Islamabad Cannot Balance Its IMF Books by Starving the Provinces

The Problem, Stated Plainly

Pakistan’s macroeconomic survival has become an exercise in constitutional arbitrage. Under the current IMF Extended Fund Facility (EFF), the federal government has committed to a consolidated primary surplus target that relies heavily on a projected provincial surplus of PKR 1.2 trillion for the fiscal year. This mechanism, while presented by federal technocrats as a harmless exercise in unified national accounting, represents a quiet, insidious subversion of the 18th Amendment. By forcing the provinces to lock up their cash reserves to offset the federal government’s chronic inability to tax its own elite sectors, Islamabad is effectively centralizing fiscal policy through the back door.

The structural mismatch is glaring. Under the 7th National Finance Commission (NFC) Award, the provinces are constitutionally guaranteed 57.5% of the divisible pool. This resource distribution was designed to fund devolved subjects—primarily education, healthcare, agriculture, and local infrastructure—for a population that has now surged to 241.49 million, according to the Pakistan Bureau of Statistics (2023) census. However, because the federal government remains burdened by massive debt-servicing liabilities and refuses to downsize its duplicated ministries, it treats the provincial share as a pool of liquidity to be clawed back. This practice does not solve Pakistan's fiscal crisis; it merely relocates the deficit from the federal ledger to the provincial social sector, starving schools and clinics to satisfy balance sheets in Washington.

Fiscal Devolution Is Not a Luxury; It Is the Constitutional Bedrock of the Federation

The 18th Amendment, passed in 2010, is now over 15 years old. It was not a mere legislative adjustment; it was a historic peace treaty between a highly centralized state and its long-neglected peripheral provinces. By abolishing the Concurrent Legislative List and transferring 40 subjects to the provinces, the amendment sought to anchor democratic legitimacy in local service delivery. To fund this massive transfer of responsibilities, the 7th NFC Award established that the federal share of the divisible pool could not be decreased in subsequent awards—a constitutional safeguard under Article 160(3A).

Yet, the federal government has consistently failed to adjust its own structural footprint to match this constitutional reality. Instead of downsizing the federal ministries that duplicate devolved provincial subjects—such as the Ministry of National Health Services and the Ministry of Federal Education—Islamabad has maintained these bloated bureaucracies. According to federal budget documents (2025), billions of rupees are still allocated annually to federal departments that have no constitutional business managing local schools or primary healthcare units. This failure to downsize has left the federal government with a structural deficit that it now seeks to cure by demanding the provinces run massive surpluses.

This demand is not just a technical accounting request; it is a direct violation of the spirit of fiscal federalism. When the federal government obligates provinces to generate a combined surplus of PKR 1.2 trillion, it is effectively telling provincial finance departments to freeze their development budgets. In practice, this means that provincial civil servants—who are on the front lines of executing clean water schemes, building rural health centers, and upgrading primary schools—are forced to halt work. The constitutional division of power is thus subverted: the federal government retains the authority to spend on non-devolved, inefficient federal projects, while the provinces are forced to under-spend on critical human development sectors.

Furthermore, the legal architecture of the federation has evolved to protect these constitutional boundaries. With the passage of the 27th Constitutional Amendment on 13 November 2025, the Federal Constitutional Court (FCC) was established under Article 175E. The FCC now stands as the ultimate arbiter of constitutional disputes, including fiscal federalism. Any unilateral federal attempt to alter the NFC formula or coerce provincial budgets through executive fiats can—and likely will—be challenged before the FCC. This makes the federal push to centralize fiscal policy not only economically counterproductive but also legally volatile, risking a major constitutional standoff at a time when the country needs institutional stability.

Starving Human Development to Cover Federal Profligacy Is Economically Ruinous

The economic consequences of this forced centralization are devastating for Pakistan’s long-term growth. Pakistan’s primary economic challenge is not merely a short-term liquidity crisis; it is a deep-seated human capital crisis. According to the United Nations Development Programme (UNDP) Pakistan National Human Development Report, the country continues to lag significantly behind its regional peers in education, health, and living standards. By forcing provinces to withhold development funds to generate surpluses, the federal government is directly undermining the country's productive capacity.

