PUBLISHED
August 31, 2025
KARACHI:
After sixteen long years, President Asif Ali Zardari has recently notified the 11th National Finance Commission (NFC). This has triggered both hope and despair throughout Pakistan. According to the constitution, the NFC is responsible for determining how the federal government’s collected revenues will be divided between the federal government and the provinces. Therefore, the provinces’ financial independence and the welfare of their citizens are directly impacted by its decisions. The NFC’s discussions hold existential significance for Khyber-Pakhtunkhwa, a province that is heavily dependent on federal transfers and bears particular developmental and security burdens.
Importance and scope of the NFC
The NFC establishes both the horizontal distribution of resources among provinces and the vertical distribution between the federation and provinces. A divisible pool of taxes collected by the Federal Board of Revenue (FBR) is allocated for this purpose. Although population has historically been the main criterion, other factors like poverty, backwardness, revenue generation, sacrifices related to security, and particular provincial challenges have been acknowledged over time.
The essence of the NFC seeks to avert the imbalance of strengthening the federation at the expense of the provinces. It seeks to accomplish balance, justice and constitutional wisdom. Properly applied, the NFC enhances provincial self-governance, powerful functioning of the federation, and self-rule.
The 7th award and multiple-criteria formula
The 7th NFC Award applied a multiple-criteria formula, giving weightages to each parameter as follows: 82% to population, 10.3% to poverty and backwardness, 5% to revenue collection/generation, and 2.7% to Inverse Population Density (IPD).
There has been enhancement in the last award in the shares of the provinces in the federal divisible pool from 47.5% to 57.5%, a significant rise of 10%. In addition to that, the sole criterion for resource distribution is based not only on population but also poverty, revenue generation and inverse population density. The weights for each of the four criteria have also been shown in the attached chart.
Under Clause 3(A) of Article 160 of the Constitution, inserted through the 18th Amendment, the share of the provinces in each future award of the NFC shall not be less than the share given to the provinces in the previous award.
An amount of Rs1,165.6 billion and even more is expected to be transferred from the Federal Government to the K-P government during the financial year 2025-26, under the NFC award. This is intended to address the development needs of the merged districts for the next ten years, as per the Tribal Decade Strategy.
The K-P government will continue to comprehensively approach the next NFC award to realise the optimal share of the province, inclusive of the merged districts, and press upon all other federating units to honor their commitments. This is necessary to ensure that the war-affected region enters the mainstream and integrates smoothly with the rest of the province. Recognising K-P’s central role in the War on Terror, 1% of the Gross Divisible Pool was also assigned to it in addition to its regular share.
Prior to making a new award, the following considerations need to be taken:
1. A recalculation of the provincial share on the basis of the 2023 census;
2. the integration of the demographics of the merged districts into the province, particularly the 2.94% share of the national population as per the 2023 census;
3. a permanent settlement of the issue of Net Hydel Profits determination in line with the Constitution under Article 161, and demand for a constitutional right for the imposition of Federal Excise Duty on oil as per Article 161(b) of the Constitution.
This necessitates a recalculation of K-P’s share under any new formula for horizontal distribution to be finalised by the 10th NFC. The prime minister has also pledged that 3% of the NFC share of the Federal Government, Punjab, and K-P will be allocated to fund these priorities.
Concerns about representation and transparency
Concerns have been expressed among diverse segment of the population over the nominations of persons not domiciled in the province to represent the province in the NFC. Experts with roots in the province and an understanding of its fiscal, social, and developmental challenges should have been appointed. Ignoring local expertise sends a wrong signal, as if the province is short of financial experts of integrity.
This concern is not new; in previous commissions, questions were raised about the manipulation of data, opaque decision-making, and lack of transparency in proceedings. Given K-P’s reliance on federal transfers for developmental and administrative needs, such opacity has direct consequences for the province’s fiscal health and public welfare.
Proposed federal changes and their implications
According to reports, the federal government is considering linking revenue distribution to indicators such as health, education, environmental pollution, and population control. Additionally, proposals have surfaced to shift the expenditure burden of Islamabad, Gilgit-Baltistan, and Azad Jammu & Kashmir (AJK) onto the divisible pool, with an alleged 10% cut in provinces’ shares.
Experts view these proposals as constitutionally questionable and financially dangerous for weaker provinces. Measures that divert resources from provinces to meet federal or external expenditures risk deepening fiscal crises and widening the trust deficit between the center and provinces. For K-P, which carries extraordinary burdens related to security, rehabilitation of newly merged districts, and infrastructure needs, any reduction in federal transfers would be catastrophic.
Income of K-P and dependence on federal transfers
K-P’s income structure underscores why the NFC is vital for the province. The bulk of K-P’s revenue comes from federal transfers: its share from the divisible pool, net hydel profits, and other direct allocations. Historically, the province’s own sources i.e property taxes, provincial levies, and service charges have remained weak, though they are gradually improving.
Following the merger of the former Federally Administered Tribal Areas, K-P’s share in the NFC increased from 14 percent to 19 percent. This adjustment recognized the province’s poverty, backwardness, and security sacrifices. Special allocations 3 percent for the merged districts and 1 percent for the “war on terror” were also promised but remain partially unfulfilled.
