LocationsPublic Finance and Federalism:
Financing Pakistan’s Future
By Dr. Siraj Bashir Baloch | Director Research, Balochistan Think Tank Network, Quetta
The future of Pakistan’s fiscal operations lies in its capability to find a balance between public finances, and demographic and developmental demands. As the main tool of fiscal federalism, the NFC Award has to be adapted to address this challenge.
The future of Pakistan's economy not only depends on how much revenue it generates or collects, but also on how effectively it distributes and uses that revenue among its federating units.
This challenge is linked to the National Finance Commission (NFC) Award, which the constitution of Pakistan established to distribute collected resources across the federating units. But as Pakistan's population changes, the gaps in our system become more visible. The rapid and uneven population growth is not only affecting the system, but also demanding changes in the economy, while exposing weaknesses in the country’s financial framework, where resource allocation remains heavily tied to population size.
The main issue is not that population should be excluded as a factor, but that it has been treated as sufficient on its own to address the country’s development needs. The NFC model continues to give excessive importance to population size—approximately 82 percent. This model is simple, and suitable for governments in general, but not for the development of the country. Our recent findings demonstrated that the population-centric model runs the risk of equating numbers with need and thus distorting fiscal equity and strengthening regional disparities.1
This formula of imbalance has a palpable outcome for the country in general. The larger provinces benefit more from this demographic shift by receiving larger shares of the NFC, while the smaller, less developed provinces, particularly Balochistan, receive less and face structural under-investment. Although the 7th NFC Award included additional factors aimed at addressing the country's tangible realities, the new formula fails to reduce inequality or promote equal and balanced development.
The NFC model continues to give excessive importance to population size—approximately 82 percent. This model is simple, and suitable for governments in general, but not for the development of the country.The NFC model continues to give excessive importance to population size—approximately 82 percent. This model is simple, and suitable for governments in general, but not for the development of the country.
The implication of this formula is evident in the social sectors of Pakistan, where high rates of poverty, low literacy, and health problems continue to exist, all of which are directly related to fiscal distributions and their consequences in terms of development. Weak governance and a lack of institutional capacities in some provinces, such as Balochistan, have made it difficult to improve service delivery. Thus, the problem is not only the number of resources dedicated to federating units but the fact that the resources should meet the real developmental needs of the population and be backed by a region's governance capability.
Demographic changes are very crucial for a country and make for an especially complicated picture in Pakistan. The country's population is growing rapidly and changing its dynamics and structure, which may be alarming overall. Almost 64 percent of Pakistan's population is composed of youth, which creates a high youth dependency ratio and increases the demand for job opportunities, education, healthcare, and other services. In this context, at the same time, urbanization is putting additional pressure on infrastructure, housing, and public services. Unfortunately, the current NFC Award model does not effectively manage this dynamic of demographic pressures. It shows population as a static variable rather than as something that is complex and shifting, informed by migration, development, and age structure deficits.
In addition, institutional failure has also had a negative impact on fiscal federalism. Sadly, since 2009, there has been no significant change to the NFC Award, even though it needs to be updated regularly. This has resulted in increasing disparity and incompatibility between financial policy and the prevailing population and economic dynamics in the country. Specifically, political stagnation, unwillingness to implement reform, and lack of data have all contributed to a weakening of the system. Meanwhile, the absence of meaningful performance incentives has contributed to a culture of fiscal dependency, where federating units rely primarily on resource transfers rather than strengthening their own revenue generation and governance systems.
The discourse, therefore, needs to go beyond the old paradigm of population-based allocation and accept the broader concept of equity. Equity does not mean distribution solely in terms of population, but instead based on need, capacity, and lack of development. The fiscal federalism of Pakistan must be transformed into data-based and dynamic fiscal federalism which respects the diversity of the country.
There is a tremendous need for reform in the NFC Award. First, the current formula used by the government of Pakistan should be updated on a rational basis, rather than depending on cumulative measures. Population should be factored into more indicators, such as growth ratios, reducing ratios and dependency, and fiscal transfers should be allowed to reflect real demographic pressures.
Second, the NFC Award should incorporate other indicators, including human development, poverty level, climate vulnerability, natural resources, and infrastructure deficits. These proposed factors are critical to ensuring that resources are directed where they are most required in the context of the current situation in the country.
Third, the government must also initiate performance-based incentives, which are very important to the country's development. Provinces must be encouraged to focus on education, health, revenue generation, and good governance.
Fourth, local governments should be built to enhance service delivery and accountability. Fiscal decentralization cannot be complete without strengthening local institutions and redistributing resources to the most deserving.
Pakistan needs to take a proactive attitude towards fiscal federalism, one that appreciates the fact that demographic change is dynamic. The NFC formula must be periodically reviewed and revised in line with the changing economic environment, population trends, and objectives of development. A stagnant model is not able to cope with a fast-evolving society.
The future of Pakistan’s fiscal operations lies in its capability to find a balance between public finances, and demographic and developmental demands. As the main tool of fiscal federalism, the NFC Award has to be adapted to address this challenge. By shifting the focus of the model out of its population-oriented approach and towards a more equitable, performance-focused, and adaptive framework, Pakistan can turn its demographic pressures into an opportunity to achieve inclusive growth. It is a simple matter of either fixing the system to be realistic or running the risk of continuing to propagate the inequalities that the system was supposed to eliminate in the first place.
1. Kassi, N., & Baloch, S. B., ‘Equity and Reforms: Rethinking NFC Awards in the Light of Pakistan’s Population Growth’, Pakistan Journal of Social Science Review, vol. 5, no. 4, 2026, pp. 299–313.