World Bank Urges Pakistan to Fix Fiscal Federalism

The World Bank released a new report on Wednesday calling for Pakistan to overhaul how financial resources are shared between the federal, provincial and local tiers of government, warning that the present fiscal structure is weakening macroeconomic stability and limiting public service delivery.

The report, titled Strengthening Fiscal Federalism in Pakistan, argues that Pakistan’s post-2010 devolution framework gave provinces greater powers and larger revenues but did not fully resolve the mismatch between who collects money, who spends it and who remains responsible for essential services. The findings place the country’s fiscal federalism model back at the centre of the national economic debate.

According to the report, the 18th Constitutional Amendment and the 7th National Finance Commission Award marked a historic shift by expanding provincial authority and increasing provincial revenue shares. However, the World Bank says that the federal government’s expenditure responsibilities did not fall at the same pace, leaving Islamabad with persistent fiscal pressure despite transferring greater resources to provinces.

World Bank Country Director for Pakistan Bolormaa Amgaabazar said the 2010 reforms brought government closer to citizens, but their full benefit has not yet been achieved. She stressed that Pakistan must better align financing with responsibilities, broaden the tax base and ensure that money reaches schools, clinics and local communities where public needs are most visible.

The report says provincial revenues rose from below four percent of GDP before the reforms to an average of 6.5 percent between 2010 and 2024. Yet the improvement did not translate into a proportionate strengthening of service delivery, partly because the current resource-sharing formula does not sufficiently reflect fiscal needs, poverty levels, local gaps or incentives for provinces to raise their own revenues.

A major concern highlighted in the assessment is the fragmented division of tax authority across five jurisdictions. The World Bank says this arrangement increases compliance costs, weakens revenue collection and leaves important sectors under-taxed, including agriculture, which contributes more than one-fifth of Pakistan’s GDP but remains lightly covered by the direct tax system.

The report also raises concerns over the composition of provincial spending. It notes that much of the increase after the 7th NFC Award went toward recurring and administrative expenses instead of health, education and development outcomes. In 2022-23, more than 80 percent of provincial expenditure was reportedly spent on recurring costs, showing how limited fiscal space remains for transformative public investment.

Local governments are another weak point in the current structure. Their share in total public expenditure has fallen from around 10 percent in 2005 to below five percent in 2024, reducing the financial role of the tier closest to citizens. This decline matters because municipal services, primary facilities, sanitation, local roads and neighbourhood-level delivery depend heavily on empowered local institutions.

For Pakistan’s economy, the report is important because fiscal imbalances affect debt, inflation management, development spending and the quality of public services. If the country fails to improve revenue mobilisation and spending efficiency, pressure on the federal budget could continue while provinces remain unable to deliver the scale of improvements expected after devolution.

The next step will depend on whether federal and provincial governments can turn the World Bank’s recommendations into a serious policy dialogue. Any reform of fiscal federalism will be politically sensitive, but the report signals that Pakistan’s long-term stability may depend on a fairer, clearer and more accountable system for sharing money and responsibilities across the state.