Rethinking the NFC Award

Every few years, the debate over Pakistan's National Finance Commission (NFC) Award resurfaces – and rightly so. The NFC Award is not just a matter of fiscal arithmetic; it is a cornerstone of federalism in Pakistan, serving as the primary instrument for distributing financial resources between the federation and provinces. Its objective is to promote equity, enable local development and hold the federation together.

The constitution requires the NFC to be reconstituted at least once every five years. The commission includes the federal finance minister, the finance ministers of all four provinces, and additional members appointed by the president in consultation with provincial governors. Its core mandate is to recommend how the net proceeds of federal taxes should be shared vertically (between the federation and the provinces) and horizontally (among the provinces themselves). The NFC also advises on grants-in-aid and measures to strengthen provincial fiscal capacity.

An important amendment came in 2010 through the 18th Amendment, which added Clause 3A to Article 160, stipulating that a province’s share in any future award must not be less than its share in the previous award. This provision effectively institutionalises fiscal non-regression, ensuring a minimum guaranteed flow of resources to provinces.

However, the NFC process has effectively stalled despite this clear constitutional architecture. The last NFC Award, the 7th, was agreed in 2009 and implemented in 2010. At the time, it was considered a progressive step, increasing the provinces’ share in the divisible pool from 47.5 per cent to 56 per cent in 2010–11 and to 57.5 per cent from 2011 onward. The award also shifted from a population-only formula to a more nuanced model, allocating weight to poverty/backwardness (10.3 per cent), revenue generation (5.0 per cent), and inverse population density (2.7 per cent), while still assigning population the dominant weight of 82 per cent.

To account for specific challenges, the Award included special provisions: an additional 1.0 per cent share for Khyber Pakhtunkhwa due to the cost of security operations, and a guaranteed transfer to Balochistan irrespective of its limited revenue base. This reflected a recognition that equity requires more than simple formulas; it needs contextual justice.

This formula's outcome was a horizontal distribution as follows: Punjab received 51.74 per cent, Sindh 24.55 per cent, Khyber Pakhtunkhwa 14.62 per cent, and Balochistan 9.09 per cent. It also decreased the federal share to 42.5 per cent, strengthening fiscal decentralisation.

But today, what was once hailed as reform is outdated. Fifteen years have passed with no new NFC Award, a clear violation of constitutional timelines. Multiple attempts to convene new commissions have collapsed under political gridlock and bureaucratic inertia. Meanwhile, the country continues to operate on an obsolete formula that no longer reflects Pakistan’s demographic, fiscal, and developmental landscape.

The issue of vertical imbalance is now acute. The federal government faces rising obligations from debt servicing and defence to climate resilience and infrastructure, but its share of resources remains capped. International financial institutions, including the IMF, have repeatedly flagged this unsustainable fiscal equation.

Equally troubling is the weak incentive structure for provinces. Despite receiving guaranteed transfers, most provinces have failed to develop robust tax bases particularly in high-potential sectors like services, agriculture, and real estate. The 7th NFC Award’s effort to encourage revenue generation has yielded minimal results due to the absence of meaningful enforcement or fiscal discipline.

The continued dominance of population (82 per cent) in the horizontal formula is also problematic. While population remains a valid baseline, it ignores geographic, infrastructural, and security-related disparities. Provinces like Balochistan, with vast but sparsely populated areas, face high service delivery costs yet receive disproportionately low transfers. This undermines the goal of equal development.

The larger tragedy, however, is that the NFC process remains politically hostage. A framework that should be institutional, evidence-driven and periodic has become episodic and contentious. To move forward, Pakistan needs a Permanent NFC Secretariat, a technocratic body with the mandate to collect data, analyse provincial performance, simulate distribution formulas and support informed, transparent policymaking.

Future NFC formulas must evolve. Instead of relying solely on proxies like population, new indicators should include poverty reduction, human development progress, resource management, and provincial revenue effort. Such a composite formula would reflect Pakistan's changing realities and incentivise better governance and service delivery. While much attention is devoted to National Finance Commissions (NFCs) and, to a lesser extent, Provincial Finance Commissions (PFCs), the conversation rarely extends to District Finance Commissions (DFCs) the most critical yet overlooked tier in Pakistan’s fiscal federalism.

The absence of functional DFCs has led to the concentration of financial power at the provincial capitals, bypassing elected local governments. Development planning becomes top-down, less responsive and often inequitable without empowered and resourced local bodies. Revitalising DFCs is essential not only for completing the devolution process envisioned under the 18th Amendment but also for enabling a governance model that is citizen-centric, efficient, and locally accountable.

The 7th NFC Award was never intended to be permanent. It served its purpose at a different time. But clinging to it in 2025 is not just lazy governance but a recipe for institutional decay, inter-provincial mistrust and economic inefficiency. Reforming the NFC is a national imperative.

Getting the formula right is not about tweaking percentages on a spreadsheet but involves answering a deeper question: What kind of federation do we want to be? One where every province is empowered? One where public money serves public need? One where institutions adapt rather than stagnate?

It’s time to stop postponing and start rethinking. Pakistan can no longer afford to let political inertia block critical fiscal reforms. A new NFC Award must reflect today’s challenges: climate vulnerability, urban inequality and economic decentralisation. Rebuilding trust in the federation begins with a fairer, smarter and more responsive distribution system.

The writers are associated with the Sustainable Development Policy Institute, Islamabad (SDPI). The article does not necessarily represent the views of the organisation.