Financial discipline: Centre may ask provinces to retire SBP loans every quarter

Proposal floated after provinces recorded deficit instead of making savings.


Shahbaz Rana August 02, 2012

ISLAMABAD: As the national budget deficit touches a new high, the Centre is considering placing a binding on provinces to retire State Bank of Pakistan’s loans every quarter with an aim to ensure financial discipline at all tiers of the government.

The move to have an institutional framework came after the four provinces recorded a cumulative deficit of roughly Rs37 billion during the recently ended fiscal year 2011-12 instead of saving Rs124 billion, said sources in the Ministry of Finance.

Owing to the deficit suffered by the provinces, mainly Sindh followed by Punjab, the national budget deficit widened by 0.7% of gross domestic product. With this, the overall deficit will likely be around 8.5% of GDP or Rs1.76 trillion, the highest in the country’s history. This led to massive borrowing from the central bank to finance the budget, leaving little for the private sector to borrow.

The government has not yet formally announced last year’s figures. It had originally targeted to restrict the deficit to 4% of GDP. The provinces alone cannot be held responsible for the deterioration as the 0.7% increase in deficit is only 15% of the budget overrun while the rest is the result of mismanagement on the part of finance ministry.

The central government has been trying to convince the provincial governments to agree to the arrangement before it sends a summary for consideration of the Council of Common Interests (CCI) – a constitutional body which decides issues affecting the provinces and federation alike. It is headed by the prime minister with all provincial chief ministers as its members.

The provinces regularly breach their six-week ways and means borrowing limit, known as overdraft, which is primarily meant for paying salaries. They settle their bills once the finance ministry transfers money to them as their share in the federal divisible pool.

The finance ministry has proposed that the provinces should retire their bank overdraft every quarter. Total overdraft limit for all the provinces is Rs70 billion. Punjab’s limit is Rs35 billion, Sindh Rs19 billion, Khyber-Pakhtunkhwa Rs11 billion and Balochistan Rs5 billion.

At present, there is no legal provision that requires the provinces to create a surplus. They have been resisting such moves in the past while claiming financial autonomy.

The sources said the provinces release billions of rupees on the last day of the fiscal year that also raises questions about the transparent use of taxpayer money.

Under the seventh National Finance Order, the maximum share of 57.5% in federal taxes goes to the provinces. Last year, the central government transferred Rs1.2 trillion to the provinces and this year Rs1.46 trillion is expected to be transferred.

The Centre transferred an additional 10% of resources to the provinces under the seventh National Finance Commission (NFC) award with the hope that the federal tax-to-GDP ratio would increase by 1% every year. However, the ratio declined.

The decreasing tax-to-GDP ratio had compelled the central government to rely on provinces for keeping the national budget deficit at some reasonable level, said the sources. However, they added, after last fiscal year’s dismal performance by the provinces there are apprehensions the provinces may not be able to save Rs80 billion this fiscal year.

Published in The Express Tribune, August 3rd, 2012.

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