• Warns funding gap could derail IMF-linked Rs157bn budget surplus for FY26, provision of essential services in merged districts
• Transfers under divisible pool stand short by Rs76bn in first half of 2025-26
ISLAMABAD: At a time when the federal government is grappling with its own fiscal shortfall, the Khyber Pakhtunkhwa government has raised concerns that revenue transfer shortfalls from the centre during the first half of 2025-26 have jeopardised the province’s ability to meet its annual budget surplus target, as agreed with the International Monetary Fund (IMF).
The provincial government further warned that the delayed and reduced federal transfers are exerting significant pressure on its finances, particularly impacting the delivery of essential services in the merged districts of the former Federally Administered Tribal Areas (Fata).
The issue was formally raised in a two-page letter from Khyber Pakhtunkhwa’s Adviser on Finance to the Chief Minister, Muzammil Aslam, to Federal Finance Minister Muhammad Aurangzeb. The letter followed weeks after newly appointed Chief Minister Sohail Afridi publicly accused the federal government of withholding the province’s rightful share from the divisible pool.
The provincial government said that the budgeted surplus of Rs157 billion for the current fiscal year was based on the assumption that federal transfers would be released in full and on schedule. Any delay or shortfall in these transfers, the letter warned, directly undermines the province’s ability to uphold fiscal discipline and achieve its agreed surplus target.
The scale of the problem was most visible in the merged districts.
The KP government allocated Rs292bn for the merged districts in 2025-26, including Rs143bn for current expenditures, Rs50bn under the Accelerated Implementation Programme (AIP), Rs40bn for the Annual Development Programme (ADP), Rs43bn as the province’s estimated 3 per cent share of the NFC award, and Rs17bn for temporarily displaced persons (TDPs).
However, actual federal releases during the first half of FY26 amounted to just Rs56bn, only 19pc of the total allocation. Provincial officials have warned that this shortfall has significantly constrained development activity and severely disrupted essential public service delivery in some of the country’s most historically neglected regions.
According to Mr Muzammil, despite limited federal support, the provincial government has continued to sustain development through its own resources. The province released Rs26.4bn under the AIP, even though it received no federal funding under this head.
Similarly, against federal releases of just Rs9.8bn, the KP government provided Rs16.4bn from its own budget to maintain development momentum, despite growing fiscal imbalances. For current expenditures in the merged districts, provincial spending has reached Rs63bn, while federal transfers stood at only Rs46bn, leaving a funding gap of Rs17bn.
The concerns now extend beyond the merged districts, as shortfalls in federal transfers continue to undermine KP’s fiscal stability. Releases under straight transfers have fallen sharply below target, only Rs19bn has been received so far against the annual allocation of Rs115bn, representing just 17pc of the total.
Moreover, shortfalls in divisible pool tax transfers have further strained the province’s finances. KP’s share in federal tax assignments for the first half of FY26 was projected at Rs643bn, including the 1pc share for the war-on-terror. However, actual receipts amounted to only Rs567bn — resulting in a shortfall of Rs76bn.
The shortfall is also pronounced in Net Hydel Profit (NHP) payments. Against a budgeted amount of Rs106bn for FY26, the federal government has released only Rs18bn during the first half, just 17pc of the expected disbursement.
These mounting revenue pressures have coincided with unavoidable spending obligations. The KP government incurred Rs28bn on flood response and rehabilitation efforts, along with an additional Rs7bn on support for TDPs. Officials warn that these unplanned expenditures have further squeezed the province’s already limited fiscal space.
The KP government has cautioned that if federal releases continue at the current pace, achieving the budgeted surplus of Rs157bn will become increasingly complex. It has called for urgent corrective measures, stressing the need for timely and predictable federal transfers in line with budgeted assumptions to stabilise provincial finances and protect public service delivery, the letter added.
Published in Dawn, January 11th, 2026
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