The National Finance Commission (NFC) of Pakistan is a pivotal constitutional body designed to manage fiscal federalism by distributing financial resources between the Federal Government and the Provinces.1 As a cornerstone of the country’s economic and political stability, the NFC Awards determine the “divisible pool” of taxes, balancing the needs of a central authority with the demand for provincial autonomy.2
1. Constitutional Foundation and Mandate3
The NFC is established under Article 160 of the 1973 Constitution of Pakistan.4 It mandates the President of Pakistan to constitute the commission at intervals not exceeding five years.5
Core Responsibilities of the NFC:
- Vertical Distribution: Determining the percentage of the “Divisible Pool” of taxes shared between the Federal Government and the Provinces.6
- Horizontal Distribution: Defining the formula for how the provincial share is divided among the four provinces (Punjab, Sindh, Khyber Pakhtunkhwa, and Balochistan).
- Grants-in-Aid: Recommending grants from the Federal Government to provincial governments in need of assistance.7
- Borrowing Powers: Advising on the exercise of borrowing powers by both tiers of government.8
2. Historical Evolution: From Population to Multi-Factor Formulas
Historically, the NFC Awards were primarily based on population, which often led to friction, as it favored more populous provinces like Punjab while neglecting the developmental needs of smaller, less densely populated, or impoverished regions.
Key Milestones:
- The Raisman Award (1951): The first revenue-sharing program post-independence.9
- The 1991 Award: A significant step toward decentralization, expanding the divisible pool to include excise duties and improving the financial position of provinces.
- The 7th NFC Award (2010):10 A revolutionary shift in Pakistan’s fiscal history. For the first time, the “Sole Population” criterion was abandoned in favor of a Multi-Variable Formula.
| Criteria for 7th NFC Award | Weightage |
| Population | 82.0% |
| Poverty/Backwardness | 10.3% |
| Revenue Collection/Generation | 5.0% |
| Inverse Population Density | 2.7% |
3. The Impact of the 18th Amendment
The 7th NFC Award was followed by the 18th Constitutional Amendment, which significantly devolved power to the provinces. A critical safeguard introduced in Article 160(3A) stipulates that the share of the provinces in any future NFC Award cannot be less than the share given in the previous award.11
Currently, the vertical share stands at 57.5% for the Provinces and 42.5% for the Federal Government. While this has empowered provinces to invest in social sectors like health and education, it has also created a “fiscal squeeze” for the federal government, which remains responsible for national debt servicing and defense.
| Province | Population (82%) | Poverty (10.3%) | Revenue (5%) | Density (2.7%) | Total Final Share |
| Punjab | 53.20% | 23.16% | 44.00% | 4.35% | 51.74% |
| Sindh | 24.96% | 23.28% | 50.00% | 6.88% | 24.55% |
| Khyber Pakhtunkhwa | 14.78% | 27.82% | 5.00% | 15.71% | 14.62% |
| Balochistan | 7.05% | 25.74% | 1.00% | 73.06% | 9.09% |
Note: Additionally, Khyber Pakhtunkhwa receives 1% of the total Divisible Pool off-the-top as compensation for the War on Terror, while Balochistan’s share was protected by a federal guarantee to ensure its budget remains stable regardless of revenue collection shortfalls.
4. Modern Challenges and the Way Forward
Despite the progress of the 7th Award, several challenges persist in 2025:
- Vertical Fiscal Imbalance: The federal government argues that its remaining 42.5% is insufficient to cover interest payments, defense, and federal development, leading to chronic budget deficits.
- The 25th Amendment (FATA Merger): The merger of former Tribal Areas into Khyber Pakhtunkhwa has increased the province’s financial needs, leading to demands for a 3% special allocation that remains a point of contention.
- Lack of Sub-Devolution: While resources moved from the center to the provinces, many critics argue that provinces have failed to further devolve these funds to Local Governments (under Article 140A).
Proposed Reforms
Scholars and the Pakistan Institute of Development Economics (PIDE) suggest that the next award should incorporate climate-responsive governance and rewards for tax effort to encourage provinces to generate their own revenue rather than relying solely on federal transfers.
5. Critical Analysis
The 7th NFC Award is often called the “Charter of Economic Democracy” in Pakistan, but it has faced significant scrutiny since its implementation.
A. Strengths: Provincial Empowerment
- Consensus-Based Politics: It was the first award in decades achieved through political consensus rather than presidential decree, reducing the “trust deficit” between the center and smaller provinces.
- Equity over Equality: By including “Inverse Population Density” (favoring Balochistan) and “Poverty” (favoring KP and Sindh), the award acknowledged that larger territories and poorer regions require more funds per capita.
B. Weaknesses: The “Fiscal Squeeze”
- The Federal Deficit: Since the center retains only 42.5% of the pool but bears almost 100% of the burden for national debt servicing and defense, the Federal Government has faced chronic deficits. Critics argue this has forced the center into an “IMF trap” to cover its operational costs.
- Disincentive for Tax Collection: Because provinces receive guaranteed transfers from the federal pool, there has been little motivation for them to expand their own provincial tax bases (e.g., Agriculture Income Tax).
- Lack of Local Devolution: While the 18th Amendment intended for funds to reach the grassroots level, provinces have been accused of “hoarding” the money at the provincial capital level rather than transferring it to local governments via Provincial Finance Commissions (PFC).
C. Current Challenges (2025)
As of late 2025, the debate has intensified around the merger of FATA (NMDs). Khyber Pakhtunkhwa’s financial burden has increased significantly, yet the horizontal formula has not been officially updated to reflect the new population and developmental needs of the merged districts. Furthermore, the federal government has repeatedly requested the provinces to share the burden of the Benazir Income Support Programme (BISP) and electricity subsidies, which the provinces resist based on the constitutional protections of the 18th Amendment.
References
- Government of Pakistan. The Constitution of the Islamic Republic of Pakistan, 1973 (as amended). Article 160.12
- Ahmed, I., Mustafa, U., & Khalid, M. (2007). “National Finance Commission Awards in Pakistan: A Historical Perspective.”13 PIDE-Working Papers, 2007:33.14
- Jaffery, S., & Sadaqat, M. (2006). “NFC Awards: Commentary and Agenda.” Punjab University Journal of Economic Studies.
- Sabir, M. (2010). “Financial Implications of the 7th NFC Award and the Impact on Social Services.” The Pakistan Development Review, 49(4), 387-403.15
- Pakistan Institute of Development Economics (2025). “NFC at Crossroads: Revisiting Fiscal Federalism in Pakistan.” Discourse Special Issue.
- Sustainable Development Policy Institute (SDPI) (2025). “Strengthening Fiscal Federalism in Pakistan: A Roadmap for Reforming the NFC Award.”
