K-P default risk

The caretaker government in Khyber-Pakhtunkhwa is mulling drastic measures as it attempts to overcome a financial crisis that could potentially bankrupt the province. Several reports say the province could miss upcoming payments if the situation is not resolved soon. Chief among the proposed solutions is across-the-board salary cuts of as much as 35% — the same amount by which the caretaker government recently raised salaries to help provincial employees manage record inflation. This would reduce government expenditure by about Rs9 billion, but could also lead to a revolt, as many people were depending on those raises to stay afloat. Alternative proposals include lower pay cuts of about 25% — still severe, but a bit more palatable. The third option is slashing perks and privileges, which would only cut about Rs2 billion as proposed, but is unlikely to face as much backlash, and could actually generate public support.

While blame for unbudgeted pay, perks and pensions increases falls squarely on the K-P government, some provincial officials have claimed that Islamabad — itself in dire financial straits — has refused to release K-P’s share of net hydel profit, with the tab now running up to several billion rupees. This amount alone could plug, if not completely cover, pending payments. Islamabad also still owes Peshawar some Rs400 billion on account of development funds for ex-Fata areas. But one question that still must be posed for the K-P caretakers is why they appear to have set aside the IMF conditions in preparing budgets that always risked running deficits. The IMF has set balanced budgets as a major demand. While Islamabad has taken most of the tough decisions needed to move towards this goal, K-P and other provinces have appeared intent on undermining this target at every avenue, not only by failing to cut spending, but actually increasing it well beyond any potential revenue gains.

 

Published in The Express Tribune, October 27^th, 2023.

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