Unfinished business

Pakistan's landmark 18th Amendment, designed to reshape fiscal federalism by transferring greater powers and financial resources to provinces, has seen patchy and ineffective implementation over the past 16 years. A new World Bank report, "Strengthening Fiscal Federalism in Pakistan," concludes that while the constitutional framework remains sound, its practical application has fallen short of expectations.

The federal government continues to struggle with deficits. This is partly because transfers to the provinces increased without a corresponding reduction in federal expenditure or an improvement in the tax-to-GDP ratio. Islamabad also continues to spend in devolved sectors, leading to duplication of efforts and weakening fiscal discipline. Meanwhile, the provinces themselves have not adequately expanded their own tax bases. Despite receiving larger fiscal transfers, much of this additional funding has been allocated to salaries and an expanding bureaucracy, rather than significantly improving public services.

More than 80% of provincial expenditure is tied to recurrent spending, leaving limited resources for development. Local governments have also steadily weakened. The report notes that fiscal allocations often reflect historical patterns rather than current poverty levels and service delivery needs. While these findings highlight weaknesses in Pakistan's fiscal architecture, they do not necessarily indicate that devolution itself has failed.

The World Bank report suggests that provincial governments often spend inefficiently, but it does not establish that the federal government would have achieved better outcomes had these functions remained centralized. The report identifies incomplete devolution, federal overlap in devolved sectors, inadequate institutional restructuring, weak intergovernmental coordination, and blurred accountability as key undermining factors. However, it gives limited attention to how provincial performance has evolved over the years, which could offer insights into the impact of changes in provincial leadership or policy on service delivery.

Provincial governments have become the principal centers of civilian political authority, with their incentives often driven by political survival rather than service delivery. They have expanded administrative structures and recurrent expenditure while keeping local governments financially and politically weak. The report frames these issues as failures of governance rather than of devolution itself. The recommended response is to complete the unfinished process of devolution by boosting provincial revenue mobilization, rationalizing federal expenditure, reforming the NFC formula, ensuring regular awards, empowering local governments through predictable fiscal transfers, and improving coordination across all government tiers. Ultimately, stronger local governments and clearer accountability are deemed essential for fiscal federalism to deliver its intended benefits.