NFC transfers hit record high, putting pressure on Pakistan’s federal budget

Federal transfers to Pakistan’s provinces under the National Finance Commission (NFC) Award have risen sharply over the past four years, strengthening provincial finances but increasing pressure on the federal government as it struggles to contain budget deficits and meet commitments under its International Monetary Fund (IMF) program.

Official fiscal data show that transfers from the federal divisible tax pool have increased steadily since FY2022, driven by higher tax collections and inflation-led growth in federal revenues.

Under the 7th NFC Award, provinces collectively receive about 57.5% of the divisible tax pool, leaving the federal government with the remainder despite bearing the bulk of debt servicing, defense spending and federal administrative costs.

The NFC distribution formula allocates resources based on population (82%), poverty and backwardness (10.3%), revenue generation (5%), and inverse population density (2.7%).

Punjab, Pakistan’s largest province, received PKR 1.79 trillion in FY2022. Its share rose to PKR 3.33 trillion in FY2025, while transfers reached PKR 2.78 trillion during the first nine months of FY2026.

Sindh’s allocation increased from PKR 902 billion in FY2022 to PKR 1.70 trillion in FY2025. During the first nine months of FY2026, the province received PKR 1.40 trillion.

Khyber Pakhtunkhwa received PKR 596 billion in FY2022, with transfers rising to PKR 1.10 trillion in FY2025. The province received PKR 912 billion during the first nine months of FY2026.

Balochistan recorded the fastest growth in percentage terms. Transfers to the province increased from PKR 305 billion in FY2022 to PKR 720 billion in FY2025, while allocations reached PKR 536 billion during the first nine months of FY2026.

The steady increase in NFC transfers has significantly enhanced provincial fiscal capacity, enabling greater spending on development projects, health care, education and social services.

However, economists say the growing provincial share has become a major constraint on the federal government’s finances, limiting Islamabad’s fiscal flexibility at a time when debt servicing consumes a substantial portion of federal revenues.

“NFC transfers are constitutionally protected and have provided provinces with unprecedented fiscal resources, but they have also become one of the biggest constraints on federal finances,” an economist said.

“The federal government is left to finance debt servicing, defense and other national obligations with a shrinking share of revenues, intensifying debate over expenditure responsibilities and long-term fiscal sustainability.”

Analysts note that while federal tax collection has grown significantly in recent years, a large portion of additional revenue is automatically transferred to provinces under the NFC formula. As a result, the federal government has increasingly relied on borrowing and new taxation measures to bridge budget gaps.

The issue is expected to feature prominently in discussions on fiscal reforms as policymakers seek to improve coordination between federal and provincial governments while preserving the constitutional principles of fiscal devolution.

Budget estimates indicate NFC transfers will reach record levels in FY2026, reflecting stronger revenue collection by the Federal Board of Revenue and continued growth in the divisible tax pool. While the trend is expected to further strengthen provincial finances, it is also likely to add to fiscal pressures on the federal government.