World Bank backs stronger local governments in Pakistan as spending share falls to 4.7%

The World Bank has backed the establishment of a stronger third tier of government in Pakistan, saying the large size of provinces such as Punjab and Sindh creates significant room for empowered sub-provincial governments.

In its latest report, Strengthening Fiscal Federalism in Pakistan, the World Bank said local government spending remains very low despite constitutional provisions requiring provinces to devolve political, administrative and financial authority to elected local representatives.

The report said the share of total government spending undertaken by local governments fell from around 10% in 2005 to around 4.7% in 2024.

It said this decline continued even after the 18th Constitutional Amendment, as few of the additional resources transferred to provinces were made available to local governments.

The World Bank said Pakistan remains an outlier in terms of the proportion of government spending carried out through local governments.

The report noted that Punjab’s population is comparable to that of the world’s 12th-largest country, while Sindh’s population is equivalent to that of around the 26th-largest country.

Punjab accounts for about 1.6% of the world’s population, while Sindh accounts for around 0.7%, it said.

At this scale, the report said, lower tiers of government could help shorten accountability loops and improve adherence to the “home rule” principle without undermining economies of scale or creating high administrative costs.

The World Bank said a fiscally aligned federal system, based on international practice, would require stronger local governments supported by transparent and rule-based provincial transfers.

Such transfers, it said, should provide predictable funding, improve district-level budgeting, promote equity through indicators such as population and poverty, and align financing with service delivery responsibilities in sectors including health and education.

The report said structured sub-provincial participation in fiscal decisions would also improve accountability.

Under Article 140A of the Constitution, provinces are required to establish local government systems and devolve political, administrative and financial authority to elected local representatives.

However, the Constitution allows provinces to design their own local government structures, resulting in different frameworks across the country.

The World Bank said provinces continue to retain significant control over the vertical distribution of resources.

Each province first deducts priority or obligatory expenditures from its revenues, after which the remaining amount becomes the divisible pool available for transfer to local governments.

In Khyber Pakhtunkhwa, the Provincial Finance Commission defines “obligatory expenditures” as mostly non-discretionary public expenditures.

In Sindh, “priority expenditures” are determined at the province’s discretion, with no formal constraints and with non-tax revenue excluded.

Punjab sets an arbitrary share of total revenues for allocation under its Provincial Finance Commission Award.

In Balochistan, local governments receive discretionary, non-formula-based provincial grants, which have varied significantly.

The report said local governments also generate own-source revenue through municipal taxes and fees, but these receipts are not recorded in provincial financial management systems or reported in national fiscal accounts.

It added that actual transfers to local governments have been significantly lower and more volatile than those outlined in the provinces’ last notified Provincial Finance Commission Awards.