Beyond the divide: rethinking federal-provincial collaboration for economic transformation—II

Business Recorder

a day ago

Agriculture, livelihoods, and forests: climate impacts and systemic constraints
Agriculture remains the backbone of Khyber Pakhtunkhwa's rural economy—contributing 30% of provincial GDP and employing 32% of the labour force. KP hosts 45% of Pakistan's forest cover and contributes over 50% to the country's carbon sink—yet receives little recognition or fiscal compensation for its stewardship role.
Forest conservation, reforestation, and sustainable land-use initiatives remain underfunded and excluded from federal climate finance frameworks.
Beyond the divide: rethinking federal-provincial collaboration for economic transformation—I
Despite constitutional devolution, KP lacks the fiscal autonomy and institutional access to key instruments such as green climate funds, carbon markets, and agricultural risk insurance schemes. Without flexible financing, targeted climate adaptation resources, and greater programmatic authority, the province remains constrained in addressing both the short-term needs of farmers and the long-term challenge of climate change.
Misaligned policies and data disconnect
One of the gravest flaws in Pakistan's fiscal governance is the siloed preparation of budgets. Federal and provincial budgets are formulated in isolation, without integrated data or joint economic planning. Decisions like changes in property taxation, sales tax, etc., are taken unilaterally by the federal government, with little regard for provincial fiscal autonomy or local economic realities.
The Pakistan Bureau of Statistics (PBS), central to data generation, remains under federal control—leaving provinces dependent on potentially outdated or misaligned datasets for planning and investment.
Rethinking the NFC: misaligned incentives and a disconnected federation
The current National Finance Commission (NFC) Award—structured predominantly around population size — has become increasingly disconnected from Pakistan's development needs and federal realities. Provinces like Punjab and Sindh, by virtue of their demographic weight, receive nearly 80% of the divisible pool. In contrast, regions such as Khyber Pakhtunkhwa (KP), Balochistan, Gilgit-Baltistan, and Azad Jammu & Kashmir — despite facing deeper development deficits, climate vulnerability, and regional instability — remain chronically underfunded.
Khyber Pakhtunkhwa exemplifies this imbalance. The province that hosts over 1.5 million Afghan refugees has absorbed the Ex-FATA region without corresponding fiscal adjustment, and accounts for 45% of Pakistan's forest cover. Its vital contributions to national security, environmental preservation, and humanitarian burden-sharing go largely unrecognized in the current NFC formula.
By rewarding population growth over economic performance, resilience, or service delivery, the NFC structure not only neglects disadvantaged regions but also distorts provincial incentives. International models—such as Vietnam's capped population shares and performance-linked transfers—offer more equitable frameworks, aligning resource allocation with outcomes rather than demographics alone.
Efforts to reform the fiscal compact have been insufficient. KP's National Dialogue on the NFC in February 2025 signaled an intent to revisit the distribution model, but the absence of key federal and provincial actors reflected a broader lack of political will. The debate over vertical and horizontal allocations remains hostage to entrenched interests, especially in larger provinces that dominate federal politics.
Federal fiscal policies further compound the imbalance. IMF-mandated surplus targets require provinces to underwrite federal deficits, while unfunded mandates—such as the devolution of higher education, social protection, and climate adaptation—shift responsibilities to provinces without the resources or autonomy to meet them. These gaps between constitutional obligations and fiscal reality are growing wider.
If Pakistan is to function as a true federation, the NFC must evolve. A reformed framework should account for provincial contributions to national stability, equity, and long-term development—not just population figures. Until then, regions like KP will continue to carry disproportionate burdens, with limited fiscal space to realize their full potential.
Toward a functional federation: empowering provinces, energizing Pakistan
Khyber Pakhtunkhwa's experience offers a window into a broader national truth: Pakistan's progress is only as strong as the sum of its provinces. Yet today, provinces are expected to deliver on national priorities without the authority, autonomy, or tools to do so. Fiscal transfers alone are not enough. What Pakistan needs is a new federal compact—one that shifts from control to coordination, from entitlement to performance. The National Finance Commission (NFC) Award must evolve to reward results, resilience, and resource stewardship—not just population size. Provinces should have the power to issue bonds, tap into international climate and diaspora finance, and generate their own revenues. Control over key sectors—energy, minerals, tourism, trade logistics—must be operationally devolved, backed by institutional coordination rather than political gatekeeping. Federal planning must reflect provincial realities, not override them. KP has shown initiative—reforming regulations, attracting investors, and pushing innovation—but its efforts remain stifled by a system that doesn't keep pace. To unlock Pakistan's full potential, we must empower its provinces—not just with mandates, but with the means to lead.
Conclusion: expand the pie, don't just fight over slices — unlocking Pakistan's true potential
Pakistan's future won't be won by provinces fighting over shrinking slices of a fixed pie or by a federal system that clings to outdated formulas. Instead, real progress will come from expanding the pie—by empowering provinces to unlock their unique strengths, invest boldly, and drive growth that benefits all.
Khyber Pakhtunkhwa's story is a powerful reminder: it's not a tale of dependency or deficit, but of immense potential held back by an inflexible system. Despite bearing heavy burdens—from hosting millions of refugees to safeguarding nearly half of Pakistan's forests—KP remains shackled by fiscal constraints and limited autonomy. Imagine the possibilities if these provinces were trusted to lead their own growth with the tools and resources they deserve.
The National Finance Commission must transform—from a zero-sum contest focused on population numbers to a dynamic framework that rewards innovation, resilience, and results. Provinces should be architects of their own destinies, empowered to build infrastructure, attract investment, and pioneer solutions aligned with national goals.
This is not just a fiscal debate—it's a call for a new social contract: a federation that shares opportunities, not just resources; a Pakistan where every province sees itself not as a burden, but as a vital partner in shaping a prosperous, sustainable future.
The true test of federalism lies in creating an ecosystem where provinces grow not in spite of the system, but because of it. Reform the structure, and provinces like KP won't just survive—they will thrive and lead Pakistan toward green growth, enhanced regional trade, and lasting unity.
The road ahead demands courage and vision. But if Pakistan can embrace a federation that trusts its provinces, values their contributions, and grows the pie together, the promise of inclusive, resilient development will finally be within reach.
(Concluded)
(The writer is an expert in public policy and finance, focusing on fiscal federalism, economic development, and governance reforms)
Copyright Business Recorder, 2025