By Sakib Sherani
Published in Dawn on December 06, 2025
THE newfound eagerness to recast Pakistan into a ‘hard state’, with its attendant power-centralising and anti-participatory tendency, has given an impetus to rolling back the federal structure enshrined in the 1973 Constitution. Reworking the NFC Award by fiat rather than political consensus is a part of this misplaced effort. This is a mistake that history will neither forget nor forgive.
Ever since the seventh NFC Award came into effect in 2010, it has been characterised in conventional wisdom, either mistakenly or disingenuously, as the real reason for the country’s slide towards fiscal ‘insolvency’. Has the said award been solely responsible for sinking Pakistan’s public finances? This false conclusion is the result of simplistic reductionism and is not borne out by facts.
A clinical, dispassionate and thorough analysis of Pakistan’s public finances since 2010 reveals the following facts and underlying trends, most of which are not touched upon in the discourse. Instead, a lazy consensus has developed blaming the seventh NFC Award for the start of the country’s fiscal troubles. As this article will illustrate, this position is not supported by the evidence.
Pakistan’s public finances are under water due to four proximate factors. One, perennial low revenue mobilisation. Two, lack of fiscal discipline on the expenditure side. Third, Covid-19. Fourth, the shock introduced by the rapid slide in the rupee since 2018, especially the large devaluations in 2019 and 2023, combined with the steep hike in the policy rate since. None of these are directly related to the seventh NFC Award per se, or are factors that could not have been anticipated and accommodated with better governance.
Firstly, Pakistan’s public finances have been in deep water since the late 1980s. Profligate spending and chronic low mobilisation of revenue led to persistently high fiscal deficits, resulting in public debt touching around 535 per cent of revenue by 2000. This led to the need for debt relief under the Paris Club in 2001. By 2008, the fiscal deficit had once again shot up to 7.6pc of GDP.
The NFC Award’s real failure is not its formula but the misgovernance of the ruling elite.
While the fiscal deficit did receive an impetus in the first few years after the seventh NFC Award went into effect, a result of the centre continuing to pay for substantial provincial expenditures despite the passage of the 18th Amendment, it was contained from 2014 onwards. Despite the need for additional fiscal resources, the centre made no serious effort to raise tax revenue, with FBR’s tax effort remaining underwhelming. The tax-GDP ratio remained flat-lined at around 10pc of GDP.
In spite of the weak tax effort, growth in federal revenues roughly matched the annual increase in debt servicing from 2012 till 2018. As a result, the ratio of debt servicing to net federal revenue (after provincial transfers) was on a declining path in this period.
The real shocks to Pakistan’s public finances have come from 2019 onwards. First of these was the impact of the massive rupee devaluation combined with the steep increase in the policy rate by SBP since then. The rupee has lost 63pc of its value against the US dollar since 2017. Cumulatively, the twin shocks have added Rs23.1 trillion to the public debt stock between 2018 and 2025, accounting for a full 48pc of the increase in public debt over this period. Rather than provincial transfers, the sharp fall in the rupee combined with the skyrocketing of the SBP policy rate have strained public finances. A compounding factor occurred in 2020 and 2021, with the government responding to the Covid-19 shock with a fiscal stimulus amounting to over 4.9pc of GDP.
Together with a perennial revenue mobilisation failure, Pakistan faces a public spending crisis. Nothing illustrates the spending misgovernance as much as the utilisation of the additional resources transferred to the provinces under the seventh NFC Award. Cumulatively, Rs40.4tr has been transferred to the provinces since 2010, ostensibly for education, health services, etc, and yet, the number of children out of school has increased exponentially instead of declining, health outcomes are not better, and nearly every social and development indicator in Pakistan has worsened.
The combined public budget for 2024-25 starkly demonstrates this governance failure. Total government expenditure (federal and provinces combined) amounted to Rs24tr. After paying interest, salaries and pensions, and for defence, an amount of Rs 12.6tr (or $45 billion) was available for discretionary spending. Not enough money for the impact on the lives of citizens to be visible? Where has the money gone? The recently released IMF Governance and Corruption Diagnostic Assessment provides an answer with relation to the corruption of the ruling elite. (Interestingly, to support the political project underway in the country since 2022, a sharp increase in low-efficiency, high-leakage and misdirected public spending has occurred under the watch of the very same IMF).
In summary, the seventh NFC Award is at best a compounding factor but not a proximate cause. Pakistan’s weak public finances predate the award, and multiple governments since have failed to respond adequately by stepping up fiscal effort or introducing guardrails for public expenditure. The real failure is a failure of governance of the ruling elite — unwilling to tax themselves or their constituents, and unwilling to spend the country’s resources on meeting its challenges. This predatory mindset is independent of the nature of the NFC Award.
Having said this, it is also important to recognise that instruments of redistribution of resources, such as NFC Awards, should necessarily be the result of political processes. They should inherently be democratic in nature. In federations such as Pakistan, the NFC Award anchors the project of federalism itself. Hence, technocratic proposals to roll-back the vertical distribution formula, are relics of non-democratic set-ups and thinking — and must be resisted.
The real issue is not how the resources are distributed, but how they are raised and where they are spent. Redistributing the federal divisible pool from mis-spending provinces to a mis-spending centre will not address Pakistan’s fiscal woes.
