Provinces retain most federal transfers as local governments get limited share

ISLAMABAD: Provincial governments are receiving the bulk of federal transfers while passing on a much smaller amount to local governments, reviving concerns over incomplete devolution after the 18th Amendment.

The provinces are projected to receive Rs9.2 trillion in federal transfers in FY2026-27, but only Rs1.8 trillion is expected to be transferred onward to local governments. In a post on X, the think tank said local governments remain central to service delivery but continue to receive a limited share of public resources.

Its estimates show Punjab’s federal transfers are projected to rise by 8.1% in FY2026-27, while allocations to local governments are expected to fall by 11.8%. As a result, the local government share of federal transfers in the province is projected to decline from 22.8% to 18.6%. In Balochistan, transfers to local governments are projected to decrease by 9.2% even though federal receipts are expected to increase by 4.1%.

Sindh and Khyber Pakhtunkhwa were described as comparatively better performers in the same assessment. Sindh increased transfers to local governments by 147%, while Khyber Pakhtunkhwa raised them by 9.5%. Even so, experts said these allocations remain too low when measured against the resources provinces receive and the demands placed on local service delivery.

Concerns over constitutional devolution

Dr Jazib Mumtaz, an applied economist associated with the Institute of Business Administration, said the situation reflected a serious constitutional shortcoming after powers transferred from the federation were not meaningfully passed down to local tiers.

"It is a major constitutional failure as the 18th Amendment has given powers to provinces, but provinces failed to devolve powers under the same amendment"

The 2010 constitutional changes had transferred significant authority from the federation to the provinces, but that process appears to have stalled at the provincial level. Citizens remain reliant on provincial administrations instead of being able to shape development priorities through empowered district and local institutions.

Mukhtar Ahmad Ali, Executive Director of the Centre for Peace and Development Initiatives, said the intent of the 18th Amendment remained unmet because provinces had not devolved political, administrative and financial powers to local governments as required under Article 140A of the Constitution. He also said local governments should be enabled to generate their own revenues and receive funds through Provincial Finance Commission awards based on transparent criteria including population, revenue effort, performance and existing development levels.

Service delivery and development gaps

Roads, sanitation, water supply and community services are largely provided at the local level. It argued that when fiscal devolution stops with the provinces, development, accountability and democratic participation are weakened.

Dr Abid Qaiyum Suleri, Executive Director of the Sustainable Development Policy Institute, linked weak social outcomes to the absence of empowered local governments. He said Pakistan ranks poorly on several international measures, including the Human Development Index, the Sustainable Development Goals Index and gender-related development indicators.

"Higher financing is important, but development outcomes also depend on functional local governments. Human development cannot take place unless local governments are adequately funded and empowered"

Suleri also called on provinces to announce Provincial Finance Commission awards using transparent resource-sharing formulas, and stressed the need for local government elections in Punjab, where elected local bodies remain absent despite the province accounting for more than half of the country’s population.

Karachi funding shortfall highlighted

Mumtaz cited Karachi as an example of prolonged underinvestment. By his estimates, Sindh spent Rs3.87 trillion on development projects between FY2010-11 and FY2024-25. Based on a population share of around 37%, he said Karachi should have received about Rs1.42 trillion, but actually received Rs472 billion, leaving a gap of nearly Rs945 billion.

He further said Karachi should have obtained around Rs757 billion from the federal Public Sector Development Programme over the same period, but received only Rs340 billion, creating an additional deficit of more than Rs416 billion.

"The cumulative development deficit for Karachi exceeded Rs1.36 trillion during this period"

Ahmad Jawad, Chief Organiser of the Pakistan Business Forum, said the most substantial push for devolution came during the Musharraf period. He said many provinces still have not made Provincial Finance Commissions fully effective, leaving local governments dependent on provincial discretion. Jawad also argued that provincial governments often prefer to govern through bureaucratic structures rather than strong elected local representatives, and proposed giving district mayors authority over planning, budgeting and oversight of local departments while limiting deputy commissioners mainly to revenue administration and provincial coordination.