As Pakistan approaches Budget 2026-27, its fiscal federalism is mired in stagnation rather than progress. The 11th National Finance Commission (NFC), constituted in August 2025 amid much anticipation, has held multiple meetings and formed working groups on critical issues. Yet, a consensus award remains elusive.
Realistically, negotiations are unlikely to conclude before the upcoming budget cycle. This deadlock need not immobilize the fiscal federal system; instead, it should push policymakers toward a pragmatic, evidence-based approach that safeguards fairness and stability during this transition period.
Although the 7th NFC Award of 2010 marked significant progress toward provincial autonomy, the resource distribution mechanism no longer reflects current realities. The existing 7th NFC formula distributes the divisible pool horizontally using four weighted criteria: population (82 percent), poverty and backwardness (10.3 percent), revenue collection and generation (5 percent), and inverse population density (2.7 percent).
It is important to recognize that the underlying indicators for interprovincial resource distribution have shifted significantly since 2010. Demographic realities have been transformed by the integration of the former FATA into Khyber Pakhtunkhwa. Similarly, official poverty estimates (based on the Household Integrated Economic Survey 2024–25 data) are now available. Therefore, there is a need to recalibrate the NFC’s core indicators to uphold constitutionality, fairness, and fiscal accuracy.
In this context, a report published by the Social Policy and Development Centre (SPDC) proposes a technically rigorous and constitutionally defensible interim solution: update the underlying data in the existing NFC formula while retaining its original structure. This approach, grounded in administrative precedent, ensures that the provincial shares in the divisible pool are recalibrated to reflect current population, deprivation, and revenue realities – without prejudging the eventual outcome of the 11th NFC negotiations.
A precedent was set after the 1998 Census, when the NFC Secretariat recalibrated provincial shares based on updated demographic data without requiring a new Presidential Order, even though the 1997 NFC Award remained in force. These recalibrated shares were implemented from 2002-03 to 2005–06.
The updated fiscal framework increases the federal share by 0.42 percentage points, while provinces experience varied adjustments reflecting updated data. Balochistan records the largest gain, rising by 1.03 percentage points, followed by Khyber Pakhtunkhwa (+0.55 pp), due to improved demographic recognition and the incorporation of merged districts. Conversely, Punjab (–1.86 pp) and Sindh (–0.15 pp) show moderate declines, primarily due to recalibration rather than fundamental changes. For example, Punjab’s reduced share stems from slower relative population growth and progress in poverty alleviation. Collectively, these changes signal a transition to a more data-driven, formula-based allocation system.
Looking ahead, Pakistan must move beyond a framework that rewards provinces primarily for having larger populations or higher levels of poverty. International experience, particularly from developing countries, suggests that incorporating performance indicators, such as improvements in health, education, and revenue mobilization, can foster accountability and incentivize progress. Future NFC awards should draw on global best practices and gradually introduce such metrics, ensuring that resource allocations both address need and reward achievement.
Copyright Business Recorder, 2026
The writer is the Managing Director of the Social Policy and Development Centre (SPDC)