The 11th National Finance Commission (NFC) meeting kicked off on Thursday at the Ministry of Finance in Islamabad, signalling a critical attempt to revamp Pakistan’s resource-sharing framework between the federal government and provinces.
Chaired by Finance Minister Muhammad Aurangzeb, the meeting brings together finance ministers and technical experts from all four provinces, alongside senior federal officials, to deliberate on a new NFC resource distribution formula aimed at balancing provincial autonomy with federal fiscal needs.
Planning Minister Ahsan Iqbal highlighted the urgent need to review both vertical and horizontal distribution of resources, stressing that a recalibrated formula is essential to strengthen Pakistan’s fiscal federalism and ensure sustainable economic growth. This meeting is particularly significant as it marks the first structured effort after previous NFC rounds—the eighth, ninth, and tenth commissions—ended without achieving a consensus award.
Key proposals for resource allocation
Under the current NFC Award, provinces receive 57.5% of the divisible pool, while the federal government takes 42.5%. Khyber Pakhtunkhwa (KP) enjoys an additional 1% share for counter-terrorism efforts. The new proposals, however, suggest major reforms:
The federal government’s upfront share may increase from 4.7% to 6% to cover national priorities.
Population weight in provincial allocations could fall from 82% to 60%.
Provinces may receive up to 20% weight based on revenue generation and fiscal performance.
These changes are projected to significantly alter provincial shares. Punjab could see a reduction of up to 10%, Sindh a minor decrease of 0.5%, KP’s allocation could rise from 1% to 2.6%, Balochistan’s share may increase to 3%, and Islamabad could be granted a 5% share for the first time under the NFC.
The federal government has argued that increased fiscal resources are critical to meet defense obligations, service external debt, fund major national infrastructure projects, and address security-related expenditures. Officials say that sustained federal capacity is also essential for disaster management, climate adaptation, and national security.
KP has finalized its demands ahead of the meeting, which include increasing the war-on-terror allocation from 1% to 3%, incorporating former FATA districts, revising gas excise duties, and modifying the round-the-clock levy framework. Sindh, Punjab, and Balochistan are expected to present their own priorities, making this a complex negotiation process aimed at balancing historical entitlements with emerging fiscal realities.
Three scenarios for horizontal distribution
The Ministry of Planning has shared a detailed working paper titled “Revisiting the NFC Award”, proposing three options for horizontal distribution within provinces:
Option 1: Population weight reduced to 78%, with modest increases for factors like forest cover and inverse population density.
Option 2: Population weight lowered to 68%, while revenue generation is assigned a 10% weight, inverse fertility 2%, and forest cover 2%.
Option 3: A more balanced approach, reducing population weight to 60%, revenue generation 20%, inverse fertility 5%, and forest cover 5%.
Under these scenarios, Punjab’s share could decline from 51.74% to as low as 41.89%, while KP, Balochistan, and Islamabad would see significant increases. Sindh’s share remains relatively stable but may be slightly adjusted depending on the adopted formula.
Structural fiscal challenges
Despite provincial shares of 57.5% of the divisible pool, overall provincial revenue generation remains weak at around 1% of GDP. This highlights structural gaps in taxation, including poor performance in services taxes, agriculture income tax, and property taxation. Experts say that addressing these gaps is crucial for sustainable provincial fiscal autonomy.
The meeting will finalize negotiation strategies, form technical working groups, and establish timelines for upcoming NFC sessions. A more balanced NFC resource distribution formula is expected to not only strengthen federal capacity but also enhance provincial autonomy, ensuring fairness in fiscal arrangements while supporting long-term economic stability.
