NFC Award: a system under strain

EDITORIAL: A recent media report has highlighted a view gaining traction within policymaking circles that the NFC Award’s vertical resource-sharing formula between the Centre and the provinces has become unsustainable, and must be revised to reflect the fiscal realities confronting the federal government. Proponents argue that the current arrangement leaves the Centre with insufficient resources to meet its core obligations, particularly defence and debt-servicing. The debate centres on the fiscal framework established under the seventh NFC Award following the 18th Amendment’s passage, which raised the provincial share of the divisible tax pool to 57. 5 percent and reduced the federal share to 42. 5 percent. Crucially, it also mandated that any future NFC Award cannot reduce the provincial share below its existing level, effectively making any change to the vertical distribution contingent upon a constitutional amendment. However, given the sensitivity of the issue, the provinces so far haven’t been able to agree to such an amendment. A workaround was instead devised during recent budget-making sessions, whereby the provinces voluntarily surrendered Rs1. 035 trillion to the Centre from their share of the divisible tax pool. Yet influential quarters remain convinced that the underlying imbalance will eventually require a constitutional amendment. What is often overlooked in this debate, however, is that the existing formula was grounded in specific assumptions: that the economy would grow at a pace sufficient to expand the overall fiscal pie, and that the devolution of subjects such as education and health to the provinces, as mandated by the 18th Amendment, would be matched by the abolition of corresponding federal ministries. Neither expectation materialised. Growth remained below projections, while many devolved ministries continued to operate at the Centre, forcing the federal government to finance responsibilities that were expected to disappear. Had these assumptions held, the fiscal pressures now cited as evidence of the vertical formula’s unsustainability may have been far less severe. Yet even as attention focuses on the vertical distribution of resources, far too little is being said about what is arguably an even more unsustainable aspect of the NFC framework: the horizontal formula governing resource distribution among the provinces. Under this arrangement, population accounts for a massive 82 percent of the weight used to distribute resources among provinces. Such overwhelming reliance on this metric effectively rewards rapid population growth. This is particularly alarming as Pakistan’s population growth rate is perhaps the country’s most pressing existential challenge. At 2. 55 percent annually, the population is expanding at a pace that requires GDP growth of at least six percent every year simply to keep up with the demands generated by a rapidly growing population. And, given Pakistan’s current productive capacity, that is unlikely to happen. The consequences are already visible. Hundreds of thousands of young people enter the labour force every year, yet the economy lacks the capacity to absorb them. Unemployment remains rampant, social pressures continue to mount and Pakistan contends with an accelerating brain drain, with many of its brightest minds choosing to build their futures elsewhere. When population remains a dominant factor not only in resource allocation but also in federal job quotas and other governance structures, the incentive for effective population control inevitably weakens. If Pakistan is serious about addressing its long-term challenges, reforming the horizontal distribution formula deserves as much attention as the debate over the vertical one. Unlike changes to the federation-province resource split, revising the horizontal formula does not require a constitutional amendment. It requires consensus among the federating units through the NFC process. Given the political and constitutional hurdles involved in altering the vertical formula, building agreement around a more balanced horizontal formula may be both the more achievable and the more critical reform, and must be urgently pursued. Copyright Business Recorder, 2026

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