Consider the mechanics of provincial spending. Unlike the federal government, which spends the vast majority of its budget on debt servicing, defense, and running a bloated federal apparatus, provincial governments direct their resources toward direct service delivery. In Khyber Pakhtunkhwa, for instance, the provincial bureaucracy has successfully utilized devolved funds to expand the Sehat Card Plus health insurance program and execute the Accelerated Implementation Programme (AIP) in the merged districts. These programs are managed by dedicated provincial civil servants who understand local dynamics far better than any federal ministry in Islamabad. Forcing these departments to cut spending to meet an arbitrary IMF surplus target directly translates into closed clinics, unmaintained schools, and stalled clean water projects.

Comparative international evidence shows that successful federations do not achieve fiscal discipline by starving their subnational units. In India, the Fourteenth and Fifteenth Finance Commissions actually increased the share of untied devolution to the states, recognizing that local governments are more efficient at spending on social sectors. India’s macroeconomic stability was maintained not by forcing state surpluses, but by implementing strict fiscal responsibility laws at both the federal and state levels, coupled with a collaborative Goods and Services Tax (GST) Council. Pakistan’s attempt to achieve fiscal consolidation through unilateral federal coercion is an anomaly that threatens to derail both economic growth and social cohesion.

"We cannot build a stable 21st-century economy by treating the constitutional rights of 241 million citizens as an adjustable accounting entry for the IMF."

The Counterargument — And Why It Fails

Proponents of the federal government’s approach—including several federal technocrats and IMF mission chiefs—argue that in times of existential economic crisis, national survival must take precedence over provincial autonomy. They contend that if Pakistan defaults on its sovereign debt, the provinces will suffer far more than they would from temporary budget cuts. In this view, unified national accounting is a technical necessity; the sovereign state must present a single, consolidated balance sheet to international creditors, and the federal government must have the authority to enforce fiscal discipline across all tiers of government.

This argument, while superficially pragmatic, fails to address the root cause of Pakistan's fiscal imbalance. The federal government’s deficit is not caused by provincial overspending; it is caused by the federal government’s own structural refusal to reform its revenue collection and expenditure patterns. According to the Federal Board of Revenue (FBR) data (2025), the federal tax-to-GDP ratio remains stuck at under 10%, largely because powerful lobby groups in retail, wholesale trade, and real estate continue to evade the tax net. Instead of politically confronting these interest groups, the federal government finds it easier to squeeze the provinces.

Moreover, the assumption that provincial spending is inherently inefficient is contradicted by empirical evidence. While capacity gaps certainly exist within provincial bureaucracies, provincial revenue authorities—such as the Khyber Pakhtunkhwa Revenue Authority (KPRA) and the Sindh Revenue Board (SRB)—have consistently outperformed the federal FBR in revenue growth since devolution. These provincial institutions have demonstrated that localized, specialized administration is highly effective. Squeezing provincial budgets does not teach fiscal discipline; it merely starves the most efficient revenue-generating and service-delivering arms of the state to cover up federal structural failures.

What Must Actually Happen — A Concrete Agenda

To resolve this structural impasse, Pakistan must move away from ad-hoc, coercive fiscal centralization and embrace a collaborative, rule-based model of cooperative federalism. This requires empowering provincial civil servants, reforming federal expenditures, and establishing institutional mechanisms that align macroeconomic stability with constitutional devolution. The following four-point agenda outlines the specific, actionable steps required to achieve this balance:

Conclusion

Pakistan cannot borrow its way to structural stability, nor can it centralize its way to prosperity. The federal government’s attempt to satisfy the IMF by squeezing provincial budgets is a short-sighted accounting trick that threatens the very fabric of the federation. By starving healthcare, education, and local development to cover federal deficits, Islamabad is undermining the long-term productive capacity of the country’s 241.5 million citizens. True fiscal consolidation will not come from subverting the 18th Amendment; it will come from the federal government finally having the political courage to tax its own elites, downsize its own bloated ministries, and respect the constitutional contract that holds this diverse nation together. It is time for Islamabad to stop balancing its books on the backs of the provinces.