The 18th Amendment and Pakistan’s Fiscal Federalism: Why the Centre and Provinces Are Both Broke

Fifteen years after the 7th NFC Award transferred 57.5% of federal tax revenues to the provinces, the federal government cannot meet its obligations and the provinces cannot fund their own development. The amendment that was supposed to resolve Pakistan’s fiscal imbalances has, in practice, deepened them.

By Mehmood ul Hasan Qadir
Economist & Financial Analyst | Dubai, UAE

Executive Summary

• Pakistan has not produced a new National Finance Commission award in fifteen years. The 7th NFC Award of 2010, designed to last five years, still governs revenue sharing between the federation and four provinces.
• The 11th NFC was constituted in August 2025. As of June 2026, no new award has been agreed — its inaugural session was postponed twice and the deadlock reflects structural, not procedural, conflict.
• The federal government retained just Rs 11.3 trillion in net revenues in FY2025–26 against current expenditure of Rs 22.1 trillion, with interest payments of Rs 9.78 trillion consuming over 86% of net federal revenue receipts.
• The headline 57.5% provincial share is materially overstated. Adjusted for petroleum levy exclusions and forced surpluses, the effective provincial transfer share falls to approximately 42–45%, according to economist Hafiz Pasha.
• Provinces collectively raise own-source revenues equivalent to only ~13% of total provincial receipts — a structural disincentive embedded in the NFC formula itself, which allocates only 5% weight to revenue effort.
• The crisis is not primarily distributional. It is a simultaneous revenue failure at every level of government — a condition no NFC formula redesign alone can resolve.

The Opening

Pakistan has not produced a new National Finance Commission award in fifteen years. The 7th NFC Award of 2010, designed to last five years, still governs how the federal government divides its tax revenues with the four provinces — a constitutional arrangement that has outlasted four governments, three IMF programmes, and a near-sovereign default, without anyone being able to agree on what should replace it.

The 11th NFC was constituted in August 2025. Its inaugural session, scheduled for 27 August, was postponed, then postponed again to 18 November. As of June 2026, no new award has been agreed. The deadlock is not procedural. It reflects a structural conflict at the heart of Pakistan’s fiscal architecture that the 18th Amendment created but did not resolve.

The Architecture of the Problem

The 7th NFC Award was a genuine political achievement. For the first time, the provincial share of the federal divisible pool — the aggregate of income tax, general sales tax, customs duties, and other centrally collected revenues — was fixed at 57.5%, up from 46.25% under the previous award. The allocation formula was also expanded from a single population criterion to a multi-variable one: 82% population, 10.3% poverty and backwardness, 5% revenue generation, and 2.7% inverse population density. The 18th Amendment constitutionalised this floor, prohibiting any future award from reducing a province’s share below what it received under the previous one.

The result was unprecedented fiscal decentralisation on paper. Transfers to provinces climbed from roughly Rs 600 billion in FY2009–10 to over Rs 4.4 trillion in FY2022–23, and reached an estimated Rs 8.2 trillion in the FY2026 federal budget — representing 42% of gross federal revenue receipts. In absolute terms, the provinces receive more money than at any point in Pakistan’s history.

The federal government retains 42.5% of the divisible pool after transfers. On that residual, it must service Rs 9.78 trillion in annual interest payments on domestic and external debt — a figure that alone exceeds net federal revenue receipts after provincial transfers. Defence expenditure, running costs of the civil administration, pension liabilities, and development spending are all funded from what remains after debt service. The arithmetic does not work. It has not worked for years.

The Federal Squeeze

Pakistan’s federal fiscal position is structurally insolvent by any conventional measure. The FY2025–26 federal budget recorded gross revenue receipts of Rs 19.3 trillion against total expenditure of Rs 23.8 trillion — a deficit of Rs 12.6 trillion, or approximately 5.4% of GDP. After transferring Rs 8.2 trillion to provinces, the federal government retained Rs 11.3 trillion in net revenues against current expenditure alone of Rs 22.1 trillion. The development budget — infrastructure, public investment, human capital — was funded almost entirely through borrowing.

Interest payments of Rs 9.78 trillion consumed over 86% of net federal revenue receipts in FY2025. The implication is stark: after paying interest on accumulated debt, the federal government has less than 14% of its net revenues left for defence, governance, subsidies, transfers, and everything else the state is expected to do. Every rupee of federal development spending is a borrowed rupee.

The federal government’s response to this squeeze has been predictable. It has levied charges — notably the petroleum levy — outside the divisible pool, precisely because such levies are not subject to NFC sharing. The petroleum levy collected Rs 1.22 trillion in FY2024–25 and Rs 1.47 trillion in FY2025–26 — revenues that stay entirely with the federation. When these off-pool collections are factored in, the provinces’ effective share of total federal revenues falls from the headline 57.5% to approximately 42–46%, according to analysis by economist Hafiz Pasha published in Business Recorder. The constitutional guarantee means less than the nominal figure suggests.

The Provincial Illusion

The standard critique of the 18th Amendment — heard consistently from federal finance officials and IMF technical advisers — is that provinces receive too much and spend it badly. The data complicates this narrative.

