Development programmes: A fourth of govt spending hinges on foreign support

A quarter of public sector financing will come from foreign lenders.

ISLAMABAD:

As much as a fourth of the proposed spending budgeted under next fiscal year’s federal development programme hinges on the country’s relations with international creditors, while uncertainty lingers over the PML-N government’s policy towards the International Monetary Fund (IMF).

Budget makers have estimated receipts worth Rs112 billion as loans for projects falling under the Public Sector Development Programme (PSDP) 2013-14, sources in the finance ministry said. This foreign loan component forms almost 25% of the total proposed development budget of Rs450 billion for the next fiscal year.

The National Economic Council, which will be headed by the new prime minister, will accord a final approval to next year’s PSDP before it is presented to the National Assembly.

Foreign contributions are pivotal to the overall size of the PSDP, as loaned money is usually used to procure machinery and equipment for different projects. However, there always remains an element of uncertainty regarding the timely disbursement of foreign funding, due to factors such as the timely execution of projects and the country’s relations with international creditors.

Sartaj Aziz, tipped as the next adviser to the prime minister on the economy and foreign affairs, recently said that his government would not negotiate for a new programme with the IMF for the next three to four months at least.



The IMF usually does not provide funds for project assistance and releases money only for balance of payments crises. However, the other creditors who do – like the World Bank and the Asian Development Bank (ADB) – always look to the IMF before extending any assistance to Pakistan.

Due to Islamabad’s already strained relations with the IMF, the World Bank and the ADB have suspended budgetary support to Pakistan as well. The latter two are also in the process of cancelling various project loans, primarily because of Pakistan’s inability to complete projects on time and also because of bureaucratic dillydallying.

Aziz’s statement has added an element of uncertainty as economic managers plan their budgetary projections for next fiscal year, an official of the Planning Commission said.

Foreign loans for development projects are important, but there is always a risk factor attached to them as their disbursement is in the hands of donors, says Dr Ishrat Husain, former governor of the State Bank of Pakistan. Dr Husain has written a paper on the “National Economy and Impact of Foreign Aid”. He said that slow progress on projects cause slow disbursements from international lenders.

Dr Husain is also critical of the PSDP structure: he maintains that the fragmentation of PSDP allocations into various categories, like the Peoples Works Programme (which is spent at the discretion of the prime minister and parliamentarians), has rendered the PSDP ineffective and leaving little impact on economic growth.

Planning Commission spokesperson Asif Sheikh said a final decision will be taken regarding the share of the foreign loan component in the total size of the PSDP after due diligence. He said the Planning Commission, having learnt from past mistakes, would take only those foreign loans into account which have already been affirmed by lenders.

Out of the total Rs360 billion size of the PSDP for the current fiscal year, the foreign loans component summed to Rs100 billion. Approximately Rs84 billion had been received till early May, Sheikh said.

Pakistan’s increasing reliance on foreign loans lends it to exploitation by international lenders, sources warned. For instance, China’s Exim Bank has withheld $448 million despite committing that sum to the 969 megawatt Neelum-Jhelum Hydropower Project, which has greatly affected work on its development. The Exim Bank is forcing Pakistan’s hand, asking the country to take out another loan for the controversial Safe City Project, designed to protect major cities from terrorist attacks by installing scanners at key areas. The Supreme Court of Pakistan had earlier struck down the project after finding serious flaws in the award of its contract.

After the Exim Bank’s refusal to release funds otherwise, the government has been forced to negotiate an expensive $500 million loan from the Standard Chartered Bank in a bid to keep work on the Neelum-Jhelum project moving.

Published in The Express Tribune, May 22^nd, 2013.

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