NEC doubles borrowing limit for provinces

Published: May 20, 2017
Prime Minister Nawaz Sharif chairs a meeting of the National Economic Council. PHOTO: APP

Prime Minister Nawaz Sharif chairs a meeting of the National Economic Council. PHOTO: APP

ISLAMABAD: The National Economic Council (NEC) on Friday doubled the borrowing limit for the four provinces as it approved a Rs2.5 trillion national development outlay for the upcoming fiscal year.

The provinces will now be able to cumulatively acquire Rs300 billion in loans from the domestic market – almost twice as much as the existing ceiling, which is Rs153 billion. The decision is aimed at helping the federating units meet their growing development expenditure needs.

According to sources in the finance ministry, the NEC allowed the provinces to raise loans equivalent to 0.85% of the GDP – with Rs360 billion being the estimated size of 1% of the GDP for FY2017-18.

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At 0.85%, the maximum borrowing limit for the provinces is Rs307 billion. The maximum borrowing limit will also be the net amount of loans that the provinces have already obtained from the federal government.

For the ongoing fiscal year, the limit was 0.5% of the GDP or Rs153 billion, but the provinces have termed it too small, even though they had not exploited the full limit this fiscal.

The borrowing ceiling is further divided among the four provinces on the basis of their population, with the maximum share going to Punjab.

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During Friday’s meeting, Punjab Chief Minister Shehbaz Sharif demanded that the borrowing ceiling be increased to 1% of GDP, according to finance ministry sources.

Finance Minister Ishaq Dar opposed the proposal, raising concerns about its implications on the national economic framework. Dar offered to relax the ceiling to 0.7% of GDP. However, on the intervention of the prime minister, he agreed to relax the limit to 0.85% of the GDP, said sources.

Article 167 of the Constitution, inserted as a part of the 18th Amendment to the Constitution, gives the NEC the authority to set borrowing limits for provincial governments for international borrowing. Sections 2 and 3 define the criteria for borrowings, subject to conditions set by the federal government and specified by the NEC.

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The finance ministry is cautious about determining borrowing limits for the provinces, noting problems faced by other nations after they allowed their sub-national units to borrow directly from international lenders. They cited the examples of Brazil, Argentina, India, Germany and South Africa.

“The Punjab government will adhere to the principles of fiscal prudency and, as a responsible government, will not resort to any reckless borrowing,” said Punjab Finance Minister Dr Ayesha Ghaus Pasha.

She said even in the outgoing fiscal year, the provincial government had borrowed only where it was required and at the same time started the process of returning these loans.

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The Punjab government’s interest payments are only 3% of the province’s GDP size. The provincial government is also working on a piece of legislation to ensure fiscal prudency and impose legal bindings on borrowings.

It was in June last year when the NEC had allowed the provinces to start borrowing from domestic markets for the first time.

After the 18th constitutional amendment, the provincial share in the federal fiscal resources increased to 57.5% of the GDP, which allowed for a greater space to spend resources on infrastructure. However, the provinces have remained unable to spend the entire resources and showing budget surpluses.

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During the first nine-months of FY2016-17, the four federating units spent Rs1.6 trillion and 26.4% of it or Rs422 billion was the development spending. Punjab alone spent Rs239 billion on development activities from July through March of the current fiscal.

However, at the same time, the four federating units generated a Rs137.6 billion cash surplus. Punjab showed Rs82 billion surplus, according to the federal finance ministry.

National development budget

NEC approved a Rs2.5 trillion national development outlay for the next fiscal year including roughly Rs400 billion that corporations would spend outside the federal and provincial budgets, Planning Minister Ahsan Iqbal told reporters.

He said the federal PSDP was set at Rs1.001 trillion while provincial development budgets would stand at Rs1.112 trillion. Corporations will spend Rs394 billion by arranging funds on the strength of their balance sheets.

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An amount of Rs180 billion has been given for completing CPEC projects.

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