Why any expansion of Pakistans provincial structure
should first pass a fiscal viability test
By Shahid Anwar
Pakistan’s debate over creating additional provinces is usually framed around administrative efficiency, political representation and improved governance. However, there is another crucial question that deserves equal attention: Can Pakistan’s economy sustainably support a larger number of provincial governments?
A province may be administratively desirable but fiscally unsustainable. Therefore, any proposal to redraw Pakistan’s provincial map should first undergo a transparent Fiscal Viability Assessment.
Pakistan’s Existing Fiscal Reality
Pakistan’s provinces already depend heavily on federal transfers. During JulyMarch FY2025-26, provincial revenue stood at Rs. 7.22 trillion, including Rs. 5.63 trillion in federal transfers, while provincial own-source revenue was reported at Rs. 1.14 trillion.
This means federal transfers represented roughly 78% of provincial revenue during the period.
Provincial own revenue nevertheless increased by 28.3%, while provincial tax revenue rose by 25.8%. While this improvement is encouraging, the overall structure demonstrates the continuing importance of federal transfers in provincial finances.
The fundamental lesson is clear: creating a new administrative unit does not automatically create a new tax base.
The NFC Award and New Provinces
The proposed creation of additional provinces is closely connected with Pakistan’s system of fiscal federalism and the National Finance Commission (NFC).
The 11th NFC, constituted in August 2025 under Article 160 of the Constitution, is reviewing important issues concerning the distribution of federal revenues between the federation and provinces, grants, borrowing powers and other aspects of intergovernmental fiscal relations.
If Pakistan creates more provinces, policymakers will need to determine how the existing fiscal-sharing system would accommodate them.
Would the provincial share of the divisible pool be divided among more units? Would the horizontal distribution formula need to change? Should population remain the dominant criterion, or should revenue effort, expenditure needs, development gaps and economic capacity receive greater weight?
These are not merely constitutional or administrative questions. They are fundamental fiscal questions.
Every New Province Needs an Economic Base
A sustainable province requires an economic foundation capable of generating revenue and supporting public services.
Formal employment, industrial activity, services, property transactions, agricultural income, natural resources and exports can all contribute to a province’s revenue potential.
This means that every proposal for a new province should begin with a detailed assessment of its revenue-generating capacity.
Population alone cannot determine fiscal viability. A proposed province with a limited formal tax base and substantial development needs could remain heavily dependent on federal transfers for decades.
Conversely, a smaller province with a diversified economy and strong revenue potential could potentially become more fiscally sustainable.
Recurring Expenditure Is the Bigger Challenge
Creating a province involves more than drawing boundaries and establishing a capital.
There would be transition costs involving departments, employees, assets, administrative infrastructure and institutional arrangements. More importantly, there would be continuing costs.
Government departments, public employees, service-delivery institutions and pension obligations create recurring expenditure that continues year after year.
During JulyMarch FY2025-26, provincial current expenditure was Rs. 4.47 trillion, compared with Rs. 1.61 trillion in development expenditure.
These figures do not indicate the precise cost of creating a new province, because that would depend on how responsibilities, employees, assets and institutions are redistributed. They nevertheless demonstrate why recurring expenditure must be a central part of any fiscal assessment.
A Provincial Fiscal Viability Test
No serious proposal for creating a new province should proceed without a transparent Provincial Fiscal Impact Statement.
Such an assessment should examine:
- Own-source revenue potential
- Expected NFC transfers
- Current and future recurrent expenditure
- Pension and other long-term liabilities
- Development requirements
- Administrative transition costs
- Borrowing requirements and limits
- Impact on the federal divisible pool
- Impact on existing provinces
- Long-term fiscal sustainability
The assessment should cover at least 10-year and 20-year horizons, separating one-time transition costs from permanent recurring expenditure.
Three scenarios should also be considered:
Base Case: Reasonable assumptions about economic and revenue growth.
Stress Case: Lower revenue growth combined with higher expenditure pressures.
Growth Case: Stronger investment, economic formalization and improved revenue mobilization.
Fiscal Devolution Must Mean Fiscal Responsibility
Greater provincial autonomy should be accompanied by greater fiscal responsibility.
If a new province receives significant federal transfers, it should also have clearly defined revenue responsibilities and measurable targets for improving own-source revenue.
Borrowing limits, expenditure controls, fiscal reporting requirements and revenue-mobilization targets should be established from the beginning.
Pakistan could therefore consider linking future provincial restructuring with a Fiscal Responsibility Framework covering revenue generation, expenditure management, borrowing limits and transparent financial reporting.
Should Pakistan Create More Provinces or Strengthen Local Governments?
Another important question is whether the objectives associated with new provinces could be achieved through stronger local governments.
If the primary objective is to bring decision-making and public services closer to citizens, strengthening local governments and providing them with predictable financial resources could potentially achieve some of the same goals without creating another complete layer of provincial administration.
Pakistan’s decentralization debate should therefore examine which level of government can provide better public services, stronger accountability and greater value from every rupee of public money.
A Decision That Must Be Based on Numbers
The debate over new provinces should not be reduced to political arguments.
Pakistan may eventually need to reconsider its provincial structure. But before creating additional provinces, policymakers should understand the fiscal consequences.
The 11th NFC provides an important opportunity to examine these questions within the broader framework of fiscal federalism.
Any serious proposal for a new province should therefore be accompanied by a Fiscal Viability Assessment covering revenue capacity, federal transfers, expenditure obligations, long-term liabilities, development requirements and the impact on the wider NFC framework.
The objective should neither be to automatically support nor oppose new provinces. The objective should be to ensure that administrative restructuring is accompanied by sound fiscal planning.
Conclusion
A province may be administratively desirable and still be fiscally weak. On the other hand, a smaller province could become economically viable if it has a sufficiently broad revenue base, appropriate expenditure responsibilities and the ability to improve public service delivery.
The difference cannot be established through political arguments alone.
It has to be demonstrated through numbers.
Pakistan may eventually redraw its provincial map. Before it does, policymakers should understand the fiscal map that would accompany it.
The question is not simply how many provinces Pakistan can create. It is how many fiscally sustainable provincial governments Pakistan’s economy can support.
About the Author
Shahid Anwar is a Business & Trade Advisor and Economic Analyst and former Secretary General of the Federation of Pakistan Chambers of Commerce & Industry (FPCCI). He has also served as Senior Director Research at the Institute of Cost and Management Accountants of Pakistan (ICMAP), with extensive experience in business, trade and economic affairs. He can be reached at shahid.anwar.writer.26@gmail.com
Disclaimer
This article represents the views and analysis of the author, Shahid Anwar, and is intended for informational and public-policy discussion purposes. The fiscal figures and references cited in the article are attributed to the sources mentioned by the author. Readers and policymakers should independently verify data, assumptions and policy implications before making financial, political or administrative decisions. Publication of this article does not necessarily imply endorsement of all views expressed.
This image is AI-generated and is intended for illustrative purposes only. It does not represent an actual photograph, event, location, government document, or real-life scene. Any resemblance to actual people, places, buildings, or situations is purely coincidental.
