Govt considers changes to NFC formula, linking provincial shares to performance: report

The federal government is reviewing options to amend the resource distribution formula, with discussions focusing on linking provincial revenue shares to their performance in areas such as education, health, population management, and climate resilience, The Express Tribune reported, citing official sources.  

This comes as the government grapples with ongoing financial constraints and a delay in reconvening the National Finance Commission (NFC) to finalise a new formula.

One option being considered is reducing the provinces’ share of the revenue pool, which currently stands at 82%, and instead earmarking funds for specific projects such as large dam construction and the Benazir Income Support Programme (BISP). 

Another proposal includes setting aside a portion of the divisible pool to support Islamabad Capital Territory (ICT), Azad Jammu & Kashmir, and Gilgit-Baltistan.

The government’s approach aims to make the resource allocation process more performance-based, encouraging provinces to improve social indicators and tax efforts in exchange for a higher share of the revenue. 

The Ministry of Finance is also preparing a report to analyse the long-term impact of these proposed changes on federal finances, particularly regarding public debt and budget deficits.

Provinces such as Sindh and Punjab have already expressed concerns over the proposed changes, particularly regarding the reduction of their shares and the potential shift of responsibilities like BISP to provincial governments. These matters are expected to be discussed further in upcoming meetings, with a formal NFC session scheduled to take place later in the year.

According to the report, the federal government is also considering the inclusion of environmental resilience indicators, such as forest cover and climate adaptation efforts, in the new NFC formula. The Ministry of Planning has emphasised the need for a revised formula, citing concerns over fiscal stress and the lack of a comprehensive review of the current system.

While the government has yet to announce the reconvening of the NFC formally, the discussions reflect growing concerns over the long-term sustainability of the current revenue-sharing arrangements.

The Ministry of Finance recently held an internal review of the upcoming NFC Award, examining financial flows under the 7th NFC, including provincial tax shares and BISP allocations. The first formal meeting with the provinces, originally planned for August, has been delayed and is now expected to take place in September or October 2025.