Pakistan weighs changes to NFC Award under IMF pressure

Amid mounting pressure from the International Monetary Fund (IMF), the federal government is actively considering significant changes to Pakistan’s National Finance Commission (NFC) Award to reduce its budget deficit and ease the national debt burden, sources close to the matter revealed to Nukta.

According to the sources, the IMF has linked further financial support to concrete fiscal reforms, a central element of which is a potential revision of the existing revenue-sharing formula between the federation and the provinces.

“The federal government’s current fiscal space is shrinking rapidly. The IMF sees the NFC formula as outdated and an obstacle to meaningful deficit reduction,” said an economist.

Currently, provinces receive 57.5% of divisible pool revenues under the 7th NFC Award. However, the federal government is now reportedly exploring the option to reduce this share, either through consensus with provinces or, if necessary, via a constitutional amendment—potentially the 27th—to unilaterally alter the distribution mechanism.

Sources say that a proposal is being examined to shift from a population-based quota (currently 82%) to a more performance-driven model. The new criteria would take into account population, poverty levels, and tax collection efficiency.

“Moving away from a purely population-based model would incentivize better tax governance and spending efficiency at the provincial level,” said an analyst. “But achieving consensus will be politically difficult.”

Key programs like the Benazir Income Support Program (BISP) may also be transferred to provincial control under the new NFC, aligning with the broader objective of fiscal decentralization. In addition, the Annual Development Plan (ADP) may be devolved to provinces, further reducing federal expenditure commitments.

Finance Minister Muhammad Aurangzeb recently chaired a crucial meeting on the formation of a new NFC. During the session, a detailed review of the 7th NFC Award’s fiscal performance, tax contributions by provinces, and BISP funding data was conducted. Officials were reportedly directed to prepare working papers for future discussions.

While the first NFC meeting between the federation and provinces was initially expected in August, it has now been postponed to September or October. Notably, the Khyber Pakhtunkhwa government has written to Prime Minister Shehbaz Sharif, urging the federal government to expedite the meeting.

“The center may find it challenging to negotiate a lower provincial share without severe political blowback,” warned an analyst. “The provinces, already under financial pressure, will resist any unilateral move.”

Despite the delay, the government remains committed to pushing these reforms forward. Once the final proposals are approved by the prime minister, formal consultations with the provinces will begin.

In the meantime, provincial disbursements for the first quarter of the current fiscal year have continued under the existing NFC formula.