Provinces are required, under the National Fiscal Pact negotiated alongside IMF programme commitments, to maintain cash surpluses rather than deficit-spend. In FY2024–25, provinces were forced to accumulate Rs 921 billion in surpluses they were not permitted to deploy. In FY2025–26, that figure rose to an estimated Rs 1.5 trillion. These constrained surpluses are counted in the provinces’ nominal transfer receipts but represent money they cannot actually spend — funds parked in accounts to support the federal government’s consolidated fiscal position for IMF reporting purposes. Adjusted for these forced surpluses and for petroleum levy exclusions, the effective provincial transfer share drops materially below what Article 160 guarantees on paper.

The deeper problem, however, is not how much money the provinces receive. It is how little they generate themselves. The 7th NFC formula allocates only 5% weight to revenue effort — a deliberate political decision that has produced an institutional disincentive to build provincial tax capacity. Four provinces that collectively govern 257 million people, manage vast agricultural sectors, and deliver the bulk of public services raise own-source revenues that are a fraction of what comparable subnational governments generate elsewhere. Punjab’s agricultural income — the largest single untaxed income base in the country — only began to face statutory taxation in 2025, under IMF compulsion, fifteen years after the devolution that was supposed to make provinces more fiscally responsible.

The CDPR analysis published in March 2026 is precise on this structural failure: Pakistan is “formally a three-tier federation; fiscally, it operates as a one-tier system, with a fragile second tier and a non-existent third rung.” Local governments — the constitutional third tier — receive no guaranteed fiscal transfer. Provincial Finance Commissions, which should mirror the NFC mechanism at the subnational level, have either not been constituted or have produced no binding awards in most provinces. Devolution, in practice, stopped at the provincial level and went no further.

The 11th NFC Deadlock

Indicator	FY2009–10	FY2022–23	FY2025–26
Provincial share of divisible pool	46.25%	57.5%	57.5% (nominal)
Effective provincial share (adj. for petroleum levy & forced surpluses)	~46%	~47%	~42–45%
Total transfers to provinces (Rs trillion)	~0.6	~4.4	~8.2
Federal interest payments (Rs trillion)	~0.6	~5.4	~9.78
Federal fiscal deficit (% of GDP)	~5.3%	~7.9%	~5.4%
Provinces’ own-source revenue as % of total provincial receipts	~15%	~12%	~13%

Sources: Ministry of Finance Federal Budget Documents FY2025–26; Hafiz Pasha, Business Recorder, October 2025; Profit by Pakistan Today, December 2025; CDPR Policy Brief, March 2026; Trading Economics, Government of Pakistan data

The 11th NFC was constituted amid openly conflicting positions. The federal government and the military establishment have argued for a larger federal share, citing defence obligations and debt service costs that have grown substantially since 2010. Khyber Pakhtunkhwa’s Chief Minister publicly rejected any revision as discriminatory in early 2026. Sindh and Balochistan, both structurally dependent on federal transfers that cover the overwhelming majority of their budgetary needs, have resisted any formula change that would reduce their absolute receipts.

The constitutional floor — Article 160(3)’s prohibition on reducing any province’s share below the previous award — makes formal renegotiation legally complicated and politically explosive. A constitutional amendment requires a two-thirds majority in both houses of parliament. In the current coalition configuration, that threshold is practically unachievable. The result is an NFC that cannot produce a new award and a fiscal system that cannot produce a solvent federal government.

Dawn noted in August 2025 that Planning Minister Ahsan Iqbal had described a fresh NFC award as “an imperative” for responsive fiscal federalism. The 11th NFC’s inability to hold even its inaugural session on schedule suggests that imperative is not being translated into political urgency.

What the Data Does Not Resolve

The fiscal federalism debate in Pakistan is frequently framed as a contest between federal adequacy and provincial autonomy — as though one side must lose for the other to gain. This framing obscures the real problem. Neither level of government is performing its fiscal function adequately. The federal government is not collecting sufficient tax revenue: the FBR’s target for FY2026 was revised down by Rs 620 billion after persistent shortfalls, and tax-to-GDP remains below 10.5%. The provinces are not mobilising own-source revenues: agricultural income, services, property, and urban land remain systematically undertaxed at the provincial level across all four provinces.

The argument that reducing the provincial share would solve the federal fiscal crisis does not withstand arithmetic scrutiny. As Profit Pakistan’s NFC analysis demonstrated, even if the federal government were to recover several hundred billion rupees in additional transfers, the federal interest burden of Rs 9.78 trillion would remain structurally unsustainable. The crisis is not primarily distributional. It is a revenue crisis at every level of government simultaneously — a condition that no NFC formula, however redesigned, can resolve without a fundamental expansion of the national tax base.

Closing

The 11th NFC’s most consequential decision will not be the percentage split between Islamabad and the provinces. It will be whether the new formula introduces a meaningful weight for own-source revenue effort — penalising provinces that depend entirely on federal transfers while rewarding those that build their own fiscal capacity. Without that structural shift, Pakistan’s fiscal federalism will continue to distribute inadequate revenues between two tiers of government that have both learned to survive on transfers rather than on the harder work of taxation.