Minister seeks urgent NFC overhaul
Iqbal made the recommendations to Prime Minister Shehbaz Sharif, urging him to review the 15-year-old award that has outlived its five-year constitutional life and requires a revision to ease "acute stress" on the federal government. The president of Pakistan is extending the award every year due to a disagreement between the provinces and the Center over the new formula.
The recommendation has been made at a time when the 10th National Finance Commission has expired on July 21st and the Finance Ministry, which is the Secretariat to the Commission, is in the process of forming a new Commission.
Sindh has retained Asad Sayeed and Khyber-Pakhtunkhwa might again be represented by Musharraf Rasool Cyan in the 11th Commission. Nasir Khosa may represent Punjab as its technical member but there is no official notification yet, which has to be issued after the approval of the president of Pakistan. Balochistan has nominated Mr Farman.
The planning and development minister has proposed new multi-criteria, for the distribution of resources by focusing on development-oriented formula instead of demographic-dominated award.
The minister has suggested to the prime minister that the population numbers should be frozen at the latest census (241.5 million) and its weightage should be reduced from the current level to promote population stabilisation.
The 82% of the NFC is distributed on the basis of the population among the provinces, which is an incentive against controlling the population and exaggerating the number too.
Pakistan's annual population growth rate is 2.6%, which is near the annual economic growth rate and is highly unsustainable. The current horizontal distribution is heavily weighted (82%) towards population.
While population is an essential indicator, this creates adverse incentives against population control and penalizes provinces with better demographic management, stated Iqbal.
The planning minister has also recommended including provincial revenue performance as a new criterion to distribute resources. He has written that there is a need to reward provinces with higher tax-to-GDP ratios and stronger digital tax infrastructure.
Provinces do not have incentives to expand their narrow tax bases and heavily rely on their shares under the NFC.
The minister has also proposed including environmental resilience as a new criterion by adding indicators such as forest cover, climate adaptation investments, and reforestation efforts.
According to another important recommendation, Human development outcomes should be linked with transfer of resources and the province should prioritize education, health, and gender equity.
The Constitution requires all the five governments to unanimously agree on the new formula and even if one government disagrees no change can be made in the award.
The minister also recommended including water vulnerability as another new criterion and suggested allocating funds for provinces investing in sustainable water infrastructure and management.
The minister has underlined national unity and inclusion as benchmark for the distribution of money between the Center and the provinces. The Center gets only 42.5% share and is also responsible for expenditure on Azad Jammu & Kashmir, Gilgit Baltistan, and ICT from the divisible pool to ensure full participation in national development for their citizens.
The minister said that over Rs150 billion are annually spent by the federal government on development and recurrent obligations in AJK, Gilgit-Baltistan and merged districts and the Islamabad capital territory all from the federal share, while these regions are entitled to have their own share in the divisible pool like other provinces.
The federal government is also funding the Benazir Income Support Programme (BISP) to the tune of Rs716 billion, despite social protection being a devolved provincial subject post-18th Amendment.
Iqbal said that there was a need to immediately initiate the process for a new National Finance Commission (NFC) Award, adding, it is both a constitutional obligation and a fiscal necessity.
Iqbal said that the 7th NFC Award has now been in effect for nearly 15 years — far beyond its intended duration and merits consideration in wake of new realities.
He said that the federal government was facing fiscal pressures due to anomalies in the present NFC Award. A fresh NFC Award is, therefore, imperative to ensure that fiscal federalism remains dynamic, equitable, and responsive to Pakistan's evolving development landscape while protecting provinces rights, he added.
Due to limited fiscal space and higher spending on debt servicing, the federal government is not left with enough fiscal space for development expenditure. The minister said that the Public Sector Development Programme (PSDP) has shrunk alarmingly - from 2.6% of GDP in 2018 to just 0.8% in 2025.
This regression represents not only a constraint on national development but a systemic distortion of constitutional fiscal responsibilities with federal subjects getting underfunded, he added.
He also emphasized upon encourage fiscal responsibility and own-revenue generation at the provincial level, and more importantly operationalization of Provincial Finance Commissions (PFCs)
The constitutional promise of equity cannot be realized without intra-provincial resource distribution. Provincial Finance Commissions (PFCs), which were envisioned to decentralize resources within provinces, remain largely dormant or non-transparent in their functioning, he added.
The new NFC Award should make PFCs' operationalization mandatory as part of the NFC framework, recommended the Planning Minister.
Without adequate federal fiscal space, the implementation of flagship national programmes - including Special Economic Zones (SEZs), Digital Pakistan, national grid, dams, human resource development and multi model connectivity infrastructure — remains compromised, stated the Minister.
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