Pakistan’s NFC formula faces scrutiny as federal-provincial divide strains finances

Pakistan is entering a decisive phase in its debate over the National Finance Commission (NFC) Award, with senior officials and political leaders signaling that the current revenue-sharing formula is no longer sustainable for a financially distressed state.

In the latest episode of “On My Radar,” Kamran Khan said Pakistan cannot remain a viable economic state if the NFC continues in its existing structure. He argued that the issue has become so politically sensitive that even the country’s most powerful institutions have struggled to advance reforms.

Khan noted that the Pakistan Peoples Party (PPP) has already drawn a red line. PPP Chairman Bilawal Bhutto-Zardari this week declared that he would not accept any change to the NFC or the 18th Amendment, calling attempts to alter the constitutional arrangement “playing with fire.”

He has previously said that no one has the courage to reverse the 18th Amendment, which in 2010 transformed Pakistan’s governance structure and dramatically expanded provincial autonomy.

According to Khan, the 18th Amendment introduced a “magic formula” in the NFC Award that shook the foundations of Pakistan’s economy. Under that formula, if national revenue amounts to 100 rupees, provinces receive 57.5 rupees while the federal share is limited to 42.5 rupees. The arrangement has remained unchanged for 15 years.

He argued that this imbalance burdens the federal government with debt servicing, defense spending, disaster management, the federal development program, and the Benazir Income Support Program—all within its limited share. As a result, the federal government becomes indebted on the first day of every fiscal year.

A key constitutional barrier lies in Article 160 (3A), which guarantees that provincial shares in every new NFC Award cannot be reduced. Amending this protection would require a constitutional amendment—likely the proposed 28th Amendment, which officials say is now under consideration.

Some senior officials, according to Khan, believe restructuring the NFC through this amendment is essential for stabilizing the state.

There are early signs of movement. The Finance Ministry has convened an NFC meeting on December 4, to be chaired by Finance Minister Muhammad Aurangzeb. Punjab and Balochistan’s finance ministers will attend, along with the chief ministers of Sindh and Khyber Pakhtunkhwa.

Aurangzeb has said he is looking forward to a “national fiscal pact” between the federal government and the provinces.

Under the proposed 28th Amendment, the provincial share could fall from 57.5 percent to around 47.5 percent, implying at least a 10 percent cut. Another option under discussion is shifting certain federal expenditures—such as defense allocations and debt servicing—into the provinces’ share.

There are also reports that the federal government may take back health, education, and population welfare ministries from the provinces. Such reversals, officials believe, would ease federal fiscal pressure and free up funds for debt payments and development projects.

Khan argued that several nationwide governance issues stem from the 18th Amendment and the current NFC structure. He said that while provinces grew financially stronger, they did not devolve power downward as intended.

He highlighted Sindh as an example, where Article 140A—requiring provinces to empower local governments—remains largely unimplemented. Most municipal functions, including water and sewerage, waste management, building control, land use, transport, health, and education, remain under the provincial government.

This, Khan said, partly explains why the PPP is the strongest defender of the NFC and the 18th Amendment.

The federal government has also informed the International Monetary Fund that reforming the NFC will be a major challenge. As an initial step, Islamabad and the provinces may share responsibility for electricity losses and jointly fund the Benazir Income Support Program.

An unusual convergence is emerging: leaders from both the Pakistan Muslim League-Nawaz (PML-N) and Pakistan Tehreek-e-Insaf (PTI) reportedly agree that the NFC formula must be revised.

Khan said future provincial shares must also take into account how effectively provinces have used funds since 2010. The IMF governance and corruption diagnostic report recommended that federal authorities monitor and audit provincial expenditures, but Article 160 only governs revenue distribution—expenditure oversight remains outside federal jurisdiction.

These constitutional constraints, he argued, have intensified calls for new provinces, empowered local governments, or additional administrative units to address governance deficits.

The “change journey,” he said, has already begun in Punjab, where the provincial assembly recently passed a major resolution supporting deeper devolution. Most political parties—including PML-N, PPP, and PTI—publicly back empowered local governments and the creation of new provinces.

But in Sindh, the PPP continues to reject proposals for new provinces, portraying them as attempts to divide the province.

Khan concluded that the 18th Amendment, the NFC Award, and provincial centralization have disrupted Pakistan’s fiscal administration, making a new formula for distributing power and resources a matter of national survival.