KHYBER PAKHTUNKHWA’S FISCAL MISMANAGEMENT;DEPENDENCE ON FEDERAL SUPPORT
Muhammad Hamza Minhas
Publishing date: 05 December 2025
Despite receiving some of the most generous financial support from the federal government, Khyber Pakhtunkhwa (KP) continues to struggle with weak service delivery, fragile law and order, and persistent governance challenges. The disconnect between the province’s large financial inflows and its disappointing outcomes raises profound questions about institutional capacity, leadership priorities, and accountability mechanisms within KP’s governance framework.
KP remains one of Pakistan’s most federally dependent provinces. An overwhelming 94% of its total revenue is financed by the federal government, while its own-source revenues account for a mere 6%. For the fiscal year 2025–26, the province expects total revenue receipts of Rs 2,119 billion, of which a staggering Rs 1,990 billion will come from federal transfers. KP anticipates generating only Rs 129 billion on its own—highlighting the province’s continued inability or unwillingness to grow its internal revenue base.
Since the 7th NFC Award in 2010, KP has received an extraordinary Rs 7.426 trillion from the Centre over the last 15 years. This includes Rs 5.802 trillion against its 14.62% share of the federal divisible pool, marking an astonishing 686% increase. Before the 2018 merger of FATA with KP, all FATA expenditures were covered by the federal government. Even after the merger, the Centre has continued to finance the Newly Merged Districts (NMDs), contributing Rs 687.4 billion to date from its own share. Over the past 15 years, KP has also received Rs 115 billion through federal PSDP allocations for development projects that fall within the province’s own purview.
KP’s dependence goes beyond standard transfers. Under the special War on Terror (WoT) compensation mechanism, the province receives an additional 1% share of the federal divisible pool, amounting to Rs 697.438 billion so far—a 671% increase since 2010. Between 2010 and 2021, KP also received Rs 117.166 billion in federal funding to support internally displaced persons (IDPs) resulting from prolonged conflict and military operations.
Additional federal streams continue to support the province’s finances. For FY 2025–26, KP will receive Rs 57.11 billion through straight transfers, Rs 58.15 billion in oil and gas royalties, and Rs 106 billion in hydel profit allocations and arrears. When these flows are aggregated, KP’s per capita budgetary availability reaches Rs 52,000—significantly higher than Punjab’s Rs 41,800—reinforcing the notion that financing is not the province’s primary constraint.
Despite substantial inflows, KP consistently fails to utilize its development budgets. In FY 2022–23, only 31% of the Rs 319 billion development budget for settled districts was spent, amounting to just Rs 99 billion. Similarly, last year the province managed to spend only Rs 230 billion out of its Rs 468 billion Annual Development Programme—an abysmal 35% utilization rate. Perhaps more concerning is that the provincial government did not release any funds to tehsil councils, despite allocating Rs 94 billion—20% of the total ADP—to them.
Weak financial transparency compounds these inefficiencies. Audit objections have surpassed Rs 300 billion, while tens of billions remain in unadjusted advances. Yet, no comprehensive public audit exists to track precisely how these funds were used. Instead of addressing internal inefficiencies, the provincial leadership repeatedly turns to the federal government seeking additional financial support, thereby reinforcing a cycle of dependency.
KP’s service delivery outcomes fail to reflect the scale of resources available to it. Across key sectors—public security, health, education, water and sanitation, and municipal services—the province underperforms significantly. The literacy rate stands at just 55%, immunization coverage is 71%, access to clean drinking water is 82%, and there are only 0.5 hospital beds per 1,000 residents. Persistent militancy, shortages of medicines in public hospitals, chronic absenteeism of government staff, and poor quality of education continue to undermine progress and public confidence.
While relying heavily on federal transfers, KP has made little progress in expanding its own revenue base. Critical reforms—such as digitizing land and property records, broadening the tax net, enforcing taxation on high-income sectors, and tapping into high-growth industries—have not been pursued with seriousness. The province’s immense potential in tourism, mining, energy generation, and professional services remains largely untapped, representing billions in potential revenue that could reduce its dependence on the Centre.
KP stands today as a province flush with federal funds yet deeply fragile in governance, security, and service delivery. Its dependency is not merely a financial condition—it reflects deeper structural weaknesses. True fiscal strength will emerge not from additional transfers but from a decisive reform agenda: expanding the tax base, modernizing revenue collection, strengthening local institutions, improving project execution, ensuring transparent audits, and enforcing accountability across all levels of government. Until KP embraces these long-overdue reforms, it will remain trapped in a cycle of dependency—rich in federal support but poor in outcomes.