Punjab’s ‘no’ to foreign aid

As a government -in-waiting, the PML-N must have alternative economic models ready, of which it has demonstrated none.

The 18^th Amendment allowed provinces to “raise domestic or international loans, or give guarantees on the security of the Provincial Consolidated Fund, within such limits as may be specified by the National Economic Council”. Earlier, the federal government borrowed and on-lent to the provinces. Instead of claiming this autonomy to borrow, the Punjab chief minister says foreign aid is the mother of all our ills. Economic dependence limits political choices which results in the loss of sovereignty. Mercifully, the chief minister resisted the temptation of ordering the immediate suspension of aid. Instead, the Punjab cabinet was asked to give shape to the proposal and the PML-N would decide the party line after thorough reflection.

Aid flows, in the post-war period, began on the premise that they would help the recipient country to eventually help itself. There is little evidence of this happening. My wife, Dr Nadia Tahir, who has been researching the subject, sees a relationship between conflict, military governance and aid inflows. It is a fit case of the good old moral hazard problem — “My kingdom for a crisis!” Far from achieving self-sustained growth, the country suffers from a chronic aid addiction. But can a province, no matter if it is the largest in the country, go it alone? Not really. But there is no harm in trying to show the way to the federal government, which so far has shown no interest in reducing dependence on aid. As the government — in — waiting, it is, in any case, expected of the PML-N to have demonstrable, alternative models ready before it comes to power.

The record of managing debt in Punjab is not all that great. It has a hefty overdraft of Rs100 billion with the State Bank. The total outstanding debt is Rs486 billion, over 80 per cent of which is foreign. Foreign debt servicing is Rs12.4 billion. Interestingly, the budgeted inflow of foreign loans this year is Rs12.6 billion. In other words, the inflows are about the same as outflows. And this provides the entry point for understanding the consequences of Shahbaz Sharif’s vow. Not contracting fresh loans means resources have to be found for activities that would have been financed by loans and for servicing past loans. The record on reducing expenditure and generating resources is not very impressive, though. Expenditure just rose to match the newfound treasure under the seventh NFC award. No serious effort was made to increase the yield of provincial taxes and tax on agricultural income remains a joke. Revenue sources devolved to the provinces under the eighteenth amendment were not even considered for levying. Most surprising, Punjab failed to take the lead in collecting sales tax on services.

The incidence of the taxes not levied hitherto will be on Ashrafia, the bugbear mentioned by the chief minister. The next Punjab budget should be exciting.

Published in The Express Tribune, May 20^th, 2011.