NFC and the crisis of fiscal trust

For the last fifteen years, the constitutionally mandated cycle of National Finance Commission (NFC) awards has not materialised.

Political disagreements between the federation and provinces, and among the provinces, repeatedly blocked negotiations and delivery. The 7th NFC Award, therefore, became a stopgap that turned into a long-running settlement. The backlog of unresolved trade-offs has hardened positions, leaving little room for ambiguity or quiet compromise in the ongoing (10th) NFC Award negotiations.

Begin with the federal government’s position. It is squeezed by debt servicing, persistent deficits and security and administrative obligations that cannot be compromised. In that setting, it looks for fiscal space in two places. One is the vertical split itself. The other is the composition of revenues, with greater reliance on instruments outside the divisible pool, such as the petroleum levy. Provinces read this as a narrowing of what is shareable. The federation reads it as necessary flexibility in a constrained macro environment. This difference in framing shapes the entire negotiation.

Once the federal position is placed on the table, provincial arguments fall into two broad categories: demand and cost.

Punjab and Sindh argue from demand. They carry the largest numbers of school-age children and the largest patient loads. They also face the most visible urban service pressures. Density compresses governance failures into daily headlines, such as the recent Gul Plaza tragedy in Karachi, and it increases the political cost of under-provision. From their perspective, a population-anchored formula remains the most defensible principle and the easiest to explain to citizens.

Khyber Pakhtunkhwa and Balochistan argue over cost. Delivery is structurally more expensive in areas with dispersed settlements, difficult terrain, and long distances. Roads cost more per kilometre. Policing costs more per capita. Health coverage costs more per patient. School access costs more per child. The 7th NFC did recognise cost disability through inverse population density, but at a modest weight. For these provinces, the formula should place greater weight on this parameter.

The problem becomes harder once special cases enter the room, because they introduce claims that are not easily resolved through weights and indicators.

KP has post-merger fiscal needs and legacy entitlement disputes. Even when technical groups are formed, negotiations become hostage to whether parties agree on baseline spending, outstanding liabilities and future fiscal needs. When a province believes it is owed large dues and the centre believes releases are on schedule, the conversation shifts from design to credibility. In such conditions, a formula cannot do the job because the parties are not starting from the same ledger.

Gilgit-Baltistan and Azad Jammu and Kashmir create a different type of complexity. They sit outside the formal NFC structure. They are not provinces in the constitutional sense, yet they carry province-like service-delivery responsibilities and face high unit costs because terrain and connectivity raise delivery costs. Islamabad already supports them through grants, subsidies and development allocations. What is often missed in NFC debates is that if GB and AJK were treated as provinces for fiscal purposes, they would also claim a share of the vertically split divisible pool from the four provinces, not merely ad-hoc federal support.

Even without these special cases, the negotiation would remain difficult because adherence and effort are contested on both sides. Provinces point to delays, adjustments and netting-off practices that reduce predictability. Islamabad points to weak provincial tax effort. Both arguments exist in the same room, and both need to be addressed if a new award is to be credible.

Provincial revenue mobilisation remains modest relative to the bases provinces control. Agricultural income taxation remains politically dormant. Property taxation is outdated and under-enforced. Sales tax on services is a provincial achievement, but it still needs deeper base broadening and compliance.

Local government finance presents another contradiction. Provinces demand from the federal government what they don’t want to share at the sub-national level. They retain significant discretion and control over transfers to cities and districts. Service delivery is experienced at the local level. However, provincial governments deprive local governments of predictable funding by failing to announce the Provincial Finance Awards, thereby undermining their effectiveness.

Bring these strands together and the reason for deadlock becomes clear. The same award is expected to serve four objectives simultaneously: federal fiscal manageability, population-driven service capacity, recognition of delivery costs, and predictable funding for special areas. No single adjustment can satisfy all four, especially when trust is limited and the constitutional schedule has been neglected for so long.

Still, attempts can be made to reduce suspicion and separate competing objectives.

The federal government should start by presenting the figures clearly and transparently. A transparent fiscal ledger within the federal budget would lessen political discord. Focus on only four numbers: the divisible pool base, major non-divisible instruments such as the petroleum levy, the provincial entitlement as specified by the award and the actual releases after adjustments, including the legal basis for any deductions. This approach does not limit federal flexibility but helps reduce suspicion and directs debate onto these consistent figures rather than conflicting claims.

If GB and AJK were provinces, they would have been claimants on the 57.5% share like others. Since their constitutional status prevents that route, we should create a small, pre-split carve-out for GB and AJK from the divisible pool before applying the vertical split. The federal government should continue to support GB and AJK through direct transfers and federal grants, but the four provinces should also share responsibility for these special areas. 

If a pre-split pool is not politically palatable, then a small, clearly defined contribution from the provincial share after the split would make support for GB and AJK a shared national commitment rather than a discretionary federal arrangement.

Finally, there should be a small ‘reward pot’ to encourage provinces to do the basics better, without taking away their autonomy. This fund would be financed from a tiny, fixed share of federal revenues that are not part of the NFC divisible pool, such as the petroleum levy, so it does not disturb the main sharing formula. The rules should be simple and transparent.

Provinces that widen their property tax net, improve collection of sales tax on services and regularly pass money to cities and districts through their Provincial Finance Commissions should receive more from this pot. The emphasis should be on expanding the tax base and improving systems, not on who collects the most, so smaller or poorer provinces are not punished for starting from a lower level.

None of the above steps requires a dramatic rewrite of the 7th NFC logic. The largest obstacle in 2025 is not the absence of a workable formula but the absence of a credible process. A federation of Pakistan’s size cannot run on one award for 15 years. The longer the delay, the more every adjustment becomes political and the more the formula becomes secondary. The next award matters, and so does restoring the credibility of the process, recognising the ground realities.

The writer heads SDPI, chairs the board of the National Disaster Risk Management Fund, and serves on the ADBI’s Advisory Board. He posts on LinkedIn @Abidsuleri

Disclaimer: The viewpoints expressed in this piece are the writer's own and don't necessarily reflect Geo.tv's editorial policy.

Originally published in The News