The inaugural meeting of the National Finance Commission (NFC) is set to focus on provincial performance, particularly in Khyber Pakhtunkhwa (KP). The government is devising a new formula for distributing fiscal resources.
Planning Minister Ahsan Iqbal has submitted proposals to Prime Minister Shehbaz Sharif. The proposals outline multiple options to strengthen the Centre and benefit smaller federating units.
The proposals suggest significant changes to the current distribution. Despite giving greater weight to variables that favour smaller provinces, KP’s share is projected to increase from approximately 1%. It could range from 3% to 3.4% of the adjusted divisible pool. The KP government, however, claims its share should rise by 6% to nearly 20% due to the merger of the former tribal districts.
A key suggestion is for the federal government to deduct 4.7% to 6% of the total divisible pool upfront. This would cover critical national expenses such as war on terror costs, water security, and higher education before distributing the remaining 57.5% among provinces. To incentivise self-reliance, the Planning Ministry proposes drastically reducing the weight of population in the formula from 82% to as low as 60%. They also suggest introducing a weight for provincial revenue generation of up to 20%.
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The NFC meeting, chaired by Finance Minister Muhammad Aurangzeb, will place particular focus on KP Chief Minister Sohail Afridi. Federal authorities aim to hold the provincial government accountable for its perceived failure to utilise substantial past transfers effectively.
In addition to its standard 14.62% NFC share, KP has received a 1% war-on-terror compensation and an estimated Rs700 billion in additional resources since 2010. Federal authorities contend that promised improvements in public safety and post-conflict recovery remain unrealised. They are calling for a comprehensive public audit of these funds.
The Planning Ministry’s report highlights a critical issue: provincial revenues have not expanded in line with NFC objectives. Provincial tax and non-tax revenues remain negligible at 1.1% of the economy. This fosters a “culture of dependency” and leaves them vulnerable to federal revenue shocks.
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The ministry argues that strategic recalibration is a “policy necessity.” Defence, debt servicing, and national investments in water security and climate resilience are inherently federal responsibilities. These areas require predictable fiscal space. The proposed deductions (4.7%- 6%) from the divisible pool are intended to provide this capacity. The 6% option could potentially increase federal resources by 12% by 2030 compared to the current baseline.
The proposed horizontal distribution changes would rebalance provincial shares:
- Punjab’s share would decrease by about 10%.
- Sindh’s share would see a marginal half-percentage-point reduction.
- Khyber Pakhtunkhwa’s share could increase between 1% and 2.6%.
- Balochistan’s share may rise by up to 3%.
- Islamabad Capital Territory could receive a share for the first time, potentially up to 5%.
This transition aims to recognise fiscal effort, social outcomes, and ecological contributions, moving beyond a purely population-based distribution to a more balanced and incentive-driven framework.
