenditure (Rs1.3 trillion), Civil Government Operations (Rs971 billion), and a Provision for Emergency (Rs389 billion). 

The arithmetic clearly demonstrates that the current NFC arrangement is fiscally unsustainable.

Red alert: The crux of the federal "squeeze" lies in debt servicing and defence.

Consideration 1: Debt servicing and defence are not federal luxuries. Consideration 2: The Rs8.2 trillion allocated for interest payments represents debt incurred and spent on behalf of all four provinces and the State of Pakistan as a whole — not merely on Islamabad.

Consideration 3: The Rs2.5 trillion earmarked for defence affairs is intended to safeguard Pakistan's 881,913 square kilometres of territory — not just the 906 square kilometres of Islamabad.

A simpler, more pragmatic path forward is clear: provinces must shoulder their fair share of debt and defence, in strict proportion to the very NFC formula from which they benefit.

Here's the "Proportional Sharing" model: Debt servicing and defence should be treated as the nation's first charge — deducted from total resources before the divisible pool is distributed. Under this approach, the federal government would carry 42.5% of the burden, while the provinces collectively assume 57.5%.

The provincial share would then be divided according to the existing NFC percentages: Punjab 51.74%, Sindh 24.55%, Khyber Pakhtunkhwa 14.62%, and Balochistan 9.09%. To be certain, under the "Proportional Sharing" model, provinces' net remains positive, allowing them to fund devolved responsibilities.

To be sure, this isn't about punishing provinces; it's about equity. It’s about keeping the NFC formula intact. It's about preserving hard-won gains from the 18th Amendment.

It's about avoiding the chaos of redrawing boundaries or formulas. It’s about incentivising national fiscal prudence. It’s about stabilising finances without the political theatre of a full NFC overhaul. It's about sharing the load, not reinventing the wheel.

Originally published in The News