Pakistan’s 18th Constitutional Amendment, passed in 2010, transformed the country’s fiscal federalism by deleting most of the Concurrent List, devolving major spending functions to provinces, and recasting the federation-province power balance. Politically, it deepened provincial autonomy; economically, it hard-wired a new budget arithmetic that still shapes every federal budget, IMF review, and development plan today. The question is no longer whether devolution is good or bad-it is whether the current design delivers national solvency, growth, and coherence without starving the centre or letting provinces default on service delivery.
The 18th Amendment and Article 172 recast resource ownership: provinces and federation are joint and equal owners of onshore oil and gas; offshore resources vest with the federation.
The core fiscal pivot sits in Article 160(3A), inserted by the 18th Amendment, which says the share of provinces in each National Finance Commission (NFC) Award cannot be less than the previous Award. Practically, that locked in the 7th NFC Award’s jump in the provincial share of the divisible pool to 57.5% from FY2011 onward, making downward revision constitutionally off-limits unless the Constitution itself is amended. This “non-regression” clause delivered predictability for provinces but left the federation far tighter for cash while its fixed obligations (debt service, defence, foreign affairs, pensions, national programmes) kept rising. Any serious economic assessment must start by acknowledging this rulebook. This architecture meets a brutally simple budget reality: Islamabad’s fiscal space is razor-thin. The IMF’s first review under the current Extended Fund Facility (May 9, 2025) praises consolidation but also ties fiscal sustainability to both federal discipline and provincial tax action-especially on agriculture income tax (AIT), property taxes, and sales tax on services (STS). The centre’s primary surplus target is now explicitly a “whole of government” job, not just a federal one. In other words, the new federalism only works if provinces carry their side of the bargain on revenue, not just spending. Where does that leave the federation versus the provinces in hard numbers? Through July-March FY25, Pakistan posted a primary surplus of roughly 3.0% of GDP, a sharp improvement on last year as consolidation bit. Crucially, provincial surpluses-now a regular feature of IMF program design-were part of the arithmetic that delivered this outcome, underscoring that the centre depends on provinces to balance the national books. This is not merely an accounting curiosity; it is the lived reality of Pakistan’s macro framework post-18th Amendment.
At the province level, Khyber Pakhtunkhwa (KP) illustrates both promise and constraint. The KP finance department’s mid-year review for FY2024-25 recorded a sizeable fiscal surplus (about Rs119.9 billion), citing revenue improvements and expenditure control, while candidly noting low absorption on foreign-project assistance and PSDP-linked spending due to tied receipts and project delays. KP’s own Citizens’ Budget narrative for 2025-26 even touts the “highest budgetary surplus” among provinces in the outgoing year. Surpluses are fiscally helpful for the national ledger, but low development absorption signals capacity and coordination problems that dilute real-economy impact.
The devolution of the sales tax on services is Exhibit A of the new fiscal order. It gave provinces a buoyant tax base and theoretically aligned service-sector growth with provincial revenues. But the gains have been uneven because tax administration, rate settings, and bases differ across provincial revenue authorities; fragmentation and capacity gaps persist. IMF technical work and earlier Selected Issues papers are explicit that post-7th NFC, GST on services belongs to the provinces and should be a pillar of their own-source revenue-if they administer it well. Agriculture income tax-constitutionally a provincial domain-remained chronically under-tapped for years, undermining fairness and revenue productivity. That is now being forced up the policy agenda: under the National Fiscal Pact with provinces, the IMF review notes legislative alignment of AIT with federal regimes and commitments to push provincial tax effort on STS, property tax, and AIT. If followed through, this is the single most important fix to make the 18th Amendment’s fiscal math work without periodic centre-province trench warfare.
What, then, are the economic pros of the 18th Amendment? First, it puts money closer to citizens. Provincial development budgets rose, and local priorities (health, education, water, and agriculture extension) received higher visibility. Second, it reduced centre-heavy bottlenecks by letting provinces pilot and scale service delivery innovations. Third, it created space for competitive federalism: provinces that reform faster can, in theory, grow faster and be rewarded with higher own-source revenues.
And the cons? The federation’s structural bills-debt service and defence in particular-do not shrink just because revenues were reassigned. The centre’s share of the divisible pool is now too small to comfortably fund national public goods, shocks, and externally-facing obligations, forcing Islamabad to lean on borrowing or to rely on provincial surpluses to hit IMF primary balance targets. Meanwhile, too many provinces still free-ride on transfers instead of building robust tax administration for STS, property, and agricultural income. Uneven capacity leads to lapsed development funds and duplication across provinces; big cross-border sectors-energy, water, and agriculture markets-suffer when policy coordination is weak. These trade-offs become starker when we look at Pakistan’s mineral future. The 18th Amendment and Article 172 recast resource ownership: provinces and federation are joint and equal owners of onshore oil and gas; offshore resources vest with the federation. For solid minerals, provinces have primacy inside their boundaries, while the federation’s policy and international-economic roles remain decisive for investment, exports, and geopolitics. This constitutional sharing was meant to spur exploration by aligning local stakes with national strategy. On the ground, Balochistan’s copper-gold endowment at Reko Diq is the flagship. It is one of the world’s largest undeveloped copper-gold projects; ownership today is 50% Barrick Gold, 25% federal SOEs, and 25% Government of Balochistan (10% free-carried, 15% fully funded). This structure explicitly recognises both federal and provincial stakes while anchoring governance in a global operator’s framework-exactly the type of arrangement that can translate geology into growth if security, infrastructure, and policy stability hold.
(To Be Continued)
The writer is a financial expert and can be reached at jawadsaleem.1982@ gmail.com. He tweets @JawadSaleem1982