Without sustained federal support, K-P cannot adequately fund development projects, provide essential public services, or meet the extraordinary costs of rehabilitating the merged districts and Malakand Division. Moreover, the province faces significant structural challenges: the newly merged districts, with a population of 24.149 million, and Malakand Division, home to 10 million people, have rising expectations for basic services, yet a limited taxable population and widespread tax evasion leave the rest of the province disproportionately burdened.
Constitutional and fiscal obligations
The federal government must recognize that the 18th Amendment abolished the concurrent list and devolved many subjects to the provinces. While this has reduced the federal government’s direct responsibilities, it has increased provincial obligations, requiring greater fiscal support to match liabilities. If the federal government shoulders expenditures for AJK, Gilgit-Baltistan, and Islamabad, K-P must similarly be supported to manage the NMDs and Malakand Division, which are largely exempt from taxation.
It is also imperative that the federal government focuses on shedding unproductive or “sick” units and public sector entities, rather than establishing new federal organizations such as a Federal Reserve Force. Social welfare, now a provincial subject, should be managed through provincial departments, rather than central programs like the Benazir Income Support Programme, to avoid unnecessary expenditures and ensure accountability.
Key demands and points for K-P
During NFC negotiations, K-P must insist on certain non-negotiable points to safeguard its fiscal and constitutional rights.
The existing formula must not be altered unless changes increase K-P’s share. Arrears under the AGN Qazi formula should be cleared without delay. The province’s share, recognizing its poverty and backwardness (19% post-merger), must be preserved. Special allocations for merged districts (3%) and war-on-terror compensation (1%) should be guaranteed.
As agriculture is a provincial subject, tobacco and related taxation must remain under provincial jurisdiction. K-P, being a leading producer, has a direct stake. To prevent arbitrary federal practices, provincial shares of taxes must be deducted at source and directly transferred to K-P’s accounts.
Provinces are equal owners of oil and gas under the Constitution. The Petroleum Act, petroleum policy, and Rules of Business should be amended to protect K-P’s ownership. Mines and minerals are provincial property. No international agreements related to exploration or extraction should be signed without explicit provincial consent. Transparency and consultation with provinces are essential.
Given the melting of glaciers, flash floods, and cloud bursts, K-P requires additional resources (approximately 1% of the NFC pool) for forestation, drainage systems, and climate adaptation measures.
Challenges K-P faces
K-P is in a uniquely vulnerable position. It faces a severe financial crisis due to locational disadvantage, rising terrorism, devastating floods, displaced populations (IDPs), spiraling energy costs, inflation, and volatile border policy with Afghanistan. These challenges have collectively eroded the province’s fiscal capacity and stalled both economic growth and social development.
In addition, structural issues such as chronic tax evasion, a small taxable population, and increased expectations in the NMDs and Malakand Division exacerbate fiscal pressures. These constraints limit K-P’s ability to invest adequately in education, healthcare, infrastructure, and social protection programs areas constitutionally assigned to the province.
K-P’s representatives to the NFC bear immense responsibility. They must scrutinize every proposed change, guided by the provincial cabinet and assembly, and refuse to compromise on matters of provincial rights. History shows that opaque agreements and ad hoc federal decisions often lead to long-term disadvantages for provinces, particularly smaller or economically weaker ones.
Representatives must act not merely as negotiators but as trustees of the province’s future. They must resist federal pressures, uphold constitutional principles, and safeguard the province’s fiscal and developmental interests with clarity and firmness.
The federal government may argue for performance-based allocations, using GNP, tax collection, or other economic indicators rather than population and other . While such arguments may seem practical, they are not in line with the constitutional social contract under Article 160. K-P’s claims are grounded in both logic and law:
1. The province contributes significantly to national revenue through oil, gas, and minerals as well as water and power.
2. K-P bears extraordinary security-related costs due to proximity to Afghanistan and terrorism impacts.
3. Delayed payments and withheld arrears under the NHP mechanism further undermine its fiscal stability.
4. Climate-induced disasters necessitate additional financial support to protect infrastructure, livelihoods, and social wellbeing.
The final NFC award should therefore be approved by the K-P assembly only after in-depth debate and discussion in a dedicated session. The standing committee should examine proposed changes with expert consultation, ensuring decisions are well-informed and defendable.
The constitution of the 11th NFC presents K-P with both an opportunity and a challenge. On one hand, it allows the province to secure overdue arrears, strengthen fiscal autonomy, and ensure fairness in revenue distribution. On the other hand, looming federal proposals threaten to dilute provincial rights and deepen fiscal imbalance.
For K-P, the path forward lies in adopting a unified, well-researched stance grounded in constitutional provisions, public interest, and practical fiscal realities. Its representatives must resist pressures, uphold provincial and constitutional rights, and ensure that the NFC functions as a viable mechanism for revenue distribution.
Dr Syed Akhtar Ali Shah is a former Secretary to Government, Home and Tribal Affairs Department and a retired IGP. He currently heads “ Good Governance”. He can be reached at syed_shah94@yahoo.com
All facts and information are the sole responsibility of the author
