The maiden meeting of the 11th NFC concludes with the decision to form working groups

• Sindh, KP CMs participated in the meeting as provincial finance ministers.
• KP CM’s adviser on Finance Muzzammil Aslam also participated in the meeting.
• 8th, 9th, 10th National Economic Commission ended without award.
  

ISLAMABAD: The 11th meeting of the National Finance Commission (NFC) in Islamabad concluded on Thursday with the decision to form six to seven working groups to take forward discussions on fiscal issues.

The maiden NFC meeting, chaired by Finance Minister Muhammad Aurangzeb, was attended by the chief ministers of Sindh and Khyber Pakhtunkhwa, who participated as provincial finance ministers, while Punjab and Balochistan were represented by their respective finance ministers.

KP CM’s adviser on Finance Muzzammil Aslam also attended the meeting along with CM Afridi. Federal Board of Revenue (FBR) Chairman Rashid Langrial was also present, along with private members from all the four provinces.

Sources said the next NFC meeting is expected to be held on January 8 or 15.

The sources said the working groups will look into key economic issues, including a task force on the erstwhile FATA region, which will look at how the merged regions can be fully integrated into the federal fiscal framework.

After the meeting, Sindh Chief Minister Murad Ali Shah spoke briefly to the media and said, “It has been decided that teams will be formed to take up economic issues.”

Speaking to the media, Muzzammil Aslam termed the meeting as constructive. “The proposal is to form separate groups that will deal with different issues,” he said, adding that six to seven groups would be created and above them would be an umbrella group.

He confirmed that one of the teams will specifically deal with the tax integration of the former FATA areas. “There is a task force for [ex] FATA to decide how it should be included in the financial structure,” he said.

He then said that the meeting took place in a positive environment. No one was pressured [during the meeting] and everyone’s opinions were heard.”

Muzzammil also clarified that no proposal regarding reducing the share of provinces under the NFC Award was discussed.

Meanwhile, speaking at the 11th NFC session, FinMin Aurangzed described the inaugural meeting as an important moment of constitutional responsibility and mutual cooperation, adding that the NFC forum was established under Article 150 of the Constitution. He noted that the 10th NFC Award ended on July 21, 2025.

Aurangzeb emphasized that the federal government was committed to convene the inaugural meeting of the 11th NFC without delay. “The prime minister was personally interested in ensuring that this meeting took place as early as possible,” he said.

He explained that the meeting was earlier postponed due to the devastating floods in Punjab, Khyber Pakhtunkhwa and Sindh. Addressing the speculation surrounding NFC, he said: “The solution to concerns and ambiguities lies in honest and transparent dialogue.”

Aurangzeb further said, “We are here with open minds and without prejudice. Our first priority is to listen to each other. The federal government is here to listen to the position of the provinces.”

He expressed hope that the provinces will move forward in a spirit of constructive cooperation, commending them for signing the National Fiscal Compact, which he described as proof of our shared commitment and ability to work together for the national interest.

Aurangzeb recognized provincial cooperation in achieving compulsory surpluses and implementing the IMF programme. Recalling the national challenges, he said: “This year the country has faced extraordinary threats from India and severe floods, yet we have stood together as a strong federation.”

“This is the spirit we want to maintain throughout the process of the 11th NFC Award,” he added.

“NFC Award Repeat”

Planning Minister Ahsan Iqbal suggested a revision in both the vertical and horizontal distribution of the type of resources between the Center and the provinces, The News reported on Thursday.

A working paper titled ‘Review of NFC Award’ was shared by the Ministry of Planning with Chief Minister Shehbaz Sharif, suggesting two scenarios for vertical allocation of resources between the Center and the provinces.

Under the first scenario, advance deductions have been proposed for national priorities such as before distribution, 2.5% of the divisible pool is allocated for critical issues (such as war on terror, water security, Civilian Armed Forces (CAF) and grants to AJK & GB are also allocated from the divisible pool before distribution.

The remainder is then shared at the existing rate of 57.5% and 42.5% between the provinces and the federal government, respectively. From FY2027 onwards, this mechanism will slightly ease the federal fiscal space.

Under Scenario II, expenditure on BISP and HEC is charged up front by the split team. The remaining revenue is then distributed as 57.5% to the provinces and 42.5% to the federal government. By FY2030, federal resources are about 11-12% higher than the baseline.

It is imperative to streamline the vertical allocation of resources under NFC. A recalibrated formula, recognizing constitutional provinces alongside AJK, GB, ICT and NMD, will create a more balanced, fair and sustainable fiscal arrangement, strengthen federal capacity to meet national obligations and support the long-term stability of Pakistan’s fiscal federalism.

Overall, higher spending relative to revenue has led to a persistently higher federal budget deficit, which has remained in the 5 to 8.4 percent range for more than a decade. This is not just cyclical but structural, fueling debt accumulation and undermining fiscal sustainability. This, in turn, has greatly increased the cost of servicing the debt, which eats up a significant portion of federal revenues and squeezes the government’s fiscal space for priority areas, thus leading to repeated and often severe adjustments to bridge the revenue-expenditure gap.

For the horizontal distribution within provinces, the working paper states that population dominates with a weight of 82%, while poverty, income generation and inverse population density are only marginally important. This report has proposed three alternatives to move away from this approach that hurts the population.

In Option 1, the population weight is reduced to 78%, with modest increases for other factors such as inverse population density, fertility and forest cover.

In Option 2, the distribution becomes more balanced, as the population weight is reduced to 68%, while reasonable coefficients are weighted towards revenue generation (10%), reverse fertility rate (2%) and forest cover (2%).

In Option 3, the distribution would change further, as the population weight is reduced to 60%, while high rates go to revenue generation (20%), reverse fertility rate (5%) and forest cover (5%). This move to a further broader approach reflects the intention to recognize fiscal effort, social outcomes and ecological contributions alongside population. In all the three scenarios, Punjab’s share was reduced from the existing 51.74% to 47.26% in scenario 1, 44.73% in scenario 2 and 41.89% in the third scenario under the federal divisible pool.

Sindh’s share remained at 25.55% under the existing NFC and would be 25.05% under scenario-1, 25.55% under scenario-2 and 25.09% under scenario-3.

KP’s share was 14.62% with existing NFC and in scenario-1, it will remain at 17.12%, 16.95% in scenario-2 and 15.67% in scenario-3.

Balochistan’s share in the existing NFC stood at 9.09% and would be 9.75% in scenario 1, 11.5% in scenario 2 and 12.02% in scenario 3.

The share of ICT will be 0.83% in scenario-1, 1.26% in scenario-2 and 5.33% in scenario-3.

It states that the current NFC agreement, while historic in terms of expanding provincial fiscal space and enhancing autonomy, has created structural imbalances that threaten the sustainability of Pakistan’s fiscal federalism.

Despite receiving 57.5% of distributable transfers, provincial revenues remain stagnant at around 1% of GDP, with weak performance in service tax, agricultural income tax and property tax.