Pakistan’s new constitutional court could fix economic fault lines

Pakistan’s economy appears to be stabilizing after one of the most demanding International Monetary Fund (IMF) programs. Yet beneath some reassuring economic indicators lie structural fractures no IMF program can repair. They stem from long-standing constitutional ambiguities: Who taxes? Who spends? Who controls natural resources? And how should markets, regulators, and state-owned enterprises function within a federation?

These critical questions also surfaced at a recent public-private dialogue in Islamabad hosted by the Pakistan Business Council, where nearly every institution involved in economic governance was present. In this context, the creation of Pakistan’s new Federal Constitutional Court (FCC) under the 27th Amendment is an important development. Could this new court provide the institutional clarity that has eluded Pakistan’s economy?

Constitutional clarity matters for economic reform. When the rules of the economy are vague, governments litigate instead of coordinate, and businesses defend rather than invest. Pakistan’s provinces and the federation frequently clash over budgetary spending, overlapping tax jurisdictions and inconsistent regulatory regimes. Investment in agriculture, energy, and mining stalls because contracts, royalties, and revenue-sharing mechanisms are contestable in courtrooms. The result is predictable: higher costs for government, private sector and the consumers, lower investment, and slower job creation.

How can FCC make a difference? First, it could help in making fiscal federalism functional. Pakistan’s National Finance Commission (NFC) Award, the backbone of fiscal federalism, is mandated to be revised regularly. Yet, it has been frozen for more than a decade.

The FCC could push a dynamic NFC framework that shifts incentives toward performance-based outcomes instead of population-driven allocations among provinces. Such a framework will also clarify: the limits of local, provincial, and federal taxes; obligations for harmonized tax administration across provinces; transparent, rules-based principles for revenue sharing which are regularly revisited. A court-mandated roadmap, with deadlines and an arbitration mechanism, could transform NFC awards.

The FCC could offer the constitutional stability that Pakistan’s economy has long been denied.

Dr. Vaqar Ahmed

Second, tax jurisdiction conflicts have been lingering on in the courts. The 18th Amendment decentralized sales tax on services, but the federal government continues to impose levies that effectively re-tax services under different names. Meanwhile, provinces have failed to broaden their tax bases, allowing major sectors, agriculture, wholesale and retail trade, and large segments of services to avoid meaningful taxation. The result is a squeeze on those already in the tax net. MNCs are exiting, noting that even their local consultants are subjected to some of the highest service taxes globally, accelerating the brain drain of Pakistan’s most skilled professionals.

The FCC is already hearing high-profile economic cases, including one related to federal super tax. How it rules will signal whether Pakistan is finally ready for consistent, predictable tax interpretation.

Third, resource rights and revenue governance need to be transparent. Disputes over royalties, gas rents, and hydropower profits have become a norm. The ongoing controversy over the Karoonjhar Hills, where competing claims have emerged, shows how constitutional grey zones can freeze investment.

The FCC should clarify constitutional clauses on natural resources by: revisiting royalties and profit-sharing mechanisms; requiring public audits of resource revenues; and limiting unilateral executive discretion in resource contracts. This would unlock billions in dormant investment. This aspect is also important for governance of public investment. Donor-financed loans have become increasingly expensive, with critical water-sector projects delayed and embroiled in prolonged legal and administrative disputes.

Fourth, dismantling barriers to competitive markets is important. Constitutional guarantees of free movement of goods and services are routinely undermined by provincial checkpoints, unofficial levies, inconsistent compliance rules, and informal trade. These barriers fragment domestic markets, distort competition, and worsen price volatility. The FCC can rule decisively against measures that obstruct inter-provincial commerce and attach enforceable timelines for dismantling them. This would reduce the cost of doing business countrywide.

Fifth, FFC needs to help regulatory independence. Pakistan’s economy needs credible, independent regulators, whether for monetary policy, energy tariffs, or competition oversight. Yet their autonomy is regularly eroded. The FCC could stand ready to protect decisions by regulators, appointment processes, defining removal thresholds, and mandating transparent performance reviews.

This is important for Pakistan’s external stakeholder. Chinese firms involved in CPEC projects have repeatedly faced conflicting provincial and federal mandates. GCC investors exploring mining, agriculture, and real estate struggle to identify the appropriate regulation, even with Pakistan’s recent efforts through its Special Investment Facilitation Council.

The FCC enters the scene amid skepticism about its independence. But it also enters with unprecedented jurisdiction over the core constitutional issues that have hindered Pakistan’s economy for decades. If the judges exercise restraint, independence, and economic literacy, the FCC could offer the constitutional stability that Pakistan’s economy has long been denied.

– Dr. Vaqar Ahmed is an award-winning economist and former civil servant. He supported the formulation of various tax and trade policies during his tenure at Pakistan’s Planning Commission, Federal Board of Revenue, and the Ministries of Finance and Commerce. X: @vaqarahmed​